Trading the Stock Market

 

THE BASICS


Congrats on your interest in the stock market.With the interest rates going down ,increasing inflation ,continued growth of the economy and no other avenues for the middle class to generate wealth or extra income, Stock markets are the best alternatives.
What is a Stock ?
Essentially a stock (aka Equity/Share) is a Financial Instrument that gives ownership to it’s holder (the stock investor) of a company, directly proportional to the amount invested into the business.
Share is nothing but the Ownership of the company divided into small parts and each part is called as Share or Stock or Equity.

Let us say XYZ and ABC have started a company with an investment of Rs.100/- (50 + 50).They invest in capital goods ,inventory and working capital. If they use raw material worth Rs 10/- to manufacture the goods and sell the finished goods for Rs 15/- they make a profit of Rs. 15/- on an investment of Rs100/- .Therefore the earning per share will be Rs 15/2 ie Rs.7.50.What is Share Market (stock market)


A Share market is the place where buying and selling of shares takes place.One should have a demat and trading account, computer and internet connection and he/she can start the share trading or investing from anywhere.

What are the basic functions of the stock markets (also called exchanges):

  1. They bring a large number of investors and good companies in a single place. Thus, investors have a lot of companies to choose from and companies have a lot of investors to provide money. This works the same for any marketplace. A Stock market is a company just like eBay or Amazon that brings different parties together.
  2. They verify the credentials of the company to make sure only really quality companies are listed in the board. The best exchanges allow only the best companies. Thus, it is a mark of honor to be listed on a reputed exchange like New York Stock Exchange.
  3. They provide each ways for transfer of payments & share certificates between the buyers and sellers.

In India, the most famous are the Bombay Stock Exchange and the National Stock Exchange.
The NSE is the country’s largest exchange, which means it sees the most amount of shares bought or sold in a day. The BSE stands second but is the oldest; it was established way back in 1875.
Then there are regional exchanges like the Ahmedabad Stock Exchange, Calcutta Stock Exchange and the Cochin Stock Exchange.

 

The stock Exchanges in India are governed by the Securities and Exchange Board of India (SEBI) is a board of India appointed by the Government of India in 1992 with its head office at Mumbai.
Its one of the function is helping the business in stock exchanges and in other security markets. In another word it is the regulator for stock exchanges. It monitors and regulates both (NSE and BSE) stock exchanges in India.What is Demat account and why it is required?
The market regulator, the Securities and Exchange Board of India (SEBI), has made it compulsory to open the demat account if you want to buy and sell shares in Indian share market.Without this account you cant buy and sell shares in Indian share market.

a) Demat (short form of De materialization) is the process by which an investor receives shares in electronic format. (physical share certificates are stopped) converted into electronic form maintained in an account with the Depository Participant (DP). As you need bank account to save money, deposit cheques etc, likewise you need to have a demat account to buy and sell stocks in share market and to hold the shares.

b) DP could be organizations involved in the business of providing financial services like banks, brokers, financial institutions etc. DP’s are like agents of Depository.

c) Depository is an organization responsible to maintain investor’s securities (securities can be shares or any other form of investments) in the electronic form. In India there are two such organizations called NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services India Ltd.)

d) Investor’s wishing to open Demat account has agents/brokers  who are part of either NSDL  or CDSL. All brokers will be part of these two agencies

e) Opening the Demat account is as simple as opening the saving bank account with any bank. Nowadays there are lot of brokers and banks offering demat and trading account at much lower rates.

f) All shares what you own will show in your demat account, so you don’t have to possess any physical certificates. All shares will be held electronically in your demat account. As you buy and sell the shares, accordingly, your shares will get adjusted in your demat account.

Brokers to Choose.
There are many brokers available and those can be approached to open your Demat and Trading accounts.Banking based brokers like ICICI, HDFC also offer bank account tied up with the trading account.

Primarily there are two types of stock brokers – Full service and discount.

Full-service brokers provide a variety of services along with buying and selling of shares such as research and advice as well as retirement and tax planning.

Among the full-service brokers there are bank subsidiaries that provide a 3-in-1 account, that is, a savings bank account, a demat account and an online trading facility. Examples are ICICI Securities, HDFC Securities and Kotak Securities.

Other full-service brokers provide all these facilities except a savings account. Some renowned brokerage houses are Angel Securities, Sharekhan, India Infoline and BRICS Securities.

Discount brokers offer no-frill stock broking accounts. They only provide the necessary trading facility at the least possible cost. You can think of them as low-cost carriers. Discount brokers are a recent trend in India. Investors’ money is safe with them as well, for the simple reason that brokerage is highly regulated business.

Discount brokers charge a much lower fee than fullservice brokers. Among the prominent discount brokers in India are RKSV Securities, Zerodha, Smart Trade Online and Compositedge.

 

Now that we have browsed the basics of the stock trading gear we will proceed to the methods of investment or trading in stock market in the next blog.

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