Suppose you want to start your own business and you don't have enough money to buy land,pay salaries to your employees,buy necessary equipment etc. then there you need some methods to arrange money to help your purpose.
Lets' talk of two such methods :
1)Debt : You take money and promise to pay some some interest monthly/yearly/quarterly and then you have to return that amount after an agreed period of time.e.g. Bonds,Bank Loan etc
2) Equity : You can take some money and in return you offer ownership in your business.Here comes the idea of Equity.
बकर Time : Shyam(Sunit Shetty) wants to start a new business in
then he is bound to return all the borrowed money with interest at the time as per the agreement even if his company makes losses.
Therefore he decides to use equity as a tool to borrow money from these guys and give them share in his business.This time also he issues them a piece of paper in which it is written that "I am offering you x% share in my company".We call this paper a share as through this paper you are offering some ownership in your company.
Now. this time even if Shyam's company makes losses he is not bound to return the money to the share-holders.
But this doesn't mean that once Shyam gets the money he can do whatever he wants.Whenever you issue a share you do it under Company law which says that you need to constitute a board of directors and should also hold an annual general meeting of shareholders who may also vote during the important decision making processes .Board of Directors supervise over Shyam's activities.
Demat Account
Nowadays when you buy shares of a company you don't get it as a piece of paper rather the shares are transferred electronically to your Demat Account in the Depository.
Q. What is a Depository ?
A Depository is like a locker(
There are only two Depositories in India :
National Securities Depositories Limited (NSDL) and Central Depositories Services Limited (CDSL).
Okay, It means Khadak Singh should open his Demat Account in either of these two Depositories.
No! Depository Participants which are like bank branches are the places where you can open your Demat account.Here your shares get de-materialised and get transferred/emailed to the depositories.
SBI,HDFC,etc offer this service.
When one sells his company's shares for the first time to the public it is called Initial Public Offering or IPO. IPOs can be bought and sold in primary market.
IPO is risky and highly speculative from shareholder's point of view => As no past history of the company,difficult to predict gains.
In Secondary Market, IPOs are re-sold as shares.
Need for Secondary Market => If Devi Prasad now needs money to run his own business his hands are tied as his money is with Shyam therefore secondary market provides him the exit-route as he can sell these shares to someone and regain his money.
Also, while trading people get to know about prices of different companies and they get to judge about Performance of different Companies,Government's performance,State of Overall Economy etc.
But where can you buy and sell shares?
Stock Exchange Markets. It is a place where exchange of securities,bonds takes place e.g. Bombay Stock Exchange , National Stock Exchange etc.
Who regulates both primary and secondary markets ?
SEBI(Securities and Exchange Board of India) regulates both primary and secondary markets.It was established in 1988 and was given statutory powers in 1992. Upendra Kumar Sinha is its present chairman.
What is a Stock ?
Suppose Kejriwal buys 100 shares of Rs.10 in Shyam's company then he owns a Stock of Rs.1000 in his comapany.
Thus Share = No of security papers while Stock = Value of money of those Shares
Type of Shares :
There are mainly two types of shares Preferential Shares and Equity (Common) Shares.
Preferential Share = > No Voting Rights but you get a fixed dividend.When profit is liquidated as dividend the fixed dividend of Preferential shareholders is given first.
Equity(Normal Share) = > Voting Rights but no fixed Dividend.
Right Issues of Shares :
IPO is over but after some time he needs some more money.Thus he has to again issue some additional shares but under companies act he can only issue those shares to the exisiting shareholders.This is called Rights Issue of Shares.
Employee Stock Option Scheme
Under this scheme the company can issue shares to its employees at discounted prices so that they work hard towards the success of the company thereby
If company does well => More Profit => More Dividend for them.
But what the hell is Nifty and SENSEX ?
They are indexes.An index is basically an indicator.Its value predicts and gives an idea whether the prices of most of the shares(Stocks) of major companies which are traded on that stock exchange have gone up or down.
SENSEX is the stock market index for BSE Limited, previously known as the Bombay Stock Exchange. SENSEX Index is comprised of 30 of the largest and most actively-traded stocks on the BSE. Nifty is the stock market index for the National Stock Exchange (NSE). Nifty comprises of 50 of the largest and most actively traded stocks on the NSE that covers 22 sectors of the Indian economy.
How to calulate value of SENSEX ?
Before we start, first understand :
What is Market Capitalization ?
Market Cap or Market Capitalization of a company is the total money required to buy all the shares of that Company
Market Cap = Total No. of shares issued by a company * Price of each share.
Now Free Float Market Capitalization :
In a company some shares are held by Founders,Directors,Government,Holdings through FDI route etc. The shares which are open for trading by Aam Junta are called Free Float Shares.
Free Float Market Capitalization (FFMC) = No. of free float shares * price of each share.
Now BSE will pick up top 30 companies and add their FFMC suppose it is 15000 Rs.(Hypothetical)
Now if we take the base year (1979 for BSE) suppose total FFMC for those 30 companies was 10 Rs.
Value of Sensex = (Total FFMC in current year/Total FFMC in the base year i.e. 1979) *100
= (15000/10)*100=150000
This is not technically 100 % right. Actually BSE finds a Free float factor based on the shareholders information given by the company to BSE.Multiplies it by the Market Cap to find FFMC and then add the FFMCs of the 30 companies and then make it relative to the base year to find the value of SENSEX.
For NIFTY = > Same method for 50 Companies.
On what paramater does NSE/BSE select these 50 or 30 companies ?
It depends various factors like Mareket-Cap, Trading frequency,Industry representation etc.
Huff ! Now we are done with the topic.
Happy Learning :)
mast sir :)
ReplyDeleteThanks sidd! All the best for your interview
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