This is an article aimed towards readers who have not got any past exposure to finance and stocks. It is best to start with knowing the basics right…
If you simply Google the definition of stock you would probably find a long statement; “the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity); “he owns a controlling share of the company’s stock”… confusing isn’t it?
Stock is basically a piece of ownership in a company. A stock and a share are completely interchangeable terms. So, next time you come across the word ‘share’ think ‘stock’ which is nothing but a part of ownership in an organization.
I’m sure the next obvious question coming to your mind would be how can I invest in stocks? Can I buy stock of any company?
The answer to this needs to be explained in a little more detail. There are private companies and public companies. Private companies cannot be invested in. As the name suggests they are owned privately. Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering***. In general, the shares of these businesses are less liquid and the values are difficult to determine.
(***Initial public offerings: is a process through which a company can go public and issue shares. It’s basically the first sale of stock by a private company to the general public. It is also referred to as public offering.)
On the other hand a publicly held company is that which has already issued shares via IPO ( Initial Public Offering ) and is either traded on any of the stock exchanges ( also termed as open market ) or in over the counter market*. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of two such exchanges.
(*over the counter market : The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to financial instruments such as derivatives and other securities which are traded through a dealer network. )
Why would a company issue stocks?
A company would issue stocks for a number of reasons. One of the main reasons being raising capital which may be required for either expansion or starting off a new project all together. So when investing, it is advisable to know the company’s motive to issue stocks, its historical performance, management rules and future short term and long term goals. This helps in providing a guide line while making investment decisions.
When a company issues stock it is said to be floated initially which simply means the company decides the price range on which to come out with the initial offering. However it is the demand and supply later that decides the price value of the stocks. The very act of becoming a public company allows the market to decide the value of the company through daily trading.
Once a company goes public, it has to answer to its shareholders. For example, certain corporate structure changes and amendments must be brought up for shareholder vote. Public companies must meet stringent reporting requirements set out by SEBI (Securities and Exchange Board of India).
How can one make money from stock?
It’s not as simple as it seems. Buy a stock, hold it till its price goes up and sell it, when it does. What is missing here is the timing. To know when exactly to buy a stock, how long to hold it for and when exactly is the right time to sell. You have to remember that the market is not always predictable and the stocks when fall down can cause tremendous losses. It is advisable to attain some financial knowledge and even assistance before you start investing the first time.
nice one. it is very simple to understand.
Thank you..glad u liked it..thanks for reading…!