We wont start by telling you about the history and ridiculously long definitions, in fact we will explain with the help of an example.
Lets assume you are an entrepreneur. You have decided to setup a cloth production factory, next step will be arranging the funds required. You get loan approved by a bank and also use most of the funds lying with you.
After 3 years of hard work, your business is doing really well and receiving orders from around the world. Your factory is running at its full potential but still you are not able to cope up with the demand. What do you do?
That amazing word comes to your mind “Expansion”. The total cost for that would be about Rs.50 crores which will include everything from buying land to setting up a full new plant. The next question would be from where will you arrange all these funds?
The bank refuses to give more loan as you haven’t still paid off the old one and your funds are also not enough. Now what do you do?
Here the Stock Market comes into the picture.
Now you go up to an exchange (in case of India NSE-National Stock Exchange), hereyour company would be extensively evaluated and you have to abide a long list of stringent laws to get your company listed at the exchange.
You divide Rs.50,00,00,000 (the amount needed for expansion) into shares worth Rs.10 per share. That means you have to sell 5 crore shares to get the full Rs.50 crores.
After all this you will release an IPO (Initial Public Offering), this means that you are inviting public to buy your shares.
These shares which are sold to the public can now be traded. It means that if a person who bought 100 shares of your company, now wants to sell those he can do that buy selling it on the exchange.
This basically sums up the main purpose of the stock market.