Namaskar, In today’s lecture we will learn what is a share and stock market, and how does the stock market work.
Stock market for beginners
Companies need funds to grow their business, and there are different ways to raise money Like raising money from Angel Investor or Venture Capital, taking loans from banks or Institutions, or Stock Markets or Public etc
Raising Funds have been divided into 2 categories, Debt Financing & Equity Financing Debt means a loan, the money that the company raises from Debt Financing, will have to return after some time The company also has to give some interest.
The best example of Debt Financing is a loan taken from the bank When the company takes a loan from the bank, then the company has to return that money with an interest But when the company raises funds from Equity Financing like Angel Investors, Venture Capital or stock Markets, then the company doesn’t have to repay any money or the interest If the company is not returning the money & the interest, then what are the investors getting from the company?
The money that the company had raised from Equity Financing, they give the investors a share from which investors get funds & they become partners in the company So when a company raises funds from the Stock Market, that’s called Equity Financing.
Stock market basics for beginners
Stock Market is like a platform for the investors where anyone can buy shares rich or poor and become a partner in the company Stock Market is a platform for companies where companies can raise funds from the public All the companies which are in the Stock Market, have raised funds from the public and make them the partners in return. These companies are called Public companies.
Initial Public Offering (IPO)
When a company raises funds from the public for the 1st time, its called Initial Public Offering In an IPO, a company raises funds from the public and offers them a partnership in return In an IPO, there is a direct transaction between the company and the Investor The company takes money from the Investor in an IPO and makes them the partners in the company For example, In March 2017, D-Mart came, which is a Supermarket Chain.
It’s a parent company, Avenue Supermarts IPO came Avenue Supermart raised 1870 crore funds from the public In return, they gave the investors a stake of 10% in the company So whatever shares you will buy, you get a share in the company according to that proportion In an IPO, the company decides the price band with the Investment bank An IPO is generally open for 3 to 10 days In these 3 days, the investors have to subscribe to the shares of the company After that, shares are allotted.
Transactions on Stock Exchange and IPO
You can only buy shares from the company in an IPO, you can’t sell them To sell the shares, you will have to wait till the stock is listed in the stock Exchange When the shares are allotted in the IPO, the stock gets listed in the Stock Exchange After it's listed in the Stock Exchange, now you can sell the shares you bought Investors who want to buy those shares, they will buy those shares with you in the stock Exchange and become partners in the company When you sell your shares, then automatically the share gets transferred to the investor In this way, the shares which are issued in an IPO gets exchanged between people in the stock Exchange The transactions made in the stock exchange are between the investors.
The company is not involved in this When you buy shares in an IPO, you buy shares from the company directly But when you buy shares in the stock exchange, then you buy shares from the other investor Similarly in the Stock Exchange, money and shares are exchanged between the investors For example Avenue Supermarts IPO was done in March 2017.
Avenue Supermart IPO was open on 8,9 &10th Mar 2017 So in these 3 days, investors had to subscribe to the shares of AvenueSuperMart The shares of Avenue Supermart were allotted on 16th Mar 2017 and it’s stock was listed on the Stock Exchange on the 21st Mar 2017 From 21st Mar 2017, the shares of Avenue Supermart have been exchanged between people Stock Exchange unites people who buy and sell shares and Buyers and sellers buy &sell in the stock exchange This entire system is online.
Demat Account and Trading Account
You can buy or sell shares only by sitting at home Stock Exchange uses Automatic Order Matching System: When the order of buyer & seller matches, then the transaction is complete Avenue Supermarts raised funds from people through IPO and gave them the shares of the company Now the stocks of Avenue Supermart have been exchanged between people in the stock exchange For example, if you are buying the shares of Avenue SuperMart, then you are buying these shares from a different investor And the money that you have invested in buying the share, will go the investor from whom you bought the share Whether you buy a share in an IPO or stock exchange, you first need to open a D-Mat account with a Stock Brokerage firm Because a D-mat account is compulsory if you want to invest in a stock market Stock Brokerage Firms are Mediators: Through them, you can buy and sell shares In return, you need to pay some brokerage charges to the firm: A D-mat account is like a Bank Saving account Just like you put your money in a savings account, similarly, you put your shares in a D-mat account With a D-mat account, comes another account which is called Trading Account: You can buy or sell shares through a Trading account The shares you buy you keep them in a D-Mat account: Demat account does the job of storing the shares that you bought You don’t need to open a Trading and D-mat account separately:
Documents required for opening a Demat Account
Usually, When you open a D-mat account, you also get a Trading Account You need some basic documents to open a D-mat account like your Pan-Card, Aadhar card, Address Proof, Voting card, Bank Passbook or Cancel cheque.
How to buy and sell shares
After you open a D-mat account, you have 3 ways to buy or sell shares:1st through Stock Brokerage firm or Mobile App of Stock Exchange Secondly, through the website of Stock Brokerage Firm, and the third call directly to the stock brokerage firm: You can tell your broker about the choice of your shares You don't have to maintain a minimum amount in some Brokerage Firms in your Trading account So you can also start investing in a Stock Market with a minimum balance You should open your D-mat account with a Brokerage Firm which delivers good service and matches your requirement with affordable charges You can easily sell or buy shares between 9:15 am to 3:30 pm India.
Two main stock exchanges in India
There has mainly 2 stock exchanges-BSE (Bombay Stock Exchange) & NSE( National Stock exchange) More than 1600 companies are listed in NSE: And more than 5500 companies are listed in BSE It’s not easy to keep a track of all these stocks:
Sensex and Nifty
This is why indices are made, like Sensex and Nifty Sensex is the main Index of BSE: Sensex word is made of Sensitive+Index: Sensex is made of 30 well-established companies The movement of Sensex depends on the performance of these 30 companies Nifty is the main Index of NSE: Nifty is made of National +Fifty: Fifty because fifty has 50 companies, and Nifty’s performance is based on these 50 companies Companies which are a part of Nifty & Sensex have been chosen from sectors like Pharma, IT, Energy, Financial Services & Telecom And they are the leaders of their respective sectors.
This way different sectors get covered in Nifty & Sensex So the performance of Nifty & Sensex is counted as the performance of the Stock market, and people get to know everything about Sensex & Nifty without tracing all the stocks When Sensex & Nifty rises, we say that the stock market is doing well and vice-versa Everyone invests to earn good returns:
What kind of return do investors get from the stock market?
Let’s see how investors get returns by investing in the stock market By investing in stock markets you get profit by 2 ways, Dividen Capital Appreciation When a company shares some of its profit with the shareholders, its called Dividend: The company doesn’t need to give a dividend to the shareholders Whether to give a dividend to the shareholders or not, it is a call of the Board of Directors of the company: You cannot depend more on the dividend income Small companies don't give dividends: They prefer to invest their profit in the company’s growth Capital Appreciation means when the value of share rises, investment value also rises Just assume you bought the shares of a company called ABC 2 yrs ago when you invested the share price of one share was 1000 Rs Today the price of that share is 1600 Rs: This 600 hike is called Capital Appreciation: Capital Appreciation is the main source of earning money in the stock market In Long term, share price follows the growth of the company: so when the company is earning well, their Market value increases And the share price of the stock also rises. Similarly, when the company performs poorly, its Market value decreases & the share of the stock also decreases Your main focus should be how you can earn a good profit with the help of Capital Appreciation For this, you need to do a good analysis.
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