The Stock market is a place which provides many opportunities for individuals to grow their wealth and build savings. It is a place where company shares are bought and sold. By issuing shares to investors, the company in question aims to collect funds for its business needs. When investors purchase these shares, they become part-owners of the company and may often receive dividends.

Of course, this is only the short version. If you are keen to invest or trade in the stock market, you must understand the nuances of how it works. Read along to become familiar with how stock markets function and why they are important. Also, get tips on how to invest and trade in the stock market.

HOW DO STOCK MARKETS WORK?

The stock market can be divided into two parts: the primary market and the secondary market. Let’s take a quick look at how they function:

Primary Stock Market

When a company decides to go public and list on the stock exchange, it issues shares to the public through an initial public offering (IPO). This IPO takes place in what is called the primary market. Investors can apply for these newly issued shares through their trading account or via their bank account. Once the subscription period ends, the company allots the shares to the subscribers. Soon after, the newly formed company lists on the stock exchange and shareholders can sell their shares in the secondary market. In India, the two main exchanges where stock trading is carried out are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Secondary Stock Market

In the secondary stock market, traders can buy and sell stocks that are listed on the exchange. Here, the prices of the listed shares change based on fluctuations in demand and supply. If the demand among buyers goes up while sellers are few, the stock price is likely to rise. On the other hand, if many sellers are trying to exit their shares but buyers are limited, the stock price could fall. But as there is a huge number of traders on the market at any given time, finding the best trades can be tough. Here, the broker plays a key role in helping buyers to find sellers and sellers to find buyers.

You should also take note of certain key terms when trading on the stock market:

• The buyers in the market state their bid price. This is the highest price they are willing to pay to purchase the stock.
• The sellers in the market mention their ask price. This is the price at which they are ready to sell their securities.
• The difference between the bid price and the ask price is known as the spread.

Read more about how stock market works

IMPORTANCE OF STOCK MARKET

The stock market offers businesses an opportunity to raise capital for their growth and expansion. Investors who wish to become a part of the company’s growth story can participate by purchasing its shares. Traders, most of whom purchase shares for the short term, could earn profits based on stock price fluctuations in the market. Thus, the stock market has a hand in wealth creation at different levels of the economy.

Traders and investors also benefit from the high liquidity of stock investments. It is possible to liquidate shareholdings at any time. A shareholder who needs funds urgently has the option to sell their shares when the market is in session. Thus, the holdings can be converted into cash at any time.

Now, let’s look at some of the ways in which shareholders gain from investing in the stock market:

• Dividend Income
  Dividend refers to the profits that a company shares with its shareholders. It is distributed based on the number of shares held by each investor. While not all companies pay dividends, those that do are a major attraction for long-term investors.
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• Capital Growth
  Many investors look to earn long-term wealth. So, they invest in stocks and hold on to them for years in the hope of capital appreciation—that is, a rise in the stock price. If capital growth is your goal, check that the company has strong fundamentals before investing.
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• Stock Buyback
  At times, the company may repurchase (buy back) its shares from the shareholders, paying slightly higher than the market value. Companies buy back shares when they have a large amount of cash in hand or want to consolidate their ownership in the company.
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DEMAT AND TRADING ACCOUNTS

To invest in shares, you will need a Demat account to de-materialize your shares. You will also need a trading account to carry out the buying and selling of shares. Anytime you purchase stocks, the payment will be debited from your trading account balance and the purchased stocks will be credited to your demat account. Should you sell any stocks, the reverse will occur. Stocks will be debited from your demat account and any money from the sale will reach your trading account.

The procedure to open demat and trading accounts is simple enough. Most brokers will open both accounts for you simultaneously. Here are the steps to keep in mind:

• Visit the broker and fill in the application form.
• Submit the relevant documents:
  1. PAN card
  2.  Aadhaar card
  3. Identity and address proofs
  4. Income proof
  5. Cancelled cheque leaf as bank account proof
  6. Passport-sized photograph
• Read through the terms and conditions.
• Complete the in-person verification. The broker will send a representative to your home.
• Once the formalities are complete, you will receive your client ID, a password, and account details.
• Use the details to log in to your account.
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PLACING STOCK MARKET ORDERS

As a stock trader and investor in India, you can buy and sell shares on the Bombay Stock Exchange (BSE), MSE (Metropolitan Stock Exchange) and the National Stock Exchange (NSE). The broker with whom you hold an account will mediate between you and the exchange. Here’s how order placement works:

There are two ways in which you can place your orders for stock trading: the online mode and the offline mode.

Online order placement

Using the online mode is safe and easy. Simply log in to your Trading account and set up the order. You will have to mention the scrip name, price, number of units, and other details. The broker will execute your order accordingly, and the shares will be automatically credited or debited from your demat account.

Offline order placement

In the offline mode, you can instruct the broker over the phone or by visiting their office. The next steps are like in the online mode. All debits and credits will happen automatically.

TIPS FOR INVESTING IN STOCK MARKET

• Invest only after doing thorough research and analysis. Never rely on the advice of friends, relatives, or acquaintances.
• Invest in companies and sectors that you understand. That way, you will be able to gauge their future prospects and growth.
• Don’t try to time the market. No one can successfully invest at the exact bottom and sell at exact highs.
• Be a disciplined investor. When required, wait patiently for the stock price to rise in the long run.
• Don’t get influenced by emotion. Decisions taken on the basis of emotions can lead to losses in the stock market.
• Diversify your portfolio by investing across companies and sectors. This helps minimise your risk and brings good returns in the long run.
• Be realistic about your expectation of returns from the market.
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SUMMING UP

Now that you have a general idea of what stock market investment entails, take the next steps. Open an account with a trustworthy broker like Kotak Securities. When that’s done, zero in on the sectors and companies you would like to focus on and shortlist scrips that you would like to follow. Study the fundamentals of each before investing in its shares. Also, look up price charts, stock recommendations, and research reports before you start investing. With a little practice, you should be able to figure out a trading and investment strategy that works for you.