The reason I’m putting this post out is because the last time I had posted on this platform, many of my friends reached out to me and told me to start from the beginning and explain the most basic terms. The posts will be under each other so please scroll down for the next post.
Let’s start with the basic component of the market – a share/stock
A share/stock is an ownership claim of part of the company (usually a very small percentage). Hence, entitling you to a part ownership of their assets and earnings. A stock usually has a stock certificate which is proof of ownership. We don’t actually see these documents nowadays because they are handled online which makes stock easier to trade. Earlier, people actually had to take their stock certificates to the broker and had it traded.
The ownership of a stock does not give you a right to go and tell the top brass of that company how to function. If you as a shareholder believe that the management is not doing well, shareholders can vote them out of the company. Of course, only the larger shareholders would be able to make such big decisions since you need to own a large percentage of the company to actually have some influence. I’m going to repeat: the most important characteristic of a stock is that it gives you a claim on its assets and earnings. Another important property is a stock’s limited liability. You cannot personally lose more than your investment value if the company is in debt i.e. Owners are the shareholders. They do not hold shareholders accountable.
Next important term is Debt vs. Equity
Why would companies take loans or sell ownership of their company? Because at some point in a company’s journey, it might need money to finance its expansions. Now, there are 2 ways to finance a company:
- Debt financing includes taking loans and issuing bonds.
- Equity financing includes selling their company as stocks/shares.
Issuing bonds – Investor gives money to the company on the condition that he is paid periodic interest payments and when the bond matures, the company has to return the borrowed amount.
A very, very important rule to remember on risks of investment – greater the risk, higher the returns
E.g. People put money in their bank accounts because it is safe, but the returns on this are very low. Usually new banks will offer higher interest rates because of higher risk. I.e. the chances of a new bank falling apart is less than an old established bank.
Different types of stocks:
Common Stock – this type of stock is the one we just discussed about which has all basic properties and has variable dividend amounts. Thus, increasing the risk and if the company fails, the common shareholder does not receive any profits.
Preferred Stock – this type of stock has a fixed dividend and does not change over time. It has much lesser risk because of the fact that the preferred stockholders are paid before the common stockholders . Common shareholders are paid last. But Stocks can be classified in many other ways also. For example, a company can make shares that have different votes per share.
So, going to the main topic of this post. What is a stock market?
It is the place where Stocks/shares of different types are traded i.e.different buyers and sellers meet and decide on a price to buy/sell that particular stock.
On this blog I’ll be writing only about the USA and Indian markets.
US markets –
- New York Stock Exchange (NYSE)
- NASDAQ
Indian markets –
- Bombay Stock Exchange
- National Stock Exchange
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