What the heck is stock market?
“I hate Indian education system” — Almost every kid just before his board exams say these enlightening and hard hitting words. In this article, along with showering some financial knowledge on you, I will tell you my personal reason of hating the Indian schooling system.
From an early age we were trained in memorising things. That’s fine. Memorising is good. But when we get out of schools and start a new adult life we realise that many things we wasted hours upon are of no use in real world. I bet every science student remembers “Beta Mange Car Santro Bap Razi”, an ugly sounding text they memorised just to remember [Be M C S B Ra] of periodic table. We were made to learn history dates but no one taught us to find patterns and themes in historic event.We were made to remember who is who on political stage but no one taught us about how different political ideologies changed the globe. And one thing my teachers did not teach at all was how to get rich. How to invest and how to make our quality of life better. From childhood many of might be hearing sentences life “nifty went up” or “sensex crashed” on television. But there are high chances that you, the creature holding this device, have no idea what these terms are. Don’t you think life would have been easier if you were taught to live life to its fullest and get hold of one thing on which the whole planet runs, money. Now enough with complains, let’s teach ourselves the basics of investing and learn step by step process of investing in Indian stock market.
What are shares?
When you buy shares of a company, you buy a part of it. The amount of the company you own is proportional to the numbers of share you bought. But why exactly company sell its shares. Let’s find out by an example.
Why companies go public?
When a company start selling it’s shares it is said that it has gone public. Let’s create a fictional aunty “Amma”. Amma, under the influence of cheap herbs, thought of an amazing business idea, Golden commodes. Yes, commodes! She calculated that she needs 5 crore rupees to convert this idea into reality. She has only 3 crores now. She now asks “mausa” and “phupha” to invest 1 crore each for 5–5 % shares of her company and she authorised 40% shares to herself. Now the company is valued at Rs 5 crore because this amount is the only asset it has right now. Now they divide the entire value of company into 5 lakh small shares each valuing at Rs. 100 (5 lakh X 100 = 5 crores). These are called authorised shares.
Now lets take a look at who have what.
One promoter and two investors have 2,50,000 shares in total. These are issued shares. Rest 2,50,000 shares are not authorised to anyone.
2 years have passed and rich people are liking the commodes very much. Amma now wants to expand. She found a Venture capitalist or VC who is ready to invest 10 crores more for 10% shares. Now a dramatic thing happens. The VC is valuing company’s 10% at 10 crores that means he is valuing entire company at 100 crores. Now the company’s value has dramatically increased. 1 share was valued at Rs. 100 before and now 1 share is valued at Rs. 2000 (remember entire company was divided in 5 shares). still 40% shares are unauthorised.
Suppose few more years passed and some investors invested in the company. Now company is valued at a whooping 200 crores and 15% shares are still unauthorised. Amma now wants to go global. But, it is very hard to find an investor at this stage because capital requirements are now very high. So amma decides to file an IPO or initial public offering for her 15% of unauthorised shares. Note one thing that now 1 share = Rs. 4000, that means 15% of 5 lakh shares i.e. 75 thousand shares = Rs 30 crores. This is the amount Amma will raise after company gets public. Now that shares are public. Normal people like you and me will start buying and trading these shares.
Why people will buy the shares?
When company first went public with it’s 75,000 shares many people bought these shares because they had a gut feeling that golden commodes is the next big thing and if they invest in these shares now they will get good returns. Now, how exactly are they going to get good returns? It’s a simple demand and supply equation. If the the company is doing good, more people will want a piece of that company, more the demand, higher the prices. If company performs poor, people will want to sell their shares but nobody wants to buy them, supply is more than demand, simply, prices will fall. Let’s look at an example. There is a dispute between Amma and Mausa over the colour of golden commodes. Mausa says colour of golden commodes will be golden (because common sense). But Amma said it will be pink (because ganja!). Now people who had shares, heard about this dispute. Some of them thought company is going to fall, so they will hurry to sell there shares, but nobody wants to buy, prices fell. But some genius people thought that, albeit this dispute, company is gonna rise again. So they bought these shares at a low price. Guess what? Company did rise again. Share prices went up. People who sold at low prices are now regretting a huge loss. In the end, it all comes to gut feeling. Now you have a basic idea how shares work. Let’s learn about how the insides of trading shares work and how can you start investing in India.
How to start investing and India?
We now know that a stock market is like a super market where you can trade your shares. This market consists of shops called exchanges. There are two major stock exchange in India. Bombay stock exchange and National stock exchange.
Now, if you want to buy shares of a company, pick your carry bag and go to one of these exchanges, right? Wrong. First of all shares are stored electronically and second, you cannot directly buy shares from exchanges. You need to open a trading account with an agent who is authorised by Securities and Exchange Board of India or SEBI. This agent is called an stock broker. Whenever you want to buy or sell your shares you have to contact your broker for the same. Some brokerage companies also provide you with software and mobile apps that lets you trade yourselves. To trade, you will have to transfer money from your bank account to your trading account. When your broker buys shares for you, these shares sit in a DEMAT account(which you need to open) in electronic forms. DEMAT stands for dematerialised or non-physical form. These DEMAT accounts are stored in organisations known as depositories. There are two depositories in India — Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL).
Now let’s wrap it all up
Your broker bought shares from stock market(somebody sold there for you to buy) with money from your trading account. Those shares will now be stored in your DEMAT account which are maintained by depositories. simple.
Note that there are many other intermediary organisations which works behind the scenes to make you trading seamless but you don’t really need to know about them right now.
If you are a student or a young adult, you might want to start getting into investing as it is very lucrative way to increase capital. I know there are risk involved but with great risks comes greater rewards.