How to Learn Stock Market from Scratch | Day - 1

What is actually Stock or Share?
Let's begin from something that we already know.
The price of Pen Reynolds-045 is Rs 6 so one needs to pay Rs 6 to buy it and own it wholly.

Now let's assume there is a company named XYZ of total worth(price) is Rs 10,000. You need to pay Rs 10,000 to buy it and own that company wholly.

This total worth or net worth of the company is termed as Company's Capital.


The statement "You need to pay the Company's Capital to own the company wholly" is technically correct but in reality Company's Capital is so huge that a single person can't pay in order to buy the whole company. 


One single person usually doesn't own the whole company the way you can own R-045 Pen by paying Rs 6.


For example the Capital Amount of Reliance Industries Limited (RIL) company is around  Rs 10 Lac Crore and thus as an individual if you want to own Reliance company wholly you need to pay Rs 10 Lac Crore =Rs 10,00,000 Crore =Rs 10,00,000,00,00,000.


So now the question is:

How do these companies run businesses?
From where do they arrange that much money?
Actually Company divides it's Capital into many equals parts so that numerous people can buy one or more such equal parts and participate in company's business. 

So the fact is big companies are funded from the money of many other participants other than the owner of the company.


If you are having the parts of Company's Capital, technically you are a partner of company therefore if company runs business well you will be entitled with the proportion of profit.


How can you claim that you are a partner of company and have right to claim on the profit of company?

When company divides it's Capital in many equals parts they do so by issuing those many paper documents and by doing so company distributes it's ownership(rights of company) on the paper documents.

Hence the buyers of such paper documents will have ownership in the company in the proportionate of the no of paper documents they have bought. 


Assume again the worth of company XYZ  is Rs. 10,000 and company issues 1,000 paper documents of worth Rs. 10 each to represent the whole company. It means if you buy all the 1,000 paper documents then company is yours. 
Note: One person can buy multiple share certificates.
This paper document itself is known as Share Certificate that certifies that even if you have one Share Certificate you have some Sharing in the company and you will be considered as a Shareholder(partner) of that company.

Based on the above assumption now one can say that the company  XYZ decided to divide it's worth in the form of Share Certificates and has issued  1,000 Shares Certificates of Rs. 10 each.



The worth of company is still : 1,000 Shares * Rs. 10/Share = Rs. 10,000.

To learn stock market from scratch it's mandatory to understand the meaning of share or stock , what is it actually?

For making it more simpler let's take an analogy of a piece of Land(10 Acre). The owner of the land wants to sell this land among 10 people 1 acre each, the owner issues 10 paper documents(Land Certificate) of 1 acre each and  distributes them among the buyers.

Here what's the value of the Land Paper(Land Certificate)?
Owner had divided the land in 10 parts with physical boundaries, each buyer can go to the respective land and plough it to grow something  or make home in it. In future if somebody else claims on this land the actual buyer(now owner) can resolve the conflict by showing the paper document(Land Certificate) to respective authority.

So here in the above example the buyer of Land Certificate buys the Physical Land where he can go sit eat and do various things.

But in case of companies by issuing the Share Certificates the owner doesn't draw the physical boundaries between the walls of company where you can go sit in the chairs or take out the bricks. 

In that case Company divides the ownership of company where you can enjoy the ownership only, so based on the possession of Share Certificates you can claim on the businesses and profits of the company. Story is little different when you buy the shares in bulk percentage such as 1% or 10%, so that's a little separate discussion that we may see later.


Note : Now onward for simplicity we will use the term Share to represent Share Certificate.

The person who buys the Shares of a company and by doing so invest in the business of the company is termed as Investor and the process of doing such is known as Investing or Investment.


As an Investor if you buy 100 Shares of worth Rs. 1,000 you are now a partner of company having 10% partnership. 


If the company runs business well and as the consequences worth of company turns to Rs. 20,000 from Rs. 10,000 then worth of your 10% partnership automatically turns out to be Rs. 2,000 which is now 100 Shares * Rs. 20 Each.


Here your Investment is returning profit in term of Appreciation of Share price of the company you Invested in.


Share price of a company can rise when company does business well, since the image of company is reflected in public eyes as a positive outlook and it creates a great demand of Shares of such company and hence larger no of Investors may think to Invest in such company.


When Demand is more than the supply it Appreciates the price of product and when Supply is more than the demand price is Depreciated. This is very simple funda of Demand & Supply in any normal market.


There is another way also to earn money from your Investment.

When companies earn profit from the businesses, companies pay the part of profit in a proportion to their Investors (It is known as Dividend) to encourage their Investors keep Investing constantly.

But still there is no any hard & fast rule that company has to pay Dividends to Investors when company earns profit, company can decide to reinvest the profit in expanding it's business.


Dividend is an extra benefit comes to Investors' hands directly apart from the Appreciation in the price of Shares.


On the other hand there is no hard & fast rule that Dividends are distributed only when Company earns profit. 


When company does not run business well Investors lose interest in such company, in such case it becomes very critical for company to keep their Investors excited and motivated to stay Invested. Company does so by paying Dividends from their Cash Reserve.


Cash reserves are money that company keeps reserve with them for the use in emergency situations such as some unplanned or unexpected event.


Remember the moment Investors lose interest in company and they start exiting from Investment i.e they start selling the Shares and thus the Supply of Shares in market will increase and it will decrease the price of Share. It can create a Bad Image of company in public eye and as a consequence more Investors can plan to exit and chain can continue.


Many companies pay Dividends periodically while many other companies pay Dividends occasionally.


For small Investors, Dividends can help in their normal expenses, so for those who are completely dependent on Investments, Dividend has much importance for them. 


Definition of Share - When Company divides it's Capital into many equal parts every such equals parts are known as Share which entitles the holder with the proportion of the profit.


Note: For the time being we can assume that the terms Share, Equity, Security and Stock are synonyms.


To Do: See the price of your favorite company stock price at website     MoneyControl >>


Terms:

    Share| Equity | Stock | Security.
    Company's Capital.
    Investor, Investing, Investment.
    Dividend.
    Appreciation vs Depreciation.
    Cash Reserve.

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Comments

  1. It is really a nice blog to start and learn with stock and stock market.

    I started going through it.

    Thank You!!!

    ReplyDelete
    Replies
    1. Hi! I am so glad you found this post helpful!

      Thank You!!

      Delete
  2. You have explained the complex and technical statements in very layman terms, nicely done..

    ReplyDelete
  3. You have explained the complex and technical statements in very layman terms, nicely done..

    ReplyDelete
  4. Wonderful explanation in a very lucid and layman language

    ReplyDelete
    Replies
    1. Hi Rohit ! I’m so glad you found this post good!

      Delete
  5. It's really a very helpful blog for beginners to start.

    ReplyDelete
    Replies
    1. Hi, Thank you for your valuable feedback.
      Stay tuned with us , we will put more effort to make it better.

      Delete
  6. This comment has been removed by the author.

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