what is stock market?
- Yesterday, the nifty & Sensex slipped -1%, which erased investors’ money.
- Yesterday, the nifty & Sensex gained 200 points.
On a daily basis in the morning newspapers and TV news. You can see the news with these headlines. Have you ever wondered what this refers to and even sometimes you may wonder what the stock market is?
Why do people invest, trade and put money in the stock market? If your head is full of these types of questions you are in the right place.
In this article let’s know what the stock market is? Why does the stock market exist? and how to earn from the stock market?
The stock market is a place where everyone buys and sells company shares in order to fulfill their personal needs.
What are shares?
Here, in the stock market shares represent the ownership in a particular company. The companies decide their share price initially (IPO’s) and later the market decides their actual share price based on their valuations (growth, sales, returns and other factors).
Why Do Companies Issue Shares?
The companies divide their rights into shares for pulling money from the people and this money is used in their business operations which will help them in their business growth, as the proof that people invested money in their business companies split their rights into shares and give in exchange.
What is the benefit of this entire process – i know after reading this, this is the question raised in your mind let us know about that also ?
Why the stock market? and history of stock market?
Imagine you’re running a business for a while – feel you are the owner, ok ! You have been running a toy business for a year in your locality only, with very good turnover and you wanted to start your business in another locality also or you wanted to make big (add more toys are something that helps business growth) your business in the same locality.
For the expansion in your business what is the ultimate resource you need without hesitation you and everyone know it is money. Now, how do you raise money? What are the ways that help you to raise money and expand your business?
Most probably well known ways are:
- Reinvesting the returns into a new business plan.
- Take business loans from banks and financial firms.
- Take loans personally other than banks and firms with high interest.
- Selling the owner’s current property.
In all the ways mentioned above creates the difficulty for owners to run present and new planning business in terms of money. Imagine if he (owner) sells current property or takes loans (at any interest) to start a business that puts him into risk because business contains both ups and downs.
If he faces business upsets for months that are definitely going to create difficulty if he took loans he needed to repay, if he sold property he directly put his entire family on the road.
So, these are not highly recommended ways to start a business, at this time the solution is invested in the year 1602 the first modern stock market started in Amsterdam (Netherlands).
What happened in the year 1602 ?
A company called Dutch East India Company(VOC) is the first company to sell shares to the public, people invested money and people got shares(ownership). This is how the modern stock market concept was introduced to the world. Before, around 1300 – 1400s in places like Italy & Europe trades were already buying and selling debts and business stakes were done but it was not organized like today’s stock market.
So, simply the stock market idea is introduced to the world where business owners will pull money from people and give in return their rights as ownership(shares) for people and use the raised money in their business growth and gain or loss is distributed with respect.
How to participate in the stock market?
ok, where do you need to buy and sell shares of the company?
- To buy vegetables do you go to a medical shop?
- To buy clothes do you go to the vegetable market?
No, like this to buy and sell shares of a company you need to do through Exchanges.
What are Exchanges?
Simply A place (or system) where people buy and sell shares. There are many exchanges in India, but only NSE (National Stock Exchange) are BSE (Bombay Stock Exchange) very popular ones in India and NYSE (USA) & NASDAQ (USA) world wide famous ones.
So, under the Exchanges regulations people buy and sell the shares of a company.
Why are these exchanges needed? What if there are no exchanges?
“Without a stock exchange, it is hard for buyers and sellers to find each other and there is a higher risk of fraud, whereas with a stock exchange, trading becomes safe, prices are transparent, and buying or selling shares is easy.”
How do any individuals participate in the stock market?
For any individual to participate in the stock market there are many ways like IPO’s, ESOP (Employee Stock Ownership Plan) and other ways but a well known and popularly followed way is participating through broker apps. creating demat accounts, trading accounts with brokers like grow, upstock, Zerodha.
Benefits of the Stock market?
The Stock Market helps companies pull money by selling their rights as shares to the public this helps business to grow invest in new ideas and grow company without depending on loans and also enable liquidity which means investors can easily buy and sell shares at any time.
Which makes it simple to convert investments into cash compared to other assets. Another key benefit is price discovery. Stock prices are decided by demand and supply, which ensures fair and transparent pricing of shares.
The stock market also supports economic growth both directly and indirectly by moving money from investors to businesses. As companies grow, they create jobs and contribute to the overall development of the economy.
How to earn money in the stock market ?
To earn money through the stock market there are different particles. Let’s discuss each and everyone in detail.
1) Capital Gains (Price Increase)
This is the very common and most followed way in real time buying at low prices and selling at high prices and the difference between buy and sell price is your profit or loss.
Example:
| BUY | SELL | DIFFERENCE | NET P&L |
| 100 ₹ | 120 ₹ | 20 ₹ | PROFIT |
| 100 | 80 | -20 ₹ | LOSS |
2) Dividends (Passive Income)
Dividends income this is considered as passive income the companies rewards the investors for their loyal share holding with 2 – 3% annually. This dividend is decided by the company only and it is up to them to award or not?
Note:
3) Long-Term and Short- Term Investment Growth
Investors buy and sell shares for many years. Generally holding period is 10 – 15 years also, long term investing is one of the ways investors make money through the stock market.
Short term holding period is generally less than 2 years or even 1 year also, short term is more risky then compared to long term, from both long term and short term investments, money can be made through stock market.
4) Trading
Investors can make money through trading in the stock market also, trading is considered as risky as their holding period is very less which comes under 1 day to 1min also, but investors can also make money through trading in stock market.
Is the Stock market risky or safe?
The risk depends on individual behavior. The stock market is a place which has many opportunities and risks depending on how you see and use the stock market.
Example:
person A – He is a new person to the stock market but a safe person. He just wanted to make some returns to beat inflation and wanted to enjoy stake holding in a company so, he chose to invest in a company for the long term and bought shares at a low price and hold for a long term where he gains capital gain and dividends.
Here, the risk is very very negligible. You can’t say that loss will not affect the person a but he approached the safe with respect to his mentality and decision so stock market is safe for him.
Person B – He is a new person to stock market but with risky mindset means don’t know anything about stock market but his mindset whatever it happens i will take and invested for short period and chosen to take out money even he see any small loss and bought on high price and holding for short period.
Here, the risk is moderate or even high because of his individual activities.
In final, the risk factor of the stock market depends on individuals how to take or use the stock market?
Note : “The returns mentioned in the article are based on historical performance and market trends. Investments are subject to market risks.” I am sharing information about investments. Please consider consulting your financial advisor before investing.
Conclusion
So, finally the stock market is a place where an individual buys and sells shares of a company under exchange regulations under Sebi guidance. With the stock market directly and indirectly the economy will get benefited and every individual can get benefited as per their personal goals.
“To understand basics, read What is Investment”
“Stock market helps beat inflation over time”
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