Investment in Stock market – in Layman’s Language

Seeing the number of comments I have received for my Earlier two blogs, I have become quite sure that no one is going to visit my blog and this has encouraged me to discuss about a topic I am not quite familiar with … Investment in Stock market…….so here goes… My attempt of explaining something which is beyond my Imagination and reach.

If you have 5000 bucks, what do you do.. Will you invest it in bank deposit..... I would say that’s the safest thing to do provided that you are investing in a govt bank… The next best thing would be Postal savings account, NSC and Mutual Funds…… if you are a little greedy and have a flare for finance in your mind and of course the time to research and do analysis then you should go for share market……

So what is Share Market…It’s an Exchange board where the shares of various companies are bought and sold…. Its looks pretty simple na… now the question is how should one buy and sell shares, from whom, what companies should we invest….. Of these three questions, third one is the most difficult to handle, we will try to maximize the possibilities of finding a solution to that question at the end of this discussion.

To trade in stock market one should have a DP account and a Trading account, A DP account is nothing but savings account that you maintain in your banks, the only difference is instead of money to your credit, there will be shares to your credit in DP account. Trading account is Mandatory to be in stock market….The money you give/receive by way of buying/selling of shares must be maintained in the trading account…. Nowadays people prefer online trading … therefore go to your nearest brokerage house and open an Online Trading account and DP Account. In the Trading account you are required to maintain a specific balance, it’s like a surety that you will pay the money for the shares you have bought in the market and there is a specific limit for trading in shares. For buying and selling of shares in large quantities you need to maintain a Hugh balance in your trading account…

Now after opening the Online account….. You need a have basic knowledge about the share market to deal with shares…. There are two kinds of market – Primary Market and secondary market….. Primary Market is the IPO market… IPO is Initial Public offer by a company to the public which is not listed in the stock exchange…. The company advertises in various newspapers and TV channels about the issue, number of shares issues and the value of the shares offered, usually the price will always be range bound with respect to the PE Ratio of the company.

Depending upon the number of bids received from the public, the company will allocate shares to the retail investors and the shares will get listed in the stock exchange after 20 days of closure of the issue which could be at a premium or at a discount. For example if the issue price band is between 60-72 RS, the company will generally fix the price of the share after the closure of the issue and it will usually be at the upper price band. Then if the shares get listed on the BSE and the NSE (Bombay stock exchange and National stock exchange are the two stock exchanges in which people trade in equities) at 84 RS, then it got listed at a premium of 12 RS, therefore if you got 100 shares allotted and if you sell the shares immediately on listing you will get a profit of 100*12 (84-72) = 1200RS. Cool na….

This is primary market… usually I would say it’s the safest place to invest in stock market, of course please do go by the company reputation and market capitalization and brand name, don’t go for every IPO. Ok now how to apply for IPO and how much one can invest. In the advertisement for Initial public offer… the company will mention the minimum number of shares one can apply and in what lots to apply. For example in the above example of price band of 60-72 RS, the company might say that the minimum shares to be applied will be 100 shares and further in lots of 100 shares, so for retail investors the maximum limit is 1 Lakh RS, Retail investors will mostly apply at the upper price band always ( 72 RS) , as there is a likely wood of getting more shares , You can apply to a maximum of 1000 shares and a minimum of 100 shares and further in lots of 100, pls note that above 50K you have to attach a PAN card Xerox along with the application. Application can be found in any of the stock broker’s office. You have to fill out the form the number of shares applied and along with the Cheque have to submit the application to the broker.

Once the application form is submitted (before the closure of the issue), the company will take 15 days to allot shares to you, depending upon the number of shares you have applied, shares will be allocated to you in your DP account, of course there could cases where you have not been allotted any shares…. Few trail runs in the primary market will make you an expert and in future IPO’s you will be able to figure out what is the exact number of shares to be applied to get shares allocated in your name. After 20 days of the closure of the issue, the shares will get listed in BSE and in NSE....you can either sell it on listing for a meager profit.. or you can keep track of the share for sometime and sell it at a higher price… this all depends on the name of the company and its market capitalization.

Trading can be of two types – You can do Intra day trading or else you can go for delivery based trading of shares in your account. Intra day is buying and selling of shares in the same day itself and delivery is you do only one transaction on a day i.e buying of shares and take delivery of it in your DP account, the shares will get credited to your account two days from the date you buy the shares.

Now for secondary market….. Once shares are listed in both the exchanges, you can trade in the shares; you can buy, sell and short sell shares. I mentioned earlier that the latest trend is to have an online account. After you open and online account and have sufficient cash in your trading account…. You can start trading in stock market. Buying of shares is to buy any share in the market, to sell shares you will need to have those shares in your DP account, for short sell you need not have the shares in your DP account, you can sell shares, but you will need to cover that up before the end of the day, Generally people go for short sell if you have a feeling that the share price will come down at the end of the day… so for example a share when the market got opened was trading at 220 RS and you know that its going to come down in the latter part of the day.. you can short sell the share at 220 RS and in the latter part of the day as you predicted the share value comes down to 206 RS , then buy it back again and you can njoy a decent profit of 14 RS per share.

Now for the climax, what companies should we pick and choose and trade in share market. Analyze the market first, before you invest in a company, look at its past records, results, dividends, acquisitions, mergers, goodwill etc, wait for the right time to enter… watch the stock for atleast 6 months before you enter the stock….see whether any news triggers boost the value of the shares, if you get any price sensitive information about the company (i.e. to be short- Trade secrets) that would be of great use.

There is also something called options and futures, which I am not going to discuss now, as people have to first get the knowledge about equities and once done they can have a go at this topic. All said and done… Its not easy to be in market, 9 out of 10 people will come out of market with a loss and only one person will succeed and that one person would have complete knowledge about the market. You need to watch the market, its ups and downs and after 6 months start trading… see how it goes…..

I am discussing all this for people to know about what’s happening in stock market, my intention is not to get you all in stock market bcoz stock market is only for people who are willing to dedicate certain amount of time and their sleep from their normal life and njoy the benefits… Not for all… Think well before you invest.