Ok.. So I have explained now whats a stock or a share is but how does that explain the huge Stock Market? And why does it bounce around so much?
To recapitulate a share is a part ownership of the business. If an enterpreneur wants to start a business he or she will give away part ownership of the business to a friend or a relative so that the business takes off.
All this works if the business is small. But say if the project is big like a big chemical factory or a garment factory.Then a single or a couple of investor may not be able to satisfy the full need of the project. So many people may be required. That is where a Capital Market comes in. It is the market which provides capital to a business owner.
So there is government agency called SEBI – Securities Exchange Board of India who has laid down rules for a Business man / Promoter on how to access the Capital Markets.
That is how they companies who want capital comes out with a initial public offer – IPO to access capital from the public.
But why the bouncing around ? And why does the market go up and down..?
This requires a slightly longer answer.. But lets take baby steps..
Lets go back to my investment in my friend Akansha’s Art Class. Say the class works wonderfully for two years and I get a decent share of the profit. But now I have decided to buy a bigger house and want the money back from Akansha. She understands but doesnt know vwhat to do. Her business is doing well. Why should she close it down just to pay me back my original investment?
So she talks to another friend Simran. She was willing to buy my share out. Great, Problem solved.
All are happy. ?
But if the project was bigger and had many shareholders then to work one on one and find buyers for every share holder who wants to sell is impossible.
That is why an exchange comes in . It transfers shares from one person to another at a moments notice. Shares issued in Capital markets are freely transferable. It is anonymous and anyone can invest through it.
A Stock market facilitates these transactions. This is Share Bazaar in its simplest form.
What does it mean when Market has gone up or down..? Why does the price move up and down?
Again there are many parts to these questions. But we will take one part at a time.
And let me break down in parts..
All of you must have gone and shopped in a mall or online. When we go to a mall there are products lined up and prices displayed. Sometimes there are markdowns and you may get a good deal. Its straightforward , walk into a showroom, if you like something and the price fits your pocket just swipe your credit card and walk out with your shiny new thing.
Prices don’t move up & down crazily.
After shopping the mall , you go to a vegetable market. You will walk in ask for the price of a kilo of Okra.. The vendor will quote Rs.70 a kilo, you will feign shock , state that I want 3 kilos, give me for Rs. 50 a kilo. The vendor will shoo you away .
And the dance begins, you walk away , he calls you and finally the deal is struck at Rs. 60 a kilo.
Sometimes if the vegetable seller wants to get rid of his produce, he will offer you at a throwaway price and you will go home ecstatic. Now why would he lower his price? It can be many reasons.. he needs money which is blocked..or he wants to go home .. or sees that there are many of his friends selling lower and wants to get rid of his stock first. Can be anything..
Now in the stock Market, say there are 10,000 shares of Reliance Industries available to sell at Rs.1200 per share. Multiple sellers with this aggregate quantity. But the buyers are there only for 5000 shares. Others want Shares at Rs.1180 per share.
So a deal for 5000 shares get struck at Rs. 1200 as the price and quantity are matching.
Now for the rest of 5000 shares either the seller has to come down or the buyers have to agree to Rs. 1200. After a while the seller gets tired and tries to sell at 1195 per share. 500 gets sold. The seller has to keep lowering the price till the full quantity gets sold at Rs.1180 per share.
In a while the quantity of 10,000 gets over and now there are fresh new buyers who emerge for 25,000 shares. No sellers.. Some new sellers come in for Rs.1225.. Again deal gets struck at from Rs 1205 to Rs 1208..per share..
Hopefully you have understood why the prices of stock move up and down every minute?
Deals are struck via a software as against physical buying and selling in the market. But the basic principle of bargaining is the same.. ?
The Stock Market is akin to huge supermarket with prices moving up and down simultaneously depending on buying and selling interest.
We will discuss how companies are valued in some other post.
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