Team CrawFin / Harshal Jawale, CFPCM
Financial Markets are majorly comprised of Stock market, Commodities i.e. Bullion and Agri, Currencies etc. There are other luxurious forms of financial markets including investments into Arts, Wines, PE/VC funding into newly born companies, big real estate projects etc. I will start with well known form of investment i.e. stock market in this article.
Stock Market
Share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company and can be purchased from the stock market.
A stock market allows the trading of company stock and derivatives of company security at an agreed price. It can be done privately called as private placement or publicly at on stock exchange.
Participant in this trade can be simple retail investor, corporate, financial Institution, hedge fund or any high value strategic investor. Trades carry out in the physical form or electronically.
What else can be traded?
Apart from company securities; commodities & currencies can also be traded on global platform.
Importance of stock market, trader and exchange
Listing of securities is the major source of fund raising for the company promoters. It allows them to dilute the stake in the organization and thereby gather funds for expansion plans. Over the short-term stocks can be battered by events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally vague. However, these non-rational reactions are opportunities to make money.
Exchange does clearing & settlement of the securities, meaning they are responsible to collect and deliver the shares.
What is trade?
There are several types of stock trade; intraday, delivery based, auction based etc. Buy today sell tomorrow, short sell are sub categories of the types that we discussed above.
Intraday –
In this type one can buy shares and sell it on the same day. Upside will provide the buyer profit here; downside will take him into losses. If one anticipates rise in the stock price because of any reason he/she can buy the shares within this category.
On the contrary if one anticipates that the share price will fall in one day; he can sell the share first and then buy them later in the same day. Note in this case buyer actually borrows the share from his broker and it is mandatory for him to buy them back within the day. This mechanism is called as short sell. Speculators generally use this type to make money on news based events. Cost of this trade ranges from 2-10 paise / 100 rupees.
Delivery based –
It is typically used by investing community to buy in shares and then sell them on any future date. Total amount of investment is taken out from the buyers account by the buyer’s broker and given to the seller’s broker, who in turn deposits it in the seller’s account.
There is no limit to which the buyer can hold the shares in his account. Cost of this trade ranges from 25 – 75 paise / 100 rupees. BSE takes the settlement charges which are to be recovered by the broker. However there is no limit to number of shares that a person can sell at a time.
How to trade?
For buying/selling of a security one has to have Demat account. Though person can have shares in both electronic and physical format, it is always desirable to have it in electronic format as physical share carries risk of getting stolen or even forged. Demat account should be opened with the recognized Depository Participant (DP). List of recognized DP’s can be obtained from the website of CDSL and NSDL.
A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients. A DP will just give you an account to hold those shares. When one buys share, share goes into his DP account. Apart from this one also has trading account with the broker. In short when one opens a Demat account he actually opens one trading account and one DP account. Where,
Trading account – when delivery of shares not required and only difference amount is transacted. Client has to deposit investment amount to his own trading account with broker to use for trade. This is because trading members are not allowed to use client’s bank saving account.
DP Account – when delivery of shares is required. Shares are deposited in this account till account owners opts to sell them.
Broker/ DP/ Clearing & Settlement – practically in majority cases they are all handled by broker in India.
Let us illustrate how things happen
Intraday Transaction
Sonia buys 10 shares of TCS on 3rd March at Rs 1200 each. Order gets executed at 11 am. Before end of trade Sonia sells full 10 shares of Infosys at Rs 1220 each. In this case Broker deposits complete (Rs 200 – Transaction cost) to her trading account as a profit.
Delivery Based Transaction
Piyush buys 5 shares of Wipro on 3rd May at Rs 450 each, and keeps them for delivery. Clearing & Settlement member of Demat withdraws Rs 2250 from Piyush’s trading account and deposits 5 shares of TCS into DP account. Delivery of shares as a rule should be done on T+2 basis
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