The share market is one of the best places for creating wealth. Every day people try their hand in hopes of becoming the next Jhunjhunwala or Damani.
If the share market interests you, a prudent things to do is to understand the basics. You need to understand terms such as trading account, Demat Account, types of brokers, etc.
Today we take a look at the basics of the share market.
- Trading account
When a company goes public and lists itself on the stock exchange, investors can trade (buy and sell) the shares. Before the use of computers and electronic format, traders would shout out loud the prices and verbal trading would take place.
Ever since the stock exchanges adopted the electronic system, all trades take place through a computer which verifies the trade before approving it. You need an account for the buying and selling these shares. The account is a trading account.
- Demat Account
Demat stands for dematerialized account. This account is mandatory for share trading in India. The same way bank accounts store your money, a Demat Account stores your shares, securities, bonds, mutual funds, Exchange-Traded Funds in electronic format.
You need a Depository Participant (DP) to open a Demat Account. India’s two biggest depositories – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) list qualified DPs from which you can choose one.
- Stock Broker
A stock broker is an individual or organisation who trades on behalf of clients in the share market. The stock broker is a registered member of the exchange and is thus permitted to trade on it.
There are two types of stock brokers:
- Full-Service brokers – The traditional ones, these brokers offer for a commission; trading (stocks, currency, and commodities), research, advice, portfolio management, asset management, and tax assessment under one umbrella. They also offer investments in IPOs, Forex, Mutual Funds, and Exchange-Traded Funds.
- Discount Brokers – They are the new age brokers. For a lower commission, discount brokers offer no-frills brokerage. They provide high-speed trading platforms. These are do-it-yourself platforms where you trade all by yourself.
When a company goes public, its capital is divided into shares. Each share forms a unit of ownership of the company. When a company wants to raise capital, these shares go on sale.
There are two types of shares:
- Equity Shares – These shareholders apart from receiving dividends enjoy voting power in major company decisions such as mergers and acquisitions.
- Preference Shares – These shareholders do not enjoy voting rights but have the benefit of enjoying the dividend distribution first. If the company shuts down, they have the right to the capital before equity shareholders.
- Bull/Bear Markets
When people discuss the share markets, these two terms are often inserted into the discussion.
- Bull Market – A bull market see rising prices. Market confidence is high and investors are optimistic. The volume of trades increase during a bull market and more companies go public during this period.
- Bear Market – Bear Market the opposite of a bull market. It’s a period when prices fall and there is widespread pessimism in the market. Investors are tentative in their trading and trading volume is low.
These are the five most basic terms of the share market and you should understand everything about them before you begin your trading journey.