what is the stock market?

Stock market , intraday trading, Future and options are gaining huge popularity in India. Detailed explanation of What is the Stock market and explanation about each terms so you get to learn the basics.

With this you will also get to learn about how stock market works, how startup raise capital and benefits of stock listings.

Topics covered

  1. Overview
  2. What is a stock?
  3. Types of shares in stock market
  4. What is a stock exchange ?
  5. Benefits of Stock Exchange listing
  6. Problems of Stock Exchange listing
  7. Sectors in Stock Market
  8. What is the stock market

1. Overview

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2. What is a stock?

Stock or shares of a company represents ownership equity of a firm. It gives residual claim on corporate earnings in the form of capital gains and dividends.
It also gives voting rights for any decision in the company if it is comman share. ( not preffered )

If a person have shares of the company, it means shareholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares.

2. Types of shares in stock market

Majorly there are two types of stock :

  • Common
  • Preferred

Common shares carry voting rights that gives shareholders the leverage to have a point in corporate meetings where board of directors or appointment of auditors are voted upon.

Preferred shares don’t have voting rights rather they have the preferrence over the common shares in a company to recieve dividends as well as assets in the event of a liquidation.

Raising capital

How can a startup raise capital ? ( Ever got this question.. )

Well there are ways to raise money either by selling shares or borrowing money. Borrowing money is also referred to as debt financing which can be a huge problem for a startup.

Many startups don’t have much assets to pledge for a loan ( like in tech or bio technology companies ) and interest on the loan would impose a financial burden in early days.

Safer method used by most startups is equity financing. Business person or startup owner initially invest their own money, friends family and after that if it becomes more stable, substancial and profitable they may turn to angel investors and venture capital firms.

Listing shares in stock market

How do companies do that ? ( Another questions ponder in mind. )

When a company establishes itself, instead of taking a corporate loan, it can get higher amount of money by selling equity to public through initial public offering ( IPO ).

When any company does this, it’s status changes from private firm whose shares are held by a few shareholders to publicly traded firm whose shares are held by numerous numbers of general public.

Once company’s shares are regitered in stock market, the prices of shares will fluctuate as investors and traders assess and reassess their intrinsic value.

4. What is a stock exchange?

These are secondary markets where existing owner can sell their shares to other potential buyers looking to buy shares in the company.

You have to understand that corporations that are listed on stock market doesn’t buy or sell shares on regular basis.

When you buy a share you don’t buy it from the company but you buy it from existing shareholder. Similarly when you sell the share, it’s not to the company but to other investor who is looking to buy the same.

5. Benefits of stock exchange listing

Stock exhange listing have multiple benefits listed below :

  1. Exchange listing means ready liquidity of shares held by the company’s shareholders.
  2. If anytime company wants to raise funds, it can issue more shares.
  3. Having publicly traded shares makes it easier to set up stock options plans that are necessary to attract talented employes.
  4. Once a company is listed in stock exchange, it’s visibility incerase which attracts analyst coverage and demands from institutional investors. This can raise the value of stock.

6. Problems of Stock exchange listing

There are certain drawbacks when it comes to negative sides of listing :

  1. Cost of listing your company in exhange, rates assocaited with compliance and reporting are high.
  2. Their strick restrictions, t and c’s can stop company’s ability to do business.
  3. Some companies work for investors favour and forces to grow their first quarter results. This makes them vulnerable for long term investments and lack in corporate strategy.

7. Sectors in stock market

There are in total 11 sectors inside GICS ( Global industry classification standard )

  • Energy
  • Materials
  • Industrials
  • Consumer Discretionary
  • Consumer Staples
  • Health care
  • Financials
  • Information technology
  • Communication services
  • Utilities
  • Real Estate

8. What is the stock market ?

Stock market refers to the collection of markets and exchanges where regular activities of buying, selling and issuance of shares of publicly traded companies takes place.

These financial activites takes place under over the counter marketplaces which operate under a defined set of regilations.

If somebody says to you, they trade in stock market that means they buy and sell shares/equitites on one or more of the stock exchanges that are part of overall stock market.

Hope you got to learn all you were looking for. Stay tuned for more upcoming blogs.

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