What is the Stock Market/Stock Exchange?

Stock Market

Stock Market or commonly mentioned as Stock Exchange is the market where stocks/shares of listed (Quoted Public Limited Companies) companies are being traded or bought or sold among buyers and sellers. It's as simple as that. But the process is much more complicated than that. 

Let's see how a company enters the Share Market. There are basically two ways, namely;

1) IPO - Initial Public Offering

2) SPO - Secondary Public Offering

IPO

An Initial Public Offering is where a company ENTERS the stock exchange with a share issue to the public. If the share issue is successful (meaning if all shares are bought by the public) it will be considered a valid share issue and the company name will be listed in the stock exchange and allowed to function as a PLC. However if the shares are not fully subscribed (bought) by the public, the IPO will be considered void or a failure and the Stock Exchange will not allow the company to proceed with it's business activities. 

Entering the market with an IPO involves some risk due to the above factor. If the public doesn't feel like the company is a safe and worthwhile investment, they will not buy the shares and the company will be forced to shut down. Why? Because a share issue is the main mode of capital generation for a company and when it comes to an IPO, it is the step which a company tries to generate capital to START a company, so if that fails there's simply no money to start the business. To avoid this companies use a method called "Under Writing". Under Writing means prior to an IPO, the company gets a bank to sign a deal with the company to purchase the shares of a company in the event the public refuses to buy the full amount of shares. This deal offers security for the company as-well-as some assurance for the public that if the bank trusts the company we should not worry too. So Under Writing works in those two ways and help IPOs get successful.

SPO

Secondary Public Offering is where a company ALREADY LISTED in the Stock Exchange issues shares to the public. A company could have many number of SPOs in it's life time. All the share issue except for the first and foremost share issue will be falling under the category of a SPO. SPOs generally do not involve very much risk so Under Writing agreements are not of necessity and even if a SPO fails, it will not threaten the existence of the company. Usually a company goes for a SPO to generate additional capital maybe for expansion activities, new researches and developments and activities like that. So that's about the two main methods a company gets enlisted in the stock exchange.    

What are Stocks and Shares!!!

First, What is a "stock/share"??

Ok, what is a Stock? A stock can be identified as the smallest portion of ownership of a company. Meaning, if you own a stock/share of a company, congratulations!! you're a proud OWNER of a company. Yes, an owner. But this is conditional, let us see how.

There are basically two main types of stocks/shares. Namely;

1) Ordinary Shares (we don't call 'Ordinary Stocks') and'

2) Preference Shares (not 'Preference Stocks')

Let us a look a little deeper into these two types.

Ordinary Shares

This is the most important type of shares in a company. Because holders/investors of Ordinary Shares are the REAL OWNERS of a company. Yes, Ordinary Shares give the investor the opportunity to participate in company meetings, vote at such meetings and most importantly be eligible to be voted as a director of the company. The only catch with Ordinary Shares is that it involves a little risk of not being eligible for a fixed dividend (Dividend is a payment made by a company to both Ordinary and Preference shareholders based on the profit made by the company during a financial year) If by misfortune the company ends up making losses, Ordinary shareholders may not be eligible for any dividends for that year. Simply it's a waving rate of dividends. No profits, no dividends; small profits, small dividends; high profits, high dividends. Unlike Preference shares, Ordinary shareholders will be eligible for high dividends when the company makes high profits. Other than that an investor should always eye for Ordinary shares.

Preference Shares

This is a more non-risky mode of investment. Preference shareholders are eligible for a fixed amount of dividends for a financial year. Even though the company makes profits or losses they will receive their share of dividends without trouble. But, preference shares lack all other benefits offered by Ordinary Shares, such as attending for company meetings, voting power and being elected for the director board. So an investor who likes peace at mind should eye for Preference shares.

Issuing Shares

Only one type of business organization is allowed to issue shares to the public. That is a "Public Limited Company". A Public Limited Company (PLC) by definition is described as a company that is authorized to issue shares to the public. It's not like that other companies cannot issue shares, Private Limited Companies, Co-operative Societies etc can too issue shares, but NOT to the general public. General public is basically the population of a country like you and me. :) Even not all PLCs issue shares to the public. PLCs are of two types;

1) Quoted Public Limited Companies

2) Unquoted Public Limited Companies

"Quoted" refers to the state of enlisting at the stock market of a related country. So basically only Quoted PLCs issue shares to the public. 

Share/Stock Value

At first shares are issued at their "Par Value", that is the value at which the founders of the company issue the shares at the formation of the company thought an Initial Public Offering (IPO). The based on the performance of the company, with time and with the demand to the shares, the share price may increase or decrease. If it's increased, the increased amount is considered as a "Premium Value".

This article should give the reader enough basic idea about Shares/Stocks. We'll look into more of the stocks and stock trading in future articles.