What are stocks and shares ?
A stock or share, at the simplest level, is a unit of ownership in a company. If you own a stock, you own a percentage of the company whose stock you own. As the company grows over time and increases its profits, investors keep valuing the company more. This means that they are willing to pay a higher price for each stock of the now ‘more valuable’ company. Consequently, the value of your holding (stock) grows, thereby, making you richer over time.
What is the worth of the company?
The total stocks of the company multiplied by the value of a single stock at any given time defines the total market capitalisation or market value of that company. This is the amount that the market. (investors or potential investors) is willing to pay for the entire company.
What is stock market and stock exchange?
You can imagine stock market to be just like any other market. As you already know, a market is a place where buyers and sellers meet to exchange a commodity in exchange for money. Similarly, in the stock market, the commodities that are exchanged (bought and sold) are stocks of various companies. In a stock market, a stock exchange is an entity (e.g National Stock Exchange or Bombay Stock Exchange in India) with which several companies are listed. The stock exchange facilitates the actual transfer of shares and money between the buyers and sellers.
Why does this whole stock system exists?
When a company gets launched, the promoters or owners have several ways of raising funds. They can bootstrap (use their own/family/friend’s money) or approach the banks to lend money to them (also called debt) as their initial capital to run the company. The promoters can also approach various angel investors to raise capital. However, if the promoters still need additional capital, they can approach the general public by getting listed in a stock exchange. This is also called an initial public offer (IPO).
Through an IPO, the company basically offers a share of its ownership to the general public in exchange for money. This money can be used as capital for running company operations, clearing debts or as exit-strategy for the initial investors. For good companies, it’s a win-win situation for both the general public and the company since the company gets the funds and the investors (public) get an opportunity to build wealth with the company’s growth. Once the company gets listed on the exchange, the investors can buy or sell stocks of the company on the exchange.
How can you make money from stocks?
The simplest way to make money from stocks, like any other commodity, is to buy them a low price and sell at a higher price, thereby, making profit.
Additionally, dividends and bonus shares also serve as indirect income from stocks. Many profit-making companies decide to roll out a share of profits, called dividends, to the investors or offer additional stocks to them, which are called bonus stocks. This builds investor confidence and brand image for the company while also providing income to investors.
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Originally published at http://stocklayman.wordpress.com on February 14, 2021.
