Capital Market – Basics
Hello guys,
In my new category “Capital Market – Basics” i shall be discussing about stock market and why this game is played.
These are the basic things one must know before you start trading / investing.
Lets first understand as why a company gets listed in a stock exchange.
First and fore most reason – They need working capital(MONEY) to do business, complete a new project, open a new division within the company etc etc….
So they first file for an Initial Public Offering (IPO) and when they get the permission from Securities and Exchange Board of India to get listed, they get a unique ID to trade and a price is determined for that particular stock.
And a certain number of share are made available for investors to buy.
Say ABC company is authorized to have 1000 share at Rs 10 each, so at max ABC can raise capital of 1000*10 = Rs 10000.
This will be its Market Capitalization
With out getting much in to the details of SEBI’s requirement and Book building process for price determination, let get to the main motive as how to invest and but obvious how to make profit out of that investment.
Beginning with an example, suppose Reliance Industries got listed in NSE today and its market value is Rs 400.
Now we being an investor we are aware that the company is quite old, good respect in the market, big projects in hand and many other factors which makes the stock juicy and then we think if we invest in this stock the price might go up to Rs 500 and we can make Rs 100 profit in each share.
So if you buy 1000 Shares of Reliance at Rs 400 today, after some days, weeks, years it may got to Rs 500 and you will make a profit of Rs 100*1000 = Rs 1,00,000.
So with Rs 4 Lacs one could have made Rs 1 Lac as his profit. No wonder if the price goes to Rs 300, your loss will be of Rs 1 Lac.
Now, what happens when you actually buy shares?
Few years back when IT was not introduced in Stocks, companies used to mail you a document, which describes that you are the owner of 1000 stocks and also mentions your buying price, date and time.
In other word you paid 4 Lacs to buy that piece of document, and when the market value of this company goes up, the value of your share (that document) also goes up, hence when you sell it in the market, people may happily pay you Rs 500 (as discussed in the example).
And today these documents are not sent to you but are maintained by a depository in dematerialized form and gets credited to your Demat A/c.
Who is a Stock Broker?
A stock broker is the person between you and the stock exchange, he is the person who will buy and sell share on your permission in the exchange.
Now a days these broker provide you with an electronic interface where you can log in to their software or even website and place a order to buy / sell shares.
And for doing this he charges you a commission, which is called as brokerage.
Sorry for making it a very big one. I will stop here and post more in other blogs, do comment and ask question on this.
Bye