Equities make an attractive investment avenue both for long term capital appreciation and earning a regular dividend income.
In this Beginner’s Guide to Stock Market Investment we discuss how you can make money by investing in the Indian Stock Market.
What are Equity Shares?
Equity Shares (a.k.a Equities) represent part ownership in a company. The holders’ of equity shares are part owners of the company and have a right to vote on major decisions at company meetings.
The Stock Exchange – Where the Buying and Selling of Shares take place.
A Stock Exchanges is regulated marketplace which facilitate the buying and selling of shares.
In a stock exchange, the buyers and sellers of shares never meet physically. An order to buy or sell a share has to be placed with the stock exchange through a broker.
The stock exchanges publish price information of shares on a real-time basis.
There are two primary stock exchanges in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
How are stock prices determined?
In a stock exchange, the price for a particular stock is determined through a process of bidding.
A buy bid is a bid to buy a certain quantity of shares of a particular company at a defined price per share. Similarly, a sell bid is a bid to sell a certain quantity of shares of a particular company at a defined price per share.
When the price quoted by the bidder matches with the price quoted by the seller, equilibrium price or the market price is determined and the trade gets executed.
Note: Bids can also be placed at current market price.
What causes stock prices to move up or down?
Stock prices, like the price of any other commodity or asset, is determined through the interaction of the forces of demand and supply.
The law of demand and supply tells us that when demand exceeds supply, price increases. The reverse happens when supply exceeds demand and the price falls.
The same law of demand and supply holds true in the stock market.
When investors anticipate a particular company to do well in the future, demand for the shares of the company increases. Bidders bid higher to acquire shares in the company and the price moves up.
The reverse happens when the future of a company does not look too bright. Holders of equity shares in the company look to dispose off their holding in order to protect themselves from losses.
When sellers exceed buyers, the sellers are forced to quote lower for their shares and the price of the stock moves down.
Recommended Read: Why Do Equity Share Price Rise or Fall?
The Basics of Stock Market Investing :
The basics of stock market investing consists of buying shares at a low price and then selling them high. The difference between the selling price and the buying price (less applicable brokerage) will represent your profit.
Note that you cannot directly buy or sell shares from/to a stock exchange. The buying or selling has to take place via a broker (with whom you need to open an account) who will charge brokerage on every buy or sell order that you place through them.
To start investing in equities, you need to open the following accounts with a registered broker – a Demat Account and a Trading Account.
Demat Account: Demat Account is an account where the shares you buy are held in an electronic format.
Once you buy a share, the same is added to your Demat Account. Similarly, when you sell a share the same is deducted from your Demat account balance.
Trading Account: An account maintained with a broker to buy or sell equities. To trade in securities, you need to transfer the requisite funds to your trading account. Payment for shares bought and receipts for shares sold will be made through this account.
Generally large brokerage houses (e.g Kotak Securities or SBI) will offer both accounts under a common umbrella. It would also be helpful if you maintain a net banking account with any scheduled commercial bank as this will facilitate quick transfer of funds to and from your trading account.
Buying/Selling shares – the Steps Involved:
Trading in equities generally involves the following steps:
1. Transfer the requisite funds to your trading account from your bank account.
2. Place the buy/sell order with your broker. This can be done by personally visiting the broker’s premises, over the phone or through any online trading terminal provided by the broker.
Note: You can place two types of order: Delivery and Intraday.
A Delivery Order is one where you opt of delivery(credit) of the shares bought to your Demat Account.
These shares can be held in your Demat account for as long as you want and sold when you want to book profits. A delivery order is placed when you wish to hold the shares for more than a day.
Note that delivery of the shares to your Demat account will take place on the Settlement Date. You can read more about settlement below.
Intraday Orders on the contrary do not involve delivery of shares and are squared off during the day. Intraday orders are to be placed when you wish to buy and sell the share on the same day.
Since the share is bought and sold on the same day, they do not flow to your Demat Account.
Note that if you are entering the markets to seek long term capital appreciation on your stocks, delivery order is the one to place.
3. Once the order is confirmed the trade will be executed and you will receive a written confirmation for the same. This confirmation; often referred to as the broker’s note will detail the amount of brokerage charged by them.
4. Settlement – Settlement involves the debit/credit of securities to/from your demat account and the corresponding credit/debit of funds from/to your trading account. Settlement in India takes place on a T+2 basis (Trade date plus 2 working days).
This means that for executed on Monday settlement will take place on Wednesday. Similarly, for trades executed on Friday the settlement will take place on Tuesday.
Note: The Indian stock markets generally function on a Monday – Friday basis.