Stock Market 101 - What is a Share?

A ‘Share’ or ‘Stock’, to put simply is a share in ownership of a business. When you buy a share you basically get ownership of a percentage of the business.

Let’s understand this with an example. Consider Mr. A’s life is a business. When, Mr. A was born, a startup was established. He went through the school and now wants to go for higher education. But, Mr. A doesn’t have money to go to college, so, he gives an advertisement in the newspaper, that whoever will give him 5Lacs for going to college, he will give that person 10% of his income for lifetime, this is called public issue or IPO (Initial Public Offer). Now, people study this person’s school grades, his intelligence, the course for which this person is going for since, it may impact his earning capacity, his nature whether this person will work hard enough to pass through college with good grades. 

Depending on all this information, people will calculate what kind of income Mr. A can generate, and judge if they want to give that 5Lacs to Mr. A. Now, consider Mr. B, consider that Mr. A is good enough and will generate good income, hence, he gives this Rs. 5 Lacs to Mr. A. On getting the money, Mr. A signs a contract with Mr. B committing to provide 10% share in his income throughout his life. This contract is called a 'Share' and transaction happens in primary market. 

Using this money, Mr. A goes to college and bingo, after 4 years in education got a job in a company, earning Rs.1Lac/month. Since, Mr. B has 10% share, 10% of Rs. 1 Lacs i.e. Rs10,000 should go to Mr. B, as 'Dividend'. But, Mr. A may think that instead of paying this Rs.10,000 to Mr. A, he may go for further education to increase his income further. Mr. B doesn’t agree, but Mr. A still being majority owner (90% remember), can go ahead, with his decision. However, Mr. B could be in need of the money or may consider this decision wrong and doesnt want to keep this share with him. He can do this by selling his share to someone else. At this stage, he can go to 'Stock Market'. It's a place wherein he can find the people who are interested in purchasing the stocks. These people are supposed to do there own research on Mr. A and depending upon their decision, they may offer whatever money they think 10% of Mr. A is worth. It may be 2Lacs or Rs.10Lacs, depending upon how the investors see the future income of Mr. A after his higher education. Do note, that at this time, Mr. A, can go on with his own decisions and he is not involved in buying or selling of shares, other people will do so. This is called 'Secondary Market'. This way, the share will keep trading until Mr. A dies (company closes). 

As you have seen above, shares gives investor a part in the income or assets of the issuer, in lieu of the money. This way, the issuer (Mr. A) gets the money and the investor (Mr. B) a part of income without actually going through college and working. The investors can spend his time in something they consider is worth more than doing that business on his own. However, do note that Mr. A can simply waste the Rs.5 Lacs raised or may not get a job and may not earn anything.

While many could consider this as gamble, it is not. Investors can increase the probability of profit by doing a proper check on the past record of the company (Mr. A) and studying the future prospects. However, there’s always a risk as Mr. A, inspite of his best intentions and hard work, may not be able to make money. Also, it is good for a country or a society, as Mr. A using investors money, got educated, will pay taxes and who knows may even generate much more jobs going forward.

This is how the stock market functions at its core. This article is supposed for the new comers and hence, this over simplified explanation. The actual value of shares and price calculation is a complex problem and everyone in the market is doing that. The person who predicts it the best, wins.

Just as a fun exercise, do check, if someone asks for share in your income/assets for whole life what will you ask for 10% of your share. Just a tip, do take future growth in your income before coming to any price. And do let us know on @MoneyMatrs or comment on this post.

To invest in stock market you need a demat account, you many open one at upstox by clicking here. 

But if you are new to stock markets, I would suggest you to go through a mutual fund. You can invest in Mutual funds using KUVERA by clicking here.