The usage of the term stocks and shares together gives people an idea that there is not much difference them. Actually their difference is in the context they are used. When somebody says that they own ‘stock’ it means that they have invested their money in more than one company. . Whereas when you say that you have some ‘shares’ it means that you have invested in a particular company. Having said this, you are no doubt arriving here with one burning question: what is the procedure to trade in stocks and shares for beginners?
The basic necessity is to have a trading account with one of the share broking firms that have registered with the stock exchange in your country. Earlier one should visit the broker or instruct the broker over phone as to what price he should buy or sell shares for him. With the advancement in information technology it is now possible to trade in shares from your home through your computer. Of course, this is also through software installed in your computer by the share broking firm.
You need to provide your identity proof and address proof; details of bank accounts which are necessary invest or withdraw money from your trading account. You should invest a minimum amount in your trading account as per the stipulation of the broking firm. Once the papers are in order, you will be given a username and password through which you can trade shares online.
There are two ways to buy shares. One is through the IPO, short for Initial Public Offer. When a company wants to raise working capital from the market, they enter the share market by offering shares of the company to the public in lieu of cash. The value of such shares will be a face value plus a premium which is fixed by the financial experts in the industry.
A number of factor decide the premium such as the segment the company is operating, their reputation in the industry, track record of profit in the yester years etc., One should apply for a minimum lot and multiples of that lot. Most of the time the IPO’s are oversubscribed and a company will allot shares on a pro rata or a random selection by a computer. The shares will be listed in the stock exchange after the stipulated period by the Stock Exchange. If the shares are allotted to you, you can start selling them on the first day itself depending upon the market conditions; higher or lower than what you have paid for that share. By now you should understand some principals which will help those trying to understand stocks and shares for beginners.
But What Are Stock And Shares
Stocks and shares are certificates that are sold to raise money for starting a new company or for expanding an existing company. Stocks and shares are also called securities. The people who buy them are called investors. Stocks and shares are certificates of ownership. A person who buys stock in a company becomes one of the company’s owners. As an owner, the stockholder is eligible to receive a dividend, or share of the company’s profits. The amount of this dividend may change from year to year. It depends on the company’s performance. Well-established companies try to pay stockholders as high a dividend as possible.
There are two types of stock: common stock and preferred stock. Owners of common stock may vote for company directors and attend annual stockholders’ meetings. At these meetings they have the chance to review the company’s yearly performance and its future plans. They may also present their own ideas. Owners of preferred stock do not usually have voting rights or the right to attend stockholders’ meetings. They do, however, have priority when dividends are paid. The dividends on preferred stocks are paid according to a set rate. In contrast, the dividends on common stocks fluctuate according to the company’s performance. If the company does well, however, preferred stocks do not usually gain in value as much as common stocks. If a company goes out of business, preferred stockholders are paid off first.
Stock Exchanges Today
Today, the largest and most important stock exchanges are the New York Stock Exchange, the London Stock Exchange, and the Tokyo Stock Exchange. These exchanges act as marketplaces for the buying and selling of stocks. Another important source of stock transactions is the NASDAQ system. NASDAQ, which stands for National Association of Securities Dealers Automated Quotations, allows stock transactions to be made over computer terminals simultaneously in many cities around the world. Thousands of stocks are now traded over the NASDAQsystem.
Placing an Order
Suppose an investor in Iowa decides to buy 2,000 shares of XYZ Corporation. The investor calls a stockbroker—a registered representative of a stock exchange member—whose job is to provide investors with information and carry out investors’ orders to buy and sell. The investor asks the broker the price of XYZ stock. The broker checks the price on a computer terminal and learns that XYZ Corporation is quoted at 25 to a quarter. This means that, at the moment, the highest bid to buy XYZ is $25 a share and the lowest offer to sell is $25.25 a share. The investor tells the broker to buy “at the market,” which means to buy shares at the best available price at the time the order reaches the stock exchange. If the investor sets an exact price he or she is willing to pay, the order is called a “limit order.” No sale can take place unless another stockholder wants to buy or sell at that price.
By telephone or computer, the broker in Iowa sends the investor’s order through a trading desk at his or her firm’s main office to a clerk on the floor of the stock exchange in New York. The clerk alerts the firm’s floor broker by putting the broker’s call number on two boards, one on each side of the trading floor. These boards are visible no matter where the floor broker is standing. The broker sees the call number and immediately goes to take the order.
Understanding Stocks And Shares
Understanding stocks and shares is not rocket science provided you do not want to get too technical about it. And if you stick to the stock market basics, it is also not very difficult to learn how to trade in stock markets without spending money.
First things first, stocks or shares refer to part ownership of a company. When a business needs money for expansion the owners have two options. They may borrow money from lending institutions or issue bonds. In both cases the business has to pay interest. While banks may grant a term loan or allow a credit line, bonds have a fixed maturity period and must be redeemed on that date. The other option is to find investors interested in part ownership of the company. Depending upon company value, the company’s capital is divided into a specific number of shares; each share has a designated value. The business does not pay any interest but shares profits as all shareholders are part owners. Profit distributed per share is referred to as dividend.
When we talk of understanding stocks and shares, we actually mean trading them in stock exchanges. If you are interested in stocks and shares, you can learn how to trade without much effort. One way is to buy literature or join a trading course. However, there are also ways of understanding stocks and shares without spending money.
One way is to join an experienced trader as an apprentice. Spend some hours with him/her in front of the computer screen and try to understand what makes share prices move. The other way is to register with a share broker who offers a demo account. Keep track of business news by registering at a business news channel or magazine. Over time you will see that you have a better understating of stocks and shares and what makes markets move the way they do.
Generally, only rarely does a company buyback its shares. Selling or trading is the only means through which shareholders can benefit from the growth of the company. Barring certain situations, growth and profitability of a company is represented by its price in the stock market. Share value of a company also depends upon its reserves and surpluses, which are undistributed profits.