Some of us have got weird perceptions about stock market. Some common ones which we have encountered are:
- It’s purely a gamble
- It’s a quick way to make some money without any ‘efforts’
- Never invest in stock markets, you always lose!
Some people even consider it as a black box and expect some magic to happen. We have seen people asking their broker to do some magic and earn them a regular income from stock markets, like earn Rs. 5000 a month by investing Rs. 50,000 in total. Well, if you are thinking what’s wrong in expecting this little income, then keep reading..
Today we’ll have the kindergarten class of stocks. In the words of our youth icon ‘Rahul’, we want to ‘empower’ you so that you can form a well-informed opinion about stocks and their markets. Grab a cup of coffee, it's a long one.
C for Company
You must be knowing what a company is. Especially, these days every second person has got a business idea to start up a company. Yeah yeah, we are also from the same crazy breed :) Anyways, when you start a company, that company has its own legal existence. Just like you are a living citizen of your country, the company has also got its distinct identity. Just that the company doesn’t breathe oxygen like us, it breathes money! ;) The company has its own fundamental rights and duties defined by the constitution. No we never said that the company can do everything on its own! It has its separate existence, but it’s not human. It cannot take intelligent decisions like us on its own.
E for equity
The people who give birth to a company (by going through a ‘smooth’ process of company incorporation with government), define how much right do they have on their child. However, it’s not as emotional and as understandable as ownership of a child. Have you ever heard father and mother arguing that one owns 60% of their child and other 40%?! But, it goes quite practical when your child is a company. You have to define how much of their child each parent owns. And a company can have many parents. Each parent need to mathematically define their right over the company by the money they pour in to start the company. Suppose, three people start a company; first of them puts in Rs. 200,000, second one puts in another Rs. 200,000 and the third one puts Rs. 100,000. So, they have given birth to a company whose value at the time of birth is Rs. 500,000. The first and second one owns 40% of the company and third one owns 20% of it. This is called their ‘equity’ or share in the company. These three are also responsible for parental supervision of the things which the company does. However, what a company does is not decided by which parent is dominating. But, by how much part of the company the parent owns.
P for Profits
Unlike human child, parents of a company are not that emotionally attached with it. The sole purpose of existence of a company is to make money (of course also to utilize resources and make this world a better place, as often quoted). Whatever may be the purpose, the efficiency of this child is measured in terms of how much money it can make. It’s the duty of the company to make profits and distribute it to its parents or the shareholders in proportion of their ownership in the company. Company does not have fundamental right to follow its passion. It needs to make money, or else it will be killed or die a natural death soon. In fact, infanticide is quite common in case of companies. Many of them are aborted while they are still on paper because their parents don’t feel that they will be worthwhile. Sadly, they do not have this fundamental right as their sole purpose is to make money. We won’t get into how the company make profits. We are sure that you very well know the game of profits! After all, that’s what we are taught! That’s what’s the aim of our lives is! To make money! Isn’t it?
S for Stock Markets
What if you no more like your child? You can’t do much about it if the child is a human. But, you can sell your child if it’s a company. And it’s perfectly legal! We have even got markets specifically for this purpose! These are called the ‘Stock Markets’. Stock market is the place where these cruel parents meetup to trade their children. Some want to sell their ownership in their child, and some want to become parents. People sell the portion of their child or their ‘share’ in their child when they have fulfilled their purpose of making money from it, or they no longer see any future scope in their company. On the other hand, would be parents or buyers of shares buy the shares in expectations that they will also make some money through the company. The number of buyers and sellers in a stock market is so huge that they constantly bid for these shares. Suppose, you happen to like child ‘X’ and some other person also happen to like that child. If some seller is selling one share of that child, then you both will compete to purchase that share. You both will ‘bid’ to buy that child. Whoever pays a higher price, gets it. And due to this never ending bidding, we see that price of shares change every second. Experts in finance have defined much sophisticated methods to decide a fair price of a share depending on how much potential does it have to make profits in future. ‘Ideally’, people purchase shares considering the long term profits which the company may earn them.
Poor child, how much it has to suffer! Don’t you feel so?
T for Traders
These are the people who have got least of emotions! The company is purely a commodity for them! They buy this child for days or even hours or seconds! They don’t even believe in believing in the potential of the company to make profits and make money that way. They make money by taking the advantage of ever changing prices of shares. They are in front of their computers looking for opportunities to buy at a lower price and sell it a higher price at the first opportunity they get :) You see, ideally the value of a share is decided by how much profit making potential does it have. Do you really think, the profit making potential of a company changes each second as indicated by its share prices? It’s impractical! But the traders make it look like this! They buy and sell so much among themselves that price changes every other second. Sometimes they make money, sometimes they lose. There is no logical reason for their profits and losses. These are the people who develop a perception that stock market is gamble, or it’s a quick way to make some money or you always lose money in stock markets.
I for Investors
Investors are some humanly people who believe in the company’s potential of making profits, unlike traders. They also buy and sell shares of the company, but they hold their shares for an extended period of time, usually years or forever. They take care of the company and nurture it to become profitable, and then take away their part of earning through these profits. Or also, by selling their part of shares at increased prices due to increased profit making potential of the company. These are the people who drive the price of shares in long term. They strive to price the shares in line with the performance of the company after applying those sophisticated techniques. These are the people who make us focus at the very basics of a company which are its core operations. This is the way to put money in shares if you are not a fan of gambling! If you invest money this way, you will be more certain about the profits or losses which you may make. Now, the most important point to be noted is that your child doesn’t start walking right after taking birth. Neither in life has everything gone well every time. Same is the case with a company. It has its own cycle of ups and downs. It might do very well sometimes and not so well at other times. All of that gets reflected in its stock prices. But, if a company is fundamentally good, that is it really has got potential to do a good business, these short term fluctuations due to trading activities should not matter!
Time for a break, Yay!
Having said that, we reiterate that if you ‘invest’ in equity or shares, you have to consider the long term picture. Investing in equity for short term is against the basic rules :) If it is for short term, it’s called trading. Becoming trader is a different profession altogether and it needs different kind of mind and heart, which is hard to manage with your day job. So, when you consider ‘investing’ in stock markets, think like an ‘Investor’! That means, ‘think equity, think long-term’ and you will be fine. It takes years for the little child to get up and assist you. You have to have patience to see your little plant produce some fruits for you.