If you have a great business idea and decide to try it out, you will need money to start things of – for example, to rent an office, hire employees, buy computers, manufacture your product, travel to meet with suppliers or customers, set up a website etc. The money you need to run a business is called ‘capital’.
Initially, entrepreneurs use their own savings or borrow from friends and family to put together enough capital, maybe Rs 2-3 lakh. As the business grows, more capital is required. This time, the entrepreneur may take a bank loan, let’s say for Rs 50 lakh.
Now let’s assume the business becomes really successful and starts to expand – the entrepreneur may decide to open branches in other cities, start selling a wider range of products and implement a much more expensive advertising campaign, even buy out a competing business. One of the ways that the entrepreneur’s need for a much larger amount of capital, say a few crores, to be met is through a stock exchange. Here, the entrepreneur can raise the capital he requires if he can convince millions of investors registered with the exchange that he/she is running a successful business with a great future and the potential to earn profits. In return for investing money in the business, these investors can own a tiny portion of the business.
For example, if the total capital of a business is Rs 1 crore put together equally by 20,000 investors, that means that each person has bought a share in the business for Rs 500 and owns 0.005% of the business.
Keeping track
A stock exchange is a kind of marketplace where companies and investors come together to raise capital and invest their money respectively, no different from buyers and sellers in any other market except that here, the product being bought and sold is money itself. The biggest exchanges in the world have thousands of companies on their lists that investors can choose from. Companies that are ‘listed’ (to use the official term) with an exchange are obliged to inform the exchange regularly about their performance, what profits they’ve earned or loss that they have suffered, any major decisions they take (has the CEO quit?) and expectations for the future, so investors can have access to such information and decide whether to buy more shares or sell the ones they hold.
Rising and falling
The price of a company’s share in the stock market rises or falls based on investor demand. If the company whose share originally cost Rs 500 invents a new medicine or doubles production by opening a new factory, more and more investors may be keen on buying its shares. As demand rises, investors start trading these shares among themselves for higher prices. For example, an investor who bought the original share for Rs 500 may now sell it to another investor for Rs 560, hence making a profit or Rs 60. (You should note that the new investor also owns only 0.005% of the company but has paid more money for the share.)
Stock exchanges often reflect what the mood of the economy is like. For instance, share prices kept rising during the general elections when investors and business owners were convinced that Narendra Modi would become Prime Minister, since he had made several campaign promises in favour of the business fraternity. (Be careful not to trust it very easily, though. Read more at >The Stock Market Connect )
How do you keep up with a stock exchange? Every exchange has something called an index – this is a selection of specific companies that more or less represent all the other companies listed. For example, the Bombay Stock Exchange has selected 30 shares that form the Sensex (expanded as Sensitivity Index). All the changes in the prices of the shares that figure in the Sensex together account for changes in the Sensex. If Share A moves up by 10% and Share B falls by 5%, the Sensex will show an average rise of 5%.
This week’s question
The National Stock Exchange’s index is called the Nifty. Find how the Nifty was valued at the end of today (June 17) and by how many points did it rise or fall from Monday’s value.
Last week’s answer: El Nino. Congratulations Hari for sending the right answer
