Buying and selling shares

Buying shares and debentures involves the following steps:

Locating a Broker: Typically shares are bought through a stock broker who is licensed member of a recognized stock exchange. So, when you want to buy shares, you should locate a broker. Ask your friends who have experience to recommend some names and meet the suggested brokers personally and make a first hand assessment. Basically satisfy yourself that the broker you select can render an efficient service and protect your interest.

For doing business with the broker you have to submit a client registration form as well as a member constituent form (or a sub broker client agreement form). The latter contains the terms and conditions relating to order/trade confirmation brokerage charged by a trading member/registered sub broker and delivery of securities and funds.

Placement of order: After locating a suitable broker, place your order to buy. Your order should clearly specify the name of the company and the type of securities (equity shares, preference shares or debentures). Note that all transactions through a stock exchange are now settled through the depositories. So you must gave a demat account with an authorized depository before you place an order.

You can place a limit order or a market order. A limit order specifies the quantity to be traded, the highest price (the limit price) that the buyer is willing to accept and the length of time the order is valid. A day order remains valid only on the day when it is placed. If the order is not executed on that day, it automatically lapses. A week order is one which is valid for a week. A month order is an order which is valid for one month. An open order remains valid in effect until it is executed or cancelled. For example, you may submit a limit order to buy 100 shares of a company until the close of the trading on a particular day at any price less than or equal to the limit price of Rs 505.

When you submit a limit order, you run the risk of delayed execution as well as the risks that the order will not be executed. Those who place active limit orders essentially stand ready to trade at the discretion of the other market participants. Hence they supply liquidity to the market, just as a market maker (who is ready to buy when investors want to sell and to sell when investors want to buy) does.

When you submit a market order, you merely specify the quantity that you want to buy at the best available price. For example, you may submit a market order for 100 shares of a company. A markets order guarantees execution; however the trade price is not known beforehand. Those who place market orders essentially require liquidity from the market. Put differently, they demand liquidity from the market.

Execution of order: On receiving the broker will feed the same on his terminal. Once the order is executed the broker will inform you and send a contract note. Representing the documentary evidence of the transactions, the contract note contains details of the transactions. Preserve it for tax and other purposes.

You are expected to pay for your purchase within a stipulated period specified by the broker. After you have effected the payment the broker will transfer the shares electronically to your depository participant account.

Procedure for selling:

Once you have located the steps involved in selling shares are as follows:

Placement of order: You have to place a sale order with your broker. You may place a limit order wherein you specify the minimum price acceptable to you; or you may place a market order which means that you instruct your broker to sell at the best available Market price before placing the order make sure that the shares you want to sell are to your credit in your depository account.