Share Market
Fundamentals of Stock Markets for beginners
What are Shares?
As the meaning of the word denotes, Share, in the context of stock market, means a portion of the ownership of the company or in other words having invested in shares of a company means that you have brought in a part of the capital of the company and you become an owner of the company to the extent of your holding. A person holding more than 50 percent shares of a company is able to exercise control over the affairs of the company as he has the maximum proportion of shares as compared to other shareholders.
Every company has a share capital and the persons who contribute that share capital are called shareholders. Initially the company starts its operations as a closely held company with the capital contributed by its promoters and as the company progresses, it may require more funds. The available options are to raise further equity or share capital or raise debt by securing loan from various banks and financial institutions. In the case of debt the principal as well as interest is payable and the transaction may also require the company to pledge its assets. On the other side if the company decides to raise further equity, it is not required to repay the principal and no interest is payable either. But the promoters have to share their ownership and profits with the new shareholders. Now when the company decides to raise further capital, again, it has two options. One, to raise capital through private placement and two, to raise capital through an IPO (Initial Public Offer). In the former case the equity is issued to a few large investors who buy stake in the company and in the latter case the equity is issued to public at large where a number of retail investors subscribe to the issue and a small portion of capital is contributed by each of them. A company can have two types of share capital. Equity share capital and preference share capital. In case of preference share capital a fixed rate of dividend is paid on the shares every year out of the profits of the company but the preference shareholders do not have voting powers exercisable at the General Meeting of the company. Equity share holders are paid dividend out of the profit left after distributing fixed dividend to the preference shareholders but they can exercise their right to vote at the General Meeting of the company where all the important decisions are taken.
What is share market?
Putting money in an investment is useless unless it is saleable. Shares once issued remain afloat until the company is running and the life of a company is perpetual, it never dies. But a person having shares of a company might not hold them for life; he would like to sell them for profit. To provide liquidity to the investments made by retail investors in shares of companies, stock markets were evolved. Stock market is a place where buyers and sellers are provided with a platform called an exchange where they can buy and sell shares of the companies listed on that stock exchange. In India two popular stock exchanges are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
Trading on a stock exchange
Stock markets are organized markets controlled and regulated by various governing agencies and regulatory bodies. Trading on stock exchanges is done through stock brokers who are regulated by SEBI (Securities and Exchange Board of India). All trades on stock exchanges are done in the electronic form, the trading is completely paperless. The shares are also held in electronic form at various depository participants and deliveries are given and taken through these depository participants. Depository participants are like banks, you can hold your shares in the accounts maintained by depository participant. To put it simple let us take an example. Let’s see how a beginner can enter the stock markets.
The first step to buy shares is to open two accounts. One with a depository participant and one with a SEBI registered stock broker. All you need to have to open these accounts is a Permanent Account Number (PAN), a passport size color photograph, an address proof and an identity proof. After opening these accounts you can place your bids on the terminals of stock exchanges maintained at the trading premises of stock brokers. Live trading can be seen on the terminals, buy and sell bids can be put online and the trades are done on matching bids of buyers and sellers. You may buy a stock either at the prevailing market price or you may put a bid of your choice and wait for the price to come down to your target. Bids once put in the system remain valid for the whole trading session. However these can be modified or cancelled at the option of bidder. Similarly orders can be placed to sell the stocks.
Once the orders are executed, settlement is done by the exchanges and all those who have sold the shares, have to give deliveries of the shares sold and all those who have bought the shares, have to make the payments as per the price at which the shares were bought. Both NSE and BSE follow T+2 rolling settlement systems. It means that settlement of trades executed shall be made on the second day from the Trading day. For example trades executed on Monday will be settled on Wednesday. Payments and deliveries are to be given to the stock broker where the bids were executed and he will then settle the trades at the stock exchanges on behalf of all his clients on the settlement date. Payments can be made by check to the broker and deliveries can be given by issuing delivery instruction slips to the depository participant, where you have your account, in favor of the clearing member (your broker’s pool account). The depository participants would take a maximum of 24 hours to execute your delivery instructions, therefore you have only one day to give delivery instructions to your depository participant after the trading day and before the settlement day.
Now you can open an account and start trading. But be careful, stock markets are risky, be informed about the company you are going to invest in, track the progress of the companies on your portfolio, have an expert advice and remember that a stock price can come down as much as it can go up. Happy trading.