I hope you have heard about SENSEX, NIFTY. And some of times you have seen that people talk about market gaining and loosing money.
SENSEX and NIFTY
These SENSEX and NIFTY are the indices run by BSE and NSE respectively. We will be coming to these things later on. When I heard about BSE or NSE or SENSEX or NIFTY they all seems to be same and I was never sure why the hell I should be worried about these things. Let me tell you that these stock exchanges contribute a significant part in the progress of our country.
Now let us start from basics. Suppose tomorrow I wanted to go and start lemonade business. I also have some basic capital for the raw materials which I require for my business. The next day I went ahead and started my business of selling lemonades at Rs 20 per glass. Fast forward 1 month, I was lucky and my hard work paid off. I was able to book decent profits within 1 month of running my business.
Now I want to move ahead and expand my business but there is a problem. I don’t have capital to start another shop. But I do know a bunch of people who are willing to invest in my company. So I approached 1 investor for some investment in my company. Now I need to give something in return to the investor so that he could also become part of my company. Now I decide to give 25% of my company shareholding to investor against Rs50,000. In order to complete the investment, I bring a legal stamp paper and complete the deal.
As you saw, I transferred some amount of shareholding of my company to another person. This is the real meaning of shares. So whenever you are buying a share from the market you are taking some ownership in the company. Usually, the companies listed on market issues in laws. The ownership you get by buying few hundred of shares is very less. Irrespective of your shareholding in the company, whenever the company makes profits you will be the part of profit/ loss making. The companies distribute profits to their shareholders by means of dividends. The amount which needed to distribute is decided based on company profits. If the company has performed very well they will distribute good dividends. And if the company has been in loss then they will not give any dividends.
I guess you must be clear that a person who is buying a share of the particular company is actually investing in the company. The company will be investing this money in the progress of the company that could be in the new projects they are planning to start or hiring employees etc. So there may be an important question who decide the value of the share?
In India, we have a government body SEBI which regulates the listing of the company on the market and also laid certain guidelines which one need to follow. So whenever any company wants to get listed on market, they need to get permission from SEBI and need to contact some promoters which usually are big investment banks. These investment banks will analyze the company’s balance sheet, P & L, the past performance, and goodwill. After doing various research they will prepare a document about company’s financial records and the price band of shares, a lot size. The company will now issue shares to the general public and whosoever is interested could buy the shares of the company. Once the issue is over within 1 week or so the company will be listed on market.
Now there is the most important question what is the market and who controls it?
These markets are independent private organizations which list other companies and are usually called as Stock Exchanges. In India, we have BSE and NSE which list other companies and across the globe, we have Nyse, Nasdaq etc. The index or number we usually see like Sensex or Nifty is a number which represents top 30 and top 50 companies listed on their respective market. If on one day Sensex or Nifty is falling that clearly indicates the top 30 or top 50 companies aren’t performaning well. This also indicates the shares price of those companies is also decreasing.
Now again a very important question should arrive. Why the share price increase or decrease? As I told previously initially the share prices are decided base on multiple factors by the investment bank. The investment bank decides the share price initially only. Once a company is listed on stock exchange, based on people sentiments the value of the share is decided. One should understand that people usually see the company financial records like quarterly or annual earnings, any new progress made by the company, future scopes of the company etc. The sentiments could include logical and fundamentals analysis. There may be the times that a company is not showing any profits but showing huge turnovers. Then there will be also a scope that the company is expanding very fast or implementing new ideas due to which it was not able to book profits. In such cases, people know that the company will give profits in future and then also the stock price increases.
Whenever there is a surge in a number of buyers of a share than the share price increases and vice versa. So the next time you go and buy a share do your homework first. You should be assured enough that why you are going to buy the share of the particular company, why not other company. What is the future of that company? How has already bet on that company etc?
I hope this small article has helped you in your investor journey. See you again