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The Stock
Trading
Equity shares are a popular class of investments.
Their popularity is due to the opportunity they give for rapid
capital appreciation through trading. However, equity trading is
also very volatile with the danger of losing investments also high.
What is equity trading ?
It is simply buying and selling of equities. However, unlike other
commodities, equities are not traded everywhere, and are traded only
in special market places called exchanges.
What is an exchange?
An exchange is a mechanism through which buyers and sellers of
equities are brought together. These days this is largely electronic
and done with computers.
Investors cannot, however, participate directly in the exchange
and can participate only through, members of the exchange, popularly
referred to as brokers.
How does the exchange work?
An exchange has pre-specified timings. During that time all the
members of the exchange link up to a 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 the bid or
the offer confirm their acceptance and the transaction is completed.
Members of stock exchanges place bids and offers on behalf of
their clients, who are the investors.
Why are brokers required?
Investing in equities is quite risky. The broker is a professional
who knows the risk and can advise the investor accordingly.
<>Secondly, an exchange will become an unwieldy mechanism if
the entire universe of investors were to go and start making bids
and offers. Reducing the number of individuals is a way of keeping
control.
Third, equity trading can also be abused. To prevent these abuses
exchanges as well as the Government has a number of regulations in
place. Restricting activity to the members of the exchange will
enable the regulations to be followed, preventing abuse of the
system.
How are shares traded?
Like in any other buying or selling, once the broker confirms the
trade, if you are buying the share, you pay the broker the value of
the shares and take delivery of the shares. If you are selling the
shares, you hand over the equities to the broker and the broker will
pay you for your shares.
When does settlement happen?
Each exchange has its own settlement period within which the
entire process of delivery and purchase should be completed.
Typically, the process is completed in a week to ten days time.
What is an index?
An index is an indicator of how the stock market is doing on the
whole. An index comprises a basket of stocks. The collective value
of these stocks on a given date is taken and given a score of 100.
From that day onwards the value of these stocks is tracked and its
score relative to 100 is computed.
The stocks selected are based upon a number of parameters that
the creators of the index decide. Equally, the valuation is also
done using complex mathematical principles. Periodically, the list
of shares used for computing the index also undergoes a change.
These changes are decided by the index creators based on the
parameters they have set for the stocks for inclusion.
An index shows whether the stock market, on the whole, is
appreciating in value or declining in value.
The movement of the index itself is no indicator for individual
shares. You may find that a particular share may be increasing in
its price even when the index is down and vice versa. The index is
only an indicator of the general trend.
The common indexes in Indian stock markets are the SENSEX, the
index for stocks listed on the Bombay Stock Exchange and Nifty, the
index for stocks listed on the National Stock Exchange.
Which shares to buy and sell?
Buying and selling shares involve a fair amount of research. These
involve assessing how well the company is managed, how the company
is performing compared to others in the industry, how the industry
itself is doing, the financial performance of the company, the
interest of the lay public in the company, etc.
It is best that you consult an expert in such analysis before you
decided to buy or sell a particular share. Such investment advice is
also provided by your share brokers.
How long to hold on to shares?
Historically, it has been demonstrated that investments in equities
offer the best long term returns and hence the highest opportunity
to enhance your capital. Thus the longer you stay invested in the
equity markets, the better will be your returns.
However, this holds true for the equity market as a whole, and
not necessarily for shares of individual companies. The value of
shares of specific companies are subject to various pulls and
pressures which could cause a share that is highly valued one day,
to drop its value overnight, as a result of unpredictable factors
ranging from Government policy to acts of omission and commission by
the management of the company.
It is advisable that you periodically, at least once in a year,
evaluate your holdings and decide whether to continue with them or
change them.
However, one very important thumb rule which the professionals
offer is never to get emotional about a share. In other words do not
hold on to the share of a company whose value is declining, just
because its history has been very good!
Are investments in shares safe?
Any investment is prone to a certain degree of risk. Shares, as a
class of investment have the highest element of risk. The only
services more risky are lotteries and other games of chance.
These risks arise as a result of factors described earlier.
However, today there is strong legislation, procedures and a
regulatory authority - Securities Exchange Board of India (SEBI),
which to a large extent prevent risk as a result of misleading the
investing public.
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