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Stock Market Trading for Beginners

What is a Stock Market?

A stock market is a market where equity of publicly held companies, bonds, and other classes of securities are issued and traded. The trade takes place through formal exchanges or over-the-counter (OTC) marketplaces. The stock market which is also known as the equity (share) market- helps top fortune companies to gain access to capital in exchange for giving investors a slice of ownership. The stock market consists of two sections:

  • The primary market - Here new shares are first sold through initial public offerings (IPOs).
  • The secondary market - Here the opening price of the IPO stock will be determined by the number of shares issued and worth of the company.

Types of stocks

There are two main types of stocks:
  • Common Stocks: Shareholders are entitled to their proportionate share of companies profits and losses. Shareholders can elect the Board of Directors who represent them and decide how the profits would be utilised, whether in the form of reinvestment or sharing a part of it with the shareholders in the form of dividends.
  • Preferred stocks: Shareholders have some degree of ownership in a company but do not the same voting rights. Here shareholders receive a fixed dividend at predefined intervals. The advantage is that the dividend paid to shareholders of the preferred stocks are generally before the dividends are paid to the shareholders of common stocks.

Share market basics

In a company, if the ownership is divided into 500 parts, the profits and losses will also be divided into 500 parts. It is later decided whether these profits are to be reinvested in the business or a part of it is to be shared among the shareholders. If the company is enormous and at some point, any of the owners decides to sell his share of ownership, it can come out with an IPO (Initial Public Offering)- where the ownership shares are traded to the public directly in the primary market. After the IPO is completed, the shares are listed on the stock exchanges, from where people buy and sell shares. The price fluctuation of these stocks depends on the demand and supply method and also on the company's management, growth and future prospects.

How to invest in the stock market?

1) Buy stocks using a brokerage or an online agency - You and I cannot directly go to the stock market and buy or sell stocks. Few authorised people buy and sell in the stock markets, and they are called the brokers. These brokers can be individuals or companies and even online agencies that are registered and licensed by the Securities and Exchanges Board of India (SEBI). Make sure you do some research on enough brokers before zeroing on one.
2) Use demat or trading account - After getting yourself a broker, you will now need a Demat Account and Trading account. The demat account will hold the shares you buy from the market in your name, and the shares will reflect in your profile. You will regularly receive demat statements that will show information on the shares bought and sold. The broker you hired will open a trading account along with the demat account. A trading account will help you buy and sell your shares easily. A demat account cannot function by itself, and without the presence of both accounts, you will not be able to invest in stocks.
3) Depository participant - There are two depositories in India- the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). When you sign up at any of the depositories, you will be given an account to store the shares that you have bought. A depository's function is to save stocks merely and is entirely different from a demat account or a trading account.
4) Buy and sell shares - A broker usually buys or sells shares on an individual's behalf. There's a timeframe to make these transactions. Suppose the buy or sale price of the shares doesn't reach the anticipated cost, you will need to make a fresh order as the old one will be cancelled. Various exchanges carry out the buying and selling of shares - BSE and NSE are two prominent exchanges in India, and you can choose where you want to carry out the trading.

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