After understanding the gains one can make using the stock market, one must understand how the stock market works to make such gains. 

But first, what is a stock? 

A stock/share is a unit of ownership in a company. A person who owns a single stock in a company is (theoretically) an owner of the company. However, that does not necessarily mean that you can make decisions for the company. That’s because each share carries voting rights with it.

Every shareholder is allowed to vote for/against the resolutions which are tabled at the meetings held by the company, and the resolutions which receive the requisite majority are passed. By holding shares in a company, you are eligible to attend the company’s meetings, vote on several matters, and receive dividends.

There are two kinds of shares: Equity and Preference. 

Equity shares are the shares we discussed above. These shares carry voting rights and allow shareholders to earn dividends when announced by the company. A preference share is a different kind of share that is not very well known or offered by most companies. However, these shares have certain benefits that equity shares do not possess:

  • A company may or may not declare dividends for Equity shares, they are not legally required to. One may hold the shares of a company for a lifetime and not receive any dividends. However, Preference shareholders must be paid a certain amount of dividend every year. If a company is unable to pay the same in a particular year, the dividend accumulates and must be paid alongside next year’s dividend.
  • If a company liquidates i.e. shuts down, Preference shareholders are given priority over Equity shareholders in terms of capital recovery. It means that when a company wraps up, the chances of recovering the invested amount are higher for Preference shareholders as opposed to Equity shareholders.

So shouldn’t we just purchase Preference shares? Not necessarily. Although Preference shares sound like a pretty attractive investment opportunity, Equity shares have a few pros of their own:

  • There are certain times when companies earn excess profits due to certain reasons (either internal or external). In such cases, Preference shareholders are only paid the fixed dividend amount that was promised while Equity shareholders would be the direct recipients of such extraordinary profits.

For example, Majesco Ltd., an insurance solutions provider, would normally pay Rs 1 or 2 as dividends. However, the company sold its entire stake in its US subsidiary in 2020 for a huge profit. The company decided to announce an interim dividend and paid a dividend of Rs 974 or 9,000+% on each share!!!!

  • Equity shareholders possess the power to overturn the management of the entire company. When a certain number of them band together, they can call forth meetings of their own volition and table any resolution they so desire. However, Preference shareholders do not possess such voting rights.

Now, when discussing shares, one must know that these shares are available to everybody i.e. anybody can buy these shares if they desire to. One only needs funds in their bank account and a Demat account. 

The shares used to be sold physically in the absence of computers through Share Certificates. Share prices were changed manually on a board in the stock market and the brokers would swarm the trading floor to buy/sell the shares. This method was called the “Open Outcry” method of trading.

A Demat account is an account created with a broker that an individual can use to purchase shares in their desired company. These shares are held in a ‘Dematerialized’ form (‘Demat’ in short) in the investor’s account. For example: If I want to, I can buy shares in Reliance Industries, India’s most valuable conglomerate, by paying the price of these shares to the seller via my broker.

So, how does one buy these shares? No shops are selling us shares. All share transactions are carried out through exchanges. 

An Exchange is a market that allows us to meet buyers/sellers to buy/sell our desired stock. In this market, we can buy our stock and sell our stock, but all these transactions take place through a registered broker. 

When you as a buyer meet a seller who is selling the stock you want at the price that both of you are content with, a deal is finalized and upon transfer of funds, the transaction is completed with both parties getting what they wanted: You, your desired stock & the seller, the money. 

Would you believe it if I were to tell you that you can sell gold, silver, copper, and even oil through exchanges? 

It might be hard to believe, but one can also sell these things through exchanges. Different exchanges facilitate the trade of different types of items. When discussing commodities like gold and silver, the deals are complicated. You cannot simply sell or buy as you do in a normal market. You must enter into contracts called derivatives to carry out your transactions.

However, the main purpose of all these exchanges is the same: to connect buyers with sellers.