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What is a stock ? A stock is a partial ownership in a company or an industry, with rights to share in its profits. When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, whichis called the µdividendµ.
How do you make profits with stocks ? But many traders make real profit in stocks using the market price of the stocks Stocks are . traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. µMarket priceµ of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the µface value¶ of the stock, depending on the company¶s performance and prospects, investors¶ interests in the company and a lot of other factors. Market price of a stock keeps varying as traders trade the stock in the market. Traders ofen t make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as µlongµ positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. Thiis is referred to as µshortµ positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders.
What is the Stock Market ? Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders. In India the most famous exchanges or markets are the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock (NYSE), NASDAQ, London Stock Exchange, Hong Kong Stock Exchange etc.. Any market can be thought of with two functionalities: Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium
for the face value of the shares, which will be distributed to the investors. This is called the Initial Public Offer or the IPO. Secondary Market : After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stockmarket. Here the people can buy the shares at a current price as determinedby other investors in the market.
What is the Demat Account ? Like opening a bank account for doing your personal financial transactions, you ha to open ve a Demat account to trade in the stock market. Demat account refers to Dematerialized account. This account helps you to buy and sell stocks without the need for physical paper shares. A Demat Account is a must for trading the stocks these days. To open a demat account, you should select a Depository Participant (DP). These days most of the banks are also DPs. So you can contact any of the DPs with your identity, address proof and PAN documents for opening a demat account for a prescribed fee by the DP. The registered DPs are also listed in NSDL (http://www.nsdl.co.in/) and CDSL (http://www.cdslindia.com/) websites.
Who is the Stock Broker ? Stock Brokers are members of the Stock Exchanges. Only these members can conduct transactions in the exchange on behalf of the individuals and companies. So if you want to buy or sell shares in the exchange, you have to contact a stock broker for doingso. This normally requires the individuals to open an account with the Stock Broker. So the individual becomes a client for the stock broker. Once the client wishes to buy a stock, the broker would place the order in the stock exchange on behalf of the client. When the transaction is done, the broker places the price to the client. The client pays for the stocks he bought and the broker transfers the stocks into the demat account of the client by following the transaction and settlement procedures.
BASICS OF ONLINE TRADING
How do I Buy / Sell Stocks with my Online Account ? Buying or Selling stocks is done by placing µOrdersµ. You can place a µBuy Orderµ to buy the stocks at a particular price. Similarly to sell a stock at a particular price, you have to place a µSell Orderµ.
Each Online platform has different ways to place these orders. But generally, all of these provide the following basic options when placing an order:
y y y y
Option to choose whether you wish to Buy or Sell a particular stock The name / symbol of the particular stock which you want to either Buy or Sell The Number of stocks (Quantity) that you want to either Buy or Sell The Price at which you would like to either Buy or Sell this stock.
After you have confirmed the order, it is placed in the Stock Exchange through the Online System. Your stocks are actually bought or sold once this order gets executed in the exchange.
What is a Limit Order / Limit Price ? A Limit Order is a Buy / Sell order which you want to get executed at a pre-determined desired price. This is the most common type of order that investors and traders place in the market. Buy Order with Limit Price For example, if you want to buy the stocks of company µA¶ at a price of Rs.300. However the current price of the stock might be higher than your desired price. But you feel that the price of this stock would come down sooner and reach Rs. 300. In such a case, you can place a Buy order with a limit price of Rs. 300. This means that you are instructing the system to buy the stocks of company A, only if the price reaches Rs. 300 or lesser. So if a Buy Order gets executed with the Limit Price specified, then you could be assured that the actual price at which the stocks are purchased by you will always be either equal to or lesser than the Limit Price specified by you. Sell Order with Limit Price
Similarly you may have the stocks of company µB¶ in your demat account, which you would like to sell at a price of Rs.500. But currently the market price of the stock is lesser than 500 and you expect that sooner the price will reach Rs. 500. In such a case you can place a Sell order with a limit price set to Rs. 500. In this case, the stocks will be sold only if the price reaches Rs.500 or above. So if a Sell Order gets executed with the Limit Price specified, then you could be assured that the actual price at which the stocks are sold by you will always be either equal to or greater than the Limit Price specified by you.
What i a Market Order ? Market Orders are placed, when you are not concerned too much about the current price of the stock, but you want to get assured that the stocks are either bought or sold immediatel . So a Market Order can be placed only during the Market Trading Hours. You cannot place a Market Order when the Markets are closed. Market Order for Buying For example, consider an instance where in you know the fact that company µA¶ will be making a big announcement in the afternoon tod ay and so the price of the stocks of this company will definitely rise after this event. So you are looking for buying this stock desperately now, irrespective of its current traded price. In such a case, you can place a µmarket order¶ for this stock. This will place an order for buying the stocks at the Last Traded Price in the Stock Market. So the chances of buying the stocks increase, as you are trying to buy the stock very close to its Last Traded Price in the market. Market Order for Selling Similarly suppose that you know the price of stocks of company µB¶ will go down later in the day when the company comes out with its Earnings report of Losses for the Quarter. So you would want to sell the stocks of this company immediately, before the price of the stocks fall drastically. In such a case, you can place a Market Order for Selling. This will place an order for selling the stocks at the Last Traded Price in the Stock Market. So the chances of selling the stocks increase, as you are trying to sell the st ock very close to its Last Traded Price in the market.
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