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Monday, December 19, 2016

How To Invest In Equities - Beginner's Guide

Equity Shares represent part ownership in a company. The holders' of equity shares are owners the of the company and have a right to vote at the Annual General Meeting (AGM) and other meetings of the company.

Equities make an attractive investment avenue both for long term capital appreciation and earning a regular dividend income.


In this Beginner's Guide to Stock Market Investment we discuss how you can make money by investing in Equities. 

The Stock Exchange - Where the buying and selling of shares take place.

Buying and selling of equities/shares takes place through the auspices of a stock exchange. 

A stock exchange is a term used to denote a market place where the buyers and sellers of equities meet and decide on the price. The stock exchanges publish such price information on a real-time basis. The two primary stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

For buying and selling to take place, the concerned companies have to list themselves in one or more of the recognized stock exchanges in India.

The basics of Stock Market Investment 

The basic of stock market investing consists of buying shares at a low price and then selling them high. The difference between the selling price and the buying price (less applicable brokerage) will represent your profit.

Brokerage

Note that you cannot directly buy or sell shares from/to a stock exchange. The buying or selling has to take place via a broker (with whom you need to open an account) who will charge brokerage on every buy or sell order that you place through them.

Getting started

To start investing in equities, you need to open the following accounts with a registered broker - a Demat Account and a Trading Account.

Demat Account: Demat Account is an account where the shares you buy are held in an electronic format. Once you buy a share, the same is added to your Demat Account. Similarly, when you sell a share the same is deducted from your Demat account balance.

Trading Account: An account maintained with a broker to buy or sell equities. To trade in securities, you need to transfer the requisite funds to your trading account. Payment for shares bought and receipts for shares sold will be made through this account.

Generally large brokerage houses (e.g Kotak Securities or SBI) will offer both accounts under a common umbrella. It would also be helpful if you maintain a net banking account with any scheduled commercial bank as this will facilitate quick transfer of funds to and from your trading account.

Buying/Selling shares - the Steps Involved: 

Trading in equities generally involves the following steps:

1. Transfer the requisite funds to your trading account.

2. Place the buy/sell delivery order with your broker. This can be done by personally visiting the broker's premises, over the phone or through any online trading terminal provided by the broker.

Note: You can place two types of order: Delivery and Intraday.

A Delivery Order is one where you opt of delivery(credit) of the shares bought to your Demat Account. These shares can be held in your Demat account for as long as you want and sold when you want to book profits. A delivery order is placed when you wish to hold the shares for more than a day.

Note that delivery of the shares to your Demat account will take place on the Settlement Date. You can read more about settlement below.

Intraday Orders on the contrary do not involve delivery of shares and are squared off during the day. Intraday orders are placed when you wish to buy and sell the share on the same day. Since the share is bought and sold on the same day, they do not flow to your Demat Account. Thus if you are entering the markets to seek long term capital appreciation on your stocks, delivery order is the one to place.

3. Once the order is confirmed the trade will be executed and you will receive a written confirmation for the same. This confirmation; often referred to as the broker's note will detail the amount of brokerage charged by them.

4. Settlement - Settlement involves the debit/credit of securities to/from your demat account and the corresponding credit/debit of funds from/to your trading account. Settlement in India takes place on a T+2 basis (Trade date plus 2 working days). This means that for executed on Monday settlement will take place on Wednesday. Similarly, for trades executed on Friday the settlement will take place on Tuesday.

Note: The Indian stock markets generally function on a Monday - Friday basis.

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