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How to Invest in Share Market or Stock Market?

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What are Shares?

When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above case, the company has 1,00,000 shares of ₹10 each. In order to identify the shares, they must be numbered.

What is Share Market?

Share Market or Stock Market in a wider sense is a financial marketplace where different types of financial instruments are traded that includes stocks, bonds, etc. Stock market serves as a link between investors and companies by transferring the capital or money from investors who have a surplus amount of money to companies who are in need of money or investment.  The two primary stock markets in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

How to Invest in Share Market (Stock Exchange)?

How to Invest in Share Market?

 

Before thinking to invest in the share market one should know that there are two types of markets, i.e., Primary Market and Secondary Market.

Investing in Primary Share Market

In the primary share market, fresh shares are directly issued and sold to the general public by the respective company without involving the stock exchange. Companies invite applications by issuing prospectus to the general public through the Initial Public Offering (IPO). Investors then submit application money as their interest in buying those shares. Shares are allotted to the investors based on demand and availability. For investing in the primary share market, having a Demat Account is necessary. Demat Accounts holds all the electronic copies of the shares purchased. 

In some cases, shares can be bought directly from the bank account by the trader. IPO application can be done with the help of a process known as Application Supported by Blocked Amount (ASBA). In ASBA, the amount of money required to apply for any number of shares is not directly paid to the issuing company but blocked into the bank account of the investor. Once shares are allotted to the investor by the issuing company then only the exact amount will be debited from the account. All applications that are sent through the IPOs are required to follow this protocol.

Investing in Secondary Share Market

Before the companies start selling the securities through the stock exchange, they have to first get their securities listed in the stock exchange. The company’s name is included in listed securities only when the stock exchange authorities are satisfied with the financial soundness and various other aspects of the company.

Earlier, the buying and selling of securities were done on the trading floor of the stock exchange. However, in present times, it is done through the internet. Nowadays, there are various mobile-based applications or web platforms that provide users the comfort to buy/sell shares from their home.

The following are the steps required to invest in the secondary share market: 

1. Selection of Broker

One can buy and sell securities only through the brokers registered under SEBI and who are members of the stock exchange. A broker can be a partnership firm, an individual, or a corporate body. Hence, the first step of the trading procedure is the selection of a broker who will buy/sell securities on the behalf of a speculator or investor. Before placing an order with the registered broker, the investor has to provide some information including PAN Number, Date of Birth and Address, Educational Qualification and Occupation, Residential Status (Indian/NRI), Bank Account Details, Depository A/c details, Name of any other brokers with whom they have registered, and Client code number in the client registration form. After getting information regarding all the said things, the broker opens a trading account in the name of the investor.

2. Opening Demat Account with Depository

An account that must be opened with the Depository Participant (including stock brokers or banks) by an Indian citizen for trading in the listed securities in electronic form is known as Demat (Dematerialised) Account or Beneficial Owner (BO) Account. 

The second step of the trading procedure is opening a Demat Account. The Depository holds the securities in electronic form. A Depository is an organisation or institution which holds securities like bonds, shares, debentures, etc. At present there are two Depositories; namely, NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Securities Ltd.). The Depository and the investor do not have direct contact with each other and interact with each other through Depository Participants only. The Depository Participant will have to maintain the securities account balances of the investor and intimate the investor from time to time about the status of their holdings.

3. Research and Study the Stock Options Available

An investor should research and study the stock options available in the stock market. After proper research, they can choose the best option available in the stock market that suits their investment goals.

4. Placing the Order

The next step after opening a Demat Account is placing of an order by the investor. The investor can place the order with the broker either personally or through email, phone, etc. The investor must make sure that the order placed clearly specifies the range or price at which the securities can be sold or bought. For example, an order placed by Kashish is, “Buy 200 equity shares of Nestle for not more than ₹200 per share.”

5. Match the Share and Best Price

The broker after receiving an order from the investor will have to then go online and connect to the main stock exchange to match the share and best price available.

6. Executing Order

When the shares can be bought or sold at the price mentioned by the investor, it will be communicated to the broker terminal and then the order will be executed electronically. Once the order has been executed, the broker will issue a trade confirmation slip to the investors.

7. Issue of Contract Note

Once the trade has been executed within 24 hours, the broker will issue a contract note. A contract note consists of the details of the number of shares bought or sold, the date, time of deal, price of securities, and brokerage charges. A contract note is an essential legal document. It helps in settling disputes and claims between investors and brokers. A contract note also consists of a printed unique order code number assigned to each transaction by the Stock Exchange.

8. Delivery of Share and making Payment

In the next step, the investor has to deliver the shares sold or has to pay cash for the shares bought. The investor has to do so immediately after receiving the contract note or before the day when the broker shall make delivery of shares to the exchange or make payment. This is known as Pay in Day.

9. Settlement Cycle

The payment of securities in cash or delivery of securities is done on Pay in Day, which is, before T+2 Day. It is because the settlement cycle is T+2 days on w.e.f April 2003 rolling settlement basis. For example, if the transaction took place on Tuesday, then the payment must be done before Thursday, i.e., T+2 days (Transaction plus two more days).

10. Delivery of Shares or Making Payment

On the T+2 Day, the Stock Exchange will then deliver the share or make payment to the other broker. This is known as Payout Day. Once the shares have been delivered or payment has been made, the broker has to make payment to the investor within 24 hours of the payout day, as he/she has already received payment from the exchange.

11. Delivery of Shares in Demat Form

The last step of the trading procedure is making delivery or shares in Demat form by the broker directly to the Demat Account of the investor. The investor is obligated to give details of his Demat Account and instruct his Depository Participant (DP) for taking delivery of securities directly in his beneficial owner account.



Last Updated : 24 Mar, 2023
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