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Basics of Stock Market

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Shivam Mitra
Shivam Mitra

Learn the basics of stock market: 1. Origin of stock market 2. IPO 3. Public vs private companies 4. Primary vs secondary market 5. Why do people buy stocks 6. Why does stock price fall or rise 7. Stock market index 8. Bear market vs Bull market

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BASICS OF STOCK MARKET
HOW STOCK MARKET ORIGINATED
• In History book, you would have read about East India Company. • Who paid the bills for the ships, the food and all other expenses of the adventures? • In those days, the kings and queen had all the power. • Royal license called ”charter of corporation” was needed to go into business in royal lands. • United Dutch East India Company was world’s first popular stock. • Stock market originated in 1602 . • First stock exchange: A bridge near Amstel River in Amsterdam
• Optimists vs Pessimists • Optimists won as stock price doubled in first years of trading. • Shareholders also got a bonus known as dividends • UDEI stayed for two centuries before being dissolved in 1799. • Henry Hudson sailed his ship “the Half Moon” up the Hudson river in what is now New York. • Who paid for his adventure? • UDEI
I can calculate the motion of heavenly bodies, but not the madness of people.
THE STORY OF A COMPANY
STOCKS/SHARES • Ownership certificate of a company is called a share • A company can be divided into smaller parts known as shares. • Two friends want to start a company with investment of 10000 from each • 1000 shares each having a face value of 2 • Each friend gets 1000 shares and 50% ownership
Basics of Stock Market
Restaurant business Seed capital Venture capital Initial public offering
• I want to open more restaurants in different cities • Options • More funding from venture capitalists • Loan from a bank • Raising money from the public • Raising money from the public is done through Initial Public Offering • Investment banks are involved for deciding price, size of the IPO, valuation and other regulatory stuffs.
PRIMARY MARKET VS SECONDARY MARKET Primary market Stocks are issued for the first time through IPO Stocks are sold directly by companies to investors Managed by investment banks Secondary market Stocks trades here after shares are issues in primary market Stocks are traded between investors Managed by brokers
PUBLIC VS PRIVATE COMPANIES Private Companies Owned by one person or small group of people Mostly family owned General public cannot invest in them Liked the food from Zomato? Public Companies Owned by promoters and public General public can invest in them Liked the experience at Taj Mahal Palace,Mumbai?
A public company is the most democratic institution in the world, when it comes to who can be an owner. It’s an example of true equal opportunity. It doesn’t matter what color you are, what sex, what religion, what sign of the zodiac, or what nationality, or whether you have bunions, pimples, or bad breath. Lynch, Peter. Learn to Earn
WHY DO PEOPLE BUY STOCKS
• When you buy stocks of a company, you become a partial owner of that company • A part of profit that company makes are yours – dividend • You will be invited to attend annual meeting of the company • Main reason for buying stocks is price appreciation of stock • If a company does good, stock price increases • If a company does bad, stock price decreases
• If company does good, the demand for its stocks will increase. • Increase in stock price – demand > supply • If company does bad, the demand for its stocks will decrease. • Decrease in stock price – supply > demand • Stock market works on concept of demand and supply
WHY DOES STOCK PRICE FALL OR RISES
• Why does the demand increase or decrease for a stock? • Stock price changes everyday • Nobody knows for sure why price are increasing or decreasing • In the short term • Positive and negative news related to the company • Positive – company is opening a new car • Negative – Sales of the company has decreased
• In long term, price of a stock is function of its earnings. • If a company keeps on increasing earnings year by year, its stock price should increase. • If a company cannot grow its earnings, its stock price should decrease. • If earnings do not increase as expected by its investors, stock price can again decrease. • Expectation: 20% earnings, Reality: 10% - Decrease • Expectation: 10% earnings, Reality: 20% - Increase
HUL price being flat for many years
• People buy a stock for its future earnings. • Stock price also reflects about the future of the company • Earning per share – total profits / total no of shares • Does the stock price trade at the value of earning per share? • Will you sell your restaurant business at the price = profits? • Price to earning ratio – stock price / earnings per share • Price to growth ratio – PE / growth • PE = 10 – You are paying Rs 10 for Rs 1 profit of the company • The profits of the company is either paid to shareholders as dividends or reinvested into the business to make more profits.
EICHER MOTORS SHARE PRICE OVER YEARS
WHERE DOES THE BUYING AND SELLING OF STOCK HAPPEN
STOCK EXCHANGES • Stocks are listed on stock exchanges • Marketplace for trading of stocks between buying and sellers with broker acting as an intermediate • Vegetable marketplace • Buying and selling happens are automated today and happens through electronic medium • Two popular exchanges in India – NSE and BSE
HOW TO BUY AND SELL SHARES • Bank account, demat account and trading account • Trading account – where you buy and sell shares • Demat account – your share certificates are kept • Most banks do provide these account as 3-in 1 account • Non-banking companies - Zerodha
WHERE DOES THE BUYING AND SELLING OF STOCK HAPPEN
• Bull market • Prices of stocks are going up day by day • Economy of the country is booming or is going to boom • More optimists in the stock market than pessimists • Bear market • Prices of stocks are going down day by day • Recession is looming • Economy of the country is in bad shape or going to be bad. • More pessimists than optimists
BULL AND BEAR MARKET IN INDIA
STOCK MARKET INDICES
• A stock market index consists of a subset of stocks • The price of a stock index is determined by taking weighted arithmetic mean of the prices of the stocks in the index • A stock market index reflects the overall condition of the market • Stock market reflects the economy of a country • Popular stocks indices: Sensex and Nifty
NIFTY 50 INDEX

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Basics of Stock Market

  • 2. HOW STOCK MARKET ORIGINATED
  • 3. • In History book, you would have read about East India Company. • Who paid the bills for the ships, the food and all other expenses of the adventures? • In those days, the kings and queen had all the power. • Royal license called ”charter of corporation” was needed to go into business in royal lands. • United Dutch East India Company was world’s first popular stock. • Stock market originated in 1602 . • First stock exchange: A bridge near Amstel River in Amsterdam
  • 4. • Optimists vs Pessimists • Optimists won as stock price doubled in first years of trading. • Shareholders also got a bonus known as dividends • UDEI stayed for two centuries before being dissolved in 1799. • Henry Hudson sailed his ship “the Half Moon” up the Hudson river in what is now New York. • Who paid for his adventure? • UDEI
  • 5. I can calculate the motion of heavenly bodies, but not the madness of people.
  • 6. THE STORY OF A COMPANY
  • 7. STOCKS/SHARES • Ownership certificate of a company is called a share • A company can be divided into smaller parts known as shares. • Two friends want to start a company with investment of 10000 from each • 1000 shares each having a face value of 2 • Each friend gets 1000 shares and 50% ownership
  • 9. Restaurant business Seed capital Venture capital Initial public offering
  • 10. • I want to open more restaurants in different cities • Options • More funding from venture capitalists • Loan from a bank • Raising money from the public • Raising money from the public is done through Initial Public Offering • Investment banks are involved for deciding price, size of the IPO, valuation and other regulatory stuffs.
  • 11. PRIMARY MARKET VS SECONDARY MARKET Primary market Stocks are issued for the first time through IPO Stocks are sold directly by companies to investors Managed by investment banks Secondary market Stocks trades here after shares are issues in primary market Stocks are traded between investors Managed by brokers
  • 12. PUBLIC VS PRIVATE COMPANIES Private Companies Owned by one person or small group of people Mostly family owned General public cannot invest in them Liked the food from Zomato? Public Companies Owned by promoters and public General public can invest in them Liked the experience at Taj Mahal Palace,Mumbai?
  • 13. A public company is the most democratic institution in the world, when it comes to who can be an owner. It’s an example of true equal opportunity. It doesn’t matter what color you are, what sex, what religion, what sign of the zodiac, or what nationality, or whether you have bunions, pimples, or bad breath. Lynch, Peter. Learn to Earn
  • 14. WHY DO PEOPLE BUY STOCKS
  • 15. • When you buy stocks of a company, you become a partial owner of that company • A part of profit that company makes are yours – dividend • You will be invited to attend annual meeting of the company • Main reason for buying stocks is price appreciation of stock • If a company does good, stock price increases • If a company does bad, stock price decreases
  • 16. • If company does good, the demand for its stocks will increase. • Increase in stock price – demand > supply • If company does bad, the demand for its stocks will decrease. • Decrease in stock price – supply > demand • Stock market works on concept of demand and supply
  • 17. WHY DOES STOCK PRICE FALL OR RISES
  • 18. • Why does the demand increase or decrease for a stock? • Stock price changes everyday • Nobody knows for sure why price are increasing or decreasing • In the short term • Positive and negative news related to the company • Positive – company is opening a new car • Negative – Sales of the company has decreased
  • 19. • In long term, price of a stock is function of its earnings. • If a company keeps on increasing earnings year by year, its stock price should increase. • If a company cannot grow its earnings, its stock price should decrease. • If earnings do not increase as expected by its investors, stock price can again decrease. • Expectation: 20% earnings, Reality: 10% - Decrease • Expectation: 10% earnings, Reality: 20% - Increase
  • 20. HUL price being flat for many years
  • 21. • People buy a stock for its future earnings. • Stock price also reflects about the future of the company • Earning per share – total profits / total no of shares • Does the stock price trade at the value of earning per share? • Will you sell your restaurant business at the price = profits? • Price to earning ratio – stock price / earnings per share • Price to growth ratio – PE / growth • PE = 10 – You are paying Rs 10 for Rs 1 profit of the company • The profits of the company is either paid to shareholders as dividends or reinvested into the business to make more profits.
  • 22. EICHER MOTORS SHARE PRICE OVER YEARS
  • 23. WHERE DOES THE BUYING AND SELLING OF STOCK HAPPEN
  • 24. STOCK EXCHANGES • Stocks are listed on stock exchanges • Marketplace for trading of stocks between buying and sellers with broker acting as an intermediate • Vegetable marketplace • Buying and selling happens are automated today and happens through electronic medium • Two popular exchanges in India – NSE and BSE
  • 25. HOW TO BUY AND SELL SHARES • Bank account, demat account and trading account • Trading account – where you buy and sell shares • Demat account – your share certificates are kept • Most banks do provide these account as 3-in 1 account • Non-banking companies - Zerodha
  • 26. WHERE DOES THE BUYING AND SELLING OF STOCK HAPPEN
  • 27. • Bull market • Prices of stocks are going up day by day • Economy of the country is booming or is going to boom • More optimists in the stock market than pessimists • Bear market • Prices of stocks are going down day by day • Recession is looming • Economy of the country is in bad shape or going to be bad. • More pessimists than optimists
  • 28. BULL AND BEAR MARKET IN INDIA
  • 30. • A stock market index consists of a subset of stocks • The price of a stock index is determined by taking weighted arithmetic mean of the prices of the stocks in the index • A stock market index reflects the overall condition of the market • Stock market reflects the economy of a country • Popular stocks indices: Sensex and Nifty