Today we are going to learn what is stock market, how does it work and some other very basic things about the stock market.
Companies have a number of ways to raise capital in order to grow their businesses. Some examples include raising funds from Angel Investors, Venture Capital or taking a loan from banks or issuing shares of company stock on the stock market etc.
These fundraising methods are divided into two categories.
- Debt Financing: Debt means loan. If a company chooses Debt Financing to raise funds then they have an obligation to pay back the money they have borrowed as well as pay interest on the loan too. The best example of debt financing is bank loans. When a company takes a loan from a bank then that company has to pay back the loan with interest to the bank.
- Equity Financing: When a company raises funds through Equity Financing such as Angel Investors, Venture Capital, or the Stock Market then the company avoids having to repay any funds in the form of principal or interest.
Since a company who is raising funds via equity financing is neither paying back the money or any interest, what exactly are they giving to the investors?
If a company is raising funds through Equity Financing, the company gives the investors a particular number of shares in their company. This way the company gets the funds they need, and the investor(s) become a shareholder of the company. When a company is raising funds by selling its shares through the stock market, that is Equity Financing.
What is Stock Market?
The stock market is a platform for investors where anyone can buy shares of companies and become a shareholder of that company. And for companies, the stock market is a platform from whereby they can raise funds from the public. There are many companies in the stock market, they all raised funds from the public and those who bought shares of those companies became a shareholder of that company. These companies are called Public Companies.
What is Initial Public Offering (IPO)?
When a company raises funds from the overall public for the first time, it is known as an Initial Public Offering or IPO. During IPO companies raise funds from the public and give some shares of their company to the investors. IPO transactions occur between the company and the investors.
For example, back in March 2017 D-MART, an Indian supermarket chain launched an IPO of their parent company AVENUE SUPERMARTS. The company raised 1870 crore rupees from the public in exchange for around 10% stake in their company.
- Allotment: Before the launch of an IPO a company determines the price or price band. The IPO stays open for 3-10 days & within these 3 days, investors subscribe to the IPO. Then the allotment process starts. During the IPO you can only buy the shares of a company, you can’t sell. To sell the share you have to wait until the company gets listed on the stock market. Within a few days after the allotment is done, the company’s stock gets listed on the stock market.
- Listing: After the stock market listing, you can now sell your shares in the stock exchange and those who want to buy those shares will be able to buy from you and they will become a shareholder of that company.
- Difference between the stock market transactions and the IPO transactions: When you buy shares in an IPO then you are buying shares directly from the company, in the Primary Market. When you buy shares off of the stock exchange you are buying shares from another investor in the Secondary Market. In the stock exchange, the transaction happens between the investors. The company plays no role when one investor buys shares from another investor in the Secondary Market. Because the whole system works online, you can buy and sell shares of different companies from the comfort of your own home.
What is a Demat Account?
To buy or sell stocks of different companies you need to open a Demat account first. Stock brokerage firms are the mediators between investors and the stock exchanges. Using your Demat account you can buy and sell your shares by paying a small fee to the brokerage firms. A Demat account is like a bank savings account however, in bank accounts, you can only keep your money, but in Demat accounts, you can store your company shares.
- Difference between a bank account and a Demat account: Demat account is like a wallet where you can store your shares, there is another account which is called trading account and it will be linked to your Demat account. Using your trading account you can buy and sell your shares and then you can store the shares you bought in your Demat account. You do not need to open a trading account and Demat account separately. Usually, when opening a Demat account a trading account is automatically opened for you as well.
- Documents needed to open Demat account: You need pan card, Adhaar card, voting card, copy of bank passbook or cancelled cheque.
After opening Demat account, you can buy or sell shares using the call and trade or using the website, trading app of the stock brokerage firm. If you want to know what are the things you need to check before opening a Demat account you can go through our another article where we have discussed the pros and cons of different brokers and how to choose a good broker.
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