Creating wealth is one thing and managing as well as increasing the existing one is another. With this thought, we start thinking about various options of investments available to us in today’s world.
Very few people are satisfied with the rate of return generated by conventional methods of investments like a fixed deposit, a recurring deposit, gold, a mutual fund etc. Investment in stocks or shares has the potential of generating much higher returns in a comparatively small amount of time.
It has made people millionaires or billionaires in a span of a few years, but if not managed properly, has caused many bankruptcies as well.
Before getting to know how to buy shares, let us try to understand the brief history of stocks and the journey from the beginning till today. This will provide a concise summary of the transition of stock markets into the complicated and complex systems that exist today in India.
Historical Buy Shares Process
Before trying to learn how to buy shares, it is good to know a little about the history of the process.
Shares or stocks are a representation of one’s ownership interest in the capital of the company. History of buying and selling of stocks has been centuries old in India. The beginning of the stock market can be dated back to the 18th century when the East India Company started trading in loan securities.
Gradually, the informal group of traders that used to trade in stocks formed a formal body, The Bombay Stock Exchange in the year 1875. The BSE is the oldest stock exchange in India. For a very long time, buying stocks used to mean owning physical share certificates issued by the companies.
Let us understand how traders used to buy shares at that time.
For buying shares being issued in Initial Public Offering (IPO), investors were required to form application forms and send them along with cheques to the brokers.
After some days, the allotment of physical share certificates used to reach applicants. The whole procedure used to take many months. Once the shares had reached the common public, buying and selling of shares among those shareholders used to take place through transfer deeds. The names of the shareholders along with their signatures used to change with every transaction.
All the steps of the process used to be conducted offline.
Then came the mandatory law of dematerialization as the physical process of transfer of shares was quite cumbersome and used to take long processing time. As per the rules and regulations in the Indian stock markets, it became necessary for all the shareholders to get their physical share certificates converted into demat form.
Shareholders were required to surrender their shares to the issuing company and inform them about their depository participant (DP). After the completion of this step, the physical share certificates used to be cancelled by the issuing company and the shareholdings of investors were registered in the name of their DP informing it about the same.
After this, the stocks owned by the shareholders got to be held in a demat account.
The 2 types of depository participants in India are the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) which are registered with the Indian market regulator, the Securities Exchange Board of India (SEBI).
A depository is a place where the financial securities are held in demat form. And a depository participant is the intermediary agent between the depositories and the investors.
In the year 1996, trading started to take place on the National Stock Exchange (NSE) as well.
How to Buy Shares in the Stock Market?
There are 2 major stock exchanges in India for the trading of shares, The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). And for making transactions, a stockbroker is needed.
So, the first step is to search for a broker that suits your needs. A broker is an intermediary company or online agency acting between individual investors and stockbroking firms.
Some brokers provide other services like research, investment products, financial advice, etc. and charge accordingly. After carefully evaluating all the services provided by different brokers and their fee, one should decide upon their broker.
It is mandatory for a broker to be a member of SEBI. There are two mechanisms to understand how to buy shares:
Buy Shares Offline
When one wants to buy shares of a particular company, clear instructions need to placed with the broker either telephonically or by being in the broker’s office. The instructions must include the name of the share, the price at which one is willing to buy shares, the number of shares, etc. The broker then places the buy order on investors’ behalf.
Offline brokers charge a heavier fee as compared to online ways of buying shares. Moreover, the whole process is more time-consuming.
Buy Shares Online
Buying shares has been made very easy through online means.
Transfer of funds, placing orders and buying and selling of shares can be done just by a few clicks on one’s computer and even mobile phones.
Many trading apps are available where one can open an account with brokers and access the trading platform on their mobile phones, tabs, laptops, etc.
The brokerages and fee charged by online brokers are very less in comparison to the offline method of buying and selling of shares.
How to Buy shares through Demat and Trading Accounts
Demat account is an account which acts as a bank for storing an investor’s shares in electronic form.
A demat account is a first and foremost requirement of holding stocks and making investments.
A trading account is a link between demat and bank account of an investor. It is used for buying and selling of shares. After understanding how to buy shares, these accounts are a must for practical application.
Types of demat and trading accounts have been covered under another article. In order to open a demat account, the following things need to be submitted to the broker:
Having an online banking account is recommended for people who are opening their demat and trading accounts. Funds from the banking account to demat account and vice versa could be done instantaneously.
How to Buy Shares Actual Procedure
Now, let us focus on the exact procedure of buying shares.
Research – The first and foremost thing to remember about investing in shares is that the research should be thorough on the basis of which shares should be selected. One should know the basics of fundamental and technical analysis.
The fundamental analysis covers knowledge about financial, microeconomic and macroeconomic factors affecting the value of stocks.
On the other hand, the technical analysis covers knowledge about the prediction of stock prices with the help of analysis of previous trends in volumes and prices using charts and technical indicators. All the details of these basics have been covered under other articles.
Using the broker services – After doing the research and opening a demat account with a registered broker, then comes the process of actually placing orders.
This can be done in 2 ways, offline and online. For offline buying of shares, one can give clear instructions and details to the broker either telephonically or in person.
For online services, one needs to log into the account and then place orders.
The types of orders have been discussed below:
1. Market Order – In this type of order, the order is executed immediately.
So, one can be sure of getting the order placed but not exactly sure about the precise price at which the shares will be bought or sold. One can not be sure that the last traded price would be the price at which his/her shares will be bought or sold.
2. Limit Order – In this type of order, one has to mention the exact price at which he/she wants to buy/sell shares. The order will be executed only at that price or better.
There is no guarantee that the desired price will be reached on that day.
3. Stop Order – This is also called stop-loss order. In this type of order, one has to specify a price after reaching which the order will be executed.
Once the specified price is reached, the order becomes a market order.
4. Buy Stop Order – In this type of order, the specified price is set above the current market price of the stock.
This order is initiated in order to limit a loss when an investor has a long position. In case, an investor has a short position, then buy stop order is used for protecting one’s profits. Similarly, in a sell stop order, the specified price is set below the current market price of the stock.
This order also protects one from unlimited losses and protection of profits.
The normal trading time of NSE and BSE is Monday to Friday, 9:15 am to 3:30 pm.
Indian stock exchanges follow T + 2 settlement. T + 2 stands for trade date + 2 days.
For example, if Mr A buys shares of a particular company on Monday, those shares will start reflecting in his account on Wednesday.
How to Buy Shares before Market Opens
Pre Market Orders – In order to reduce volatility at the time of opening of the market every day, the concept of the pre-open session was introduced which occurs from 9 am to 9: 15 am.
In the first 8 minutes of this 15-minute window, limit or market orders for equity are collected. They are entered, modified and cancelled. One can not place an order in the pre-market session after 9:08 am.
In the next 4 minutes, i.e. from 9:08 am to 9:12 am, orders placed are matched and traded. The last 3 minutes are a buffer period.
How to Buy Shares After Market Closes
Post-market orders – They are collected during the post-market session that lasts from 3:40 pm to 4:00 pm.
During this period, investors can place buy or sell orders only in equity. The market orders placed during this window are done at the closing price of the stock.
This session is generally not very active.
How to Buy Shares After the Post Market Session and Before Pre Market Session
Aftermarket orders – Some brokers give this option to their clients. The time duration for which these orders can be placed are as follows:
NSE – 3:45 pm – 8:57 am
BSE – 3:45 pm – 8:59 am for equity segment & 3:45 pm – 9:10 am for Futures & Options Segment
Two Perspectives of Buying Shares
On the basis of duration of time required to earn returns on investments, investors decide whether to invest in shares for short term or long term.
Short Term Investments – These investments are done when investors keep in mind the upcoming good results or favourable news for the company. Short term investments are even made solely on the basis of technical analysis of stocks.
These investments are generally squared off within some days or months.
Long Term Investments – These investments are based on fundamental analysis of companies or the future of that particular sector. They generally last longer than a year and are squared off within some years.
Financials of companies for the last few years, undervaluation or overvaluation of stocks, etc. are some of the factors that are considered before deciding on investing in shares for longer durations of time.
In order to understand how to buy shares and generate returns by trading in them, it is imperative to know that a demat and trading account is a must and how the process works.
There are 2 mechanisms to buy shares, offline and online.
The online mechanism is hassle-free and more convenient and cheaper in comparison with the offline method. The question of how to buy shares can be answered through the knowledge about different kinds of orders that can be placed with brokers.
After doing thorough research, an investor can buy shares for short term or long terms gains as per one’s preferences.
In case you are looking to start investing in the stock market and buy/sell shares, let us assist you in taking the next steps forward.