Why Is Stock Market Very Important? How Does It Work?

 The Stock Market has prone to be an indispensable part of human lives. About 60% of the US population has invested at least some money into the stock market.

India too is growing its number of stock investors. Recently, a figure was estimated that at least more than 20 million people have an investment in stocks.

This is much better than the stats about 5 years when there were even fewer investors from India.

Let's have a quick look at some basics:

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What is Stock Market?

If a company wants to collect money or funds to expand its business or infrastructure, it has got two methods of doing it. The first method is to completely rely on its profits at the end of the Financial Year (FY) and use that to expand its business.

The second easier method is to raise money/funds from external sources. Profits usually don't perform satisfactory results for an average company's expansion plan. Plus, it depends upon many 'risky' factors such as market condition, consumer's interest, etc.

The 'profit-only' method is again branched into many ways for raising capital from the public:

The first option is to take a loan from a bank. The process is the same: Repay the debt by installments for a due course of time.

The second option, however, is easier for the company/business and it can generate massive funds in a very short span of time say about in a month or so. This method is very popular among blue-chip companies as well as the new ones. The method is to list itself in an IPO (Initial Public Offering).

If the company has been doing well or has a good history, has been generating a stable profit margin, and has built good trust among its customers, then it becomes eligible to register for an IPO or in other words the Stock Market.

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How does the Stock Market/IPO work?

During an IPO, the company which is raising capital/funds divides its whole organization/firms into many small pieces.

 These small pieces are termed Shares. While a new company may divide itself into just thousands of pieces or thousands of Shares, a blue-chip company has an average of at least 1+ million Shares or 1+ million pieces.

Usually, if a company makes 100 shares, then the value of each share is 1% of the total company's value.

If you buy 10 Shares of that company, it means that you own 10% equity in the company, or in simple words, 10% of the ownership of the company belongs to you. (If you own a considerable amount of shares of any company, you may expect to be invited to the decision-making committee or a board of decision-makers that will decide the future of the company!)

If the company performs better for the FY then more investors like to be on the hunt to invest massive money in purchasing the shares (also called stake) of that company.

And since the number of shares is limited, by the Demand-Supply rule automatically the prices/value of each share goes up. Which results in personal profit if you are willing to sell the share.

The company too earns a profit that can be used for new and quick expansions and new implementations which were earlier just a draft on paper.

There is another concept of 'Dividend'. In this, the company pays out some money to all its stakeholders no matter how much they hold called a Dividend.

The Dividend is paid at a fixed amount per share. Hence, the more shares you have, the more money you're gonna make.

What is the Importance of Stock Market?

Many experts state that the stock market of a country 'mirrors' the strength and progress of its economy.

Stronger the stock market, the stronger the economy.

What are the Features of Stock Market?

1. Stock market is an ocean of opportunities to make a profit and has one of the fastest expansion rates.

2. Huge Flow of Money (Backbone of Economies)

3. Creates the Secondary Market (Indirect financial markets like Mutual Bonds, Currency Market, etc. originate from the stock market and act as a subsidiary to it)

4. Fair Market (Stock Market is one of the most transparent forms of the market where the public can assess the performance of the listed companies and their past share prices as well as predictions of future prices within a few clicks)

5. Wealth Creation (Huge profits in one do not mean that other sectors are at a loss)

6. Base of the Country's Economy

7. The Easiest and most Reliable Monitoring System