Understanding the Stock Market Exchange and Investment

Investment is an important part of handling one’s finances, and each individual needs to have an understanding of spending, saving, and investing. There are different types of investment, such as real estate, stocks or equity, mutual funds, Bonds, debentures, or FDs, insurance investments, gold and other precious metals, or retirement funds. All have their own upsides and drawbacks. But today, we will dive into the details of stock or shares, which are known as Equity Investments. 

The word investment in shares, stock market investment, would be very familiar to many, as they are resounding more when it comes to making investments. It has taken a boom with increasing companies in the market going public, and who won't want to earn more? Yet, to make investments, it is necessary to know about stocks, what the stock market is, the upside, and the downside of these ventures. 

What are stocks?

Stocks are also called equity or shares, representing the ownership of a company. In simpler terms, it is a small part of the business, so when you are buying or investing in a business, you buy its shares or equity. Let’s think of it like you are having a pizza, and it has 10 pieces. Now, think of a company as a pizza, and it has 10 pieces, which means 10 shares, and you took 1 out of it, which means you are now 1% shareholder. 

Similarly, any establishment or firm has shares that it can divide into; those are the stocks of the organization, and if you invest to buy those shares, you are a shareholder. And the price for each stock depends on the current market value of the respective business. For example, if ABC enterprise's value in the market today is 2 crores, and they decide to go out on 10,000 shares, then the 1 share value would be 2k. If you have invested 10k, then you own 5 shares, which is 0.05% of the shares or stocks of the company. 

Does Investing in Stock Give you Company Ownership? 

Owning shares in a company will make you a part-owner of that piece of the establishment, but your ownership rights and level depend on the number of shares compared to the company’s total shares. For instance, if you own 0.05% of shares, you are a minor shareholder with voting rights only, the same for the one holding up to 1 or 2 percent of shares, and generally, many minor shareholders can select a representative to speak on their behalf. But if you own 5% share, you are considered a significant shareholder; 10% makes one eligible for EGM membership. 50% makes one with majority control, and more than 70% makes one a super majority; these generally belong to the owner of the companies. 

So far, one thing is clear: buying stock or shares is buying a small piece of the organization or business and becoming a shareholder. So if the establishment you invested in grows, you grow; if they make a profit, you also make a profit. 

Understanding Why Companies Want to List on the Stock Exchange

We have seen so far that if an organization goes public, it announces shares that can be bought by people. This is mostly the case with private companies that want to grow further and require funding but do not want to take out a loan. So let’s understand like this, ABC Enterprise has 2 Cr value but wants to expand, so they would now announce shares to be brought, and they can decide on the number they want to make public. Suppose they announce 1,00,000 shares each costing 200₹ in this case, but only make 50,000 public, this means they plan to keep 50% shares private and 50% public. This process helps the public invest in the company and increase their money value, along with them. 

The biggest step they can take is to list on the stock exchange through an Initial Public Offering, making the firm go from private to public. This also allows anyone to buy and sell the shares of the company for profits that would be based on the enterprise’s market value. There are various reasons an establishment would decide to make its shares public, such as:

• The first and most important reason is to raise funds for various goals, like expanding branches, conducting R&D, reducing debts, and entering new markets

• Listed companies gain transparency as they must publish financial reports, building trust with customers, banks, and business partners  

• Listing helps the founders and early investors gain liquidity by selling part of their shares 

• This flow of shares helps many companies develop an Employee Stock Ownership Plan, where the employees become partial owners of the organization they are working for and gain profit, hence becoming loyal and motivated to work along with their organization 

• Once an establishment is listed, it increases its business valuation and visibility in the market, attracting more investors; this can also gain it international exposure, obtaining global partnerships 

With all the benefits an organization can gain by listing on the stock exchange, they have to fulfill its responsibilities to elevate stability and gain success. 

Due Diligence Required for Company Stock Exchange Listing:

1. Financial: 

1. A company must have financial accountability for at least 3-5 years, ensuring compliance with accounting standards

2. Should not have hidden liabilities or bad debts, and make sure there is no financial misstatement or fraud

2. Legal & Regulatory:

1. The organization must be registered and compliant with the 2013 Companies Act

2. All the company’s approvals, permits, and licences must be valid, along with complying with sector-specific regulators

3. The organization must not have major legal disputes, legislation, or regulatory violations

3. Corporate Governance: 

1. The BOD (board of directors) must meet SEBI’s rules on independent directors (ensure no directors are disqualified under SEBI or the Companies Act)

2. Audit Committee and Nomination and Remuneration Committee should be in place

3. Disclosure of promoter’s holdings, related party transactions, and group structure

4. Business:

1. Assessment of intellectual property (patents/trademarks) and verification of key contracts, customer base, and suppliers' agreements 

2. Non-existence of conflict of interest or undisclosed partnership

3. Detailed study of the company’s business model, markets, and risks

5. Risk & Compliance:

1. Identify all market risks; SEBI requires them to be clearly mentioned in the Red Herring Prospectus (RHP)

2. Disclose pending tax matters, environmental issues, labor disputes, etc.

6. Promoter and Shareholding:

1. Confirm Shareholding pattern 

2. Verify the promoter's background, and ensure they meet the lock-in requirements 

7. Due Diligence Certificate: 

1. To obtain a Due Diligence certificate, the Merchant banker must apply for it with SEBI, confirming the following things 

1. Material information should not be hidden from investors

2. All disclosures in the draft Red Herring Prospectus are fair, true, and adequate

3. The organization complies with all SEBI Regulations, 2018

So there it is, the Stock Market may seem a complex existence at first glance, but when fragmented, it is all about ownership, growth, and trust in an organization or firm. Through this excerpt, we understand that individual investors are deeply connected to corporate success. The corporation that wishes to succeed on a global platform and make it big can raise funds, gain visibility, and valuation through a stock exchange listing, with certain criteria fulfilled. So if you are planning to enter this elevator of progress, understand the basics and study well to succeed. 

P. Manika

(Performist's Content Writer)