Does Stock Market helps in nation building?

Time Required: Under 20 minutes

Most of us consider stock market as a complex web where people either make a lot of money or lose all of their money and mostly people make or lose their money in a way of gambling and “I consider it a bad option, so I will stay away from it” - Isn’t that the feeling?

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So, today I am going to help you understand ‘What is a Stock Market’ ,’Does it help in nation building’, ‘Why people lose money’ and ‘How can you proceed in a safe manner’.

Let’s Jump directly to the interesting bits.

What is a stock Market -

I am sure you must have seen ‘Guru’ the biopic on ‘Dhirubhai Ambani’ and in case you have not then i will urge you to watch it. At one point in the movie, Abhishek Bachchan wants to expand his business and he decides that he won’t go to the banks; on the contrary, will go to the people to raise funds and in the process, his company gets listed on the Stock Market.

Therefore, Stock Market is a place where companies gets listed( According to Indian norms set by SEBI) to raise money,and, you must be knowing few of them i.e. Jockey, Asian Paints, Britannia; and few others such as Tata's, Reliance and Aditya Birla group have been there for decades as well.

Now, in the movie Abhishek, could either borrow from bank at certain interest rate (normally it’s around 15-25%) based on company credit rating or can borrow from general public and make them part-owner of the company paying them a part of profit and also expecting them to share a part of the losses as well.

Hope you must have got that till now that companies get listed - so that the common man, Institutional investors and anybody can be part of their journey(in form of shares of their company) and they can have the money for expanding their business.

Thus, the most basic definition of Stock Market i.e. it's a lending platform where the big business houses borrow money from common people in lieu of a part of their company( called shares in common parlance).

Now there are few ways to take part in stock market and it will help you understand ‘Why people lose money’:

Day Trading - This is the most risky way in which people participate in the stock market and it, in reality, doesn't benefit the companies as well (i.e. how many times have you taken a loan for a single day and do you really think that someone can use that money to expand their business or build a new refinery). So day traders try to predict the price on daily basis and if they are correct they make millions and if they are wrong (they lose their whole capital)

We at NiveshGyaan can’t predict and thus advise our readers also to stay away from it. As we don’t feel it benefits anyone apart from the stock broker (due to the high transaction charges) and thus this is the most commonly misinterpreted and abused way of trading.

Long Term Investing:- In this, you buy a stock considering it's basic fundamentals and then stick with it for a long time. at least for a year or until you are in some dire need of money.

In this process, you help the company and it rewards you with the gains or sometimes you do make losses (but then which business is 100% risk free). You are not gambling here, your money is invested by business. You will realize that great companies have always increased your wealth.

We advise you to take part only in long term investing!

Stock Market's role in nation building Exercise & why should you know about it:-

Let's consider for a moment there is no stock market and Tata's want to expand their business by 100 Crore, so where do you think they can borrow this money - It will be either banks or individuals or some group of investors. Though, it must be tough to borrow 100 Crore from a single individual or let’s suppose 10-15 people who are close to Tata’s as well.

If they are going to go to banks or institutional investors, they will be required to keep some form of security and also pay lending rate i.e. 15% -20% based on different channel, the risk in the project and the F.D. rate is 7%.

So, let’s suppose this company borrows from bank at 15% annually. As a result, it definitely has to make progress/profits and also worry about earning 15% extra income on the money.

Now, let's bring the stock market in the picture & let's consider that TATA's are evaluated to be a 1000 Crore organisation and now they want to borrow 100 Crore so they put their 10% of company(i.e. 100 Crore) on Stock bourse and distribute these shares in various proportion including individuals, HUL’s and institutional investors.

From Tata's perspective, two good things happened -[if !supportLists]

• The shares got divided among a lot of people, which reduces the chances of taking over the company.

• They got the required money while not actually being worried about generating 15% extra income.

Country’s Perspective:

Now, with the formulation of a new unit of Tata’s the employment will be generated, which will bring more money in the economy, which in return will boost the local economy thus churning the wheel of the country.

Therefore, companies should expand if a country needs to develop and for both country and the company it’s beneficial if this happens through the Stock Market.

Now, let’s see how ‘You’ get benefit out of all this:

Common Man’s Perspective:-

The options in front of you for your idle money are either keeping your money in the bank account or keeping it with yourself(considering you don’t rely on Stock Market), and which gives you the best interest rate of 7% (Assumption -that's the highest rate available currently).

Now, let’s take TATA’s again and I hope you agree they have a good management, they will try their best to earn more than the bank F.D. rate, else common sense tells that they could have also put all their money in a bank and sit nicely at home and there was no need of so much effort of running companies, managing employees and agitation including whole Cyrus Mistry fiasco.

Therefore, stock Market opens up a new avenue for you to put your money and grow at a faster rate than bank F.D’s and in turn helping both the companies and the economy.

Happy investing and happy growing your money.

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P.S.: Do keep a lookout for our other articles talking about effect of compounding and how small returns can make you a millionaire.