The stock market is a place where shares of publicly listed companies are traded.”
- Place: Think of a building where the trading activity happens.
- Shares: Units of ownership in a company that are bought and sold.
- Trading: One participant buys a share while another sells it, each transaction is a trade.
Key Participants in the Stock Market
| Participant | Role in the Market | Typical Perspective |
| Publicly listed companies | Issue shares to raise capital | Issuer |
| Investors/traders | Buy and sell shares | Owner |
| Exchange operators | Provide the platform for trades | Facilitator |
| Regulators | Enforce rules, protect investors | overseer |
| Brokers/Intermediaries | Execute trades, provide services | Middle-man |
Note: Most discussions focus only on the investor perspective, but the market involves all the above participants.
Story Example: Dignity Supermarket -Understanding Shares, Ownership, and Valuation
Business Background
- Owner: Jignesh the supermarket founder
- Revenue: 5 lakhs profit per month
- Valuation: 1 crore totalvalueofthebusiness.
- Ownership: 100% held by Jignesh initially.
Need for a Partner
- Jignesh wants to bring in a partner to share 50% ownership and manage operations.
Introducing Shares
- Shares = unit of ownership.
- Total 1,000 shares represent the entire 1 crore valuation.
Calculating Share Value
| Parameter | Value |
| Total valuation | 1 crore |
| Total shares | 1,000 |
| Value per share | ₹10,000 |
| Shares for 50% ownership | 500 |
| Amount paid for 500 shares | 5 lakhs |
- Result: New partner pays 5 lakhs for 500 shares, gaining 50% ownership.
Core Take away
Shares are simply units of ownership; dividing a company’s valuation by the number of shares gives the price per share.
How the Stock Market Works – From the Story to the Real World
- Company – Issues shares Public buys shares → Shares trade on the exchange.
- Investors provide capital; companies receive capital for growth.
- Brokers, exchanges, and regulators ensure that buying, selling, and price discovery happen smoothly.
All concepts above are foundational for understanding why the stock market exists, what it is, and how it functions. Why Companies Go Public
A public company is one that has sold shares to the public through an initial public offering (IPO) and is listed on a stock exchange.
Primary Reasons
- Get money to grow your business, add new product lines, or buy other businesses.
- Give founders and early investors a way out so they can turn their stock into cash.
Sources of Capital
1. Debt financing Loans
Debt: Money borrowed that must be repaid with interest
- Pros: Retains ownership; interest is tax-deductible.
- Cons: Creates a debt-trap if cash flow fails; collateral may be seized.
.
2. Equity financing Sellingshares
Equity: Ownership stake in a company in exchange for capital.
- Pros: No repayment obligation.
- Cons: Dilutes existing owners’ control.
The IPO Initial Public Of fering
IPO: The process by which a private company offers its shares to the public for the first time, becoming a publicly listed company.
Steps in an IPO
| Step | Description |
| Preparation | Convert private limited company to a public limited company PLC. |
| Regulatory filings | Submit prospectus to securities regulator. |
| Pricing | Determine offer price per share |
| Allocation | Decide % of total shares to offer e. g., 15. |
| Listing | Shares begin trading on a stock exchange. |
Share Structure & Pricing Example
- Total shares: 1,000
typicalrange1,000-10, 000 for newly registered private limited companies.
- Public offering: 15% = 150 shares offered in the IPO.
| Metric | Value |
| Total shares | ₹1000 |
| Shares offered in IPO | ₹150 15 |
| Pre-IPO share price | ₹10,000 |
| IPO share price | ₹20,000 |
| Post-IPO share price aftergrowth | e.g., ₹30,000-₹40,000 |
Stock Exchanges in India
Stock market: A regulated platform where stocks shares are listed, bought, and sold.
| Exchange | Symbol | Typical Features |
| BSE Bombay Stock Exchange | BSE | India’s oldest exchange; many legacy listings. |
| NSE National Stock Exchange | NSE | Larger market-share; high-frequency trading. |
Types of Investors
| Category | Typical Participants | Main Objective |
| Retail investors | Individuals like you and me | Grow wealth receive dividends |
| institutional investors | Fills foreign, Dils domestic | Large-scale capital appreciation |
| Traders | Short-term speculators | Profit from price fluctuations |
| Others | Fund managers, pension funds | Long-term portfolio growth |
Investor Objectives
- Capital appreciation-buy low, sell high as the company’s value rises.
- Dividend income-receive a portion of profits distributed as dividends.
- Short-term trading-profit from short-term price movements no dividend focus.
Dividend Basics
Dividend: A portion of a company’s profit distributed to shareholders, typically expressed as a percentage of profit.
Example Calculation
- Company profit: 100 crore.
- Dividend payout ratio: 10% ₹10 crore distributed.
- Investor’s ownership: 1% receives 10 lakh as dividend.
Investor Return Example
| Initial Purchase | Price per Share | Shares Bought | After 2 years Price | Gain per Share |
| &₹20,000 Total profit | 10 | 2 | ₹30,000 | ₹10,000 ₹100,000 |
Key Terms Bolded
- Capital – Money needed for investment or expansion.
- Debt trap – Situation where debt repayment becomes unsustainable.
- Equity-Ownership stake in a company
- Publicly listed company – Company whose shares are traded on a stock exchange.
- IPO – First sale of a company’s shares to the public.
- Dividend – Share of profits given to shareholders.
- Capital appreciation – Increase in the value of an investment over time.
Why the Stock Market Exists in India
- Companies list on an exchange to raise capital for expansion, R&D, and other growth activities.
- IPOs give early investors and founders an exit route selling their initials take.
- The market provides ordinary people a way to grow wealth much faster than traditional options e. g., fixed deposits.
- Historically, good companies can deliver 20-30% annual returns, which is unique to the equity market.
Primary vs. Secondary Market
Primary Market – The stage where a company sells newly issued shares to investors during an IPO. Money flows directly to the company, financing its operations.
Secondary Market – The stage after the IPO where existing shareholders trade their shares among themselves. Money flows to the seller, not the company.
Comparison Table
| Feature | Primary Market | Secondary Market |
| When? | During an IPO | After IPO, continuously |
| Who receives money? | The company | The selling shareholder |
| Purpose | Raise capital for the firm | Provide liquidity for investors |
| Price determination | Fixed by company/underwriters | Determined by market forces |
| Examples | 150 investors buying 1 share each at ₹20,000 | A buyer paying 20,100 for a share from an existing holder |
Traders vs. Investors
Trader – buys a stock, waits a short period e. g., 10 days, and sells for a quick profit . Most traders belong to the trading segment of the market.
Investor – holds stocks for long-term growth, relying on the company’s performance and stock appreciation over years.
How Stock Prices Are Determined
1. Intrinsic Valuation
- Based on revenue, profit, goodwill, future prospects, etc.
- Intrinsic price = Company ‘s total valuation ÷ Number of shares.
- Growth higher — valuation —higher stock price.
- Decline — lower valuation — lower stock price.
2. Demand-Supply Dynamics
- High demand + limited supply = price rises.
- Low demand + excess supply = price falls.
3. Market Sentiment
- Positive news e. g., new CEO, expansion plans —high demand → price up.
- Negative news e. g., competitor entry – poor earnings – low demand – price down.
Example of Demand-Supply
| Situation | Demand | Supply | Resulting Price |
| Strong investor interest, only 150 shares in hands of 150 owners | High | Low only 150 shares | ↑ Price |
| Many sellers, few buyers | Low | High lots of shares for sale | Price |
Why Prices Fluctuate Every Second
- The displayed price is the last traded price – the price at which the most recent transaction occurred.
- Example:
1. Share opens at ₹20,000 initial IPOprice.
2. A trade occurs at ₹20,100 – screen updates to 20,100.
3. Next trade at ₹20,150 -screen updates again.
- Continuous trading means new trades constantly replace the last traded price, leading to second-by-second changes.
Key Terms Bolded
- Primary market-money goes to the company during an IPO.
- Secondary market – trades among investors, money does not go to the company.
- Traders-seek short-term profits.
- Investors-seek long-term growth.
- Valuation – the business’s intrinsic worth depending on how well it succeeds financially.
- Demand/Supply – fundamental forces driving price.
- Market sentiment-collective mood influencing demand.
- Last traded price: The price that was last traded at, based on the most recent transaction.
- Last Trade Price = Current Share Price
The price shown for a share is always the price of the most recent trade.
- Real-time updates
Why Share Prices Fluctuate Every Second
- Market size: India’s stock market is massive; high-volume stocks (e.g., Tata Motors) see trades every second.
- Continuous trading: Each second, new orders arrive, causing the price to adjust repeatedly.
Brokers: The Essential Intermediaries
Broker: An intermediary who matches buyers and sellers in the market and charges a small brokerage fee for the service.
- Why you need a broker
- Broker’s function
Evolution of Brokerage
| Era | Interaction Method | Key Characteristics |
| Early days | In-person, paper certificates | Broker physically searches for sellers; paper share certificates. |
| Telephone era | Phone calls | Faster communication, still broker-mediated. |
| Digital era | Web & mobile platforms | Instant, self-service trading; funds transferred via net-banking or UPI. |
- Modern brokers offer web and mobile platforms, allowing instant buying/selling with a few clicks.
Broker Account Structure
When you open an account with a broker you get two separate accounts:
| Account Type | Purpose | Where the assets reside |
| DMAT Account | Holds digitally stored share certificates. | Depository not the broker. |
| Trading Account | Holds cash used for buying/selling. | Broker’s trading platform. |
How a Trade Works
1. Deposit money from your bank (via net-banking or UPI) into the trading account.
2. Place order to buy a stock.
3. Broker pays the seller with the funds from your trading account.
4. Shares received are credited to your DMAT account.
Funding & Transaction
- Flow Where the money comes from: your own bank savings account.
- Transfer method:
- Post-trade:
Safety of Your Shares
Your shares in DMAT are safe because the central bank keeps them, not your broker.
The DMAT makes sure your shares are still safe even if a broker “runs away.”
Choosing the Right Broker
Different brokers for different needs:
- Long-term investors may want to choose platforms that are cheap and dependable.
- Intraday/ “android” trading – need fast execution, low latency.
- Futures and options need more advanced tools and higher margins.
Factors to compare
| Feature | Why it matters |
| Brokerage fees | Direct impact on profits. |
| Platform speed | Critical for intraday trades. |
| Product offerings | Stocks, derivatives, mutual funds, etc. |
| Customer support | Helpful for troubleshooting. |
| Rewards & offers | Can add extra value when opening an account. |
The reason India has a stock market
The goal is to provide a place for businesses to get money and for buyers to get rich. Important Goals
- Capital Raising: Businesses sell shares to get money for things like growth, research and development, or other needs.
- Making Wealth: People buy stocks with the hope that their wealth will grow over time.
- Liquidity and Price Discovery: Makes it clear where supply and demand decide the prices of stocks.
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