Most of us consider stock market as a complex web where people either make a lot of money or lose all of their money. Worse, the common assumption is: people, mostly, make or lose their money in a way of gambling. The feeling about the stock market is best summed up as, “I consider it a bad option, so I will stay away from it”.
So, today I am going to help you understand: what is a stock market, does it help in nation building, why people lose money and how can you proceed in a safe manner.
What is a stock market?
I am sure you must have seen ‘Guru’ - the biopic on ‘Dhirubhai Ambani’. In case you have not, I will urge you to watch it. At one point in the movie, Abhishek Bachchan wants to expand his business and he decides that he won’t go to the banks. On the contrary, he decided to go to the people to raise funds and, in the process, his company gets listed on the stock market.
Therefore, according to Indian norms set by SEBI, the stock market is a place where companies get listed to raise money. Companies, such as Jockey, Asian Paints, Britannia as well as Tata's, Reliance and Aditya Birla group have been raising money through stock markets for decades as well.
Now, in the movie, Abhishek could either borrow from the bank at a certain interest rate which is normally around 15-25 per cent based on company credit rating or can borrow from the general public. In the latter case, he had to make them part-owner of the company, paying them a part of the profit and expecting them to share a part of the losses as well.
As the companies get listed, the common man, institutional investors and anybody can be part of the corporate journey in buying the shares of their company.
Thus, the most basic definition of the stock market is a lending platform which the big business houses can use to borrow money from common people in lieu of a part of their company (called shares in common parlance).
Now there are few ways to take part in the stock market and it will help you understand why people lose money.
Day trading: This is the most risky way in which people participate in the stock market and it, in reality, doesn't benefit the companies much. Just imagine, how many times have you taken a loan for a single day and do you really think that someone can use that money for such a short span of time to expand their business or build a new refinery. So day traders try to predict the price on a daily basis and if they are correct they make millions and if they are wrong, they lose their whole capital.
We at NiveshGyaan can’t predict and, thus, advise our readers also to stay away from it. As we don’t feel it benefits anyone apart from the stockbroker due to the high transaction charges, and this happens to be the most commonly misinterpreted and abused way of trading.
Long-term investing: In this form of trading, you buy a stock after considering its basic fundamentals and then you stick with it for a long time, at least for a year or until you are in some dire need of money.
In this process, you help the company and it rewards you with the gains or sometimes you do make losses (but then which business is 100% risk-free) though you are not gambling and over a long run_ you will realize great companies have always increased your wealth.
We advise you to take part only in long-term investing.
Stock Market's role in nation-building exercise
Let's consider for a moment there is no stock market and Tata's want to expand their business by 100 Crore, so where do you think they can borrow this money; it will be either banks or individuals or some group of investors. Though, it must be tough to borrow 100 crores from a single individual or let’s suppose 10-15 people who are close to Tata’s as well.
If they are going to go to banks or institutional investors, they will be required to keep some form of security and also pay the lending rate i.e. 15% -20% based on different channel, the risk involved in the project and the fixed deposit rate is 7%.
So, let’s suppose this company borrows from the bank at 15% annually. As a result, it definitely has to make profits and also worry about earning 15% extra on the money to pay off the interest.
Now, let's bring the stock market in the picture. Let's consider that TATA's are evaluated to be a 1000 Crore organisation and they want to borrow 100 Crore. So they put their 10% of the company (i.e. 100 Crores) on Stock and distribute these shares in various proportion, including individuals, HUL’s and institutional investors.
From Tata's perspective, two good things could happen:
? The shares got divided among a lot of people, which reduces the chances of taking over the company.
? They got the required money while not actually being worried about generating 15% extra income.
The national perspective
Now, with the formulation of a new unit of Tata’s, new employment will be generated, which will bring more money in the economy, which in return will boost the local economy, thus, churning the wheel of the country.
Therefore, companies should expand if a country needs to develop and it is beneficial for both country and the company if this happens through the stock market.
Now, let’s see how ‘You’ get benefit out of all this.
Common Man’s Perspective
The options in front of you for your idle money are either keeping your money in the bank account or keeping it with yourself, considering you don’t rely on the stock market, and which gives you the best interest rate of 7%.
Now, let’s take TATA’s again and I hope you agree they have a good management, they will try their best to earn more than the bank F.D. rate. Else common sense tells that they could have also put all their money in a bank and sit nicely at home; there was no need of so much effort IN running companies, managing employees and handling agitation, including the whole Cyrus Mistry scandal.
Therefore, stock market opens up a new avenue for you to put your money and grow at a faster rate than bank F.D’s and this, in turn, help both the companies and the economy.
Happy investing and happy growing your money.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)