A stock market, which is sometimes also called a share market.
What is share market? or what is Stock Market? Many people have this question in their mind. You read or hear about the stock market and share market all the time. On news channels, in newspapers, or directly from people at times. But what exactly is the share market? There is a lot of confusion among the people about it.
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Understand this in simple words. What is Share Market?
Share market is made up of two words, share and market. We know that share means share or a small part. And market means the market where something is bought or sold. So the share market/stock market provides a platform where shares or parts of companies are bought and sold between buyers and sellers.
This marketplace is known as the Stock Exchange. In India mainly two Stock Exchanges. National Stock Exchange (NSE), was founded in 1993, and Bombay Stock Exchange (BSE).
Every company needs capital to grow their business. Companies raise capital by issuing and selling shares to the public, as well as for investors to buy and sell these shares. The Stock market fulfills this need of every company. Any company can collect money by selling a small part in the market.
Let us understand this with an example.
Let us assume that Mr. Z’s company needs Rs 1 crore to expand its business.
Now if the current value of his company is Rs 10 crore
He divides it into 10 crore equal parts each.
The price of each part is kept at Rs. 1.
Now Mr. Z sells 1 crore parts of his company in the share market at the rate of Rs 1 each.
In this way, Mr. Z gets Rs 1 crore to expand his business.
Buyers/Investors
Let us know what benefits investors get from the share market.
People who buy that share become owners of a small part of that company or in other words become shareholders.
Becoming an owner or shareholder does not mean that any part of the company is now ours. Rather, becoming an owner here means that we are participants in the profit or loss of the company.
After buying shares, we get profit mainly in two ways, first, if the company whose shares we have bought grows. So the price of our purchased share also grows and we can earn profit by selling that share at the increased price.
And secondly, whenever the company makes a profit, it gives some part of the profit to its shareholders, which we call dividends.
Suppose we had bought 100 shares of Mr. Z’s company at the rate of Rs 1 per share.
After collecting Rs 1 crore from the market, Mr. Z expanded his business well.
After 3 years, if the price of one share of the company becomes 10 Rs.
then we can sell the 100 shares we had bought at the rate of 10 Rs.
We get 100 * 10 =1000 Rs
in this way we can earn a profit of 900 Rs. on the investment of 100 Rs.
But this is not so easy. We will get profit only if the company in which we have invested grows.
If after 3 years the company goes into loss, then it is possible that Mr. Z’s company share price decrease from 1 Rs. To 50 Paise then we will incur loss.
The share market gives us an opportunity to earn profit by becoming shareholders of companies, but we will get profit only when the company in which we have invested grows.
The stock market can be a volatile place, and the prices of individual stocks can rise or fall rapidly, influenced by a variety of economic, political, and other factors.
Working of the Stock Market
The stock market operates on a simple mechanism through an online platform. Here we highlight the main elements of the share market.
- Participants: The participants include SEBI (Securities and Exchange Board of India) , the stock exchanges that is BSE and NSE, the stockbrokers, the traders these are classified as daily traders and long term traders and the investors. Do note the investors, also known as traders, need to set up a Demat and Trading Account before they begin their trading journey.
- IPO: The initial requirement for the company to be listed in the stock exchange is to file a draft offer document with SEBI. With specific details and regulatory norms in place, on approval, the company offers its shares to the investors through an IPO in the primary market.
- Distribution: This stages the company issues and allots the shares to the investors who had applied during the IPO. It is a computerised process; hence not all the investors would get lucky. The shares are then listed in the share market, and the investor has the option to sell his newly allotted shares, and another investor has the opportunity to buy these shares through the share market.
- Stock Brokers: The intermediary or the middlemen as you would like to call them are individuals or broking agencies registered with SEBI and the Stock Exchanges that assist the investor in buying and selling shares through the stock market. Your Demat and trading account is set up with your stock broker who executes the deal for you, upon confirmation of your order the stockbroker sends you the contract cum transaction bill report.
- Order Processing: This is the final step when the broker places an order or trade on behalf of the investor on the specific exchange. The executed trade order is settled, which is the process where the buyer receives the shares and sellers receive their monies. The time frame for settlement of the order is T+1 where the payment should be concluded within one working days from the day of the transaction.
We buy shares in companies to help our money grow over time. Some people worry that investing in shares is risky, but lots of research has proved that if you pick the right shares and hang on to them for a while, like five to ten years, they can make your money grow even faster than things like houses or gold, and they can beat the rising cost of living (inflation). So, before investing in the share market gain proper knowledge of what is share market and how it works. investing in the right shares for the long run can be a smart way to make your money grow.