Introduction to Stock Markets | What are Stock Markets
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Every business needs capital to run. In the case of sole-proprietorship concerns the entire capital required for running the business is provided by the owner. He may borrow from his friends, relatives or financial institutions to meet any short falls or exigencies.
In the case of a partnership concern the entire capital is provided by the partners and they are the owners of the business. They may borrow from friends, relatives or financial institutions, like the sole proprietorship concerns, to meet any short falls exigencies.
In the case of companies it is different from the sole-proprietorship or partnership concerns. A company is a perpetual entity and its capital is contributed by the public. The promoters of a company join together to start it. They complete the initial requirements for incorporating the company and then begin to mobilise capital by issuing share capital. Share Capital is the total capital required by the company to run its business. This capital is divided into smaller units each of smaller values say Rs.10 or Rs.100. This capital is offered to the public as the initial public offer.
In a partnership or a sole proprietorship concern the owners are liable for all the debts. Their liability is unlimited. Whereas in the case of companies the share holders liability is limited. It is limited to the extent of the shares that are held by him.
The share holders can sell their shares to buyers who are interested. Those who had not applied for the initial public offerring of shares can buy from sellers who are willing to sell their share holdings. The price at which shares are sold and bought is decided in the stock market.
What are stock markets?
Understanding the stock market is the first step towards understanding the stock trading basics. What is a stock Market. A stock market is a place where you can buy shares and sell shares. The capital of public limited companies are divided into small portions and sold to investors as initial public offerrings when the company is established or incorporated as an entity under the Companies Act. Thereafter a share holder who has shares of the company can sell it or any one interested in buying the shares of the company can buy it. This is done thru a stock exchange. With the growth in technology now stock exchanges have become virtual stock exchanges where trading is done online.
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In other words stock market is the place where one can sell these shares or buy from those who own shares and are willing to sell. The market price of the share is decided on the basis of the performance of the company, demand for its shares and supply. If the company is performing well and future performance is expected to be the same then the price of the share will be more than its face value. If the face value of the share is Rs.100/- the market price will be anything more than that depending on the future expectations of the investors and its supply and demand. If the performance of the company is not good and the future prospects are also similar then the market price is bound to be less. There will be less number of people who are interested in buying the shares of company with poor performance and naturally the supply of shares in the market will be more than the demand for it. The market price of such shares will fall and often reach even below their face value.
How does equity form part of a company's capital?
Equity capital is the money invested by the shareholders of the company. As explained above the company initially offers the shares to the public for subscriptions. The interested public will subscribe to the public issue and when shares are alloted become its share holders.
So initially company's capital consists of the contribution by the shareholders. There after the earnings that are retained by the company from its profits also become a part of the equity capital as reserves.
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