Understanding Stock Markets In A simple Way

Stock Markets - Many people gamble, dont they, sometimes they lose, sometimes they win, some earn enormous profits, some bear hefty losses. Havent u heard? If you look towards the senses of sight, dont you see the markets in the business times, market tickers on television, market watches etc. But have you wondered ever, what are they?
If you have ever wondered, then you are at the right place!!!!

They are also called share markets by many. Share markets. What does the name tell? Share means a portion, by dictionary terms. Yes, the same meaning applies here too. Now suppose say you are a businessman or more rightly an entrepreneur looking to open up your own business, preferably say I tell you may want to open up a restaurant. What would you first look at? A setup of the enterprise, yea real estate. A place where you would wish to set it up. Now if you want to consider the future requirements, you would set it up at a prime or a commercial place or a place that would make yourself feel to you as the place that would earn you lots of dough or speaking in terms of finance, profits. Now you would want to make this decision because you would want to attract investors. Now, investors look to double their money by betting on your venture. If they feel the area is good and likely to earn them money, they will invest. But for time being, you have ample capital to invest in your business. That is considering that you are the sole proprietor of your firm.
But in future, there might be expenses, might be you would want partners, might be that by pooling in money, you can earn more dough.

So now you have a restaurant. Let us say you have invested 300000$ into your business. Quite a lot of capital that eh?well, you have made a decision and bought a place quite in a good commercial area. Good! Now you have hired staff too good. Let us say that you have spent around 50000$ here. Those are expenses for your firm. So now you have 250000$..well yes mathematics.....Thats the capital left. Now you run your firm for a year and say you earn now a profit of around 50000$ more...so now you have say 100000$ more. Yea, you have a profitable business now. Now think from a loss perceptive, if the business loses out, you lose out. You will be the sole one, so as to say. Still you didnt think!!Well lets say you earned a profit of 75000$ this time and your expenditures were 25000$. So now you have a capital carry over of 100000-25000=75000+75000=150000$. Oh! You are still in profit. cool!!!But now is the time I feel you should still look out.May be a partner. Maybe more.

Well, you divide portions of your capital cum profit. Investors are now attracted to your firm for it is dealing out handsome profits and they would like to make some dough. Well maybe you would like to sell some portions. Or I would say sell some SHARES. Now you have 150000$ in your account. Maybe you would like to keep half on your name and the rest you divide into 10 shares. That means probably u sell 75shares of ur firm to 10 people at 100$ each. That means you have sold 75000$ worth shares numbering 75 to 10 people at 100$ per share. And maybe in the subsequent years, you divide and keep on dividing.

But this you have done on he basis of word of mouth. But how will you publicize? How will you list yourself? It is quite difficult to market yourself. A stock exchange is used for this purpose. So what you have to do is, contact a statutory person and list your firm on the exchange. When you first list yourself, you need to make an IPO or Initial Public Offer. When an IPO is made, you would like to adhere to certain laws and regulations as put forward by the SEBI ACT. The stock exchanges are governed by the Securities Exchange Board of India(Indian exchanges only) and the laws and regulatory compliances are complied by the profession of company secretaries or chartered accountants. These professions report to the SEC(Securities and Exchange Commission.

Shares are of two types: Equity Shares and Preference Shares. Preference shareholders have two preferences. First,the dividend is paid first to them in every year in which dividend is proposed. What is dividend? Dividend is an amount paid to a shareholder out of the profits made by the company. So you would also have to pays on dividend to the investors in your firm. You have to submit all the required forms as required by the Companies Act, including the final accounts of your firm and necessary ratios. By the market indices, investors earn. The market indices are calculated by the use of free floating point market method and the ratios prepared using the balance sheet of the financial year.And the second preference is first share capital is paid. But in case of equity shareholders dividend paid after prefernce shareholders and even so the share capital. Preference shareholders have no voting rights but equity shareholders do, so they are the real owners. Preference shares have a fixed rate of dividend but equity shareholders have varied rates.

If you have understood the theoretical part put forth above,then you have understood the simple funda of stock markets. They are more complex than these. In my next blog, I will emphasise on the stock market from investor's point of view and how he/she earns profits or incurs losses by looking at the sensex.