Stock Market 101

Know the basics of the stock market before raising capital from it


An entrepreneur grows alongside his business and tackles various obstacles as a part of the grind. One such inevitable obstacle that an upcoming entrepreneur or a small and mid-size enterprise (SME) comes across is funding. One of the best ways to obtain a substantial funding for your company is to get listed on the stock market. It is an excellent exit strategy for your current investors. But before you get listed on the stock market and become a publicly traded company, it is essential to understand how the market works.

Stock Markets and Indices

When your company gets listed on the stock market, its shares can be bought and sold by investors. Stock brokers or brokerage firms are the middlemen between investors and the stock exchange. When an investor buys or sells a share, the broker passes his order to the stock exchange. The price of a share is determined by its current market value. The current market value of a share is simply based on demand and supply. If the demand is more than the supply, the price of a share rises. Whereas, if the demand is lower than the supply of the share, the price of it will fall. When companies are caught in scams or suffer huge losses, their share crashes.

Similarly, every stock market has its own indices which indicate the performance of the market. In India, the two key market indices are Sensex and Nifty of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), respectively. If a major part of the stock market has buyers more than sellers, it is known as a bull market. Whereas, if there are people pulling their money out of the stock market, it is known as a bear market. When there are more people investing in BSE and NSE, the Sensex and Nifty witness a rise and if people are aggressively selling, the Sensex will fall.

On January 17, 2018, the stock was at an all-time high of Rs 586.75. However, as of October 19, 2020, the stock is only valued Rs 13.45. It has lost more than 83 percent of investors wealth due to the scam. A stock market crash is where a significant number of stocks observe a sudden and huge drop in their share prices. It usually occurs when the economy overall is suffering a huge blow. Like the massive stock market crash in 2008 due to the financial crisis in the US. India also like many other countries suffered the ripple effect of it.

‘‘

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

- Peter Lynch

Types of Stocks

Stocks are categorized broadly based on the size of the company, its industry and location. The two fundamental categories being common stock and preferred stock.

Common stock

When we talk about stocks, we usually are referring to the common stocks. Owning a common stock represents ownership in a company and entitles you to a share of profit (dividend) and also the right to vote. Common stocks usually function in the high returns, high-risk manner.

Preferred stock

These stocks are often compared to bonds as the investors herein are usually paid a fixed amount of dividend. They get preferential treatment over common shareholders in terms of receiving the dividend. However, in most cases, they are not entitled to voting rights. They are also less volatile compared to common stocks.

We often hear statements like, ‘If you want to play safe, invest in large cap stocks.’ This is because large cap stocks are usually those stocks that control a large portion of the market.

Large cap stocks

They are well-established and have the market capitalization of Rs 1,000 Crore or above. HDFC Bank, Tata Consultancy Services, Bharti Airtel and ITC are some of the well-known large cap companies.

Midcap stocks

They fall between the large cap and small cap in terms of market capitalization. They usually have a market capital between Rs 500 Crore to Rs 1,000 Crore. Apollo Hospitals, Blue Dart Express, and Steel Authority of India are some of the popular mid-cap companies.

Small cap stocks

Small cap stocks are usually the companies that have a market capitalization of less than Rs 500 Crore. Some of the familiar small-cap companies are Reliance Infrastructure Ltd., Bajaj Consumer Care Ltd., and Network 18 Media & Investment Ltd.

Stock Market and Capital Market

A capital market is a broad category of market and the stock market is also a part of it. Apart from the stock market, commodity futures and various debt instruments are also a part of the capital market.

Debt instruments

Any instrument that is primarily categorized as ‘debt’ is termed as a debt instrument. Loans, bonds and debentures are all part of the debt instruments. The primary difference between bonds and debentures is that bonds are backed by assets but debentures are not.

Future commodities

Commodities that are traded in the capital market can be usually divided into four vast categories: metal, agriculture, energy and livestock. These commodities are traded through a futures contract. Futures contracts are used for buying or selling financial instruments for delivery on a specified future date at an agreed price. The commodity is bought and sold as per the date agreed upon in the futures contract. In India, commodities are also traded in spot markets, where the buying and selling happen instantly in exchange for cash.

Any marketplace where there are financial instruments being bought and sold can be termed as a capital market. While, the stock markets are a specific type of market where only shares are being listed and traded. Equity is a part of the capital of a company. When shares of a company are purchased so is a part ownership in it. While, the loans and borrowings of a business are known as debt and they are not a part of equity. Your company’s overall capital consists of both equity and debt.

What Happens in the Indian Stock Market

According to the market capitalization the three biggest stock markets in the world include the New York Stock Exchange with a market capitalization of $19.3 trillion followed by Nasdaq with a market capitalization of $13.8 trillion and the Tokyo Stock Exchange with the market capitalization of $5.7 trillion. This data is of the market statistics conducted by the World Federation of Exchanges in March 2020.

When it comes to the Indian stock market, the Securities and Exchange Board of India (SEBI) regulates and supervises the stock market. The two key players of the Indian stock market, where most stocks are listed, are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE is an older stock market, but the NSE has a bigger market in terms of volume. Both the markets are order-driven through an open limit order book. An open limit lets you see all the buying and selling happening in the market and thus advocates transparency. People invest in the stock market either in form of deliveries or intraday. In delivery transactions, an individual can hold-on to his shares as long as he wants. However, in intraday trading, an investor has to buy and sell the stock within the same day. Both delivery and intraday trading can be done by anyone through a broker. A broker facilitates the buying and selling of stocks in the stock market on your behalf.

Why You Should List Your Start-up/SME

Getting your start-up/SME listed opens the door to several opportunities. Being an entrepreneur, listing is a great opportunity for expanding your business.

Generates capital

The biggest advantage of listing your business is exhibiting it to a huge pool of investors. As your business expands, you may need additional capital. Listing your company will help in generating capital without having to borrow money.

Expands your reach

When your company goes public, you will witness an increase in its visibility as well as credibility. Listing ensures shareholders to invest in your company, as well as benefit from the increasing growth of your organization.

Gains stability

When a company goes public, it complies with various norms and maintains transparency by conducting frequent operations. The records being public automatically increases the stability of the firm.

‘‘

I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over.

- Warren Buffett

Ways to get your start-up/SME listed

The two main ways of listing your company on a public exchange are the initial public offering (IPO) and direct public offering (DPO). Both the methods being an interest-free way to raise funding for your venture.

Initial Public Offering (IPO)

New shares are created by your company when you get listed as an IPO. They are then underwritten by an intermediary. It is the perfect exit strategy for the early investors of your company as they receive a full profit from their private investment. The underwriters are financial experts who present you with the proposals and discuss key factors like the best type of security to issue, the offer price, the number of shares that need to be issued, and when to go public. In India, an IPO has to adhere to the strict norms of corporate governance regulated by Securities and Exchange Board of India (SEBI).

Direct Public Offering (DPO)

Hiring underwriters can be expensive. In that case, you can always opt for DPO. By listing your company as a DPO, you can offer your securities directly to the public for raising capital. Issuing a DPO eliminates the role of intermediaries like the underwriters, broker-dealers, and investment bankers. Also, a DPO enables you to raise money independently without any restrictions of bank or venture capital funding. Your company has to present the documents needed for registering in each state.

In 2020, the finance minister of India, Nirmala Sitharaman has allowed the direct listing of Indian firms in the overseas market. This step will enable companies to raise funds from permissible foreign jurisdictions. The companies can register non-convertible debentures (NCDs) on stock exchanges without having to get listed. Debentures are financial instruments that have a debt obligation towards the issuer. NCDs are those debentures that cannot be converted into shares. This fresh guideline will make the pathway easy for companies like Ola, Lenskart, and Paytm as they plan to get listed soon.

Where to List

Many upcoming Indian companies are incorporating their businesses overseas. The most preferred countries being Singapore, US, UAE and Netherlands. This is because these countries provide stable regulations, encouraging public listing norms, increase the interest of the global investors, and subsidise tax rates. Many start-up owners also complain that the regulatory policies of India make it too cumbersome to raise capital. Popular companies like Urban Company, Curefit and Lenskart plan on registering in Singapore or the US to stimulate international funding.

To discourage overseas listing, SEBI is taking measures to encourage companies to get listed in India. They are constantly upgrading their process to attract companies as well as investors.

Innovators Growth Platform (IGP)

SEBI has launched the Innovators Growth Platform (IGP) earlier known as Institutional Trading Platform (ITP). It is a great platform encouraging the listing of start-ups and new-age companies that are operating in e-commerce, nanotechnology, data analytics, and biotechnology. The companies can get funded from institutional investors, non-institutional investors, and retail individual investors. The investors of these start-ups can divest their holding without making a public offer. Also, the disclosure requirements are less stringent compared to the main board of exchanges. After a review in 2018, the IGP is also accepting start-ups that are funded by individuals and other companies by launching a new category named accredited investors. Any individual with a total gross income of Rs 50 lakh annually and who has a minimum liquid net worth of Rs 5 crore or any corporation with a net worth of Rs 25 crore are eligible to become an accredited investor.

BSE SME and Start-ups Platform

As per the rules and regulations of SEBI, BSE has set up the BSE SME and Start-ups Platform. This platform helps you in raising equity capital needed for your expansion and growth. This in turn will help you to blossom into a full-fledged company and eventually migrate into the Main Board of BSE.

On April 21, 2020, Nirmitee Robotics India. was the 5th company to get listed on the BSE Start-ups Platform, and it managed to raise a capital of Rs 3.54 crore. As of April 21, 2020, there are 322 companies that have been listed on the BSE SME and Start-ups Platform. They have managed to raise Rs 3,320.48 crore from the market.

Investing in the stock market gives a perspective of the economy from an investor’s standpoint. When you invest in the stock market, observe which companies you choose to invest in and why do you prefer them over others. The companies that inspire you will help in setting your long-term goals.

Raising capital is always an on-going part of the business whether by listing domestically or reaching out to foreign investors. To know more about how foreign investors indulge in start-ups/SMEs, do check out our article, ‘Foreign Direct Investment‘.

Tanisha Achrekar
Tanisha Achrekar
Tanisha is a Business Writer at Dutch Uncles, she writes on personal finance, management and financial concepts. Her stint includes JP Morgan and Media.net

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