It all starts with a company. Let’s say there is a company X. It is a manufacturing company and is doing well in its sector. Now it wants to expand by doing some project or research and development(R&D) in his field. For this company requires capital, in simple, money. Possible source of capital
- Owners of the company.
The company can collect a large sum of money by giving a little ownership of the company to the public. And here begins the journey of the company in the stock market. A stock market (ex BSE, NSE) is a place where the company will be able to present his ownership (in the form of the stocks) to the public. If the people think that the company will be able to grow to new heights, or if the people believe in the visions of the company X, then, they will buy the stocks to trade their money with the ownership of the company.
Thus by giving the portion of the ownership, the company is able to pool a great amount of money for its growth and development.
Generally, the shares offered by the company are not totally for public. Most of the times the owners (promoters) keep a portion of the stock (Promoters share) with them to keep the ownership in their hands.
Let’s say the company X each share price costs Rs 50 and it offers 10,00,000 shares, where 70% of the shares are public. Free Float Market Capitalization is the product of the total shares offered to the public and the price of per equity share. . Then, the free float market capitalization here will be equal to 50*7,00,000. The total Market Capitalization (not-free float) will be 50*10,00,000.
When, the first time the company enters the market, it has to provide a offering price for the shares. This is called Initial Public Offering i.e. IPO. The IPO is offered in the primary market, where the seller is the company and the buyer is the public. After the IPO, the stock goes to the secondary market, where the buyer and sellers both are the public. Here, the public generally exchange the ownership of the company.
Based on the above discussion the definition of various terms are
- Stock: A stock is a general term used to describe the ownership of any company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, all basically means the same thing.
- Stock Market: The stock market is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. It is a place where shares of pubic listed companies are traded. The stock market can be split into two main sections:
- Primary Market: It’s where new issues are first sold through initial public offerings. Institutional investors typically purchase most of these shares from investment banks.
- Secondary Market: All subsequent trading goes on in the secondary market where participants include both institutional and individual investors.
- Initial Public Offering (IPO): An IPO is the first time that the stock of a private company is offered to the public. It is a source of collecting money from the public for the first time in the market to fund for its projects. In return, the company gives the share to the investors in the company. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.
- Market Captalization: Market Cap or Market capitalization refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share.