What are stocks? And what is a Stock Market?

What are stocks?

What is a stock market?

What is Bombay stock exchange (BSE)?

What is National stock exchange (NSE)?

What is Sensex?

What is Nifty?

What is meant be Sensex/Nifty is up or down?

How does upward or downward movement of Sensex/Nifty affect the growth of the country?

What is bull and bear market?

 These are the major questions which are repeatedly asked by the common people of India whenever they hear the financial news of the television or the newspapers or magazines. Although a simple definition of all the above terms can be found easily in a book or internet, it would be simpler and more interesting if we explain the whole scenario in the story form. Later, we will give the standard definition for all the above terms for your better understanding.

It all starts with a company. Let’s say there is a company X. It is a manufacturing company and is doing well in its sector. Now it wants to expand by doing some project or research and development(R&D) in his field. For this company requires capital, in simple, money.

 At first, the company will try to get the capital from all the owners to expand the company. Further, when the owners aren’t able to meet the capital needs, it will go the biggest money source, the banks. But this will only increase his debts along with the interests. So, what options the company X has now? Where can the company X get such a large capital from?

The answer is public. The company can collect a large sum of money by giving a little ownership of the company to the public.

 And here begins the journey of the company in the stock market. A stock market (ex BSE, NSE) is a place where the company will be able to present his ownership (in the form of the stocks) to the public. And why will the people buy the stocks of the company X? It totally depends on how positive the people is about the growth of the company in terms of sales, earnings, revenue etc. If the people think that the company will be able to grow to new heights, or if the people believe in the visions of the company X, then, they will buy the stocks to trade their money with the ownership of the company.

 Thus by giving the portion of the ownership, the company is able to pool a great amount of money for its growth and development.

 Generally, the shares offered by the company are not totally for public. Most of the times the owners (promoters) keep a portion of the stock with them to keep the ownership in their hands.

For example, let’s say the company X decided to provide 10,00,000 shares. Out of the total it decides to offer 7,00,000 shares to the public and remaining 3,00,000 shares with them. Here, the promoters share will be 30%.

 {We would also like to define the term free float market capitalization here. It is the product of the total shares offered to the public and the price of per equity share. Let’s say the company X each share price costs Rs 50 and it offers 7,00,000 public shares. Then, the free float market capitalization here will be equal to 50*7,00,000. The total market capitalization (not-free float) will be 50*10,00,000}.

 Now that the company X has decided to enter the stock market. When, the first time the company enters the market, it has to provide a offering price for the shares. This is called initial public offering i.e. IPO (we will discuss about IPO in details in later sections). The IPO is offered in the primary market, where the seller is the company and the buyer is the public.

 After the IPO, the stock goes to the secondary market, where the buyer and sellers both are the public. Here, the public generally exchange the ownership of the company.

That’s the story of the stock and the company X. In the next section, we will discuss about the two stock markets in India i.e. Bombay stock exchange (BSE) and National stock exchange (NSE) and their indexes (Sensex/Nifty).

If you want to learn Indian Stock market from scratch, I will highly recommend you to read this book: Bulls, Bears and Other Beasts: A Story of the Indian Stock Market by Santosh Nair

What are stocks? What is a stock market? -Summary

Stock:  A stock is a general term used to describe the ownership of any company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, all basically means the same thing.

Stock Market: The stock market is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. It is a place where shares of pubic listed companies are traded.

The stock market can be split into two main sections: the primary market and the secondary market.

  • Primary Market: It’s where new issues are first sold through initial public offerings. Institutional investors typically purchase most of these shares from investment banks.
  • Secondary Market: All subsequent trading goes on in the secondary market where participants include both institutional and individual investors.

Initial Public Offering (IPO): An IPO is the first time that the stock of a private company is offered to the public. It is a source of collecting money from the public for the first time in the market to fund for its projects. In return, the company gives the share to the investors in the company. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

Market Captalization: Market Cap or Market capitalization refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.

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