In the past, investing or trading in the stock market was considered gambling. However, it's an unresolved puzzle until you know how to do it.
But if we do with appropriate analysis, correct intuition, and the right technique, investing and trading are no longer a mystery. But, doesn't this apply to each activity you do every day?
So, let’s try to solve this puzzle and learn how to buy shares online from the stock market. The stock market is a profit-oriented prospect, which carries the capability to grow your money and earn attractive returns.
But before you buy shares of any company or decide to invest, you need a DEMAT account or trading account with a SEBI (Securities and Exchange Board of India) registered broker.
SEBI is the regulatory authority for securities, capital, and commodity markets working under the Ministry of Finance, Government of India.
SEBI came into existence on 12 April 1988; however, statutory powers to them were given on 30 January 1992 by introducing “The SEBI Act, 1992”. Such SEBI registered brokers are linked with stock exchanges and thus, it allows them to invest or trade on your behalf on the stock exchange.
DEMAT account permits you to save your bought shares until you actually sell shares at your convenience and earn profit due to the time value of money.
A trading account allows you to buy or sell shares to earn a speculative profit (earning on rising or fall of share price).
Brokers conduct these activities of investing or trading shares on behalf of their customers for a simple consideration of brokerage fees.
In modern times and with reforms introduced by SEBI in the stock market, you can now buy shares online through a broker's website or through their application, unlike earlier of calling on the phone and booking your order.
So let's understand more about how you could buy shares.
How to Buy Shares Online?
1. Have a PAN card
Individuals, companies, and businesses are issued with a Permanent Account Number or the PAN. This comprises a unique digit alphanumeric which is issued under the regulations and guidelines of the Income Tax department.
The PAN card acts as identity proof. Investing and trading are financial taxable activities. Thus PAN card acts as a trail to track income proof.
And, thus linking PAN to your Demat or trading account is vital to avoid tax evasion. If you do not have a PAN card, then apply for a PAN card before moving on to have your demat or trading account.
2. Get a good broker
After having a valid PAN, the next move to how to buy shares online is to have an appropriate broker. As mentioned earlier, the brokers should be registered with SEBI and linked to the stock exchange.
With appropriate analysis on compliance and legal aspects, choose a valid broker. Brokers should have a valid registration number issued by SEBI for conducting “Equity segment transactions” on their customer’s behalf.
Also, it is required to consider their brokerage rates since while investing or trading, the profit you earn is net off brokerage (after deducting brokerage).
Different brokers charge different rates of brokerage, this could be an annual lump sum amount or based on each transaction executed or a certain rate of percentage on the amount of transaction executed depending on broker-to-broker.
You can select an appropriate broker by following the below-mentioned points:
- Check with a list of brokers available for providing broker service in the equity segment.
- Check their legal and registration status with SEBI. You can check this on their website.
- Compare the brokerage charges, account maintenance charges, charges on transactions executed, service charges, and decide the best suitable to you.
3. Have a demat and trading account
The next process is to have a “Demat” or “Trading account” with your selected broker. After SEBI reformation, no investor or trader could store their shares in physical form, and thus all shares as per guidelines should be in dematerialized state.
For the creation of a Demat or Trading account, you are required to provide the following documents as a part of KYC (Know Your Client) to the broker:
- PAN card
- Aadhaar card
- Address proof
- Bank details
- Income proof (Salary slip, Income tax return filed, or such document which will state your income)
You are required to self-attest all the above documents by signing all the documents or electronically attesting and authorizing brokers to use all documents to create your demat or trading account.
After successfully submitting the documents, verification and validation will be conducted. After completion of all the above processes, a demat or trading account will be created on your behalf.
4. Have a depository participant
To buy shares, the following step is to have a depository participant. In India, there are two depositories - CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited).
Depository provides different services in the capital market through its webbing depository Participants or DPs and digital platforms. Depositories enable the number of shares you have in the Demat account or the trading account to reflect the selling and buying that occurred in your account.
These depositories have their agents in the form of Depository Participants who will provide an account to store the shares. Depository Participants will showcase bought and sold shares by the investor or trader.
Depository Participant (DP) is commonly known as an agent of depository. These DP are the intermediaries between the depository and you. The connection between the DPs and the depository is regulated with an agreement.
5. UIN - (For big investments)
In case you would be dealing in voluminous or huge amounts, you would rather require a UIN. UIN is a Unique Identification Number, and it is required to maintain a tracking way-out for each of the transactions executed in the stock market.
UIN is tracked by SEBI to create data around all Market Participants and Investors, known as MAPIN. Thus, persons who execute in a single transaction, amounting to ₹ 1,00,000 or more you would then have to quote your UIN.
If you are a regular participant in the stock market or expect to deal with voluminous amounts in the near future, you should get a UIN.
6. Choose the right share and purchase:
Where an investor or trader wants to buy shares, it is important to select the right share, which has great prospects, good market size, market share, good profit-earning ratio (PE ratio), dividend fetching capability. Al
so, correct analysis of future activities, past trends helps investors or traders to decide whether to buy such shares or not.
On successful decision on buying shares of an entity, use any of the following mediums to place your order:
- By phone call to Broker
- On Broker’s website
- On Broker’s Application
Shares could be bought at the current market price (CMP) or at a specific price (limit set price) which you think is the correct valuation for such entity shares.
You are required to mention the exchange (from which exchange you want to buy) and the quantity you want to buy. Your buy orders are valid only up to a certain period of time that is for one trading session or one trading day.
In case you have set a limit price and the trading price does not touch your limit price, such an order placed will be cancelled, since it’s valid for only one trading session or one trading day.
Once you confirm with the share name, quantity, exchange, price, the order gets confirmed with the broker, at the day-end or next day, you will be provided with a contract note on your registered email address.
The note would state the details of bought shares, taxes charged, quantity purchased, etc.
Aspects to take note about while buying shares
1. Need to understand the basic knowledge around shares
To buy shares, you must learn and understand the basics about the share market, the securities proposed to buy, and how individual securities react to the market’s movement. By market essentially, we refer to “Nifty” and “Sensex”.
Nifty is run by the National Stock Exchange, whereas Sensex is run by the Bombay Stock Exchange. It is essential, as an investor or trader, to analyse the sensitivity of a security to the market, to understand what price is the right price to buy shares.
Nifty and Sensex represent “Large-cap shares” or Industry leaders, and represent the market situation as a whole. The stock market opens at 9:15 am and closes at 3:30 pm (Monday to Friday), and an investor or trader can execute transactions during this period of time.
2. “Risk vs. Return”
It is said higher risk fetches higher return, and low risk settles to low return. Higher risk allows higher prospects in business, riskier decisions in operation, and, if successful, higher growth and ultimately higher return.
3. Analyse “How Market Expectations Work”
Generally, investors or traders go wrong in understanding the sensitivity of the market (Nifty or Sensex) to the company share price. This signifies that it is not correct to buy in a company with below-average growth.
Understanding the market also includes analyzing the industry, past trends, and dividend payout, last 52 weeks high or 52 weeks low, price-earning ratio.
It's very vital to understand the financial statements (balance sheet, profit and loss account, cash-flow statement, etc.) and what they will be offering in upcoming years through Directors' Report enables ideas on future projects or prospects.
The government policies also impact the market; therefore, one may observe great volatility in the market during the presentation of the “Annual Budget” by the Cabinet Finance Minister.
Also, scenarios like the recent example of the Covid pandemic showed a great impact on the market, resulting in an almost 15 to 20% crash. Thus, as a buyer, you should consider this phenomenon also.
How to buy stocks via a Direct Stock Purchase Plan
Often companies sponsor a special type of program called a DSPP (Direct Stock Purchase Plan). It allows small investors to buy a stake in a company directly in a company that is without the involvement of any broker.
Still, every company’s system for administering a DSPP is unique. Companies allow their DSPP with the help of agents or any third-party administrator. Generally, DSPPs allow taking a voluminous stake and act as funding to the company.
Also, such DSPPs purchase price is different from market price and could be lower than what the market is offering, depending on company-to-company.
Is it possible to buy and sell stocks for free?
Yes, it's possible. Several brokers offer free brokerage shares available to buy or sell. These buy or sell will allow brokers to earn through rehypothecation. Allowing loans to short sell allows them to earn out of it. Investors can now trade stocks for free through most brokers.
A transaction where no commission is charged, trading activities allow various business activities to earn profits—resulting in larger customers and regular traders wanting to consider paying for premium accounts.
- Robinhood introduced commission-free trading, and they made huge amounts from interest, fees for upgraded services, margin lending, payment for order flow, and rehypothecation.
- Many brokers now offer commission-free trading, and through this activity, they are earning profits due to the volume of trades done.
- Commission-free trading, however, may have quality compromise, meaning many times having commission-free trade results in buying at a high price and selling at a lower price, affecting the net profit in the hands of traders.
- When rehypothecation is explored to fund commission-free trades, it can result in risk during periods of distress in the financial system.
- Commission-free trading can result in small delays in executing the transaction in the market orders, thus generating self-serving opportunities to adversely impact quality and build profits for the brokerage.
To sum it up
To buy shares, it is important to adhere to SEBI-issued regulations, RBI (Reserve Bank of India) guidelines, wherever required.
It’s also significant to have the right perspective about the economy, the industry you want to buy shares in, taxation and legal policy related to shares, future prospective, demand-supply analysis. It’s vital to choose the right partner as a broker, since many times, excessive brokerage may eat up your earned profit.
You are also required to research the shares’ position 10 years or 20 years down the line. Activities of depository also play a key role in the entire purchase of shares.
Various financial experts believe and advise investors to have their own analysis on a proposed investment before deciding to purchase its stocks. It goes a long way in ensuring a well-informed decision.
Frequently Asked Questions
Q. What are the best stocks for beginners?
Buying industry-leaders shares (who have a monopoly or monopolistic in its industry) allows less risk and if not a huge profit, an average rate of profit could be expected in a few years. Bulk buying of such shares may also allow trading and selling shares at a profit.
It is vital to understand market trends, for example, in pandemic times, the pharma sector boomed up. Where there was lockdown everywhere, only essential medical services were open and this allowed perpetual growth and stability to such shares.
Thus there is no specific recommendation, but understanding market trends are the key.
Q. How many shares should I buy?
- Decide at what market or limit price you want to buy shares and how much amount is available with you to buy shares.
- Divide the total amount available to the market or limit the price at which you decide to buy.
- On division, you will get how many shares you need to buy.
- In case fractional shares are allowed by your broker, you could buy fractional shares in that case.
- The Initial quantity to buy does not have to be bulk. It has to be, let's say, 10 or 20 quantities.
For example, if you are buying ten shares, in a given case:
- Buy first two shares at ₹ 100
- Next four shares at ₹ 99.96
- Next four shares at ₹ 98
That way, you avail the benefit and your average cost, which will be Rs 99.32 and not ten shares at ₹ 100 straight. That way, you allow a higher chance to maintain or earn more profit.
Q. Is now a good time to buy stocks?
There is no specific good time to buy shares. It all depends on the company you are planning to buy in. In a given case where the stock’s price is falling compared to its actual valuation, it means that the stock has the potential to provide you returns or cash flows soon.
This is the real-time to buy stocks, since in the near future, such stock may appreciate, and you could sell to earn profit.
Therefore, When this type of scenario will exist, will depend on market conditions and the sensitivity of the market to stock. Thus, there is no such defined good time to buy stocks, it all depends on different factors.
Q. What are some cheap stocks to buy now?
Cheap stocks are undervalued stocks, meaning that they carry the potential to generate cash flows in the near future. However, due to circumstances, they are under-estimated.
Such stocks have a high PE ratio (Price -Earning Ratio), meaning MPS/EPS, where MPS means market price and EPS means earning per share. However, stocks with a low PE ratio may not be a good option to buy.
Q. How will I know when to sell stocks?
There is no specific scenario to sell stocks. However, a scene where:
- Your selling price is over and above your average cost, and this situation continuing may be thought of to hold if future prospects are interesting, else may think of selling.
- When the market is in good condition, meaning there is a bull rally, and the price is above its previous close price, your portfolio, in that case, has a green signal to sell your stocks.
