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Decoding the purpose of the stock market:
You must have at some point in time heard about people talking about the stock market, you must also be knowing that the stock exchange enables you to buy and sell shares of a company. But, did you ever think about why the stock exchanges were introduced? What purpose does this serve?
Well, a stock exchange was initiated to help businesses raise capital for their business operation or finance their growth objectives. So, in the stock market, the promoters of a company intend to raise capital/ funds by selling shares of their company, and the investor who invests in that stock get part ownership in the company, based on the amount they have invested. So, a stock exchange acts as a platform for both the buyers and the sellers of a stock.
Here, if the business performs well so does the stock price goes up, giving investors a return, while if the business fails to do well so the stock price drops, causing a loss for their investors.
How do the companies list on stock exchange:
Companies list on stock exchanges by floating their IPO's (Initial Public Offering's), and to be able to float their IPO it needs to file a Red herring prospectus (RHP) with the regulator of the stock exchange of that country (RHP usually contains most of the information pertaining to the company's operations and prospects), e.g. SEBI is India's governing body for stock exchange so any company that wants to list in the Indian stock exchange needs to file an RHP with SEBI, and only if it gets SEBI nod it will be allowed to float its IPO.
If the company gets the regulator's nod to float its IPO, then with the help of investment banks, it launches its IPO, and investors willing to invest in the company can then subscribe for their IPO.
IPO's are usually divided into two parts: Offer For Sale (OFS) and Fresh Issue. Here, OFS is the shares of the company offered by the promoters, and the funds raised through an OFS goes in the hands of the promoters, who sold their shares, while Fresh Issue is the new shares offered by the company and funds raised through a Fresh Issue is used by the company for their
business operations or meet growth objectives.
How risky is the stock market:
As the stock market is a compilation of over 6000 listed companies so, the level of risk will hugely depend on your investment style, generally, the most riskier stocks are the penny stocks which usually come under the Micro or Small cap category, however, as you move towards the Midcaps and then the Large caps, the level of risk tend to decrease, more importantly as the highest risk stocks are termed as 'penny, similarly the safer or less risky stocks are called 'bluechips'.
The risk is not only determined by the size of the stock i.e. Micro, Small, Med, or Large. But, it can also be identified by the nature of the business that stock is involved in, such as companies that deal with Tech services that tend to evolve very quickly such as Artificial Intelligence, Cloud computing, SaaS, IoT, etc. are considered to be riskier. Whereas, companies related to consumer services such as FMCG are on the other hand less risky. Though there is no set theory to prove this, however, with past experiences and analysis, this is generally believed.
However, while investing in individual stocks there will always be some element of risk, so there are also other alternatives available that allow you to get exposure in the stock market with low risk. These include, Mutual Funds or Index Funds, such as NIFTY AlphaLowVol 30 index fund is specially designed for very low-risk appetite-based investors. These options are generally for those individuals who do not have time to monitor day-to-day activities or participate actively in the market.
How to invest in the Stock market
To be able to directly invest in the stock market/ equities, it is essential to have a Demat account, through which one can get access to all types of activities
it can perform in stock trading or investing such as buy/ sell a share, Future & Options, etc.
Just as to keep your money in a bank you will need a Current/ Savings Account, similarly, to invest in the stock market a Demat account is essential. A Demat account can be opened online within 15 minutes, through any of the brokerage platforms. Some of the low-brokerage and trusted brokers, in India, include Zerodha, Upstox, etc.