what is stock market?// HOW TO START

HOW TO START

• Setting up a bussiness:
• What is Stock?
• What is bebt?
• Secondary market?
• Stock Broker
• Bonus Shares
• Right Shares

Setting up a bussiness:

-Irrespective of which part of the world you plan to set up your business, your business needs funds. So now say you need a funds of 100 curreny units to start your business. If you have all the 100 bugs, you will be easily able to setup your business. Imagine you have 60 bugs and decide to get the remaining 40 from an outsider. You have 2 ways of making him invest. 1. Either you ask him to invest 40$ (imagining the business is in US) and give him a regular interest. Return his money when you can. 2. Or ask him to give you 40$ and give him a pro-rata share in profits and return his money evaluating the worth of the company once both of you decide. Again on pro-data basis. The first method is called debt. The second method is called Equity. The amount considered here is a low 100$ and you will get a single person to give you the required 40$. Usually the amount required to set up great industries runs into billions and you may not be able to find a single entity to invest the entire money. Thus the need comes to ask more people. Different laws exist in different countries to deal with this. But the principle purpose remains the same.

What is Stock?

- As explained in the previous topic, Imagine a business is set up with initial investment of say 10 billion. The promoter, the person who starts this venture has say 40 billion and needs another 60 billion. So he may opt for getting this amount from public in a country. So he will get the government permission for the same explaining the authorities the need. This investors along with the promoter is called share holders, which directly mean that they are pro data share holders in the new company and they will be eligible for the profit share or any other benefit that may company get in future. Note that, this also means that they will be eligible for the losses too. But, one point to note is that the loss will be only up to the level of their investment. That means a person will not be asked again to give money to fill up the losses. This 100 billion is split into X stocks of face value y , where x X y = 100 billions.

What is a debt?

- "An amount owed for funds borrowed. The debt may be owed to an organization's own reserves, individuals, banks, or other institutions. The debt is normally secured by a note or bond or mortgage or other instrument that states repayment and interest provisions. The note, in turn, may be secured by a lien against property or other assets." With respect to stock markets, a company may have debt in the form of secured/unsecured loans, bond issues.

Stock markets - trading

- After a company issues its securities either in an IPO or subsequent issues, What if an investor needs money or wants to en-cash the profits made by the company or wants to stop ongoing losses in the investment? Secondary stock markets have been set up around the world almost in all countries to facilitate an investor to sell his securities to another interested investor. Unlike IPOs where the offer price is fixed while issuing, here the rates are market driven. Which means a share can trade at a price agreed between the buyer and the seller. Some of the stock exchanges are New York Stock Exchange, NASDAQ, London stock exchange, Paris Stock Exchange, Bombay Stock Exchange.

Stock Broker / Stockbroker

- A stockbroker or Brokerage house is a entity affiliated to a stock market who bridges the gap between an investor and a stock market to buy or sell stocks and shares. Now a days most of the brokers facilitate "online trading" which facilitates you to trade online from home if you have an Internet connection. Finding a trustworthy stockbroker is most important to avoid frauds and losses due to misguiding.

Issue of Bonus shares

- A company issue shares in lieu for cash or sometimes against transfer of physical or intellectual property to the company's hands. But bonus shares are issued to the existing shareholders by converting free reserves or share premium account to equity capital without taking any consideration from investors. Bonus shares do not directly affect a company's performance. Bonus issue has following major effects. 1. Share capital gets increased according to the bonus issue ratio. 2. Liquidity in the stock increases. 3. Effective Earnings per share, Book Value and other per share values stand reduced. 4. Markets take the action usually as a favorable act. 5. Market price gets adjusted on issue of bonus shares. 6. Accumulated profits get reduced.

Issue of Rights

-An issue of securities to the existing shareholders with the right resting on the investor either to accept or reject the offer. A corporation/company usually offers a rights issue to the existing shareholders an option to buy new shares of the company at a predetermined price usually at a discount to the existing market price in a pre fixed ratio. A rights issue will be of the form, issue of x number of shares to the existing shareholders at a price of y per share in the ratio of n shares for every y shares held as on date D. A rights issue has the following effects on the price of a stock. 1. Share capital gets increased according to the rights issue ratio. 2. Liquidity in the stock increases. 3. Effective Earnings per share, Book Value and other per share values stand reduced. 4. Markets take the action usually as a favorable act. 5. Market price gets adjusted on issue of rights shares. 6. Company gets better cash flow which may be used to improve the business and may help increase effective Earnings per share. 7. Usually a shareholder may not back out from applying for the rights issue unless the offer is almost same as the prevailing market price. This is because if a stock is trading at 100 and a rights issue in the ratio 1:1 at a price of 40 will make the stock trade at 70 soon after the ex-rights date.