- What is the share market definition?
- How does share market work?
- What are its advantages and disadvantages to the share market?
- And How you can invest money in the share market?
Let us find out more about share markets in this article.
Stock market, share market or equity market- all three mean the same. These are markets where you can buy or sell a company’s shares. Buying shares of a company means buying some percentage of ownership of that company.
That is, you become the holder of a percentage of that company If that company makes a profit. Some percentage of that profit would also be given to you.
If that company incurs a loss, a percentage of that loss would also be borne by you Telling you an example of this on the smallest scale.
Let us assume, you have to establish a startup. You have 10,000 rupees, but that’s not enough. So, you go to your friend and tell him to invest another 10,000 rupees and offer him a 50-50 partnership. So, whatever your company profits in the future, 50% of it would be yours. 50% of it would be your friend’s.
In this case, you’ve given 50% of the shares to your friend in this company.
The same thing happens on a larger scale in the stock market. The only difference being, instead of going to your friend, you go the entire world and invite them to buy shares in your company.
The origin of share markets dates to around 400 years ago. Around the 1600s, there was a Dutch East India company, like the British East India company, There was a similar company in the country of Netherlands today, known as Dutch East India company. In those times, people used to indulge in a lot of exploration using ships. The entire world map had not yet been discovered.
So the companies used to send their ships to discover new lands and trade with far away places. The journey used to be of over thousands of kilometers aboard a ship. There was a huge amount of money required for this.
Not one person possessed such amounts of money individually in those times. So, they publicly invited people to invest money in their ships. When these ships would travel long distances to go to other lands and come back with treasures from there, They were promised a share of these treasures/money eventually.
But this was a very risky affair, Because during those times, more than half of the ships failed to come back. They got lost, or broke down or got looted. Anything could happen to them.
Investors realized the risky nature of this enterprise. So, instead of investing in a single ship, they preferred to invest in 5-6 of them. So that at least one of them had chances of coming back. And the money can be managed somehow for future purpose. This created somewhat of a share market.
There were open biddings of the ships on their docks. Docks are the places where the ships come out from. Gradually, this system became successful because the money crunch faced by the companies was supplemented by the common people. And the common people got a chance to earn more money.
You must have read in the history books about how rich the English East India company and the Dutch East India company became during those times.
Today, each country has its own stock exchange and every country has become greatly dependent upon the stock market. Stock exchange is that place, that building where people buy and sell shares of the companies.
The market can be divided into two types:
- The primary market
- and, the secondary market
Primary markets is where the companies sell their shares. The companies together decide the amount that what exactly should be their share prices.
Although there are some regulations in this too.
The companies cannot manage too much because a lot of it depends upon the demand.
How much price are the people willing to pay for the company’s shares. If the value of the company is 1 lakh rupees, it sells 1 lakh of its shares and offers shares at 1 re per share. If its demand is high and a lot of people want to buy its shares, the company would obviously be able to sell its shares for a higher price.
Companies, nowadays, decide upon a range. There’s a minimum price and a maximum price. They decide to sell their shares within that range.
The main thing is, “Every share of the company generated has equal value“
It is upon the company to decide how many of its shares it wants to make. If the total value of the company is 1 lakh, then it may make 1 lakh shares of 1 re each, Or it may make 2 lakh shares of 50 paise each. When companies sell their shares in the share market, it never sells 100% of them. The owner always retains majority of the shares to keep possession of his decision making power.
If you sell all the shares, then all the buyers of the shares would become owners of the company. Since they all become owners, they all can take decisions regarding that company. The individual who has more than 50% of the shares would be able to make decisions regarding the company.
Therefore the founders of the company prefer to retain more than 50% of the shares. For example, 60% of the shares of Facebook are retained by Mark Zuckerberg.
The people who have bought shares of the company can sell it to the other people, this is called the Secondary Market. Where people buy and sell shares amongst themselves and trade in shares.
In the Primary Market, the companies set the prices of their shares. The companies cannot control the prices of their shares in the secondary market. The share prices fluctuate depending upon the demand and supply of the shares. So the prices of the shares fluctuate depending upon the demand and supply.
Almost every country in the world has its stock exchange system. With so many countries registered in the stock exchange, if we want to observe, overall, whether the prices of the shares of the companies are moving up or down, how do we view this?
To measure this, some measurements have been put in place- Sensex and Nifty.
What is Sensex & Nifty?
Sensex shows the average trend of the top companies Stock Exchange averaging out, whether the shares of the companies are moving up or down.
The full form of Sensex, the sensitivity index, displays the same. The number of Sensex, that it has reached 40,000 marks.
The value of this number can be understood only upon comparison with the past numbers. Because this number has been randomly decided.
They decided, at the start that the values of the shares of the thirty companies would be this.
So we compile all the numbers and then say that it is 500. And, gradually, the sensex has been rising and it has reached the 40,000 mark in the past 50 years. This shows, how far up have the share prices of these 30 companies gone in these past 50 years.
There is another similar index- NIFTY- National + Fifty.
Nifty shows the price fluctuations of the shares of top 50 companies listed on the National Stock Exchange. If a company wants to sell its shares on the stock exchange, then this is termed as “public listing” and similarly, If a company is selling its shares for the first time, then it is called IPO- Initial Public Offering. That is, offering the shares to the public for the first time.
And these days, this procedure is very long and complicated. And it should be.
Because, think about it, how easy it is to scam the people.
Anyone could get listed on the stock exchange with a fake company, and exaggerate the value and achievements of its company. They could lie to the people and the people would foolishly invest in that company. He then could escape with the money. It has become extremely easy to scam somebody India in its history, has been a witness to a lot of scams like these.
The stock exchanges then realized that, they must have to make their process/procedures stronger and scam proof. For this the resolutions and rules were made stronger due to which there are very complicated rules today.
More than 50 shareholders should be pre present in the company, if you want a company to be publicly listed.
Now, How can you invest money in the stock markets?
With the internet in place you merely need three things- A bank account, a trading account and a DEMAT account.
- A bank account because you would need your money
- A trading account, to allow you to trade and invest money in a company
- A DEMAT account to store the stocks that you buy in a digital form
Most of the banks today have started offering a 3 in 1 account with all three accounts encompassed within your bank account. People like us would be called retail investors, that is, common people who want to invest in the stock market. A retail investor always requires a broker. A broker is someone who brings together the buyer and seller.
For us, our brokers could be our banks, a third party app or even a platform. When we invest money through brokers in the stock market, a broker retains some money as its commission. This is called “brokerage rate”.
Banks normally charge a brokerage rate of 1% in average.
But 1% is a little high. That’s not how much it should be if you look properly, you would discover platforms that charge a brokerage rate of around 0.05% or 0.1%.
This brokerage rate is a disadvantage for those who want to indulge in a lot of trading of stocks. If a lot of stocks are bought and sold in a day, a lot of money would be tapped off as brokerage fee. But if you want to invest for a long term, then a high brokerage rate wouldn’t make a lot of difference because you’d pay it only once.
Here, investing and trading are two different things.
- Investing means putting in some amount of money in the stock market and letting it stay there for some time.
- Trading means quickly putting in money at different places and withdrawing from some places. This all happens in quick succession. In fact, trading of shares is a job in itself. There are a lot of people, who are traders and do this job all day long taking out money from one share and putting it in another taking out from one place, putting it in another, and earning profit in the process.
An important question that arises is:
A lot of people compare it with gambling because a lot of risk is involved in it.
This is indeed some sort of gambling, If you are not aware of the type of the company and its performance, the parameters of the company and its financial record. if you don’t observe its history and accounting information then, in a way, this is similar to gambling. Because you would have no idea of how the company would perform in the future.
You merely listen to people saying that the company is doing well and we should invest in it in the share market, so that’s why you invest in it. You should never do this because it is extremely risky And obviously, when there are people that do this job day in and day out.
For examples the traders, who are experts in this field and have more knowledge about the stock market. They obviously would outperform the others because they have an idea of how this all works.
Also Read: Top 10 Growing-up businesses in the World.
So, in my opinion, you should never directly invest in the share market and instead rely on the experts. A very competent form of it is mutual funds. Because in mutual funds you don’t directly decide which companies you would invest in. In mutual funds, you place your trust in experts and let the experts decide which companies to invest.
In fact, a lot of mutual funds invest in many different companies to minimize the chances of loss.
Thanks for reading this article. I hope you got something valuable regarding Share Market. If you like it, spread this article to the rest of the world.