Hello friends Come, let us talk about the share market
What is the 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
This is our article on financial education
Let us find out more about share markets in this article.
What is share market?
Stock market, share market or equity market- all three mean the same
These are markets where you can buy or sell a company’s 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
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 your friend’s
In this case, you’ve given 50% of the shares to your friend in this company
The same thing happens on a larger scale in the share market
The only difference being, instead of going to your friend, you go the entire world
and invite them to buy shares in your company.
History and purpose of shares
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 far away places
The journey used to be of over thousands of kilometers aboard a ship
There was a huge amount of money required for this
Not 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 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 books
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 share market.
What is stock exchange?
Stock exchange is that place, that building where people buy and sell shares of the companies
The Share Market can be divided into two types- The primary market and the secondary market
Primary markets is 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 are the people willing to pay for the company’s shares
If the value of the company is 1 lakh rupees,
it sells 1 lakh of its shares and offers shares at 1 re 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.
How many shares can a company have?
A point to be noted here is that every share of the company has equal value
It is upon the company to decide how many of its shares it wants to make
If the total value of the company is 1 lakh, then it may make 1 lakh shares of 1 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 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 take 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.
India’s stock exchange
Almost every big country has its own stock exchange(Share Market).
There are two popular stock exchanges in India
One is the Bombay Stock Exchange(Share Market) which has around 5400 registered companies
The other is the National Stock Exchange that has 1700 registered companies
With so many countries registered in the stock exchange(Share Market).
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.
What is sensex?
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 40,000 marks
The number itself means not a lot
The value of this number can be understood only upon comparison with the past numbers
Because this number has been randomly decided
They decided, at the start that the values of the shares of the thirty companies would be this
So we compile all the numbers and then say that it is 500
So, gradually, the sensex has been rising and it has reached the 40,000 mark 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 top 50 companies listed on the National Stock Exchange.
How to sell your company’s shares?
If a company wants to sell its shares on the Share Market, 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
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, and so it should be
Because, think about it, how easy it is to scam the people
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
He then could abscond with the money
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 share market.
collecting the money and then absconding
So as and when these scams happened, the share market 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
is a regulatory body that looks into issues like which companies should be listed on the share market
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 fulfill 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 maybe 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 share market list.
How can you buy shares?
Now, how can you invest money in the share market?
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 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 market
A 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 share 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 a long term,
then a high brokerage rate wouldn’t make a lot of difference because you’d pay it only once.
Investing vs Trading
So, investing and trading are two different things
Investing means putting in some amount of money in the stock market and letting it stay there for some time
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
taking out from one place, putting it in another and earning profit in the process.
Is share market is gambling?
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 risk 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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