Thank you for following our series on the basics of
investing, we hope that you have a basic knowledge of stocks, stock market and
the different types of stock available along with the prerequisites for trading in the stock market, it is time to move on to the next phase – Understand how
the stock market works and how to buy or sell stocks.
How the stock market
works
The stock market is the place where all the financial
transactions on shares and derivatives happen. All the participants –
companies, investors and brokers will come together to conduct trades. The
stock market is governed by SEBI or Securities and Exchange Board of India, who
specify the rules and regulations of how the participants need to conduct
themselves and how the trades will happen.
First a company needs to get listed in the primary market
through Initial Public Offering (IPO). This offer will consist details of the
company, the type of stocks issued etc. The stocks are then allotted to the
investors who have bid for the same.
Now that the company is listed the allotted stocks can now
be traded in the secondary market. This is where maximum amount of transaction
happens, where buyers and sellers come together to make profits or reduce
losses.
Since there are hundreds of thousands of investors SEBI has
made it mandatory that trades will happen only through brokers who have
registered with stock exchanges. These traders will buy or sell the stocks at
the price you ask.
When a bid is put forward the broker puts forward your buy
order to the exchange, which searches for a sell order for the same share and
at the price asked by you. Once a seller and a buyer are fixed for the
finalized price, the exchange communicates to your broker that your order has
been confirmed.
Once the buyer and seller has been verified the stock
exchange facilitates in the actual transfer of shares. This used to take weeks
but now it is T+2 days which means the shares will be transferred to the buyer
after 2 days of the trade.
The prices of shares tend to fluctuate based on the demand
for a share. If you see the price of a share rise gradually then it means that
there are a large number of buy order for that share.
How to buy or sell
stocks
Step 1: The first
step before you start trading is choose your broker and open your Demat and
Trading account. Without the 3 you cannot do any investment in the stock
market.
Step 2: Know your
need – Know what you are looking for and the what is the return on investment
you want. Analyze various companies and their shares see the trend before
finalizing on the stocks you want to buy. Without proper analysis and study,
one might lose a lot of money.
Step 3: Decide on
when you want to buy the stocks – At market time or after market time. The
price you want will determine when you want to transact. If you feel that the
price during the closing hours of the market is when it will be less, then you
need to buy shares after market. On the other hand, if you believe you can get
lower price for a stock during the business hours is when the price will be low
then buy the shares at market time.
Step 4: Decide
what type of order you want to place - a limit order, a market order and a stop
loss order. A market order is when the buyer buys the stocks at the price
prevalent at that particular time. A limit order is where a person can limit
the price at which they want to purchase stocks. For example, if a person
orders 20 shares at Rs.100, the trade will be processed as long as the price
stays below Rs.100. Even if only 15 shares were allotted the buying will stop
once the price reaches Rs.100 and more. A stop loss order is where shares will
be sold when the price of a share reaches a certain limit.
Step 5: Once the
trade details have been finalized you can go online or ask your broker to do
the trade giving access to your savings account to buy the stocks.
Conclusion
With this knowledge you can now start trading in
the stock markets. If you want to know about the various stock options
available read our next part – The different type of stocks available