How Does Share Market Work?

A stock exchange is an electronic platform where financial instruments such as shares and derivatives are traded. All the market participants, which include issuing companies, brokers, traders, investors, and distributors, have to be registered with the stock exchange and the Securities and Exchange Board of India (SEBI) to conduct these trades. The entire process of share trading is regulated by the (SEBI), which formulates the rule book of conduct for these trades. Explained below are some important share market basics that you must understand if you are just starting as an investor.

Functioning of The Share Market

It is imperative for you to understand how the share market works.

If you want to purchase a stock, you need to place your order with the broker. The broker passes on your buy order to the exchange, which searches a sell order for the same stock to match the buy order. Once a seller and a buyer are fixed, a price is finally agreed upon. After this, the exchange informs your broker that your order has been confirmed. This complete trading process is executed electronically as opposed to being done manually in the yesteryears.

In the meantime, the stock exchange also performs an authentication check and confirms details of the buyer and seller to ensure that there is no default. After the authentication, the exchange facilitates the actual transfer of the ownership of those shares. This process is known as settlement and it takes two working days.

How to Invest in Shares

Now that you have a complete understanding of how the share market works, you would like to proceed further and know how to invest in share market in India. Here are the main steps for the same :

  1. Just like any other big investment, purchase of shares also needs to be a well-thought decision. You should take into consideration your future financial needs and risk appetite before taking a decision to invest in shares. The intention should be capital building over the long-term and not just short-term profits. If you buy and sell shares over the short-term, it could attract capital gains tax. Therefore, as a first step, you need to plan your finances well, so that you do not have to sell shares over a short-term to fulfil your sudden cash requirements.

  2. Now that you have understood your investment profile, you need to research well and decide upon a thorough investment strategy based on your financial goals, risk appetite, and affordability. If you have a longer time horizon, you can invest in large-cap, mid-cap, or small-cap stocks if you have the risk appetite to do so. If you want a regular income, you may choose to invest in dividend yielding stocks.

  3. There is no room for impulsive decisions in the stock market. You need to wait for the opportune time before initiating any buy or sell trade. This way you will be able to maximize your profits. No matter how well you have researched and found your stock, you need to buy it at the lowest price. Similarly, while exiting an investment, the stock needs to have achieved a proper price in order to gain maximum profit on the sale.

  4. You can conduct your trade online or through a phone call to a broker. You must also insist that the broker confirms all the details once the order is executed.

  5. After you have purchased quite a few stocks, you form a portfolio, which needs to be monitored regularly. Make sure you put in your efforts to research about the companies in your portfolio; be updated about the developments in the economy and the world. Whenever you sense some adverse situation, you can take preventive measures beforehand, without having the need to panic. Stock prices are bound to rise or fall depending on the frequency in which they are bought and sold. If you want to reap the maximum profit from your investments, you must keep patience and look at things from a long-term perspective.

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