Design by moneycare

Stock Market for beginners 

How does the stock market function and what drives a company to list its shares on it? Let’s consider an example. Near your residence operates XYZ Limited which secures substantial yearly profits measured in crores. Customers currently make good purchases of their products in the marketplace. So, what does this company think? The company plans to grow their production plant across multiple states. Their main objective is to expand their company. The company intends to build one production unit in Mumbai and will construct additional units in Delhi and Mumbai which will result in new factories being established. XYZ Limited maintains its company name across all new branches which represent the company’s expansion. You can understand this structure as branches. The company requires financial resources to establish operations in three different cities or states. The company requires 1000 crores of funding to carry out its expansion strategy.

Methods of Fund rising 

What methods will this company use to produce the needed funds? The company possesses some financial resources and profits yet lacks sufficient funds for business expansion. The organization can generate the needed 1000 crores through three different methods. The company can start by submitting a bank loan application as their initial funding method. The business seeks a 1000 crores loan from the bank. The bank will not automatically approve this loan request. The company will need to provide collateral because the bank will require them to mortgage their existing property or factory as security for the loan. The bank will extend the loan solely when the company presents collateral. A charge known as interest must be paid because loans do not come without cost. The company will be required to pay multiple crores in interest before their loan term ends which will result in financial losses.

02) The second option is to find investors who invest in crores. These investors are commonly referred to as venture capital investors. The company can approach them and provide a presentation. They can say, “Here’s our company name, and we all are partners. This is our product or service, and we had sales of X amount last year, with profits of Y crores remaining. There is good market demand for this product. Therefore, we aim to set up plants in various cities. Sales will increase, and automatically, profits will rise. So, please consider investing.”**

“They will check everything from A to Z and then decide to invest 1000 crores in your company. Do they invest for free? Surely, they should get something in return. They must be given ownership in the company. So, for the investment of such a large amount, for example, if we give them 30% ownership, we need to share the profits generated from that. The capital investors should receive their share. So, we shouldn’t incur losses. It’s our start, our product, and our idea. But why should we give? Because they are investing. Regardless of how we look at it, this is also a loss.

Moreover, if we enter the stock market, we won’t need to pay interest, and there’s no need to share profits with others. If our company is growing, their investment value increases. That’s it. Therefore, there’s no need to give shares to others from the profits we generate, nor is there a need to pay interest.”

Getting a company to enter the stock market is neither easy nor straightforward; it’s a challenging process. So, what does this company need to do first? They need to think about how to enter this process, and first, they must submit a Draft Red Herring Prospectus (DRHP) to the Securities and Exchange Board of India (SEBI). What is the DRHP? It is a booklet that contains information about the company from A to Z: when the company was started, who started it, who is running it, who the chairman is, who the CEO is, who the board of directors are, what the company’s products and services are, how sales are conducted, how they are marketed, what the profits are like, what assets and debts exist, and all A to Z information must be included in the DRHP.

The main thing is why this company needs money; why do they need so much money? What will they do with this money? All this A to Z information must be submitted to SEBI. Once SEBI is satisfied with the DRHP, they will review it. If SEBI thinks the company is good, they can allow it to go public in the stock market. If approved, an Initial Public Offering (IPO) starts. What is an IPO? An IPO, or Initial Public Offering, refers to a company entering the stock market for the first time.

Currently, there are more than 6,000 companies in the stock market; each one has been listed at some point in the past.  When did it list in the stock market?  it was called an IPO when it entered the secondary market. Since then, it has been a listed company.

For instance, we have a company named XYZ Limited. This company submitted the DRHP to enter the market, and if SEBI grants approval, it will conduct its IPO. How does this process work? First of all, SEBI issues the IPO dates, stating the period during which you can invest in the company XYZ Limited.”

“So, once the list is finished, if the company is making good profits, the share price automatically tends to rise. After the company expands, if there are losses, the share price tends to fall. Do you understand? It all depends on the company’s performance. If the company is performing well, the share price rises; if it doesn’t perform well, the share price falls. This is how it works. Therefore, the share price is almost entirely dependent on the company’s performance.”

When you hold shares in a company in the stock market, you effectively become a shareholder, meaning you are also considered an owner of that company.

Disclaimer:

Stock market investments are subject market risk. In this article we provide information educational purpose only.