Decoding Bulls and Bears
The Stock Market is actually a fantastic way for women to earn money because trading can be done remotely and the setup only requires a working laptop with an internet connection. However, in order to really succeed in the Stock Market, you will need an understanding of how the market works. Half-baked knowledge in this regard can be extremely dangerous for your bank balance.
Understanding Equity
In order to understand how the stock market works, we need to understand how companies work. The money with which you start a business is known as capital. When it comes to companies (a business becomes a company when it is registered under The Companies Act), this money is divided into ‘shares’ of a denomination of your choosing. So if you start a business with Rs. 1 Lakh, for example, it can be divided into 10,000 shares of Rs. 10/-. This Rs 10/- is known as the ‘Face Value’ of the share. The overall capital of Rs.1,00,000/- is known as the company’s ‘equity’, and this equity symbolizes ownership. So the individuals who possess the maximum number of shares or the most equity, pretty much own the company.
As companies grow and expand, the need for extra funds also increase. The company can either go to the bank for loans, or they can go to the public – you and me. When a company decides to 'go public', it issues more shares and create more capital that the public can buy.
So when you buy a share in a company, you’re literally buying a share in the company. The companies that approach the general public for capital are known as listed companies. The price at which you buy the share, however, will not be at face value – it will be a function of the company's performance and its net assets (all that it owns). So if a company is doing well, its share price will be greater than its face value. This price is known as 'market value'.
Understanding The Index
A vegetable market is one place where you can buy a variety of vegetables that are brought in from various parts of the country and sometimes, abroad. A stock market is the same thing. It’s one place where you can invest in a number of companies spanning different sectors like steel, energy, Information Technology and more. The two biggest stock markets in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The performance of every company listed on these indices are tracked every single day. If they do well and the economic environment is suitable for their business, the share value goes up and vice versa.
Both the BSE and the NSE have indexes – an index is a mathematical average of a group of stocks that are traded in these markets. They could be grouped together because they belong to a certain sector (like energy), or because they’re companies with very large capital (think Reliance, Infosys and other companies whose capital run into the hundreds of crores).
So when a company forming part of the index faces a dip in performance, the entire index is affected. Similarly, when a company forming part of the index does spectacularly, the index gets a positive boost.
The most important indexes in India are the BSE SENSEX and the NSE Nifty, which are considered to be ‘Benchmark’ Indices because they best represent the performance and the atmosphere of the market as a whole. When the market is ‘bullish’, it means that most of the companies are doing well and the index is climbing upward – the term is derived from the manner in which bulls tackle their opponents, that is by driving their horns down and throwing them up in the air. When the market is ‘bearish’, it means that the opposite is happening – companies aren’t doing well and the index is down (because bears pin their opponents to the ground).
Now that you know how the stock market functions, how do you get started with investing? Next week on Rupee Rani.
Rupee Rani is a weekly column on finance for women. Write to us with your queries at rupeerani@thenewsminute.com.