Every business starts as an idea which is generally a new thing and in most of the cases adds some value in some existing thing and generates cash flow in the process.
To convert the abstract concept of idea into a concrete business it requires financing.
How an idea can be financed?
One option is to get money with a promise of giving extra as per the pertinent Interest Rate.
It’s pretty straightforward and simple to understand.
You have an idea and other person has money and he is willing to give you the money with a promise of some additional money after a fixed period of time…Simple.
Another form of financing comes through Stocks.
How this form of financing works?
Now, this one is quite interesting and one of the greatest invention after the concept of money itself.
Let’s have a look at this more closely…
You are willing to give money without a promise of anything in return.
No Interest Rates……No Security of Principal….just a faith in the business ….. Seriously….How it works then!!
This is an astonishing thing as well as something that baffled many and make it difficult for them to fathom.
Let’s take a further look at this….
A business is divided into many parts and those parts are called Stocks of the business and people can buy those parts in the initial public offering (IPO).
Over the time these stocks are traded at a place called Stock Market based on‘perception’ about their growth in future the price changes over time.
Why price changes so much if the value of underlying business is not changing?
It’s all about Greed and Fear and it’s discussed here
How an investor with a right mindset should see it?
The analogy of Mr. Market by Benjamin Graham is very helpful in understanding the overall scenario.
According to that, you are partner in a business with a crazy person Mr. Market.
Mr. Market has wild mood swings.
Every day he offers you to Buy your shares at a particular price or Sell his shares at a particular price.
But leaves the decision up to you entirely.
Sometimes he’s in very Good mood and tend to name a price higher thantrue value of business and he will accept with joy your shares at that price.
At other times he is in such Bad mood that he tend to name a price very low than true value of business and you can take advantage of Mr. Market’s crazy offer to buy his shares.
And not to mention that you always have the choice of not doing anything.
That’s the real beauty no penalty for inaction….Which is the greatest edge for an investor with the right mindset.
We’ll explore more…Stay Tuned.