The share market is a market where equity shares are purchased and sold. Shares refer to equity shares issued by public limited companies. The share market is one of the fastest growing avenues for investment. But, before you can invest in the share market, it is better to learn how does share market works.
There are two types of share markets: Primary Markets and Secondary Markets. Each market is different and has different characteristics. Let us see how both these share market works.
A company that wants to raise funds and has not listed its shares before approaches the primary market. Different categories of investors such as institutions, retail investors i.e individuals, HUFs, high net worth individuals, foreign institutional investors etc can invest in the issue. The final allotment of shares is decided based on a formula depending on number of applications received.
The secondary market is for shares that have already been listed. These shares can be traded i.e purchased and sold at any time during market hours. The orders placed are completely online and the whole process is extremely streamlined making it very easy for anyone to purchase or sell shares.
How are orders processed in the share market?
The first step to trading in the share market is to open a demat account. A demat account is an electronic repository or a record keeper for your investments. You can open a demat account with any recognized intermediary such as Kotak Securities.
Once the demat account is opened, the next step is to open a trading account. A trading account will help you buy and sell shares. Opening an account with a reputed broker like Kotak Securities who can provide back end support is beneficial.
After your trading account is opened and operational, you have to place your order. Your order gets sent to your broker who puts it in his system. The system connects to the exchange where it is matched for price and quantity. For example, a buy transaction for 10 shares is matched with other sell transactions for similar quantities and the order gets executed. The exchange confirms this transaction.
The exchange facilitates the transfer of shares and the amount to be paid on these transactions. The settlement is done on a T+2 basis, which means it is completed 2 working days after the date of transaction. The exchange has inbuilt mechanisms to ensure the transaction is honoured by both the sides.
The price of any share is based on the demand and supply for the share in the market.
How to invest in shares?
There are different investment strategies to invest in different shares. Once you know whether you want to invest for the long term or the short term, you can invest accordingly. The time horizon for investments will affect the type of shares invested in and the growth on it as well.
It is important to take the decision related to investment after understanding how does share market works in India. There are many resources online such as the one on Kotak Securities which provide a lot of learning for free. Keep yourself updated with the market and learn how it works so that you can take smart investment decisions.