"Stock Market Explained: What It Is, How It Works, and Advantages of Investing"
Personal finance & Investments
Posted by T.Gowda on 2024-09-20 17:15:53 |
Last Updated by T.Gowda on 2024-09-20 17:15:53
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What is Stock market?
A Stock market is a place where shares of Public limited companies are traded, or a Stock market is a place where shares and stocks are bought and sold. (“Stock” is a general term used to describe the shares of any company and “shares” refers to a specific stock of a particular company). The stock market is the best way to invest your money. Stock markets may increase your wealth if you invest in it. So, stocks may be top performers as a part of your overall financial plan.
Advantages of Investment in the Stock Market:
1. Capital appreciation - Stocks typically outperform all other investment options for the Long term (maybe 9 years or more)
2. Bonus shares - A profit-sharing company delivers benefits to shareholders in the form of stock (bonus) instead of cash.
3. Annual dividends - Most of the profit-making companies give dividends (Distribution of earnings to shareholders)
4. Rights shares – Existing Shareholders are given the right to purchase a company’s shares at slightly discounted prices than market price.
5. Voting rights – Shareholders have the right to vote on important matters relating to the company such as the selection of Board Members
6. Loanability – Shareholders can pledge their shares to a bank as security to take a loan for personal / business purposes.
7. Marketability – Whatever the situation, the share of blue-chip companies can be sold any day at the prevailing market price and hence it is a very liquid instrument. The sale proceeds will be credited to the shareholder’s trading account in 2 days.
8. Tax Benefits -
9. Other Benefits – some companies give discount vouchers for the purchase of their products/ services. Eg. Titan company gives discount vouchers for the purchase of its watches, jewellery etc.
Disadvantages of Stocks:
1. Uncertainty and changing Market Conditions
2. No Guarantee of Profits
3. Problems in dealing with Brokers
4. Need for Constant Watch
5. Need for Correct Timings
6. Uncertain Government policies
7. Need for seeking professional guidance
Why Companies Issue Stock…
If a company wants to grow—maybe build more factories, hire more people, or develop new products—it needs money. It could get a loan from a bank. But then it would owe money. By issuing stock, a company can raise money without going into debt. People who buy the stock are giving the company the money it needs to grow.
Not every company can issue stock. A business owned by one person (a proprietorship) or a few people (a partnership) cannot issue stock. Only a business corporation can issue stock. A corporation has a special legal status. Like a school, its existence does not depend on the people who run it. Under the law, it is separate from the people associated with it and has special legal rights and responsibilities as well as its unique name.
… And Why People Buy It
Owning stock in a company means owning part of that company. Each part is known as a share. If a company has issued 100 shares of stock, and you bought one, you own 1% of that company. People who own stock are called stockholders, or shareholders.
Stockholders hope the company will earn money as it grows. If a company earns money, the stockholders share the profits. Over time, people usually earn more from owning stock than from leaving money in the bank, buying bonds, or making other investments.
One Man 5,000 Votes?
Stockholders in a company usually have voting rights. They vote on such issues as who will be elected to the board of directors—the group of people who oversee company decisions and whether to buy other companies. Stockholders typically have one vote for each share they own.
Every vote counts, but a stockholder with 5,000 shares will have more influence on the company than someone with only one share. Most companies have annual meetings, where stockholders cast votes and ask questions of the company’s leaders. If they cannot attend, stockholders may use an absentee ballot to vote. Shareholders also receive quarterly and annual reports that tell them how the company is doing.
What Goes up Earns Money
When the price of a particular stock rises, that stock is said to be “up,” meaning up in price. When the price falls, the stock is said to have gone “down.” The terms “up” and “down” are also used to describe the rise and fall of the market as a whole. As a company makes money, the value of its stock goes up.
For instance, pretend you bought some shares of a company for Rs. 10 each. Since you share the company’s profits, if it does well the shares might later be worth Rs.15 each. You could then sell your stock and make Rs.5 on each share. If the company loses money, however, you would also share its losses. Those Rs.10 shares might each be worth Rs.3 if the company fell on hard times.
How to research a stock?
When considering the purchase of a stock, investors should find answers to some key questions.
Fundamentals: What is the company’s business, is it financially sound – and is it growing?
Price History: How much have other investors been willing to pay for the stock in the past?
Price Target: How much are investors likely to pay for the stock in the future?
Catalysts: What catalysts will change investors’ perceptions of the stock in the future?
Comparison: How does the stock compare to others in its industry?
Recent Developments: Check out what are the recent developments in the company
Trading Strategies is a one-stop solution provider and guide to help Indian traders and investors maximize their returns from the markets and create wealth for themselves and their families. Buying or selling stocks is not an easy task if you want to make money doing it. Millions of investors have lost money in the past trying to guess stock price movements.
To consistently make money in the stock market, investors have to be right over 70% of the time. This success ratio is tough without the guidance of a successful, reliable and robust stock selection method or algorithm that has been tested and worked for many years.
Blue Chips – The shares of a company known to make profits in good and bad times. As there is a low risk of capital loss, the dividend and earnings yields are proportionately high. E.g. Infosys, L&T, TCS etc.
Bonus Issue – Companies issue shares in place of consideration. The consideration may be either in the form of cash or kind. Bonus shares are issued to the existing shareholders without payment of any consideration, either in cash or in kind. Bonus shares are issued by conversion of the reserves and surplus of the company into shares. Bonus can be issued only by companies that have accumulated free reserves i.e. reserves not set apart for any specific purpose and which can be distributed as dividends.
Some points to keep in mind
An investor must not choose any stock blindly. It means he/she should not invest in one particular stock. Do not make an average: Buying more of the same shares, generally on a falling market, lowers the average cost per share. Diversification of Portfolio: An investor must diversify his portfolio. An Investor must keep in mind that he must guard against; they are business risk, valuation risk, and force of sale risk.
Business risk- Business risk is, easily understood. It is the potential for loss of value through competition, mismanagement, and financial insolvency. Several industries are predisposed to higher levels of business risk (airlines, steel, etc.) so it is the duty of the investor to read about the company from any source that provides them knowledge.
Valuation risk – An investor must keep in mind the valuation of a company. The business may indeed be wonderful, but if it experiences a significant sales decline in one quarter or does not open new locations as rapidly as it originally projected, the stock will decline significantly.
Investment Risk – You have done your homework very well and found an excellent company that is selling far below what it is worth, buying a good number of shares. It’s January, and you plan on using the stock to pay your April tax bill. By putting yourself in this position, you have bet on when your stock is going to appreciate. This is a financially fatal mistake. In the stock market, you can be relatively certain of what will happen, but not when. So it’s your first duty to read the news of your stocks from time to time. If by chance you get some bad news of stock, then don’t be frantic. Sell this stock as early as possible so that your portfolio will be saved from bad shares and put money on some safe stock you know. consider the following: Let us suppose you had shares of Infosys, Tata Steel, and ACC at a decent price in 2004 yet had to sell the stock sometime later in the year, you would have been devastated by the crash that occurred on BLACK MONDAY (18 May 2005) Your investment analysis may have been correct but because you imposed a time limit, you opened yourself up to a tremendous amount of risk.
