You have landed here to learn more on the Indian stock market, but I want to ask each of you “How many of you actually know the real reason behind why the stock market even exists? And why did it all begin?” What comes to your mind on hearing it? Question yourself. Just think of it for a moment before you continue reading.
Whenever I put forward this query in my webinars and physical classes, these are the most common answers I get,Now let me take you through few basics. Let’s begin by understanding on businesses. I want you to visualize in your mind when I explain you on these concepts. Now think that we both together want to start a business. Starting a business means you need to be ready with many resources like human resource, machinery, money etc. But money is the main resource which can buy us every other resource.
Now from where to arrange the money? You need to sort out a way for it. It can be from your parents, your own saving or from any friends. So the money you have pooled will be enough to run your business as of now. As the days pass by your business started growing.
If you were having service based business, you would have hired five people back then. But now as the business improved, you know that there is a high chance of getting another contract where you need twenty more people. Or think if you were into a product based business and the demand went high. So now you need more machines and more labor to expand the business.
But you also know that your profitability is limited and not sufficient to set up new machines. At this point of time you know that if you invest more or install more machines you may not have salary to pay so many under you and it would be a real bad idea. So where will you go now?
Oh yes! We have so many banks out there. Why not go and get a loan? Well you may think of getting a secured loan by keeping your house or jewelry to the bank if your business is not that big or get an unsecured loan for a higher interest rate. Now bank will give you money and the problem is solved. Before going further let me explain you how the bank works.
THE BANK BUSINESS
Bank business is to take money from common people at a smaller interest rate like fixed deposit and current account, where we get a small percent of 4% and lend this money to someone who can give them a higher returns.They are ready to give you a lot of money if you are a businessman because through business loans they earn a higher interest rate.
So bank take fixed deposit money from common people and give it to businesses on 7% interest loans which goes up to 10% to 14 % depending on how secured or unsecured the loans are. So with this difference of 3% to 6% they run their bank operations.
Bank usually checks on certain things of the businesses before it lends loans. They look at collateral prospect, people behind it, brand history and so many other things. But think you have started the business just three months back in that case they may lend you on a secured loan only.
Bank has to run this business successfully without default. Now not everyone who takes a business loan would repay it. Then it results in bank ending up in a mess. Because some would not return the interest as well the principal amount. So there will be a limit on whom they lend money and they won’t give it to only to one, as they distribute the risk to many businessman.
Now let’s get back to the business. Think your business is really expanding and doing well and bank has refused to lend you money. Now where will you go to raise money? You will have N number of queries in your head. But you are very passionate to make your business grow. So you can go to the public the normal people out there doing different professions like doctors, engineers, scientist etc. We can go to them who don’t have interest in doing business on their own and raise money from them and make them our partners. Seems like a great idea right?
So for that you need to do a valuation of your business with the help of a stock broker and they go to the public and raise money for you. Now rewind a little! In case of bank they were giving fixed interest rate but here they give a portion of their company to the people. For example think me and my partner had 100 percent equity at the moment. If we want to give 5% of it to the people and raise money then our shares will come to 95% and public will become our partner.
INITIAL PUBLIC OFFERING
First time when you go to the public and raise money you bring IPO i.e Initial Public Offering. And that IPO gets listed in one of the stock exchange. In simple terms stock market is there to raise money for businesses and very first time they raise money from market they bring IPO. They are called raising money from primary market.
THE PRIMARY MARKET
IPO market is called as primary market. Some people would be very lucky to get good company in the IPO phase. Like if the application from the people exceeds the number of shares listed by the company then not everyone would get it.
So the company will have a formula to distribute it. For primary market there will be given a time period within which public can go and apply for the IPO. Once they get the IPO, on the day of listing they can either sell it or buy more of it and later the stock starts getting traded in the market. Some may not be able to buy in the primary market so they can buy on the day of listing.
There are two stock exchanges in India. NSE( National stock exchange) and BSE( Bombay stock exchange). Let’s look more into NSE as it’s the largest exchange that covers almost 96% of the total volume. Many think that BSE is older hence larger. Though NSE was formed late, they had good technical advancement from the very beginning so became the largest platform for trading in India.
You can see companies like Reliance, Infosys, Wipro trading in the market and market price keeps changing everyday that happens in the secondary market. I want you all to visit the NSE website and check on equity stock watch to see companies under them. Also you can see them under different categories like Nifty 50. Secondary market starts at morning 9.A.M and closes at 3.30.P.M . But active trading starts from 9.15.A.M.
Now all of us are clear that stock market exists as businesses needs money.
So when you decide to start investing in the stock market, you are actually investing to some business that required money and they are raising it through IPO.
And this stock became public and was being traded to give returns to every share holder.
At the end of the day you are going to invest in one of the business only.
You can do wonderful business as well as ruin them. Business do fail at times.
Stock market is all about businesses. Identifying them and investing into them.
But businesses fails that's how it becomes risky
So accepting the fact that by investing in many stocks, there are high chances of losing money is a very important point to be remembered before you start the journey.