What is a stock ?
A stock is a partial ownership in a company or an industry, with rights to share in its profits. When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, which is called the ‘dividend‘.
How do you make profits with stocks ?
But many traders make real profit in stocks using the market price of the stocks. Stocks are traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. ‘Market price‘ of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the ‘face value’ of the stock, depending on the company’s performance and prospects, investors’ interests in the company and a lot of other factors.
Market price of a stock keeps varying as traders trade the stock in the market. Traders often make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as ‘long‘ positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. Thiis is referred to as ‘short‘ positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders.
What is the Stock Market ?
Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders.
In India the most famous exchanges or markets are the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock (NYSE), NASDAQ, London Stock Exchange, Hong Kong Stock Exchange etc..
Any market can be thought of with two functionalities:
Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium for the face value of the shares, which will be distributed to the investors. This is called the Initial Public Offer or the IPO.
Secondary Market : After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stockmarket. Here the people can buy the shares at a current price as determined by other investors in the market.
What is the Demat Account ?
Like opening a bank account for doing your personal financial transactions, you have to open a Demat account to trade in the stock market. Demat account refers to Dematerialized account. This account helps you to buy and sell stocks without the need for physical paper shares.
A Demat Account is a must for trading the stocks these days. To open a demat account, you should select a Depository Participant (DP). These days most of the banks are also DPs. So you can contact any of the DPs with your identity, address proof and PAN documents for opening a demat account for a prescribed fee by the DP. The registered DPs are also listed in NSDL (http://www.nsdl.co.in/) and CDSL (http://www.cdslindia.com/) websites.
Who is the Stock Broker ?
Stock Brokers are members of the Stock Exchanges. Only these members can conduct transactions in the exchange on behalf of the individuals and companies. So if you want to buy or sell shares in the exchange, you have to contact a stock broker for doing so. This normally requires the individuals to open an account with the Stock Broker. So the individual becomes a client for the stock broker.
Once the client wishes to buy a stock, the broker would place the order in the stock exchange on behalf of the client. When the transaction is done, the broker places the price to the client. The client pays for the stocks he bought and the broker transfers the stocks into the demat account of the client by following the transaction and settlement procedures.
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