Engineer's Finance

I wanted to write about this from long time but I did not find much time to do this. Actually I have researched more than a week to write about this. You all will be aware of stock market and how people are hooked into it and how people make money in it. Let us see the other side of the coin today. As you are aware stock market is one of the most risky paths to earn money. there are huge number of people who make a living out of stock market.

Now, how do people lose money?

Let us assume that a company, say XYZ which is dealing in textiles is doing well as privately held company. Then after a couple of years, it becomes so big that it has to become a public company (there are certain rules as to how a company can go public, let us not get into it right now). Now since the company is publicly listed in the stock exchange, the shares are traded in exchange. The face value of a share is Rs.10, and company has 10,000 shares. Hence the total value of the company is Rs. 1,00,000 (10 * 10,000). Generally while issuing the IPO the company decides what is the value of a share can be. I don’t know how the company or someone decides the value. The point I want to make is that it will be generally higher than face value.

Assume that the IPO was made at Rs. 50 and people started bidding for it and bought the 10,000 shares of the company at Rs. 50. The value of the company now is Rs. 5,00,000 according to the investors in the market. They think that this company is good and they start buying shares. Since there are only 10,000 shares of the company and there are millions of people interested in these shares the price of the shares keeps going north and one fine day it touches Rs. 100 i.e. now the value of the company is Rs. 10 Lakh.

You might be wondering how the prices started going north. Stock exchange is just a market, if the stock is in demand then it becomes seller’s market and if the stocks are in bad shape then it is buyer’s market. What I mean by seller’s market is that a seller puts a heavy price for his share which sometimes won’t be justifying and vice versa for buyer’s market. If the prices are going north then it is due to loads of factors, like company doing really well. They get great orders and money starts pouring in. government provides good initiatives to that particular industry, say textile industry. There are millions of reasons.

Due to some circumstances people start losing hope on the XYZ company and all of a sudden the share prices goes south from Rs. 100 it goes down to Rs. 30. Now the value of the company becomes just Rs. 3 Lakh. Rs. 10 Lakh is reduced to Rs. 3 Lakh i.e. Rs. 7 Lakh is wiped out of investor’s wealth. Investors, who bought the shares at Rs. 100, now can’t sell more than Rs. 30. The situation is bad. People start to panic and start selling for some price since they don’t want to lose even further and one fine day the price of share is reduced to Rs. 5. Now the value of company becomes Rs. 50,000.

You can guess how much money would be lost. This money is not in the economy which can be recovered. It is in air. Once it is gone, it is over. You can’t get it back again. This is what is happening in the current situation. Government is pumping in huge amounts of money in stock market but still the situation is not so good. Markets have crashed from 21k points to close to 10k points. You can now estimate the loss that people might have incurred. This money whatever is pumped in by investors and government is gone forever. I guess the amount that people might have lost is lakhs of crores. It is a really huge amount of money for any government to handle.

Good thing for all of us right now is just stick with your hard earned money. Don’t lend nor don’t borrow. Save it up for few more years.