In this article, we will go through the basics of the stock market in simple language. The stock market is a type of financial market and is also a part of the capital markets. This market helps companies raise funds for growth.
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Complete Basics of Stock Market with an easy example
Someone gets a business idea. To start a business, he needs money, also called funding.
Initially, he gets that funding through his savings. He asks for money from his family and friends, which is called seed funding.
Next, angel investors, venture capitalists, and others provide funding to the company in exchange for equity. This means they receive a share of ownership in the company in return for their investment.
When he further needs a significant amount of money for capital expenditures (capex), he has two options: either go to a bank for a loan, which will be a liability for his business, or he can ask the public for money. If he takes a loan from the bank, he will have to repay the full amount even if his business incurs losses. On the other hand, if he raises money from the public, the risk is diversified across all the investors. Moreover, it will not be an obligation to repay the money as it would be with a bank loan.
The company then decides to go public with an IPO, also called an Initial Public Offering. The IPO process is assisted by investment banks that help determine a justified price band for the company’s shares.
After that, the company prepares a Red Herring Prospectus (RHP) and submits it to SEBI, the Indian securities market regulator.
Once SEBI approves the IPO, it is launched with a price band, and the window for applying to the IPO opens for a few days.
The normal retail public can participate in this IPO process by opening a demat account through a registered broker.
Note – There is a difference between a Demat account and a Trading account, although both can be opened through a broker.
As the IPO window closes, the shares get allotted to the investors. This phase is called the primary market, where the seller is the company and the buyers are the investors.
After 1 or 2 days, the shares get listed on the stock exchange, where the already issued shares are traded between investors. This phase is called the secondary market. Trading through the stock exchange does not provide any direct monetary benefit to the company, but it helps in building goodwill for the company.
To participate in share trading in the exchanges too, the investors needs to have a demat account. They can open a demat account through a registered broker in India.
ALSO READ – What is the true purpose of the stock market?
What are the benefits of Buying Shares?
- You will receive a portion of the company’s earnings, which is called dividend income.
- As the company grows, the value of your shares will also increase. You can sell your shares later at a higher price.
Note – A share’s value is made up of two components: its intrinsic value, which is based on the company’s actual performance and assets, and the market value, which is influenced by supply and demand in the stock market.
How to Study Stocks?
There are two ways to study stock:
- Fundamental Analysis – In this method, the focus is mainly on analyzing a company’s overall performance.
- Technical Analysis -In this method, a company’s historical price and volume are analyzed.
The Bottom Line
In conclusion, understanding the basics of the stock market is important for anyone interested in trading or investing. The stock market, as a key part of the capital markets, plays an important role in helping companies raise the funds they need to grow and expand. By understanding these fundamental concepts, you’ll be able to make informed decisions within the stock market.
Reference Site – Wikipedia