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Beginners guide to share markets

In market parlance, words like share market and stock market are used interchangeably. The stock exchange is a place where stocks are bought and sold. Some of the leading stock exchanges in the world are New York Stock Exchange, NASDAQ, London Stock Exchange, Deutsche Boerse, National Stock Exchange, Bombay Stock Exchange, Singapore Exchange etc. Here is what you need to know about share markets.

What do we understand by share / stock?

It represents proportionate ownership of the company. When a company is formed it issues shares to its subscribers. When the company gets listed, these shares start trading in the secondary market and can be bought and sold. If the share capital of XYZ Ltd. is 10,000 shares and if you own 10 shares then you have a 0.10% ownership share in the company.

Is the share market like any other market?

Like any market the share market is not a physical place but the coming together of buyers and sellers. The BSE originally started under a tree more than a century ago. Today all trades are conducted on screens with the exchange handling the administration and risk management.

Who is eligible to buy and sell on the share market?

Only authorized brokers / institutions are allowed to put trades on the share market. As an individual client, you will have to open a trading account with a registered broker before buying and selling in the share market.

What if the buyer or seller defaults?

This is called counterparty risk and was a major issue in the old days. Nowadays exchanges have created a Trade Guarantee Fund (TGF). With this fund, the clearing corporation (CC) of the exchange guarantees each trade. That means for every trade the CC is the counterparty. When X buys RIL and Y sells RIL, then actually X buys from the CC and Y sells to the CC.

What are the IPO market and the secondary market?

When a company wants to raise money to fund its expansion or diversification, it comes out with an Initial Public Offer (IPO). In India shares get listed within a period of 7-10 days from the closure of the IPO. Then it starts trading in the secondary markets.

Is anyone eligible to buy and sell shares in the share market?

The only condition is that you have to be an adult and you must not be disqualified, for any reason, from entering into a contract. You are required to undergo basic KYC (Know Your Client) verification after which you can start buying and selling shares through your broker.

Does everybody come to the share market only to invest?

That is not necessary! There are speculators who buy or sell shares with a view to reversing the position and making a quick profit. There are also arbitrageurs who play on pricing inefficiencies. Then there are also investors who are looking at long term ownership in equities. All of them together constitute the share market.

Which securities can I trade in the share market?

You can trade a variety of products in the share market including equities, futures, options, Exchange Traded Funds (ETFs), bonds, RBI gold bonds, interest rate futures etc.

What are the steps to participate in the share market?

Start off by opening a trading account and demat account with your broker. You will have to do some basic documentation and then link your bank account for transacting. You are ready for your journey in the share markets!

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