What is equity trading?
It is simply buying and selling of equities.
However, unlike other commodities, equities are not traded everywhere, and are traded only in special market places called exchanges.
What is an exchange?
An exchange is a mechanism through which buyers and sellers of equities are brought together.
These days, this is largely electronic and done with computers.
Investors cannot, however, participate directly in the exchange and can participate only through members of the exchange, popularly referred to as brokers.
How does the exchange works?
An exchange has pre-specified timings.
During that time, all the members of the exchange link up to a central computer through their remote terminals.
The members then place bids to buy equities, or make offers to sell equities. Other members who can match the bid or the offer confirm their acceptance, and the transaction is completed.
Members of stock exchanges place bids and offers on behalf of their clients, who are the investors.
Why are brokers required?
Investing in equities is quite risky.
The broker is a professional, who knows the risk and can advise the investor accordingly.
Secondly, an exchange will become an unwieldy mechanism if the entire universe of investors were to go and start making bids and offers.
Reducing the number of individuals is a way of keeping control.
Third, equity trading can also be abused. To prevent these abuses, exchanges as well as the Government has a number of regulations in place.
Restricting activity to the members of the exchange will enable the regulations to be followed, preventing abuse of the system.
How are shares traded?
Like in any other buying or selling, once the broker confirms the trade, if you are buying the share, you pay the broker the value of the shares and take delivery of the shares. If you are selling the shares, you hand over the equities to the broker and the broker will pay you for your shares.
When settlement does happen?
Each exchange has its own settlement period within which the entire process of delivery and purchase should be completed.
Typically, the process is completed in a week to ten days time.
Which shares to Buy and sell?
An index is an indicator of how the stock market is doing on the whole. An index comprises a basket of stocks.
The collective value of these stocks on a given date is taken and given a score of 100. From that day onwards, the value of these stocks is tracked and its score relative to 100 is computed.
The stocks selected are based upon a number of parameters that the creators of the index decide. Equally, the valuation is also done using complex mathematical principles. Periodically, the list of shares used for computing the index also undergoes a change. These changes are decided by the index creators based on the parameters they have set for the stocks for inclusion.
An index shows whether the stock market, on the whole, is appreciating in value or declining in value.
The movement of the index itself is no indicator for individual shares. You may find that a particular share may be increasing in its price even when the index is down and vice versa. The index is only an indicator of the general trend
The common indexes in Indian stock markets are the SENSEX, the index for stocks listed on the Bombay Stock Exchange and Nifty, the index for stocks listed on the National Stock Exchange.
What is an index?
Buying and selling shares involve a fair amount of research.
These involve assessing how well the company is managed, how the company is performing compared to others in the industry, how the industry itself is doing, the financial performance of the company, the interest of the lay public in the company, etc.
It is best that you consult an expert in such analysis, before you decided to buy or sell a particular share. Such investment advice is also provided by your share brokers.
How Long to hold on the shares?
Historically, it has been demonstrated that investments in equities offer the best long term returns and hence the highest opportunity to enhance your capital. Thus, the longer you stay invested in the equity markets, the better will be your returns.
However, this holds true for the equity market as a whole, and not necessarily for shares of individual companies. The value of shares of specific companies are subject to various pulls and pressures which could cause a share that is highly valued one day, to drop its value overnight, as a result of unpredictable factors ranging from Government policy to acts of omission and commission by the management of the company.
It is advisable that you periodically, at least once in a year, evaluate your holdings and decide whether to continue with them or change them.
However, one very important thumb rule which the professionals offer is, never to get emotional about a share. In other words, do not hold on to the share of a company whose value is declining, just because its history has been very good!
Are investment in shares safe?
Any investment is prone to a certain degree of risk. Shares, as a class of investment have the highest element of risk. The only services riskier than shares are lotteries and other games of chance.
These risks arise as a result of factors described earlier.
However, today there is strong legislation, procedures and a regulatory authority - Securities Exchange Board of India (SEBI), which to a large extent prevents risk as a result of misleading the investing public.
DOs & DONTs
The BSE has mentioned certain Dos and Donts in general for investors to follow while dealing in the stock market as there are attendant risks associated with it.
Given below are the Dos and Donts in general for investors who are dealing in stock markets.
Dos
Always deal with the market intermediaries registered with Sebi/Exchanges.
Give clear and unambiguous instructions to your broker/agent/depository participant.
Always insist on contract notes from your Broker. In case of doubt of the transactions, verify the genuineness of the same on the Exchange website.
Always settle the dues through the normal banking channels with the market intermediaries.
Before placing an order with the market intermediaries please check about the credentials of the companies, its management, its fundamentals and recent announcements made by them and various other disclosures made under various Regulations. The sources of information are the websites of Exchanges and companies, databases of data vendor, business magazines etc.
Adopt trading/ investment strategies commensurate with your risk bearing capacity as all investments carry risk, the degree of which varies according to the investment strategy adopted.
Carry out due-diligence before registering as client with any intermediary. Further, the investors are requested to carefully read and understand the contents stated in the Risk Disclosure Document, which forms part of investor registration requirement for dealing through brokers in Stock Market.
Be cautious about stocks, which show a sudden spurt in price or trading activity, especially low price stocks.
Be informed that there are no guaranteed returns on investment in stock markets.
Donts
Dont deal with unregistered brokers/sub-brokers, intermediaries.
Dont deal based on rumours generally called tips.
Dont fall prey to promises of guaranteed returns.
Dont get misled by companies showing approvals/registrations from government agencies as the approvals could be for certain other purposes and not for the securities you are buying.
Dont leave the custody of your Demat Transaction slip book in the hands of any intermediary.
Dont get carried away with onslaught of advertisements about the financial performance of companies in print and electronic media.
Dont blindly follow media reports on corporate developments, as they could be misleading.
Dont blindly imitate investment decisions of others who may have profited from their investment decisions.
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Whats a Demat Account?
The term "demat", in India, refers to a dematerialised account for individual Indian citizens to trade in listed stocks or debentures in electronic form rather than paper, as required for investors by the Securities and Exchange Board of India (SEBI). In a demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place.
Access to the demat account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the demat account are automatically made once transactions are confirmed and completed.
Advantages of Demat Account
Easy and convenient way to hold securities.
Immediate transfer of securities.
No stamp duty on transfer of securities Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares) and filling up of transfer deeds.
Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
Reduced paperwork for transfer of securities.
Reduced transaction cost
No "odd lot" problem: even one share can be sold
Change in address recorded with a DP gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
Transmission of securities is done by DP, eliminating the need for notifying companies.
Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.
A single demat account can hold investments in both equity and debt instruments.
Traders can work from anywhere (e.g. even from home)
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