Basics of share market and Buying shares online

Most of us are fascinated about stock markets.  We have heard about numerous stories of people getting rich by investing in stock markets.  Is it possible for us to become rich by investing in stockmarket?   Yes.  If you learn about the basics and fundas of stockmarket, you can surely invest and get benefited.

What is a share?
Let us assume a person named 'x' has got a good business idea.  It requires an investment of \(\$ \)100.  But he has only \(\$ \)20 with him.   If this business idea gets into pipeline, it will create lots of jobs and benefits the economy a lot.  But how to get started?  There are many ways to raise funds, But I am discussing only two important ones.  First, he approaches his nearest bank.  Bank appraises the business proposal given by 'x' and tells him that they are willing to lend a loan of \(\$ \)20 to him.  Still, our guy fell short by \(\$ \)60.  Now this \(\$ \)60 will be divided into 60 parts of \(\$ \)1 each.  These are called shares.  That means,who ever buys these shares they actually become owners of the business!! Not really! but theoretically it is!!  These people are called share holders.

So Mr.x got all the \(\$ \)100 and rolled out his business.  Now the question is what is the benefit for the share holders of this company. Let us assume, Mr.x's company has done a business worth of \(\$ \)200 in the first year.   This is called 'sales'.  Now we have to subtract 'cost of goods sold'.  This is nothing but raw materials and other consumables.  Now we get gross profit.  From this we have to subtract 'Over head expenses' which include salaries for employees, rents, power and other expenses.  The result is EBITDA.  This is nothing but Earnings before interest, tax, depreciation and amortization.  The profit and loss account looks like below.

Share price change based on future profit

Interest:  Mr.x has taken loan of \(\$ \)20 and he has to pay back to the bank.
Tax: Each corporate has to pay certain percentage of its profits as tax to the government.
Depreciation: Corporate has bought some equipment to generate goods.  But over a period of time, these machines are to be replaced by new ones. So each year corporate, reduces the value of the machines by certain percentage and count it as expense.
Amortization: This is for intangible assets like a patent or license the corporate bought to product goods.  This also expire after certain years and this will be counted as expense.

Now in the end, the corporate generates \(\$ \)17.50 as profit and this belongs to the share holders.  We have a total of 60 shares. So earnings per share (EPS) is 17.5/60 = 0.291 per share.   So each share generated 29.1% return for each dollar invested in this business. If some one keep their money in savings account or in time deposit, they give only 5 to 8% return.

Where to buy stocks and How to buy?
Suppose, you have some savings and you are interested in buying some good company shares.
Bombay stock exchangeThis is where stock markets come in.  There is an authority in each country which controls buying and selling of shares.  In India, it is SEBI (Securities and Exchange board of India).  There are two big stock exchanges in India.  BSE (Bombay stock exchange), NSE (National stock Exchange).  An individual is not allowed directly to buy or sell their share but through a financial intermediary called 'Stock broker'. These brokers buy and sell shares on behalf of you for which they charge some percentage (Usually 0.05% to 0.5%).

Share price appreciation:  
As we have seen that \(\$ \)1 invested in this firm, has a capacity to pay 29.1% return, there are some people who wants to buy this share for more.  Let us say, if some one buys this share for \(\$ \)2, then still this share gives return of 14.55% which is still good. So stock price automatically goes up because there is demand for that stock.  Similarly, on the down side, if company has not done well in a particular financial year, the stock price may go down and investor looses his money temporarily.  This is the risk associated with investing in stocks.

How to buy stocks online?
To buy and sell stocks online is called online trading.  If you have "Demat account" and "Trading account", you can directly buy or sell stock from your home using online trading platform provided by your stock trading company.  If buy shares using your trading account and your share will be saved in Demat account.  To open these account you have to go to "Stock broking offices".  There are many stock broking offices available.  For example in India, Karvy, Kotak securities, Zen Money, HDFC securities are some examples. You can enquire in your city for well noted offices for stock trading.  To see an example of stock Trading platform click here

Documents required to open a "Demat Account":
You need "PAN card", address proof, and Bank account statement.  You need to carry these copies along with a crossed Cheque. There is an application form, where you need to sign the required documents and your account will be opened in 3 to 4 days.

Charges Associated with opening Demat and Trading accounts:
Usually the charges range from Rs.300 to Rs.800 depends on the broking firm.