Ever wondered what is all that buzz around the stock market where people make and lose money? Or have you heard that stock market is like a betting game?
The Voices tries to answers to all your queries regarding the stock market in the space below.
Financial Markets
A market is essentially a place where trade happens at a price which is reached after due bargaining. And in a financial market currency, commodities and stocks are traded. Each having a market of its own.
What happens in a stock market?
Suppose you are an entrepreneur and your business is thriving well but you intend to expand which requires some capital.
The two available options are either to take loan from a bank or sell a part of the ownership in the company (stakes) and raise money from the market by bringing your IPO.
What is an IPO and why will anyone sell his/her ownership in a company?
IPO stands for Initial Public Offering. When a company’s share is listed for the first time in a stock market, it is known as an IPO. The money raised through IPO directly goes to the company. Company may use it to diversify the business.
Let’s understand with an example:
Assume company X with a valuation of 1000 crore rupees, plans to raise Rs. 200 crore for expansion. Then it will have to let go of its 20% shares worth rupees crore.
The company will present its IPO worth Rs. 200 crore to the stock market after due process. It will also specify the number of shares it is offering i.e. the parts in which its 200 crore will split. If it offers, say, 10 crore shares, then each of its share will cost 20 rupees.
Now the participants of the stock market will place their application for subscribing to IPO and after completion of the due process which takes around 5-7 days. Thereafter, the participants will receive their shares and company will receive the money it needed.
Hence, the business not only raised money but it also saved on the interest charged by the formal banks on sanctioned loans.
So how do we participate and what is our role in the stock market?
The individuals participate in stock market by opening a Demat and trading account with a stock broker. PAN Card is an essential document to open a Demat account. The individuals in a stock market are called retail investor.
Now the retail investors load the money in the trading account as we load in mobile wallets. Then with proper research we select a stock where we intend to invest.
The research is necessary because we are technically buying ownership in a company and only a company with sustainable finances and growth prospects would earn money for us.
The retail investors may buy shares in two ways:
- Primary Market: By applying in an IPO of a particular company.
- Secondary Market: From buyers of the primary market and again from the sellers in the secondary market.
To put it simple, only IPO route of buying shares is called primary market, from where the money goes directly to company. Else all shares are bought in the secondary market.
What is the role of secondary market?
The shares are listed in the stock market for trading after the allotment to IPO applicants. It is done so that the shareholders from IPO could withdraw their money as per their will by selling them in the secondary market.
The share market or the secondary market becomes significant for all the stakeholders as the value of shares fluctuate and in turn affect the market value of the company.
Suppose the shares of company X of the IPO example costs 30 rupees due to huge demand then value of the company will also increase 1.5 times i.e. if earlier the company had a value of 1000 crore, then now it will value 1500 crore. So, by selling 20 percent ownership worth 200 crore, initially it raised 200 crores for business expansion and increased the value of company by 500 crores to 1500 crore.
How does the value of share changes?
The value of shares is decided in the secondary market by basic principle of demand and supply. Any positive news may increase the share prices and negative may harm. In the shorter-term stock market works on speculations and in the longer term, on the fundamentals of the company. However, it is just a simplistic view as a number of factors come in affecting the share prices.
The stock market is all about investing in the right share at the right time to achieve maximum profits. The right time and right shares are subjective and require informed decision makings.
(Disclaimer: This is only an awareness article. Please contact your financial advisor before making any investment.)
Edited by NK Jha