A stock exchange or share market is a physical or digital space where publicly traded securities can be traded by investors. The economics of supply and demand determine the price of one unit of a particular security.
Interestingly, coffee shops were the first real stock exchanges — much before the yelling and selling across the trade floors started.
For centuries, businessmen would pool funds to take ships to other countries and trade goods. In the late 1400s, Belgium became a prominent international trading hub, where people entered into deals with the hope of future price rises and marginal gains.
This unorganised sector led to the first structured stock market in 1611, in Amsterdam, just 250 km away from Belgium. For decades, the Dutch East India Company was the only traded company on the Amsterdam Stock Exchange.
After 1700, the Buttonwood Tree Agreement was signed between a group of merchants who started meeting every day to deal in stocks and bonds. This was the genesis of the New York Stock Exchange (NYSE) in 1817.
Although the NYSE is the world’s largest stock exchange, the title of America’s first exchange is held by the Philadelphia Stock Exchange.
The National Association of Securities Dealers Automated Quotations (NASDAQ), meanwhile, started in 1971. NASDAQ joined hands with the International Exchange in London to establish the first intercontinental securities market.
From 1830 onwards, Corporate Shares started being traded in Mumbai. “Native Share and Stock Broker’s Association” was the first trading association in India which was rechristened as Bombay Stock Exchange (BSE) in 1875.
To regulate the operations of the stock market, the Securities and Exchange Board of India (SEBI) was established in 1988. The Harshad Mehta scam in 1992, necessitated the formation of a parallel exchange to bring transparency to the system. The National Stock Exchange (NSE) was, subsequently, born.
Benefits of a stock exchange
The company issuing shares through the stock exchange is able
- to raise capital
- at a reduced cost
- to fund expansion/growth and/or meet cost
- improve the company profile by being listed in the exchange
- increasing the market value of the company by being more easily available for a large investor base
- attract better quality human capital
- manage/minimize external control on business decisions
The investor is equally benefited by investing in the company through the stock market channel
- Shareholders get to own a part of the company they could never have dreamt of owning
- Benefit of dividend payout by the company
- Ease of investment in small amounts
- Ease of liquidity as per requirement
- Transparent operations of the company
- Ability to beat inflation
- Investors can directly benefit from the thriving economy
- a very convenient method of buying and selling
- Different investment avenues like shares, bonds, mutual funds, derivatives.
- Huge number of options (companies) to choose from
Should we own a stock portfolio?
We are all aware that our earnings need to cater to tomorrow, along with our today. We also know that inflation is a termite eating away at our hard-earned money.
The investment that helps us manage our future lifestyle, while safeguarding us against the monster called inflation, is our share holding.
Diversifying our investment into various companies, industries and, at times, economies give us the cushion to insulate against losses stemming from a concentrated investment portfolio.
It also amplifies our possibility of higher returns on investment. Infact, the Indian government allows an individual’s or organisation’s profits from the stock market, after one year of investment, beyond a gain of INR1,00,000, to be taxed at 10 percent only.
We’ve perhaps all received Whatsapp forwards that state INR10,000 invested in WIPRO in 1981, would have grown to INR800 crores today. Many of us have rubbished it outright.
A few years ago, in 2016, The Economic Times published a story about Amalner’s residents who cumulatively hold over INR3000 crores in WIPRO shares worth several crores. One resident’s INR10,000 investment in 1980 is today valued at an estimated INR500 crore. This stands testament to the often heard saying that compounding the the “eight wonder of the world”.
Financial freedom is underrated
The WIPRO example is only one among several. Electrical goods manufacturer Havells and automaker Royal Enfield are success stories too, for numerous investors countrywide.
INR10,000, from 1981, would be a sizable chunk of money in current valuation. But let the amount not be a deterrent. Rather, an earnest suggestion is to break one’s investments into yearly, half-yearly, quarterly, monthly, or even weekly parts, and automate the process of investment systematically.
The underlying idea is to view every periodical investment as a drop of water falling consistently from a tap. But when this consistency plays out over several years, the outcomes are sizable.
True success lies not in building a palatial home or owning a fleet of luxury cars, but in having the luxury of time. And the luxury of time can only be an outcome of securing financial freedom — a facet that is grossly underrated.