InvestorQ : I have just started investing in equities but I still find most of the terms and jargons and processes of the stock market very confusing. Can you help me understand what stock market investing means for beginners?
Katherine Gonsalves made post

I have just started investing in equities but I still find most of the terms and jargons and processes of the stock market very confusing. Can you help me understand what stock market investing means for beginners?

Mahima Roy answered.
2 years ago

If you have just opened your first trading account and are thrilled about investing in the stock markets, here is a guide book for you. Let us look at some very important key points for you to remember as someone starting out in the markets…

Know the difference between trading account and demat account: If you are trading in equities then your broker would have opened a trading account and demat account. Demat account is where you hold your assets like shares, ETFs gold bonds etc. When you buy or sell shares, your demat account will get credited or debited respectively. Effectively, demat account is like a bank account that holds your shares. The trading account is used for executing your buy and sell transactions.

I understand that when I buy a stock, I am an owner of the company: Yes, as a shareholder you are part owner of the company and your ownership of the company is proportionate to the number of shares you hold. That is why the value of your share is dependent on how the company performs.

How do I know that my shares are safe in my demat account with my broker: Your broker/DP only holds the shares in custody on behalf of the 2 institutional depositories in India viz. NSDL and CDSL. Both are backed by government sponsored institutions and therefore your shares are absolutely safe.

Difference between online trading and offline trading: In offline trading you can go to the brokers’ office and execute trades or you can call up on phone and place trades with your broker. In online broking you can access your trading account via your computer or laptop or smart phone and directly put trades. Online trades are not only cost effective but give you much more control over the entire trading process.

Understand the importance of the contract note: When you trade in the market, your broker will issue a contract note at the end of the day by email. This contract note shows the number of shares purchased/sold, the price of the transactions, the total value of all transactions, the brokerage charged by the broker and other statutory charges like STT, GST, stamp duty etc.

Is there any annual charge imposed on the trading account: The trading account does not attract any charges but the demat account does. There is an account opening charge, which is normally waived off by most brokers. However, there is an annual maintenance charge (AMC) and a charge is also debited to your account each time there is a debit to your demat account.

How to decide what shares to buy and what shares to sell: Once you open your trading account, the next question is what to buy and sell. Avoid the lure of hot tips and WhatsApp recommendations. Rely on your broker for research, talk to your financial advisor and also do your own analysis of a company before taking a buy or sell decision on any stock.

Know the importance of a debit instruction slip (DIS): Any debit to your demat account has to be backed by a DIS signed by you. Two things here! Firstly, never leave your DIS booklet unattended or pre-signed with your broker or with anybody else. Secondly, ensure that your DIS is submitted to your broker on the same day to facilitate proper delivery sales. The simpler method nowadays is to give a Power of Attorney to your broker in case of an online trading account. The demat account is debited online and you need not worry about the DIS booklet.

I have bought shares; when to pay. I have sold shares; when do I get funds: Normally, your broker will insist that your account be pre-funded before buying shares online. In case of offline trade, your broker will insist on funding by the end of the day since the pay-in will happen next day by around 11 am. When you sell shares, the shares will be debited to your demat account on T+1 day and the money will be credited on T+2 days into your designated bank account.

How rolling settlements impact your trading choices: Indian markets currently operate on T+2 rolling settlements. That means if you buy shares on Monday then you have two choices. Firstly, you can reverse the position intraday (during the same day) and there is no delivery. Secondly, if you do not reverse the position the same day then the shares will result in compulsory delivery on T+2 day settlement.

Finally, what are stop losses: When you trade you need to protect your risk. That is done through stop losses. If price goes against you, then a level is fixed at which you terminate the position and book the loss.