Stock market— the money market of the common man. If you have ever thought of investing, you must have found yourself lost in the labyrinth of words. While you made your way through countless definitions, you may have lost the will to go any further. Although the strategic intelligence required makes it confusing, you either understand better or hardly understand once you enter. So, to make this job easier, let’s take a look at the market right from the basics.
Figuring it out through a conventional example, imagine your friends own a company; both invest Rs.1000 each, making them legal owners of this company. Now for the company to run, it needs some more investment. This leads them to the stock market.
Currently, the stock exchange consists of two subs: the primary market and the secondary market. While the primary market is when the company, i.e. your friends, decide to issue more securities, they go public to sell their stocks. This is where the stakes are created, making the sale of these stocks as the IPO, or the Initial Public Offering. The secondary market is the arena; where the securities or the shares issued by the company are bought and sold on the stock exchange. This makes the secondary market the playground for all the trading by investors.
Shares and securities
The shares or the securities are exchangeable holdings, so they are tools used to raise capital in public and private markets. Securities come in three types as mentioned below:
Equity: The one where you can give away the ownership rights.
Debt: Where loans are repaid with periodic payments.
Hybrid: Consists of two or more financial instruments and is generally marketed towards institutional investors.
To understand them better, we must go through them one by one so as to help you get your way through. The equity shares represent the ownership interest that the shareholders have in the company. Equity refers to the stocks and a share of ownership the shareholder holds of that company. This generates regular earnings for the shareholders as dividends. In other words, equity means selling a stake of the company in exchange for financial backing.
The term debt is much simpler to understand; this involves borrowing directly and selling the securities. The company or the government issues these with a promise of return with interest. These include fixed dates when the company must return with the agreed interest. Examples include mortgages and bonds.
Trading in the market
This brings us to what exactly gets traded in the stock market; specifically, financial instruments like bonds, shares, derivatives and mutual funds.
Bond: Back to your friends running their company, who require money and undertake projects. One such way is through bonds, where they borrow money from the bank in exchange for regular interests, otherwise known as a loan. The same concept but with investors instead of banks, is a bond.
Shares: The pawn of the secondary market, another way for investors to raise money. In exchange for money, your friends will issue shares, which is similar to holding a portion in your friends’ company. These are then traded among other individuals. Thus shares are a certificate of your ownership, making you a shareholder of profits or losses the company faces. As the value of the company rises, so does your profit and vice-versa.
Derivatives: These are slightly different as their value depends on the underlying assets purchased and repaid, with all the process specified at the time of the initial transaction. A derivative gets its value from commodities such as gas, gold, silver, or even currencies, including interest rates, treasury rates, bonds, and stocks.
Hedge funds, an alternative form of investment, often trade these companies that make it their business to combine insurance and investments to offset the risk from the other assets. Hedge funds are generally open to individuals with a high net worth and families or institutions. While they are similar to mutual funds, they are managed more aggressively and use risky investment strategies.
Mutual Funds: These instruments allow you to indirectly invest in the share market by pooling money from collectors and investors and dividing the risk of investment equally. This makes mutual funds less risky since it’s a clear path to investment returns. Since professional fund managers handle this, the term ‘Sahi hai‘ doesn’t fail to ring bells.
By now, has your curiosity asked where exactly such a laborious process occurs?
The Stock Exchange
The BSE (Bombay stock exchange) and NSE (National stock exchange) based in India are in the world’s top 20 stock exchange centres in terms of capitalization. The NYSE (New York Stock Exchange), Nasdaq, TSE (Tokyo Stock Exchange) and SEHK (Hong Kong Stock Exchange) are ranked as the largest stock market centres. Furthermore, the top 10 indexes account for 82 trillion dollars of market capitalization as of January 2020.
The stock market index summarises the movement of the market in real-time. SENSEX and NIFTY 50 are examples that calculate the indexes for BSE and NSE, respectively.
It is essential to understand both of these indexes, starting with SENSEX. Named by stock market analysts, Mr Deepak Mohoni, the word is short for sensitive index. The SENSEX consists of thirty prominent stocks which are derived from sectors and then actively traded. If the SENSEX increases, it stands for an increase in the prices of the shares. If there is a drop, it states a decrease in the value of the shares. The SENSEX has actively managed to record the overall growth and the ups and downs of the Indian economy since January 1st, 1986.
Moving on, NIFTY 50, deriving its name from the words national and fifty, consists of fifty actively traded stocks. NIFTY is a broad index for NSE, which is the leading stock exchange of India. It is primarily an equity benchmark index that was introduced on 21 April 1996. However, Nifty comprises fifty stocks but currently fifty-one active stocks.
It becomes increasingly important to look through the differences between SENSEX and NIFTY 50. Both of the stock market indices indicate the strength of the market and target large capital stocks. While NIFTY reflects the values of NSE, SENSEX reflects BSE. NIFTY has diversified portfolios as compared to SENSEX; therefore, more trading is noticed in NSE.
While this is just the surface, the rest still awaits to be explored. The world of the stock market is extensive and detailed analysis is required to continue. The risk is analytical and requires several calculated risks. So keep your will intact; this will be a long journey with several ups and downs to look out for.
Written by Aditya Naik and Snehal Srivastava for MTTN
Edited by Ramya S Prakash for MTTN
Featured Image from The Economics Times
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