You have likely heard on the news many times that the stock market crashed today or that the value of a particular share surged significantly. You might have heard about a company listing its IPO on the stock market, or the story of Harshad Mehta—how the stock market turned him into a millionaire overnight. So, what exactly is the stock market, and how does it work? What are shares? How do market ups and downs occur, and how can we track the market?
 |
| What is Share Market |
In today's post, I am going to explain some stock market terminology in very simple terms so that your basics are completely clear before you start investing.
What is Share
Let’s start with the most basic concept of the stock market. What exactly is a share? Imagine a businessman, Mr. Sharma, who owns a company called "Sharma & Co." with a valuation of ₹100 crore. The company's products are in high demand, and it is performing well. Now, Mr. Sharma wants to expand the business further and launch new products in the market. To do this, he needs ₹50 crore in funding.
He has two ways to secure this funding: either find an investor or financier who believes in the company's vision and provides the ₹50 crore, or sell a portion of the company's equity to the public. So, he divides the company's valuation into smaller units, that's called shares. He wants to sell a portion of it to the public. If he sells, 1 crore shares at ₹50 each, the entire ₹50 crore requirement is met.
You might ask, "What do the people get out of this?" They receive a stake in the company. In other words, the number of shares one holds determines the proportion of ownership they have in the company. So, what does a "share" actually mean? Shares are units of ownership in a company. If you own 5% of a company's shares, it means you hold a 5% stake in the company's ownership. Does that mean you directly receive 5% of the profits as a shareholder? The simple answer is no! So, how do people make money from this? There are a few mechanisms for that.
Number 1: By selling the shares at a higher price
This means selling the shares for more than the price at which you originally bought them. If a company performs well and generates good profits, this is possible; a share currently valued at 50 might later be worth 60, 70, or 80. So, you could sell a share bought at 50 for 80 and earn the difference as profit.
Number 2: Dividends
Every company declares its financial results—specifically its profit and loss—on a quarterly basis. From the profit earned, the company may announce a dividend for its shareholders. These dividends can be distributed in the form of cash, property, or other assets. Essentially, this serves as a reward to shareholders for their investment in the company, helping to attract even more investors. However, not all companies pay dividends; some offer them, while others do not.
Number 3: Involves bonus shares
Shareholders may receive additional shares based on their current holdings; the company might announce a bonus issue ratio—for instance, one extra share for every ten held. To illustrate, if you own 100 shares and the company announces a 1:1 bonus issue ratio, you would receive an additional 100 shares from the company. That covers the concept of shares.
How the share market operates
Now, let’s understand how the share market operates and where you can buy or sell these shares. Suppose you want to buy a sofa; do you go directly to the Godrej factory to purchase it? No, right? You visit a store in the market to buy it.
Similarly, a specific market has been established for buying and selling shares, known as the share market. In this market, stock exchanges function much like stores. It is important to distinguish between the "stock market" and a "stock exchange." There is only one stock market in India, but it encompasses multiple stock exchanges—such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Currently, there are seven distinct recognized stock exchanges in India. Operating within these exchanges are stockbrokers; they act as agents, executing buy and sell orders on your behalf and charging a commission fee for the service.
What exactly happens when you place a buy order for a share? Your broker forwards the buy order to the stock exchange, which then searches for a corresponding sell order for that same share. Once a buyer and seller are matched and a price is agreed upon for the transaction, the stock exchange confirms the order and communicates this to your broker.
Remarkably, all these transactions take place in mere seconds. Whenever you hear news reports stating that the stock market has risen or crashed, it refers to the collective performance—up or down—of the various public companies listed on the stock exchanges.
This raises a question: why do these market fluctuations occur, and how are they tracked? The answer to the first part lies in two fundamental principles. When the demand for a share exceeds its supply, the price rises; conversely, when demand is lower than supply, the price falls.
Stock exchanges utilize algorithms to determine share prices based on current market rates and trading volumes, and these prices fluctuate rapidly. So, if prices change so quickly, how do we gauge the market's overall performance? This is done through a stock market index—a metric that represents stocks from specific industries or segments, such as technology, energy, or transportation.
In India, the two major indices used are the Sensex and the Nifty 50. The Sensex is the index for the Bombay Stock Exchange (BSE) and holds the distinction of being India's oldest stock market index. It tracks the performance of the BSE's top 30 most actively traded stocks, representing some of India's largest companies.
---End.
0 Comments