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Stock trading tutorials

 

What is equity trading? It is simply buying and selling of equities. However, unlike other commodities, equity aren't traded everywhere, and are traded only in special market places called exchanges.


What is an exchange? An exchange is mechanism through which buyers and sellers of equity are brought together. These days, this is largely electronic and done with computers. Investors cannot, however, participate directly in exchange and can participate only through members of exchange, popularly referred to as brokers.


How does exchange works? An exchange has pre-specified timings. During that time, all members of exchange link up to central computer through their remote terminals. The members then place bids to buy equities, or make offers to sell equities. Other members who can match bid or offer confirm their acceptance, and transaction is completed. Members of share exchanges place bids and offers on behalf of their clients, who are investors.


Why are brokers required? Investing in equity is quite risky. The broker is professional, who knows risk and can advise the investor accordingly. Secondly, an exchange will become an unwieldy mechanism if entire universe of investors were to go and start making bids and offers. Reducing No. of individuals is way of keeping control.

Third, equity trading can also be abused. To prevent these abuses, exchanges as well as Government has No. of regulations in place. Restricting activity to members of exchange will enable the regulations to be followed, preventing abuse of system.


How are shares traded? Like in any other buying or selling, once broker confirms trade, if u are buying share, u pay the broker value of shares and take delivery of shares. If you are selling shares, u hand over equity to broker and the broker will pay u for your shares.


When settlement does happen? Each exchange has its own settlement period within which entire process of delivery and purchase should be completed. Typically, process is completed in week to ten days time. Which shares to Buy and sell? An index is an indicator of how the share market is doing on whole. An index comprises basket of stocks. The collective value of these shares on given date is taken and given score of IOO. From that day onwards, value of these stocks is tracked and its score relative to IOO is computed.

The shares selected are based upon No. of parameters that creators of index decide. Equally, valuation is also done using complex mathematical principles. Periodically, list of shares used for computing index also undergoes change. These changes are decided by index creators based on parameters they've set for the shares for inclusion.

An index shows whether share market, on whole, is appreciating in value or declining in value.

The movement of index itself is no indicator for individual shares. You can find that particular stock can be increasing in its price even when index is down and vice versa. The index is only an indicator of general trend.

The common indexes in Indian share markets are SENSEX, index for shares listed on Bombay Stock Exchange and Nifty, index for stocks listed on National Stock Exchange.


What is an index? Buying and selling shares involve fair amount of research. These involve assessing how well Comp. is managed, how Comp. is performing compared to others in industry, how industry itself is doing, financial performance of the company, interest of lay public in company, etc.

It is best that u consult an expert in such analysis, before u decided to buy or sell particular share. Such investment advice is also provided by your stock brokers.


How Long to hold on shares? Historically, it's been demonstrated that investments in equity offer best long term returns and hence highest opportunity to enhance your capital. Thus, the longer u stay invested in equity markets, better will be your returns.

However, this holds true for equity market as whole, and not necessarily for shares of individual companies. The value of shares of specific Comp. are subject to various pulls and pressures which could cause a stock that's highly valued one day, to drop its value overnight, as result of unpredictable factors ranging from Government policy to acts of omission and commission by management of company.

It is advisable that u periodically, at least once in year, evaluate your holdings and decide whether to continue with them or change them.

However, one very Imp. thumb rule which professionals offer is, never to get emotional about share. In other words, don't hold on to stock of Comp. whose value is declining, just because its history has been very good!


Are investment in shares safe? Any investment is prone to certain degree of risk. Shares, as class of investment have highest element of risk. The only services riskier than shares are lottery and other games of chance.

These risks arise as result of factors described earlier.

However, today there is strong legislation, procedures and regulatory authority - Security Exchange Board of India [SEBIs], which to large extent prevents risk as result of misleading investing public.

 


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