What is Share Market and How it works?
What is Share market?
- Stock Market, Share market, or Equity Market all three mean the same. These are markets where you can buy and sell your 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, then 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.
- So, for example, if you want to start a new startup but you don't have enough money and you tell your friend to invest some money in your startup.
- If you and your friend invest 50-50 percent of amount, then the profit will also be shared 50-50 by both of you and loss also be borne 50-50 by both of you.
- So, in short your friend has 50% shares in your company.
- The same thing happens in large manner in stock market. The only difference here is that instead of approaching your friend for investing you can approach anyone in this world, to invest or purchase shares of your company.
History and Purpose of Shares
- The history of Share Market dates to around 400 years ago. Around 1600's there was a Dutch East India Company just like British East India Company in today's Netherlands.
- In those times, people used to indulge in lot of exploration by ships.
- The map of world was not much known. So, the companies used to send their ships to discover new lands and trade with far away places.
- This journey used to be thousands of kilometres by ships.
- The companies didn't had these much money to invest in number of such ships. So, they got an idea to start offering people to invest in their ships. So, any common person can invest in their ships.
- In return, when the ships will discover new lands for several months and then come back with treasures.
- Then the people who invested would get some amount or percentage of those treasures.
- But this was a very job at that time because most of the ships would never come back.
- They would get lost somewhere, or get breakdown or had accidents.
- So this was kind of risky for investors to invest.
- So they decided that instead of investing in just one ship, they will invest in 5-6 ships. So that at least one of them will make it back with treasure.
- So, in this way number of people started investing money in ships.
- There used to even be a bidding process on the docks for people to invest.
- So, both Dutch East India Company and British East India Company had become rich at that time by this.
What is Stock Exchange?
- Stock Exchange is the place where people buy and sell the shares.
- There are two types of markets - Primary Market and Secondary Market.
- Primary Market is the place where the company sell their shares. The company decides the value of shares. But there are some rules and regulations to it. According to rules the company sells the shares in a range.
- No company sells all of its 100% shares, because then the decision making power is with everyone who bought the shares and not on any single person.
- The individual who has more than 50% of shares can make the most of the decisions.
- So the people who bought the shares can further sell those shares to other people. This is called Secondary Market. Where the buyer is not in direct contact with the company owner.
- So the prices of the shares fluctuate according to demand and supply, in the Secondary Market.
How does it works?
- If a company wants to sell its shares in a Stock Exchange, then this term is called as Public Listing.
- It was easy to sell your company's shares during the East India Company era. But now it has become a long and complicated process.
- Due to security related issues, the rules and regulations have been hardened.
- SEBI (Security and Exchange Board of India) performs all these regulations and the companies need to fulfill the demands of SEBI.
How do you invest in stock market?
- During the East India Company era you needed to go to docks for selling and purchasing of shares.
- But, after internet has come into place, buying and selling in shares has become easy.
- You just need three things, a bank account, a trading account, and a demat account.
- Bank account because you would need your money.
- Trading account, to allow you to trade and invest in a company.
- A DEMAT account, to store the stocks that you buy in a digital form.
- People like us would be called Retail Investors, that is, common people who want to invest in a stock market.
- A Retail Investor always needs a broker who can be a bridge between you and stock market.
- If you want to invest in share market, you should also know that it is a risky thing to do.
- It is more risky if you haven't studied much about it or the company that you are investing into.
- You should never invest directly into shares, before consulting the experts. You should always ask for their opinion.
- One such option is Mutual Funds.
- Check out our post on Mutual Funds.
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