How does stock trading work?

What is Stock Trading?
Stock Trading includes buying and selling of shares of any certain company in which you want to trade-in. If you have certain shares of any company it means you have a portion of ownership in that company. Additionally, a professional or any individual who trades on the stock exchange on behalf of any financial firm is known as a stock trader. These traders are classified into three main categories are Intuitive traders, uninformed traders, and informed traders. Moreover, individual stock trading and institutional stock trading are two main types of stock trading.
Stock Markets in India
There are two main exchanges in India are:
BSE (Bombay Stock Exchange)
NSE (National Stock Exchange)
Types of share markets in India are:
Primary Share Market: A market where businesses and companies register themselves. From here the companies enter the share market to raise funds and capital by offering their stocks to the people. When a company registers itself in this market, they offer to sell their shares in the market for the public for the first time. This process of offering shares to the public first time is called Initial Public Offering (IPO).
Secondary Share Market: The actual trading occurs in the secondary market where the shares of the company are present. After IPO is out traders can start with the trading that is selling and purchasing on the prices that are totally governed by market movements.
How Can you trade in Stock Market?
In earlier times you needed to visit the broker personally and instruct them about the transaction you want to place. Now everything is digital and you can do the trading through:
Mobile-based Apps
Terminal Software
Web trading applications
How to Evaluate a Stock before Investing?
To evaluate a stock you can do it through:
Fundamental Analysis: Via fundamental analysis, you can study key factors like GP Margin, Debt-to-Equity Ratio, Returns on Equity, Earnings Yield, Interest Cover Ratio, Market cap, etc. All of these can provide great clarity on stock prices.
Technical Analysis: Technical analysis consists of a minute examination of the market if it is for Intraday trading. Additionally, you can analyze factors like RSI (Regarding Strenght Index) and Moving Average. For technical analysis, you can use indicators, charts, patterns, reports, and trends. All of these will help to analyze the movement of a stock in the market.
How Market Returns are calculated?
Two main methodologies are used to calculate market returns. Those are:
Compounded Annual Growth Methodology: The returns are calculated after taking the time period into account. This method is preferred by market experts.
Absolute returns Methodology: Many variables like selling price, buying price, returns, and return percentage are used for calculating returns.
How does Stock Trading Work in India?
Once any company is listed in the stock exchanges, the company can then issue stock that can be traded in the secondary market to cut losses or make profits. The buying and selling that takes place of stocks that are listed on the stock exchange are done by brokerage firms or stockbrokers. These stockbrokers act as an intermediary between investors and the stock exchange. Additionally, your broker will pass the order for buy of the shares to the exchange. At that time the exchange will find a sell order for the same share for you.
Once a buyer and seller are found and fixed at an agreed price they finalize the transaction. Additionally, the stock exchange will communicate to your broker that the order has been confirmed. Later this message is passed on to you by your broker who acts as a mediator. In the meantime, the stock exchange will confirm the buyer’s and seller’s detail to ensure that both the party does not default.
This facilitates the actual transfer of ownership of those shares from the seller to the buyer. This process of settling the transaction by the actual transfer of ownership is called the settlement cycle. Moreover, the settlement of the trade should be done in T+2 days.
Pricing mechanism of the Stock market in India
The key to making money in the stock market is to learn how to properly value the company. If you know how to value a company you are having enough knowledge to earn great profits. You should know the share price of the company and how is it priced in the Indian economy. Let’s understand how stocks are priced with a simple example mentioned below:
Say you purchase a book of Rs.100. On the next day itself, one of your friends is impressed by the book and offers you Rs.150 to sell it to him. Now, what's the price of the notebook? It's Rs.150.You have the opportunity to encash Rs.150 by selling the book to him. You might reject the offer thinking the book is more valuable and your other friends will bid to pay more for the book.
After that day your other three friends offer Rs.250, Rs.300 and Rs.315 to you for the book respectively. Now, what's the price of the notebook? It's Rs.315 which is the highest bid on the book. You have an idea that the book you possess has a greater value and you reject these offers hoping for better and higher offers tomorrow.
Now on the next day, a student brings the much better and shinier book with better quality pages. Now all the friends are attracted to buy that book and this leads to a dip in the value of your book. Now only a few people are willing to buy your book at the last quoted price that is Rs.315.
So that’s how demand and supply affect the price of any share in the stock market.
When Demand is greater than supply, price rises.
When Supply is greater than demand, price falls.
Conclusion
In conclusion, we discussed about the meaning of stock trading and how you can trade in the market. You can evaluate the stock before investing in two ways which are: Technical Analysis and Fundamental Analysis. Make decisions wisely and trade nicely.