The concept of investing has been present among humans since pre-historic times. It finds its origin in the Code of Hammurabi from the Mesopotamian Civilization. Since the beginning of civilization itself, humans have been involved in some form of investment or the other.
Now, in the present world, investing is as easy as online shopping for clothes or furniture or anything else. All you need to do is open up the mobile application of the asset management company (AMC) or broker house with whom you want to invest, select the stock or fund that you want to invest in, and send in your order.
Just a few simple steps and voila, your investment is ready!
But how does the stock market actually work?
What happens to the money that you invest?
Let us use an example to understand the process of investing in the stock market.
Rohan was always different from others. While in school, Rohan would spend his days fiddling with his computer in his room instead of going out to play with the neighbourhood kids. His parents worried about the fact that Rohan preferred his computer to the company of others. They were pacified by the fact that Rohan’s school performance was always top-notch and his teachers were full of praise for him.
While in college, Rohan developed an incredible idea for a start-up. His idea is innovative and revolutionary. He decides to drop out of college to work on the start-up and develop a prototype. However, his parents are extremely against this idea. They don’t want him to compromise on his education. They refuse to support him if he drops out of college.
One of Rohan’s college professors comes to the rescue. He believes in the idea and agrees to fund Rohan’s start-up. Rohan is thrilled and he finalizes the agreement with his professor. Together, they agree that based on the idea, the start-up should be valued at about Rs. 1 crore.
Rohan’s professor gives him Rs. 5 lakhs, and in exchange, Rohan gives him 5\% of the company. The remaining 95\% is retained by Rohan himself.
Let us fast forward a year into the future.
By this time, Rohan’s prototype is ready, and he is gearing up for the next phase of his company. This includes the marketing of the product. Accordingly, Rohan signs agreements with several companies who agree to buy the product. Finally, the revenue starts coming in, and Rohan is happy. He opens up a small office and hires a couple of people to spread out the workload.
Five years later, Rohan’s company is booming. He has long-term contracts with several clients and he is planning to scale up his operations so that he can also take on international clients. He decides to sell shares of his company.
This is where the stock market comes in. Just like Rohan’s professor had invested money in his company right at the beginning, the stock market allows other retail investors to invest their money in companies. In exchange for their investment, the company allots a certain percentage of their stake to the investor. The bigger the company, the higher is its value, and the lower is the stake held in a single share.
For example, Reliance Industries Limited has over 3 billion shares in the market. This means, owning a single stock will give you a minute fraction of the company. However, it still works as an asset.
In the same way, Rohan decides to dilute 30\% of his company and sell the shares in the stock market.
Soon after listing, Rohan’s company’s share prices boom. As more and more people demand the shares, the price starts to rise, and so does the market valuation of his company.
When Rohan’s professor had invested, the valuation of the company was Rs. 1 crore. After working on it for five years and adding value to the company, the market valuation reaches Rs. 6,000 crores.
This means Rohan’s professor’s initial investment of Rs. 5 lakhs will have increased by a few thousand times.
This example explains the brilliance of the stock market.
It is one of the best avenues of investment because you get to be a part of the direct value addition chain. Not only that, you get to be a part of the company’s journey and capitalize on its growth.
Shares represent a fraction of a company.
Imagine you have a very large chocolate cake. You will not be able to eat the entire cake on your own. So, you decide to sell small pieces of the cake and earn money. Now, if you compare the whole cake to the company, then each small piece of the cake will represent a share of the company.
Of course, the company is much larger in size, and therefore, it can generate a few million shares. These shares will give you partial ownership of the company. This does not mean that you will have any control over the operations of the company or take part in the business decisions. Those responsibilities are reserved for the majority shareholder, that is, the promoter of the company.
If you need groceries, you’ll have to go to the market for fruits and vegetables. If you need clothes, you’ll have to visit one of the myriad malls which house clothing stores. Similarly, if you need shares, you will have to visit the stock market.
Very simply put, a stock market is a place where the buying and selling of company shares and other securities take place. It is a place where the buyers of shares can meet the sellers of shares, and the transaction can take place.
The days of a physical stock market have long since become extinct. Nowadays, the entire platform is digital and all transactions take place through the stock exchange platforms.
All the companies whose shares are available are listed on the stock exchange. If shares are not listed, then this means that the company’s stock is not publicly traded. For example, after Rohan decided to sell his company’s stock, he had to approach SEBI and get his company listed on the stock exchange.
Of course, the stock market is slightly more complicated than a shopping mall. As the items for sale are financial assets, there are a few technicalities that you need to keep in mind.
Thus, the creation of the Stock Market for Beginners Module from Convey by FinnovationZ. Over the course of this module, we will cover everything that you need to know before investing in the stock market. So, stay tuned, and join us on this ride to financial and investment awareness.