What is Share Market? How does it work?

What is share market? The main function of share market is to function as a source of capital for companies.

Companies which wants to expand its business, can go to share market.

In share market, ownership of company is sold to investors in form of stocks/shares.

Individual stocks represent ownership of company subdivided into small units.

These small units are called as stocks which one can buy/sell in share market.

Share market is like a interface between companies and investors.

Share market is a place where stocks of companies are listed.

These listed stocks are available for investors for buying.

The money raised by companies in the process of selling their stocks is their accumulated capital.

This accumulated capital is used by companies to expand or modernise its existing business.

For companies, the main advantage of raising capital from share market is that, this capital is interest free.

Unlike bank loans, where interest payment must be made on borrowed fund, share capital demand no interest.

From point of view of investment, share market is the best long term option.

Share market provides best long term returns.

In addition to returns investors money are very liquid in share market.

The day they want they can sell their holding easily.

What is share market -1

Investing in share market is like gambling?

For majority people, share market is like gambling.

People think that playing share market is simply ‘buying low and selling high’.

People do not bother why stock’s price is falling/rising.

But in reality, share market works much more logically than a game of roulette.

For trained investors share market is no gambling. It runs with a pure business logic.

If practiced properly, share market can be predicted fairly accurately. Hence it is not gambling.

But many does not want to take the pain of understanding share market’s logic.

For them ‘buying low and selling high’ is like knowing-enough.

If you will ask your parents about share market, they will probably suggest you to stay away from it.

The reason being, they themselves have been treating share market as a pure gambling phenomenon.

People think that share market can either double money in a day or it can eat away everything.

But investing in share market is not a days/weeks/month’s activity.

It is essential to stay invested for years together.

Share market is not a short term investment option. Day trading in shares in not investing.

If one really wants to make money in share market they must keep a holding time of minimum 7 years.

Share market is a one stop solution…

When I started learning about share market, people used to give me examples like how people got ruined in share market.

They were not wrong. There are perhaps more stories of disasters than of success when it comes to share market.

But disaster stories are caused because of lack of know-how of people.

Share market is like a formula one car.

If one knows how to control it, it will be fun.

Otherwise riding it is like testing ones luck.

If there was no share market, how companies would have raised funds.

How the world would have seen the investors like Warren Buffett’s and Peter Lynch’s?

If one is interested in buying stocks, contacting individual companies, asking for its stocks is lot of pain.

Similarly selling stocks would be even harder.

Where you will find takers for your stocks?

Share market is the complete solution.

Share market acts like a shopping-mall where shares of all companies are bought & sold.

It is something like we preferring to go to shopping-mall to buy grocery, vegetables, clothes, gadgets, entertainment, dining etc.

How difficult it was in the past when one had to travel to individual shops to buy each.

So a share market is a one-stop-shop where one can buy/sell stocks of all companies.

Invest online in share market

In India we have two big share markets:

  • Bombay Stocks Exchange (BSE) and
  • National Stock Exchange (NSE).

If one wants to buy stocks from BSE or NSE, then he/she need not travel to Bombay or Delhi.

He can simply approach a stock broker or else do it oneself.

Doing oneself is possible by opening a online trading platform & a Demat account.

These days online trading platforms are provided by all major banks like ICICI, SBI, HDFC, AXIS etc.

So if one has a online trading platform, buying and selling of stocks can be done from comfort of ones home.

What is share market -2

Why people buy stocks?

Investors buy stocks for two reasons:

  • To earning dividends and
  • To claiming capital appreciation.

Dividend earning is dependent on companies profits (earnings).

Capital appreciation is dependent on growth of companies assets and earnings.

If companies earnings (profit per share) is increasing, its market price will certainly increase in the same proportion.

#Dividend Earning:

When a person buy stocks of a company in share market, they become eligible for a proportionate claim in companies earnings.

In other words, these people are proportionate owners of a company.

Suppose a company has total 10,000 share in the share market.

Out of these 10,000, you own 100 shares.

It means you have ownership claim of 0.01% of companies earnings.

If this company is generating $100,000 per year as profit, then your claim will be $1,000/year (0.01%).

When a company distributes its profits among shareholders, it is called as dividend distribution.

A company may not distribute 100% of its profit to shareholders.

They may also decided to retain a portion of profit to fund companies working capital & growth.

Suppose, companies’ EPS (earning per share) is $10 and it has declared dividend of $1.

It means company is retaining 90% of its profits (earnings).

#Capital Appreciation:

When companies does business, its objective is to generate and grow its earnings.

Suppose a company had EPS of $5 in 2015 and by 2018 its rose to $10.

It means, the company saw EPS growth of 26% per annum in 3 years.

The rate at which company EPS grows, its most likely that its market price will also appreciate in same speed.

This appreciation of market price of share is called capital appreciation.

Suppose you bought stocks of a company at market price of $100/share (EPS $10) in year 2015.

In year 2018 when market price of this stock rose to $210/share (EPS $20), you decided to sell.

In this case your capital appreciation will be $110/share (210-100).

Final words…

Share market is a financial institution where it is possible to buy and sell stocks.

If share market did not have existed, there would have noting like ‘publicly held company’.

Share market has made it possible for a common man to be a part owner in a technology company.

Even if the individual knows nothing about a technology, still he/she can be a part owner of the company.

Share market is the most powerful money making machine for a common man.

One day I can be part owner of Tata Steel and the second day I can add Reliance Industry in my portfolio.

The ease with which modern share markets allows common man to become part-owners in big companies is phenomenal.

How else a common man could have ever achieved being owners of several companies at a time.

From point of view of companies, how easy it has become for them to sell their holdings in market and generate funds.

Similarly, when company top managers feel that their stocks are undervalued they can buy their stocks easily from market.

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