HOW STOCK MARKET?
Stock Market, Share Market, Share bazaar, are different words, but they are all the same thing. In our last episode, we discussed why do we need to do investment, and what are its advantages? So let’s just assume that you are willing for an investment, and you have decided that you will invest in say, mutual funds or LIC or FD, etc., but before this, you need to understand, what are they going to do with your money, so in this episode, we will talk about why and how the stock market is important.
Okay, so without wasting much time, let’s get started!
So before we get into understanding Stock Market, first we need to understand, how business works. Let’s say you have started a new start-up and now you require funds for your start-up, so at the beginning, you won’t be going to the bank, because the bank will provide you with the loan, and ultimately you will have to pay the interest rate for the same. So when you are at the initial stage of your start-up, when you will be paying your interest rates for the loan, all your profits will ultimately be drained out. So now you don’t have the option of the bank, so you asked your family members or friends, to invest in your start-up company, and they agreed to it, and invested. Now, the first fund that you received is called Seed Funding.
Now let’s assume that your business started to run well. It’s been 1–2 years, and it has been able to generate good revenue and many of the investors have invested in your company, but now you want more profits, you aspire to expand more of your business, so what will you do? You have ample of options available, but let’s say that you have tried all the options, but you want more money, so what you will do, you will make your company public, which means that now, the general public will be able to invest in your company, and how do you do that? This is done by listing your company in the stock market, and which is done by launching an IPO, i.e., Initial Public Offering. Now there is a process, not every company can launch an IPO, there are a lot of guidelines into it which is decided by SEBI (Securities and Exchange Board of India). We will cover in the coming episodes, the guidelines, the procedure, everything.
For now, let’s assume that the company has launched the IPO and people are now starting to invest in it.
So, you must be thinking what’s the point of this story. With this story, the first thing that we need to understand is that we just don’t invest in the stock market rather we invest in businesses, which means the profits of the business will bring you profits, and vice versa. Since you are investing in a business, the profits, losses and also the risks, all are associated with your money. Now, this is something, we have to keep in mind that we are investing in a business.
Now the question is, how will the general public or a common man be able to invest in a business? Because investing in the stock market also involves a process to it, and for which we are required to open two accounts, apart from our bank account. So the First account is Demat account, now what is Demat account? Now think this way that you have invested in a company, so ultimately you become the shareholder of the company. So when you are purchasing the shares of a company, then you should be having proof of it, and you get that proof in Demat account.
A few years ago, people used to get their Demat in paper form, i.e. the proof used to be in paper form. But in the current scenario when everything is digital, you get all your Demat account proofs in digital form. You can easily show people through Demat account, all the stocks or shares that you have purchased.
Okay so now, who handles the Demat account in India? But Before that, we need to know how many types of Stock Exchanges are there in India. So in India, we have two Stock Exchanges, National stock Exchange (NSE) and Bombay Stock exchange (BSE). BSE is the oldest stock exchange, founded in 1875 and NSE is the new one launched in the year 1992. All the companies which are there in the stock market get listed in one or both of them. There are many companies that are listed in both of them, also there are many that are not listed in both of them.
Okay so now when you are opening your Demat account, it depends if you are opening your Demat account in NSE or BSE, and there are separate regulators for both of them. A Demat account in India is regulated by National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), they both aims to ensure that your Demat account is safe, secure.
After Demat account, you need a Trading Account. For purchasing or selling a stock, you require a platform to know the price of the stock, the total quantity of the stock available for purchase, so for that, you will have to open a trading account. Now in India, for opening the Demat Account and Trading account, a broker is required, and the broker helps you, in making transactions, in trading the stock.
Now you have decided that you want to open a Trading Account. So there are many stockbrokers in India e.g. Angel investor, Zerodha, etc. Zerodha is considered to be the best stock broker in India, and there is a reason behind it, we will discuss it in the coming episodes when we will discuss in details about how to open Demat Account and Trading account.
So now, you have opened your account in Zerodha, and you are thinking of investing in the stock market, but before this, you have to understand one thing, that you are investing in a business, so here you have to think, how will be the business running, whether there will be a profit or a loss in the business in the coming future, how it is going to compete against its competitors and many more?. You need to understand these things before investing your money because you are not gambling, Gambling doesn’t ensure high returns in the stock market. Often people invest in the stock market like they are gambling and this is the reason why 10% people in this world have 90% of total wealth. So before investing in the stock market, you will first have to understand, how the business is working.
”10% people in this world have 90% of total wealth ~ Robert Kiyosaki.”
Let’s say, you have to invest in automobile, so the first thing you will do is, you will check the condition of an automobile in India. Like the condition of automobile is so bad currently because of the corona, so for now, you won’t be thinking of investing in an automobile. But when you will see that the IT sector is working fine, then you will be willing to invest in the IT sector.
There are numerous events happening every year, which plays a very significant role in the performance of businesses. Like the budget launched every year in the month of February, decides the profitability and non-profitability of the companies. For example, let say that in the budget announcement, the Government of India has decided to provide 20 lakh crore to the automobile sector, then that’s obvious that the particular sector will grow.
“The stock market is a device for transferring money from the impatient to the patient ~ Warren Buffet”.
Warren Buffet has stated that when you are thinking of investing for the long term, then you should check the Fundamentals of the company. Fundamentals mean how the company is working, how is the sector performing, in which the company is involved, is the Company going to survive in the long run. And when we have to invest for a short period of time, we mostly lookout for Charts. Stocks have a tendency to repeat its patterns, thus it’s possible to analyse its behaviours using the technical chart, which we call as Technical Analysis.
When you study the fundamentals of the company, then that’s Fundamental Analysis, and when you study the charts, that is called Technical Analysis. We will discuss more about charts, how to see and analyze charts, and how do we actually study the fundamentals, but for now, let’s focus on basics.
So here comes the most interesting part i.e., why is it necessary to know about the stock market?
Let say that you invested your money in Mutual Funds or you invested in LIC, thinking your money to be safe, or say you have deposited money in the bank and you think it’s safe, then there might be this question in your mind, that where do they invest your money? So when you are investing in Mutual Funds, where people say that it’s the safest. Well, it is said to be safe, because there is someone else who is investing in the market on behalf of you. What happens in Mutual Funds, that when lots of people invest in a fund, then there is a Fund Manager, and this fund manager uses your money and invests in the market, and it is then dependent on the fund manager how profitable it will be. And above all he is also a human, when that money is invested in the stock market, definitely it carries some risk. If the whole stock market crashes then your mutual fund will also crash, and this happens. So Mutual Funds are also not safe. When it comes to LIC, Where do u think they invest? Even they invest in the stock market. Now Bank, when you deposit the money in the bank, and the banks provide you with an interest rate of 3–4%, where do you think they are getting profits from? What they do is, they grant the money as a loan to companies. So indirectly everything boils down to the same point, “Everyone invests in the business”. So, In order to know where our money is being invested, Don’t you think we need to know how the business works?
So that’s all for today from VyolvePaisa. Hope this makes your base of Stock Market clear. In our next episode, we will discuss What is Demat Account? Who is a broker? Types of Brokers, and many more. Till then, Keep following Vyolve paisa and Keep Evolving with Vyolve.
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