This post is for readers who want to understand the basics of share market. So, let me start this post by asking you a question. Are you connected with the share market? Well, if you said ‘NO’, I would suggest you to think about it once again.
How does the stock market work? – Oliver Elfenbaum
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How you are connected with the share market?
We all are connected with the share market in any of these 4 ways
- As a consumer
- As an employee
- As an investor
- As a supplier
As a consumer, as an employee, as an investor or as a supplier, we are involved in the cash flow of the company in one way or the other. But here, when we talk about share market, we focus mainly on the connection between a listed public company and an investor.
Why a company issues shares to the public?
When someone decides to start a business in a particular industry or on a particular idea, the first thing that needs to be addressed is CAPITAL. When someone use the term ‘CAPITAL’, in simple terms, it means the money required to start a business. This includes both the capital expenditure and operating expense. For a small business, capital can be raised by a single investor or by a group of investors. Other option is to raise money by taking debt from banks or from any other financial institutions. Also company could raise money by issuing bonds.
For a large-scale business, these approaches may not be always enough as the amount of capital company needs is huge. Company might need capital to expand their business, for acquisitions and sometimes even to reduce the debt company has already incurred . Companies may not prefer to take more debt as they have to pay high percentage as interest on debt which could seriously affect the profit from the business. For the same reasons, they may rely on raising capital by issuing shares to the public.
Issuing shares means promoters and initial investors are distributing or sharing their ownership with public. This way, company could raise money, but in turn, they will lose a certain percentage of ownership.
How can you buy shares from a listed company?
Share market comprised of 2 markets
- Primary Market
- Secondary Market
- Primary Market – When a company decides to issue shares to the public, they do it through the primary market. Primary market is a system where the public buys shares directly from the company through Initial Public Offering. Nowadays, this is mainly done online and anyone with a DEMAT account could buy the shares of a company through IPO. Initial public offering is done only for a specified period, say for 2-3 days. Public could buy shares from the company only during this period.
- Secondary Market-Once the IPO is closed, those who have bought the shares through IPO should wait to sell their shares till the company is listed in the stock exchange.
In India, we have two major exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Company could choose to list themselves either in both the exchanges or only in any one among them.
On a fixed day, a company is listed in this exchange. Watch a 35-second clip of listing ceremony of Indigo Airlines.
At this stage, you can find the name of the company as a ticker on the ticker board where per share price moves up and down based on the buy and sell orders given by the investors/traders.
Using DEMAT account, investors who bought the shares through IPO, if they want, could sell their shares. At this stage, those who have not bought shares through IPO, could buy and sell the shares of the listed company at their will.
To avoid confusion, keep in mind that terms like share market, equity market, stock market all are used synonymously. Stock market is a general term which includes shares of the listed companies, mutual funds and bonds. Also keep in mind that, terms like share market and equity market are used for both listed and non listed companies.
When someone uses these terms, all the processes explained above should come to your mind.
If you want to invest in the stock market, you must know the inside out on how stock market functions, how to identify a good stock, how to identify the right price and how to control your behaviour to stay away from unwanted greed and fear.
Investing without knowing all these will be like learning to drive in the middle of a Formula 1 race track that too without wearing the seat belt.
I will be writing more about the basics of equity investment and much more.
Stay connected. Be wealthy!
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