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Where Does the Money Go When u Invest or When the Market Crashes? | Basics of Stock Market Investing in Tamil | Finance Boosan
When You Invest in Stocks:
- Initial Public Offering (IPO):
When a company first goes public through an IPO, investors buy shares directly from the company. The money raised from selling these shares goes to the company. This capital can be used for various purposes like expanding operations, research and development, paying off debt, or other business activities.
Secondary Market Trading:
After the IPO, the trading of stocks takes place in the secondary market (e.g., NSE, BSE). When you buy shares here, you are purchasing them from another investor, not from the company. The money you spend goes to the seller of the shares, not to the company itself.
During Market Crashes:
Market Value Decline:
When the market crashes, the value of stocks declines. However, this does not mean that the money "disappears" in a literal sense. Rather, the perceived market value of the stocks has decreased. The money was exchanged at the time of transaction and is now held by someone else who may have sold their shares before the crash or at a lower price.
For example, if you buy a stock for ₹100 and its value drops to ₹50, you’ve lost ₹50 in market value, but the money you originally invested is now with the person who sold you the stock.
Paper Losses vs. Realized Losses:
A market crash often results in "paper losses," which means the value of your investment has dropped on paper. These losses are not realized until you actually sell the stock at a lower price. If you hold onto your stocks and the market recovers, you might not lose any money at all.
Benefits for the Company:
Even though companies don’t receive money from secondary market trades, they still benefit from being publicly traded:
Market Capitalization and Valuation:
The company's stock price affects its market capitalization, which is the total value of all its shares. A higher market capitalization can enhance the company’s reputation and market position.
Equity as Currency:
Companies can use their equity (shares) as currency for acquisitions, mergers, or as part of compensation packages for employees, especially executives.
Future Fundraising:
A strong stock price and market presence can make it easier for the company to raise additional funds in the future through secondary offerings or issuing new shares.
Debt Financing:
A healthy stock market performance can lead to better credit ratings and lower interest rates when the company seeks debt financing.
Summary:
When you invest in the NSE or BSE, money primarily flows between investors, except during IPOs or new share offerings.
During market crashes, money doesn’t disappear; instead, the market value of investments drops, leading to potential losses for investors.
Companies benefit from stock market presence through increased valuation, enhanced ability to use equity, easier fundraising, and better financing terms.
Understanding these mechanisms helps clarify the flow of money and the indirect benefits companies receive from being publicly traded on the NSE and BSE.
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