Introduction to Share Trading
As a concept, Share Trading is considered to be reserved for the Wall Street professionals and many people believe that it’s best to stay clear of it. However, the truth is, share trading is a well-researched and disciplined technique of investing which is quite simple, provided the share trading basics are right. So, yes, it is for everyone and you can start at a very slow pace and learn the tricks of the trade while investing yourself!
Let us see a few key things so that you can start by yourself.
What is Share Trading?
Share trading is the basic process of buying and selling of stocks of a company either in the primary market, i.e. from the company directly or through the secondary market, i.e. a stock exchange, like NSE or BSE. When a company issues its first set of shares, they issue an Initial Public Offer (IPO) for the people to buy the shares of the company directly. Thus, an investor becomes an owner of the company, proportionate to the value of the shares as compared to the market value of the company. After purchase, the shares need to get listed on either of the stock exchanges like NSE or BSE (explained below) for the investor to trade in them.
Benefits of share trading:
There are certain distinctive benefits of share trading like:
1. Growing your money over time and earning profit
2. Beating the inflation
3. Earning dividend
4. Portfolio diversification
5. Ownership of a company, by buying shares of that company.
However, share trading has its own risk of the assets being volatile in nature and that affects the share prices. With good share trading tips, you can learn the methods to earn maximum profits and minimal risk in share trading.
Share Trading Basics
Let us start with the basics of share trading. We will first know about the share market and stock market.
o Share/Stock Market
The share market deals with the buying and selling of shares. The Stock market is similar to the share market but in addition to shares, bonds, mutual funds, other derivative products are also traded here. Share markets are of two types i.e. Primary Share market where a company can get itself registered to issue shares for the public and Secondary Share market where the trading is carried out via a stockbroker.
o Stock Exchange
Share trading takes place at the Stock Exchange where a lot of companies are listed. All major Indian companies are listed on The BSE and NSE i.e. The Bombay Stock Exchange and The National Stock Exchange. Both the stock exchanges have the same process for functionality and the same settlement procedure.
o Market Regulation
Certain regulatory bodies in India are responsible for regulating the share market. Let us list down the regulators in the stock market of India.
• Ministry of Finance
• Securities and Exchange Board of India (SEBI)
• Reserve Bank of India(RBI)
The Securities and Exchange Board of India (SEBI) was established in the year 1988. It is a non-statutory body regulating the share market in our country. Its main objective is the protection of the interest of the investors and the development of the capital market according to certain rules and regulations.
o Depository Participant(DP)
A depository can be defined as an organization or body which holds shares, bonds, mutual funds, etc. of the traders. Two main depositors in our country are National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
A depository participant (DP) is an intermediary or an agent via which the traders make their requests to the depository. These depository participants are appointed by the depository to provide their services. For example, banks and financial institutions are the depository participants.
o Share trading at both The BSE and NSE takes place with the help of an electronic limit order book. This book is a record of all the limit orders that are unexecuted and are being maintained by a share trading specialist. When the buy and sell limit orders for a share are given, the specialist will keep a track of all these orders in the limit order book and will execute them when the appropriate pricing is available.
o The procedure is order driven and no human intervention is involved. When the market orders are placed, they are automatically matched up with the best available limit orders.
o Mostly all orders are placed via stockbrokers in the trading system. The stockbrokers provide an online facility to the customers by which orders can be placed.
Since the entire trading mechanism is order-driven, the buyers and sellers are not revealed. As a result, there is more clarity in the whole process of displaying the buy and sell orders in the system.
The two major stock market indexes are Sensex and Nifty. Investors usually tend to follow the market indexes to keep track of the movements or changes in the market. A market index can be defined as a theoretical or hypothetical aggregation of several investment holdings. These holdings represent a portion of the financial market.
Sensex consists of the 30 most frequently traded stocks on the Bombay Stock Exchange. Sensex is the oldest stock index in India and was started in the year 1986. Nifty comprises of the 50 largest stocks of the National Stock Exchange. The companies need to meet specified terms of capitalization and liquidity to be included in these indices.
How to start share trading?
Let us have a look at the basic steps involved in how to start share trading for beginners.
Firstly, you need to find out a stockbroker or a firm. Stockbrokers are of two categories i.e. full-service stockbrokers and discount stockbrokers. As the name suggests, a full-service stockbroker will provide you with numerous services starting from share trading to financial planning. Discount brokers will charge lower fees and will provide only the minimum share trading facilities. You need to scrutinize all the options wisely.
Then, you need to fill up the account opening form and the KYC form. You can do this by visiting the nearest office of the broker. Along with the forms, you will need to submit certain documents like Voter ID card, PAN card, passport, etc. for identity and address proof.
You can also open your share trading account online by visiting your stockbroker's website.
Which shares can you invest in?
Since now you know about how to do share trading, it’s time to know about the correct place of investment. In the stock market, you will find a lot of leading companies whose shares are available for trading. Now, you might be in a dilemma regarding the decision about which shares to trade?
This choice of shares for trading completely depends on a trader’s personal preferences. Usually, for beginners, it is always safe to start with shares of those companies which they know very well or can get information easily if they want. Later on, after gaining some experience in on how to do share trading, you can start trading in a large variety of shares basis your thorough research & analysis.
Share Trading Tips
Let's discuss some share trading tips which can be of great use for beginners.
o Educate yourself about the stock market, benefits of share trade, which investment would be profitable for you, etc.
o Start practicing by using an online simulator as this would help you understand the working process without any risk.
o Make a proper plan on your amount of investment and the period to hold the investment.
o Take help from a mentor who has fair experience in the world of share trading.
o Register into online sessions on stock broking, share trading for more knowledge and learning.
Share trading is not very difficult but can be mastered with time. For beginners, it is always advisable to take help from experts like IndiaNivesh who not only know the pulse of the market but also have immense experience to give the best advice.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.