4 Things to know before starting to trade
You need to have a good brokerage account. The brokerage should be transparent with its charges and should have all the options available in the market.
Brokerage account as a third-party tool that helps in buying and selling stocks. You will be adding money from your banks to the brokerage account, Using that money the transaction will be completed. Out of the transaction, brokerage houses take a small amount of commission (Like 0.1% of the transaction).
Brokerage will buy and send the buy/sell report to you. Most of the broker provide leverage on your account. For example, you can buy shares worth 5 dollars/Rupee if you have 1 dollar/Rupee. Once you will lose 1 dollar/Rupee, brokers will automatically square off the position. If you earn one rupee, then you made a 100% return from your 1 dollars/Rupee. Leveraging is a dangerous game, it will help you in growing the profits and also washout your capital. We have a strict rule with leveraging. Broker houses give this option just for getting more commission from you. Make sure that you use this option for your wealth creation. I recommend you not to use leverage if you are a new trader or if you are not consistently making money. This will washout your capital and create issues. Many give up trading due to leverage given by their stockbrokers.
- Stock Broker
- Clearing Corporation
The stockbroker was a licensed /registered participants of Regulators. They get the license from Stock exchanges to perform the trading. You are the customer of a Stockbroker, your trades were placed by your brokers in the stock exchange.
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Once you perform the trade like buying a stock, how will the company know about your investment? Depository does the issue of shareholders certificate. They will get the information from the stockbroker and send you with shareholders certificate online. Previously before digitalism, the world used to send you a physical certificate. The whole market will have only 3-4 Depository.
When an investor purchases shares, funds/money needs to be transferred to the broker. When you sell the share, the fund needs to be transferred to your bank. So the bank plays an essential financial intermediary in the share market. We currently have a Demat account, which will be used for immediate holding of funds. It is like a bank account, where you can have accounts with multiple stockbrokers to perform the transaction.
A clearing corporation is the last person in a stock transaction. Clearing corporation completes the stock market transaction. This platform will help you in performing the buy/sell of a share. They get the market place intact. It matches the price of buyers and sellers and completes the transaction. I will explain about cleaning corporation operation separately in another blog.
All the stock market instruments were controlled by a separate entity or Self-governing body of the countries Government. Generally, it will be handled by the ministry of finance of the country. They are the primary regulators of the market monitoring fraudulent activities. Altering the price of stocks in fraudulent ways like speculating information or whistleblowing. Probits insiders of a company from trading using insider information. They are also responsible for training professionals about the capital market and generates licenses for Banks, Depository, Stockbrokers, etc.
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Market participant ranges from small individual investors to foreign Government investment. In general, we can classify the investors into 2 types:
Retail Investors: These are individuals who invest their own money in the market. They can invest from 1 stock to holding a majority of stocks in the company. In general, these are small investors buying 50-10000 shares of a company. The general public of a county comes into this category. They hold the key to any economy. The more they participate in the market, the more the country can invest and grow.
Institutional Investors: We are speaking about big corporations like banks, mutual funds, and Government agencies. They make a big investment in millions creating more fluctuation. They are obliged to provide their transaction to government regulators. Most of their money comes from individuals who are not trained to invest. They tend to invest and this corporation trades with their investment and gets a return taking a small fee(Hair cut) from the revenue.
This can be further classified into 2 categories:
Local Institution: These will be major shareholders of top-performing money. They get the money from a small institution to get pension funds. They invest in big companies and the ultimate motive is to make money depending upon the fund’s risk (I will cover about risk in a separate blog).
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Foreign Institution: These are similar to a local institution, the only difference is they belong from a different country. They are in general big players trying to invest in growing countries to diversify the portfolio from their countries’ price fluctuation.