FAQ

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. This 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 Exchange (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 share, 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 stock market. 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.

Where can I trade stocks?

Stocks are traded in the Stock Market or the stock exchange. In India, the two most popular exchanges are the Bombay Stock Exchange (BSE - Located in Mumbai) and the National Stock Exchange (NSE - Located in New Delhi).

Do I have to be physically present in the stock market to trade stocks?

Not necessarily. You do not have to be physically present in the stock market to start trading. For trading in stocks, you can open an account with a stock broker, who is a registered member of the BSE or the NSE. Once you have opened the account, you can start trading in the stocks through your local Stock Broker. The Broker charges a fee called the brokerages or Commission from you for every trade that you do in the stock market.

What is online trading?

Online Trading is a fairly new and popular mechanism for trading stocks, wherein you can buy and sell the stocks over the Internet. With the flexibility that Online trading offers to the clients, this mechanism of trading has become hugely popular among the investor and traders in the recent times.

When you buy or sell stocks online, you will be interacting with an online stock broker, in contrast to the Human Broker in the conventional trading system. The Online system places the orders on your behalf, gets them executed in the exchange and inform the order status to the clients. Like the older system of trading, a fee is charged as Brokerage or Commission for every trade executed using the online system.

What other services are offered in Online Trading?

Apart from providing a platform for trading stocks, many online systems provide integrated packages that link your trading account with your Bank Account. This helps you to buy and sell stocks and get the money transferred to your Bank account in a hassle free manner.

Apart from this, many Online Systems also offer stock research and Tips from Market Analysts to the clients, over the Trading Platform. This will help you to choose and value your trade calls in the Stock Market.

How do I Buy / sell stock 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 are 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.