The day before yesterday I watched this movie “The Wolf of wall street” for the third time. After watching it I thought there are many people who are blindly investing in stocks, investing in mutual funds, and losing their money. On the other hand, there are some who think that the stock market is a gamble. There are some who do not know anything about the stock market.
Well, there are many people who have become wealthy by investing in stocks. For instance, warren buffet used to invest in stocks from the age of 12 and now he is the richest investor in the world. How he did it?
The answer is gaining proper knowledge of the stock market. What is it? How does this thing work? Answer is he reads 800 pages of a book every day. Don’t worry, you don’t have to do that.
But, in this blog, I am going to explain to you the basics of stock market and will give you an explanation of all the stock market jargon in an easy way.I am not saying that after reading this blog you will become like warren buffet because it is on you how you analyze the stock, In which stock you invest your hard-earned money.
So what is my role today? I am going to plant a seed of stock market today in you and then it will be your job to nourish it every day by getting more knowledge. Sounds good? Let’s start then.
Let’s say, I and my friend want to start an IT company. We started a xyz company. So, we are the promoter of the company. Easy isn’t it?
Who is the promoter of Reliance?
You got it right buddy! Mr Dhirubhai Ambani.
Let us continue the aforementioned example. Do you think starting a company is that easy? No! We would need some funds, right? So, we went to some investors and talk about our business model. However, we got rejected wherever we go.
So, I had an idea. I convinced my three wealthy friends to invest in it. So, they would be angels for us, right?
They are angel investors!
Understand it carefully now there are two promoters and three angel investors. So, promoters have spent 1 crore each for the company and angel investors have spent 1 crore each in the company.
Total valuation of comapny is 5 crore rs.
The simple definition of share is how much percentage of the company you own. That’s it not any complex explanation.
So promoters thought that let’s issue some share, and they come up with the following strategy.
Each promoter will have 20% of shares and each angel investor will have 3.33% of shares. So, total 50% of shares are distributed or issued.
Now 50% of shares are still there which have not been issued yet.
Face value :-
Promoters decided that the starting price of their share would be 10 rs so this is the face value.
Company value :- 5 Crore
Face value :- 10 Rs.
No of shares :- 5 crore/10 = 50 laks.
So, 25,00,000 shares are already distributed between promoters and angel investors. However, there are 25,00,000 shares which have not been issued yet.
Venture Captialist :-
Now after two or three years the company had a tremendous amount of growth and now promoters want this to expand it more. They want to open this company in different states. For that, they will need money, right?
So, Initially, the investor rejected them, but now after their companies growth, they will be interested in investing. So, they convinced one of the investors and he invested some money in this company. So, he is our venture capitalist.
And, promoters issued him 5% of the share. So, there are 45% shares still there which have not been issued.
It stands for “initial public offering”. Did you get it? of course not. Let me explain you in my way.
Have you observed that some companies are “XYZ Pvt Ltd” . So what is this Pvt Ltd? That means private limited. They are private companies.
Let’s continue our story after 5 years now promoters need more money and so they will issue IPO. This means they want their company to go in public. And they will issue that remaining 45% of shares to the public.
So, anyone will be able to buy this company stock. So if you buy 1% of share in this company that means you have 1% of ownership.
Demat Account :-
If you want to buy a share of company then you must have demat account.
Demat means “Dematerialized”. Earlier, people use to have this physical copy of share which is materialized share. However, after the technological revolution nowadays people are buying digital copies of shares for that they need this Demat account.
Demat account will be linked with your primary bank account.
So, if you want to open a Demat account then you can register it through Zerodha, Angel Investor or any broker which you think would be best for you.
If you have bought a share today and the same day you sold it that is intraday. So whoever is doing intraday they are a trader. You have to be good at technical analysis if you want to be a good intraday trader.
You bought a share today and you sell it after one month or year means whenever you want. You hold the share that is delivery.
So, if you fall into this category then you are an investor. You should be good at financial analysis if you want to be good at this category. Which includes analysis of the annual report, analysis of profit-loss statement, etc..
Mutual Funds :-
If you are neither trader nor investor. If you do not have time for reading the annual report of a particular company or don’t want to spend your time or mind in investing. Then mutual funds are for you.
What is it really? Let’s say there is one intelligent investor name John, Who has tremendous knowledge of investing. So, he will be the fund manager. He will select some companies and invest money in those companies. For instance, 10% in reliance, 10% in icici, 10 % in Godrej etc..
Wait a minute? From where did the money come?
I, you, your friend will give him money to invest. That is a mutual fund,that is all.
You can give him money at once which is call lump sum or you can give him by monthly basis which is SIP.
Well, that’s it for today. If you like my lucid explanation and want me to create another post related to the stock market or finance then let me know in the comment section.