Basics of Stock Market

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, which is
called the ‘dividend‘.

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. ‘Market price‘ 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 ‘face 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 often
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 ‘long‘ 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 ‘short‘ 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 determined by other
investors in the market.

What is the Demat Account ?

Like opening a bank account for doing your personal financial transactions, you have to open
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 doing so. 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 ‘Orders‘. You can place a ‘Buy Order‘ to buy the
stocks at a particular price. Similarly to sell a stock at a particular price, you have to place a
‘Sell Order‘.

Each Online platform has different ways to place these orders. But generally, all of these
provide the following basic options when placing an order:

 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 ‘A’ 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 ‘B’ 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 is 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 immediately. 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 ‘A’
will be making a big announcement in the afternoon today 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 ‘market 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 ‘B’ 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 stock very close to its Last
Traded Price in the market.