How to explain the Indian stock market to a 10-year-old?
Like Nasdaq and Dow Jones in the US, Indian stock market index are Sensex and Nifty. Here's how to explain India's stock index in the simplest language...
*Meets a kid at a candy shop*
Hey kid, you know the candy you buy from this shop is something that all your friends too like?
Why do they all like it? Because it is delightful.
The person making it ensures that you love eating these then only you would come with friends to buy it often.
The more you buy - the higher the candy maker earns by selling.
Now if another guy comes to our town, he can request the owner of the shop that he is interested to get a share of his candy-making business
He can propose to pay a certain amount for the profits of the shop.
Similarly, when he thinks that candies aren’t earning enough money he can sell his share to someone willing to buy.
In a country, there are many businesses - just like the selling of these toffees, be it the cloth you wear or the pencil you use.
People are ready to buy and sell shares in those businesses.
In fact you can also buy a share in any business and sell if you think that business isn’t good.
This purchase and sell of share in the business are due to demand and supply of the business which makes the price of the business change.
I hope we are on track. Eh?
Now, shares of some business are bundled in a basket. This basket is called an index.
With the change in the price of the individual business, the price of the basket is ought to change.
This basket is listed at a shop called exchange where people can go and exchange money for shares.
The basket is created to know if in general businesses are doing good or not in the locality or the economy.
Higher the price of the shares in the index - more the people are coming up to buy something or the other from it.
Obviously, it is impossible to put every damn share of business in the basket so we tell the world about how some big and easily traded shares are doing.
Shares of companies that people usually trade easily in large quantity are put in this basket.
Now you know that people buy food, electricity and house products. Companies making or providing these are listed in the index.
This index shows whether people are ready to buy the shares in businesses of the economy in general or not.
These shares are called stocks.
People are ready to buy and sell stocks of entities that are in different businesses.
The stocks of such 30 companies are clubbed together to form a basket that you call as Sensex.
It is an index of stocks.
When the price of stocks move up then we know that people have come up with the money to buy stocks and when prices decline then people are ready to sell at whatever price is available to them in market.
More the money, greater the demand, higher the price of stocks. This shows the economy is in good condition as people would only buy when they know companies will earn a profit.
So, I can say that Sensex shows the sensitivity of the market.
It is listed at an exchange in the financial capital Mumbai known as Bombay Stock Exchange. You remember what is an exchange. Right?
These are the market where stocks are traded. Just like the products of businesses in the basket which was listed at the shop where people were going to give and take money to be a part of the business.
Similarly, another index is NIFTY which comprises 50 stocks.
These stocks may also be on Sensex, so don’t get confused.
The point is - stocks should be of easily traded large companies.
Nifty stocks are listed at National Stock Exchange.
The next time you see your dad saying that Nifty is going up, don’t forget to tell him that the people are buying stocks and the money is in great shape!
*The kid hops back happily sucking his candy*