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.
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