Welcome, let us talk about what is share market. Why is it in place? How does it work? What are its advantages and disadvantages? And how you can invest money in it?
The stock market, share market or equity market are used interchangeably – all three mean the same. These are markets where you can buy or sell a company’s shares. (i.e. trade in shares) Buying shares of a company means buying some percentage of ownership of that company. That is, you become the holder of a percentage of that company.
If that company makes a profit, some percentage of that profit would also be given to you. If that company incurs a loss, a percentage of that loss would also be borne by you.
(paragraph in laymans terms)
Telling you an example of this on the smallest scale, presume you have to establish a start-up. You have 10,000 rupees, but that’s not enough. So, you go to your friend and tell him to invest another 10,000 rupees and offer him a 50-50 partnership. So, whatever your company profits in the future, 50% of it would be yours. 50% of it would be of your friend. In this case, you’ve given 50% of the shares to your friend in this company Hope this illustrative example might have answered your question what is share market?
The same thing happens on a larger scale in the stock market. The only difference being, instead of going to your friend, you go to the entire world and invite them to buy shares in your company.
What is share market / stock exchange?
The stock exchange or share market is that place, that building where people buy and sell shares of the companies. BSE (Bombay Stock Exchange), NSE (National Stock Exchange) are the share markets in India. Wall Street, NYC is the USA’s biggest stock exchange and probably the world’s most influential financial hub.
History of Share Market
The origin of share markets dates to around 400 years ago. Around the 1600s, there was a Dutch East India Company, like the British East India Company, There was a similar company in the country of Netherlands, today known as Dutch East India company
In those times, people used to indulge in a lot of exploration using ships. The entire world map had not yet been discovered. So the companies used to send their ships to discover new lands and trade with faraway places. The journey used to be of over thousands of kilo-meters aboard a ship.
There was a huge amount of money required for this. Not even one person possessed such amounts of money individually in those times. So, they publicly invited people to invest money in their ships. When these ships would travel long distances to go to other lands and come back with treasures from there. They were promised a share of these treasures/money eventually.
But this was a very risky affair. Because during those times, more than half of the ships failed to come back. They got lost, or broke down or got looted. Anything could happen to them. So investors realized the risky nature of this enterprise. So, instead of investing in a single ship, they preferred to invest in 5-6 of them. So that at least one of them had chances of coming back.
One ship used to approach multiple investors for money. So, this created somewhat of a share market. There were open biddings of the ships on their docks. Docks are the places where the ships come out from
Gradually, this system became successful because of the money crunch faced by the companies was supplemented by the common people. And the common people got a chance to earn more money.
You must have read in the history book about how rich the English East India Company and the Dutch East India company became during those times. Today, each country has its own stock exchange and every country has become greatly dependent upon the stock market
Primary Vs. Secondary
The stock exchange is that place, that building where people buy and sell shares of the companies. The market can be divided into two types: The primary market and the secondary market.
Primary & Secondary Share Market
Primary markets are where the companies sell their shares. The companies decide what exactly would be their share prices. Although there are some regulations in this too, the companies cannot manoeuvre too much because a lot of it depends upon the demand & how much price people are willing to pay for the company’s shares.
When the shares are issued by a company directly to the public – this is termed as the IPO or Initial Public Offering by a company.
If the value of the company issues shares of 1 lakh rupees, it sells 1 lakh of its shares and offers shares at 1 RS per share. If its demand is high and a lot of people want to buy its shares, the company would obviously be able to sell its shares for a higher price.
What the companies do nowadays is decide upon a range. There’s a minimum price and a maximum price. They decide to sell their shares within that range. A point to be noted here is that every share of the company has an equal value. It is upon the company to decide how many of its shares it wants to issue.
If the company wants to raise 1 lakh, then it may issue 1 lakh shares of 1 RS each, Or it may make 2 lakh shares of 50 paise each. When companies sell their shares in the share market, it never sells 100% of them. The owner always retains the majority of the shares to keep possession of his decision making power.
If you sell all the shares, then all the buyers of the shares would become owners of the company. Since they all become owners, they all can make decisions regarding that company.
The individual who has more than 50% of the shares would be able to make decisions regarding the company. Therefore the founders of the company prefer to retain more than 50% of the shares
For example, 60% of the shares of Facebook are retained by Mark Zuckerberg.
The people who have bought shares of the company can sell it to the other people. This is called the Secondary Market where people buy and sell shares amongst themselves and trade in shares.
In the Primary Market, the companies set the prices of their shares. The companies cannot control the prices of their shares in the secondary market. The share prices fluctuate depending upon the demand and supply of the shares. So the prices of the shares fluctuate depending upon the demand and supply.
Stock Exchanges / Share Markets in India
Almost every big country has its own stock exchange. There are two popular stock exchanges in India. One is the Bombay Stock Exchange which has around 5400 registered companies. The other is the National Stock Exchange that has 1700 registered companies.
There are many companies registered in the stock exchange. If we want to observe, overall, whether the prices of the shares of the companies are moving up or down,
How do we view this?
To measure this, some measurements have been put in place – Sensex and Nifty
Sensex & Nifty
The Sensex shows the average trend of the top thirty companies of the Bombay Stock Exchange averaging out, whether the shares of the companies are moving up or down
The full form of Sensex, the sensitivity index, displays the same. The number of Sensex, that it has reached 41,100 marks. The number itself means not a lot. The value of this number can be understood only upon comparison with the past numbers.
So, gradually, the Sensex has been rising and it has reached the 41,000 marks in the past 50 years. So this shows how far up have the share prices of these 30 companies gone in these past 50 years
There is another similar index- NIFTY – National + Fifty
Nifty shows the price fluctuations of the shares of the top 50 companies listed on the National Stock Exchange.
The Initial Public Offering (IPO)
If a company wants to sell its shares on the stock exchange, then this is termed as “public listing”. If a company is selling its shares for the first time, then it is called IPO – Initial Public Offering that is, offering the shares to the public for the first time.
Investor Protection and Scams
During the days of the East India Company, it was very easier to get this done. Anyone could sell the shares of their company to the public. But today, this procedure is very long and complicated because you know how easy it is to scam the people in country where there nothing but politics.
Anyone could get listed on the stock exchange with a fake company, and exaggerate the value and achievements of its company. They could lie to the people and the people would foolishly invest in his company. So it has become extremely easy to scam somebody
India in its history has been a witness to a lot of scams like these. Eg. Harshad Mehta scam. Satyam scam, they were all the same- fooling the people and getting themselves listed on the stock exchange collecting the money and then absconding.
So as and when these scams happened, the stock exchanges realized that they need to make their procedures stronger and scam proof. For this, the resolutions and rules were made stronger due to which there are very complicated rules today.
SEBI- Security And Exchange Board of India
SEBI- Security And Exchange Board of India is a regulatory body that looks into issues like which companies should be listed on the stock exchange and whether it is being done in the proper manner or not If you want to do this (i.e. get listed), then you would have to fulfil the norms of SEBI.
Their norms are very strict, for example, there need to be a lot of checks and balances on the accounting of your company; At least two auditors must have had checked your company’s accounting; This entire process may take around 3 years; More than 50 shareholders should be pre-present in the company if you want a company to be publicly listed.
When you go to sell their shares but there’s no demand for it amongst people then SEBI can remove your company from the stock market list
How to Invest in Share Market
Now that you learned what is share market let us find out how can you invest money in the stock markets?
During the times of the East India Company, one could go to the docks where the ships departed from and indulge in biddings and buy and sell stocks.
Before the dawn of the internet, one had to physically go to the Bombay Stock Exchange building to do this.
However, with the internet in place you merely need three things-
A bank account, a trading account and a DEMAT account
A bank account because you would need your money
A trading account, to allow you to trade and invest money in a company
A DEMAT account to store the stocks that you buy in a digital form
Most of the banks today have started offering a 3 in 1 account with all three accounts encompassed within your bank account.
People like us would be called retail investors, that is, common people who want to invest in the stock marketA retail investor always requires a broker. A broker is someone who brings together the buyer and seller.
For us, our brokers could be our banks, a third-party app or even a platform
When we invest money through brokers in the stock market, a broker retains some money as his commission. This is called “brokerage rate”. Banks mostly charge a brokerage rate of around 1%. But 1% is a little high. That’s not how much it should be. If you look properly, you would discover platforms that charge a brokerage rate of around 0.05% or 0.1%
This brokerage rate is a disadvantage for those who want to indulge in a lot of trading of stocks. If a lot of stocks are bought and sold in a day, a lot of money would be siphoned off as brokerage fee. But if you want to invest for the long term, then a high brokerage rate wouldn’t make a lot of difference because you’d pay it only once.
Investing and trading are two different things.Tweet
Investing means putting in some amount of money in the stock market and letting it stay there for some time.
Also read: How to start your own business?
Trading means quickly putting in money at different places and withdrawing from some places this all happens in quick succession In fact trading of shares is a job in itself. There are a lot of people in our country who are traders and do this job all day long taking out money from one share and putting it in another.
An important question that arises is whether you should invest money in the share markets?
A lot of people compare it with gambling because a lot of risks is involved in it. In my opinion, it is correct to say so because this is indeed some sort of gambling.
If you are not aware of the type of the company and its performance, the parameters of the company and its financial record if you don’t observe its history and accounting information then, in a way, this is akin to gambling. Because you would have no idea of how the company would perform in the future
You merely listen to people saying that the company is doing well and we should invest in it in the share market, so that’s why you invest in it. You should never do this because it is extremely risky.
And obviously, when there are people that do this job day in and day out, for examples the traders, who are experts in this field and have more knowledge about the stock market. They obviously would outperform the others because they have an idea of how this all works.
So, in my opinion, you should never directly invest in the share market and instead, rely on the experts.
A very competent form of it is mutual funds. Because in mutual funds you don’t directly decide which companies you would invest in.
In mutual funds, you place your trust in experts and let the experts decide which companies to invest in. Infact a lot of mutual funds invest in many different companies to minimise the chances of loss.
For instance I’ve given the example of the East India company.
Investors had quickly realised that they should not invest their money in one single ship
Investing money in 5-6 of them would ensure that atleast one of them came back
Mutual funds work the same way, investing money in many different places
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