The Indian stock market is a bustling hub of financial activity where innumerable transactions take place each day. Key players, including retail investors, institutional investors, traders, and speculators, interact within this vast ecosystem, primarily through the buying and selling of shares. Understanding this process is essential for anyone considering entering the financial markets.
Understanding Shares
Shares, also known as equities, represent a unit of ownership in a company. When you purchase shares, you essentially buy a stake in that company, granting you a claim to a portion of its assets and earnings. Companies issue shares to raise capital, which can be utilised for growth, expansion, or other business ventures.
The buying and selling of shares happen on the stock exchange, a regulated marketplace where securities are traded. In India, the two major stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Setting Up to Trade Shares
Before you begin trading shares, there are a few prerequisites. Firstly, you need a trading account with a brokerage firm and a Demat account, where your shares will be held in electronic form. Brokerage firms in India offer online trading platforms that facilitate seamless buying and selling of shares. A Permanent Account Number (PAN) issued by the Income Tax Department is mandatory for opening these accounts.
The Buying Process
Identifying the Share
The decision to buy shares involves careful analysis of market trends, company performance, and financial metrics. Investors can use various methodologies such as fundamental analysis, technical analysis, or a combination of both to identify potential investments.
Placing an Order
Once you have identified which shares to buy, you place an order through your trading platform. You can choose between a market order, which buys shares at the current market price, or a limit order, where you specify the price you are willing to pay.
Order Execution
The stock exchange matches buyers with sellers. When your order is matched with a seller’s order, the transaction is executed.
Trade Settlement
In India, the settlement of share transactions occurs on a T+2 basis, meaning the transaction is settled two business days after the trade date. The shares are credited to your Demat account post-settlement.
Selling Shares
The process of selling shares mirrors that of buying, with the added purpose of cashing in on an investment or cutting losses.
Placing a Sell Order
When you decide to sell shares, you place a sell order through your trading platform. Similar to buying, you can opt for a market order or a limit order.
Matching and Execution
The exchange matches buy orders with your sell order, completing the transaction when a match is found.
Settlement
The settlement process will debit your Demat account for the shares sold, and the proceeds from the sale will be credited to your trading account two days post-execution.
Split of Shares
A split of shares is a corporate action taken by companies to make their shares more affordable and increase liquidity. During a split, a company increases the number of its shares by dividing each existing share into multiple new shares. However, this does not change the market capitalisation of the company. For example, a 1:2 stock split would mean each share is split into two, effectively halving the price per share but doubling the number of shares held by investors.
Understanding Calculations in INR
In stock trading, calculations are pivotal both for decision-making and assessing potential returns. Let’s break down these calculations using Indian Rupees (INR).
Calculating Returns
If you bought 100 shares of a company at ₹500 each, your initial investment is ₹50,000. If the share price rises to ₹600, your total value becomes ₹60,000.
Formula:
Profit = (Number of shares * Selling price per share) – (Number of shares * Buying price per share)
Example:
Profit = (100 * 600) – (100 * 500)
Profit = 60,000 – 50,000
Profit = ₹10,000
Impact of a Stock Split
Consider the scenario where you own 100 shares of a company with a current price of ₹200 per share, valued at ₹20,000 in total. If the company announces a 2-for-1 stock split, you would now own 200 shares, each valued at ₹100, maintaining the total investment value of ₹20,000.
This recalibration ensures the share’s accessibility to a broader pool of investors while not impacting your actual holdings or investment value.
Transaction Costs and Taxes
Investors must take into account various transaction costs and taxes, including brokerage fees, Securities Transaction Tax (STT), Goods and Services Tax (GST) on brokerage, stamp duty, and any applicable statutory levies.
Example:
If the brokerage fee is 0.5% per transaction, a purchase of ₹10,000 worth of shares will incur a brokerage cost of:
Brokerage = 0.5% of ₹10,000 = ₹50
Risks Associated
Buying and selling shares come with inherent risks, including market volatility, economic downturns, and currency fluctuations. Historical data suggests market trends, but they cannot guarantee future performance.
Disclaimer
Trading in the Indian stock market involves financial risks. Investors must conduct thorough research and analysis of all associated risks and rewards. Gains and losses can occur, and a safety net, investment strategy, or expert advice might not always yield the desired results. An informed decision relies on evaluating current market conditions, company fundamentals, and personal financial goals.
Conclusion
The process of buying and selling shares in the stock market, while systematic, requires insight and understanding. Market dynamics, corporate actions like the split of shares, and associated costs all play a role in determining investment outcomes. While the stock market is a popular choice for investment, due diligence and awareness of market intricacies are imperative for any potential investor navigating the vibrant landscape of India’s financial markets.
