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The Stock Market In Your Closet

Posted in Finance Articles, Total Reads: 2612 , Published on July 02, 2012

With months down in Welingkars and the tedious exercise of economic indicators, I am sure most of you would have termed the stock market as a complex machinery. Well what if I say the stock market is as simple as your wardrobe. And buying and selling stock is synonymous to adding and removing things from your wardrobe. Don’t believe me. Keep reading..

Consider you have a company and it is same as your closet, which is sufficient in itself but desires expansion. There are two ways for you to expand either buy things on credit(credit card) or loan money from friends. Buying on credit is equivalent to taking money on loan from creditors in the market to be returned with interest. (similar to what credit card company’s do). Whereas the group of friends who lend you money are your IPO investors, since this is the first time you are going public being short on cash.

IPO or initial public offer is your company is being listed on the stock exchange for the first time and various investors invest according to their potential keeping in view their judgement of your potential for growth with the expectation of some amount of return. They are what the market calls equity share holders identical to your friends who expect a small thank you to the least when they lend you money for expanding your closet. Similarly you have to pay dividends to your investors on a regular basis if you make profits. These dividends can be withheld with the promise of future growth and reinvested in the business.

Now suppose you have an aunt or an uncle abroad who sent you the latest Michael Kors or Gucci, thus increasing the market value of your closet. They are what the market calls FIIs or foreign institutional investors. These investors are generally considered forecasters and market movers. They are called market movers because they basically influence the movement of the Sensex upwards or Downwards since their trading volumes are generally higher than domestic investors.

Forecasters because they fundamentally analyse the prospect of the company for future growth same as your aunt/uncle expect you to future prospects and provise return on the gifts.

Suppose, God forbid!, your aunt/uncle loose their job in their respective country. Obviously your inflow of goods rather brands would decrease. Therefore this is the major reason why the US employment data {released on last Thursday of every month} is important to the stock exchange in India. Since low employment means reduction in the FII inflow. Hence reducing the funds and plunging the market.

Market Capitalization often known as market cap is technically the measurement of the size of the business enterprise. Simply it is your brand value on the basis of the number and the brands in your closet.

Another important parameter is the EPS or the earning per share defined as the net profit after tax (PAT) divided by the no. of equity share holders. Simply put it is your pocket money divided by the no of people you owe money to.

Well I hope now you know your closet is as complex as the stock market. Or if you really read the above lines the stock market is as simple as your closet. The above mentioned points do not include all the indicators and hence require reader discretion.

This article has been authored by Karishma Manglani from WE School.

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