Financial wellness rests on four main pillars — earning, saving, investing and protecting. One of the most daunting of the four can be looking to invest in the stock market. For beginners, the stock market comes with complicated jargon that can be tricky to tackle. Moreover, stock markets are typically known to be fickle and have inescapable ups and downs.
In this article, we help you understand the stock market.
Understanding the stock market
The stock market is a platform or area that investors use to purchase and sell company shares, securities, bonds, mutual funds, ETF’s and more. The stock market is also known as a securities exchange. In India, the Bombay Stock Exchange and the National Stock Exchange are two principal securities exchanges in the country. These exchanges are subject to government regulation and have a set of rules that they adhere to, as laid down by the SEBI. As the backbone for a large number of companies, the Indian stock market is an avenue of growth for aspiring organisations.
In definition: The stock market is an electronic marketplace where various buyers and sellers congregate to buy and sell specific stocks. Typically, market trends and investor perceptions drive the buying and selling of stocks.
To understand this concept, let’s consider an example.
Two friends, Anand and Vishal, regularly invest in the stock market and are currently monitoring the stocks of a large beverage company. At the moment, the company is trading at Rs. 1100. In an overnight development, news headlines revealed that the company’s CEO resigned due to an internal conflict. In a matter of hours, the price of the beverage company tanked by 10% of its overall evaluation. As a large conglomerate and a blue-chip stock, the beverage company did not anticipate the downfall in its valuation.
Now, Anand possesses 500 shares of the beverage company and views the sudden development as a bearish move. He believes that the beverage company will be unable to progress without the dynamic CEO’s involvement, and hence, the stock price is likely to plummet further. Anand looks to sell his holdings at the current valuation of Rs. 950 before he accumulates further losses.
On the other hand, Vishal views this development as a rare market opportunity. Since the company’s stock valuation had not traded this price for over three years, he believes that this blue-chip beverage stock will return to its valuation of Rs. 1100 in a matter of months. He decides to purchase an additional 500 shares at Rs. 950.
This is how the stock market operates based on perception and trends.
Valuing a company in the stock market
Every large company that you see listed on the stock market today started at some point in time as a tiny operation and today has grown to become a financial giant. To learn how to value a company you must look into the nature of the business and the stock market.
For instance, consider Amazon and McDonald’s.
Amazon started as an online bookseller with its back-end operations in a garage.
McDonald’s was a tiny restaurant that no one heard about, outside of San Bernardino, California.
How did these companies emerge from their unknown hometowns to become two of the largest businesses across the world?
They did so by raising capital and selling stocks in themselves.
As a company grows, it requires additional funding for further expansion. Company owners can either borrow funds from a lender or sell a portion of their business to investors and use the money to expand the company.
Growing businesses look to issue stocks by surrendering a tiny fraction of their ownership to finance their growth and expand the business. The act of selling stock means that the company is going public in the stock market for the first time.
If you are considering investing in the stock market, it can help to know that it is a regulated and safe platform. You would need to open a demat and a trading account with a registered and well-known broker such as Kotak Securities to begin on your investment journey in the stock market. If you are new to this game, you can consider the assistance of a licensed financial expert advisor to gain knowledge before making significant stock decisions.