‘Gambling’ – that’s the first word that comes to the mind when you hear ‘Stock Market’. Of course, that is not true for people who have a fair idea of what a Stock Market or Exchange is.
In this article, I would try to simplify what Stock Market is and also would reveal certain myths which people still hold dear, I mean when you are arrogant and ignorant, you tend to create myths and spread lies which result in more lies and fewer facts, ultimately defeating the whole purpose of learning. Knowledge is sacred, so let’s dive into it to find out more.
Before I begin with the specifics, you need to understand a few terms and what they are.
Now and then we hear about different companies but what are they? Let us begin with a simple example, you own a sweet shop and you have your name on the board outside, is that a company? No. It is a sole proprietorship where you are the sole owner of the company. Pan shops, local grocery stores are all sole proprietorships.
Then what is a company? In simple words, it is a legal entity that is registered under the Companies Act to commence business. Generally, companies are of two types- Private Companies and Public Companies.
A Private Company is one where there are a certain group of people who invest funds into the business and the profits (in any) are enjoyed by them. They are not liable to answer to the general public about their business details.
Public Company becomes more interesting. In a public company, people like you and me can invest and become owners of the company! Sounds crazy? Well, a public company is one which is initiated by a person or group of person and they plan to raise let’s say 10,000 INR for their business. They pooled 2,000 INR together and took a loan of 4,000 INR but still, they are short of 4,000 INR, what do they do? They ask people like you and me to invest that money, of course, they don’t expect a single person to pay the sum. Instead what they do is they divide 4,000 INR into small tokens (shares) of let’s say 10 INR each. Now it is easier for people like you and me to purchase those shares. When we purchase those shares, we become the owner of the company to the extent of the amount invested. If I purchase 2 shares, I invest 20 INR in the company and become (20/4000) or 0.5% owners of the company. Thus, a public company is entitled to share its business details, books of accounts, and all such information to the general public. They carry the meaning of their name, public company. In such cases, the person who holds the maximum number of shares becomes the head of the company. I hope you get the idea now what a company is.
Coming back to our main discussion, what is a Stock Market? A Stock Market is a place where Public Companies list themselves (which means they register themselves in the Stock Market) and sell their company shares and the buyers (who are people like you and me, or some group of individual or other companies) purchase those shares to earn a profit. How do they transact? Do they go to the Stock Market and place orders and give money? No, that is done by the stockbroker. A stockbroker meets the buyers with the sellers. A stockbroker can be a person who helps you to buy the shares or nowadays the stockbrokers are an application or website where you can go and buy the shares. The price of a share keeps on fluctuating every minute. Now, who decides the price of a share? It is determined by demand and supply law. Hang on now, I’ll simplify that for you as well.
Let us understand it with a practical example: XYZ company listed itself today on the Stock Market. They wanted to raise capital (amount needed to commence a business) worth Rs.10,00,000. They decided that the value of each share would be Rs.10 and that they are issuing 1 lakh shares in the market ( 1 lakh x Rs.10=total capital required, i.e, Rs.10,00,000). As soon as they list the company, there are buyers who think that their business would go well and they start purchasing the shares. Now when so many buyers would purchase those shares, the price would go up because it is more in demand and less in supply, thus the price may rise from Rs.10 to let’s assume Rs.25. Now some people would like to sell those shares at Rs.25 as they bought it for Rs.10 and selling Rs.25 means making a profit of Rs.15/share. Sometimes the price falls and you make a loss but that’s part of the business. So these transactions keep on happening as long as the markets are open. Many other factors are governing it, but this is a simple example to understand how the Stock Market works.
Now in India there are two major Stock Exchanges. One is the Bombay Stock Exchange (BSE), as the name suggests, is in Bombay which was established back in the year 1875 by Premchand Roychand, who was a prominent businessman. BSE is Asia’s oldest stock exchange and World’s 10th largest stock exchange.
Second is the National Stock Exchange (NSE) which is also located in Mumbai and was established in the year 1992 as the first dematerialized electronic exchange in the country.
The Stock Exchanges in India operate from 9:30 a.m. in the morning to 3;30 p.m. in the afternoon from Monday to Friday (except national holidays). During this period one can sell and purchase shares. There are many different kinds of activities that take place but what I mentioned is the basis of every transaction.
As of now, there are 23 Stock Markets in the country. Even the Stock Market is regulated by a Government body so that there is no illegal practice or fraud in the Market. The Securities and Exchange Board of India or SEBI has the authority to look after the Stock Exchange in India.
So by now, I assume you have the idea of what exactly is a Stock Market and how it functions. I have not gone into every detail so as not to complicate with jargon. I have kept it simple for a general understanding of the Stock Market. Now let us unfold some common Myths related to the Stock Market-
Stock Market is nothing but Gambling: If that were the case, then companies like Reliance, Google, Amazon, TCS, etc. are all gamblers because they all operate in the Stock Market! The truth is a Stock Market is a place where the companies who need funds get their investors and in return, the investors get a profit or sometimes a loss. Every one who transacts in the Exchange has done some studies, made calculations, consulted people, and then place their money. Gambling, on the other hand, is a pure chance game where you leave your money in the hands of Lady Luck!
Investing in the Stock Market is only for the Professionals: I am no professional (at least not now) but I invest in the Stock Market. All you need is proper knowledge about how things operate, good analysis and you are good to go. You don’t need formal schooling to invest in Stock Markets.
Stock Market is Risky and you always lose your money: No, you lose your money because you are not aware of many things. Some people have bad choices on investment and when they lose money, they keep on spreading the lies that one should never invest in shares. The truth is, yes Stock Market is risky, but with proper portfolio diversification, you may earn handsomely.
Thus you should be careful when you invest and invest you should with proper knowledge but never listen to the myths and rumors, always believe in facts.