Stock-ing up: How to buy, sell shares

Alternatively, you could have a great deal of knowledge about companies, and participate in the speculative processes of the market. When news breaks, various people buy or sell shares, depending on whether they expect share prices to go up or down. In this case, you are an active trader, and you run a much bigger risk of losing money.

THE BASICS

How do I buy shares on the stock market?

You have to go to a stock broker — who is authorised by the stock exchange — and place an order. Your order to him may be: ‘‘I want to buy 100 shares of Infosys’’. For this order to be executed, a seller is required. If a seller is found on the system, the order is ‘‘matched’’ and becomes a ‘‘trade’’. Then you have to pay money and you get the shares.

When I buy shares, how do I know I am getting the best price?

There are two exchanges — NSE and BSE. Both operate a 100% computerised market, where orders from across the country go into computer systems. When you place a buy order, you are guaranteed (by the computer) that you are matching the lowest price from across the country. When you place a sell order, you are guaranteed (by the computer) that you are matching the highest price from across the country.

In old fashioned markets, you had to waste time ‘‘shopping around’’ and find the lowest price to buy. When you actually buy onions from any one shop, you are never sure you have got the best price in the country. Computers are best at ‘‘shopping around’’. When you buy or sell shares on NSE or BSE, thanks to ‘‘computerised order matching’’, you are sure that you have the best price available from anyone else in the country. This is a source of efficiency and peace of mind.

Will I find a buyer if I need to sell?

On average, NSE does roughly 1.5 million trades a day and BSE does roughly 1 million trades a day. These are very big numbers: NSE is the world’s 3rd largest exchange (by this measure) and BSE is the 5th largest in the world. If India plays its cards right, within a few years, we may expect to see NSE and BSE at the top of the global list.

Put together, NSE and BSE are doing 2.5 million trades every day. The trading day runs from 10 am to 3:30 pm. This works out to an average of roughly 125 trades per second during trading time. This is why stock market trading screens are always buzzing. For the top 1500 stocks in the country, if you need to sell in a hurry, you will always find a buyer.

SETTLEMENT PROCESSES

What is ‘‘the spot market’’?

There are two steps in every trade: agreeing on the terms, and then completing the ‘‘settlement’’, where money and securities change hands. If the settlement takes place fairly soon after the trade, then it is called a ‘‘spot market’’. If you go up to a store, put down money, and eat a sandwich, that’s a spot market. If you put down money to ‘‘book a car’’ which is delivered to you some weeks in the future, that is not a spot market.

When does settlement take place?

The stock market operates on what is called ‘‘T+2’’ settlement. That means that money and securities change hands on the 2nd working day after the trade date. For example, if you buy on Monday, your broker has to send money in on Wednesday, and the shares show up on Wednesday. This procedure is called ‘‘rolling settlement’’.

If I suddenly need money, for example for a hospitalisation, how quickly can securities be converted into money?

Two working days after you sell shares. Selling shares on Friday yields money on Tuesday. Many stockbrokers will give you a service of ‘‘instant cash’’ at a slight discount. That is, if you sell shares worth Rs 100 on Friday, and the money is normally expected on Tuesday, they might give you Rs 99.6 on Friday itself.

Should we move on to T+1 settlement?

India is already ahead of the world in terms of being at T+2 settlement. For example, in New York, T+3 settlement is used, which means that they have to wait one extra day (compared to India) in order to get money for shares sold.

One major factor which has held back the move to T+1 is the weak banking system. While India’s stock markets are world class, the banks are a few decades behind the world in their inability to swiftly move money across the country. The recently launched ‘‘Realtime Gross Settlement’’ (RTGS) system will provide a backbone through which banks will be able to offer better services. But this story is still some years in the future.

Even in OECD countries, where RTGS has been in place for decades, there are concerns about the final usefulness of moving to T+1. T+1 is better than T+2, but it comes at a significant cost to stockbrokers, banks, etc. Whether the benefits of moving to T+1 will outweigh the costs is not yet clear. This is a question that will play out in the country in coming years.

DON’T GET CHEATED

How can I get cheated in the transaction?The key documentation of every transaction is the ‘‘contract note’’, the invoice that comes to you from the broker which shows the transaction price, the brokerage fee, etc. You should be sure to get a physical contract note for every transaction.

At one level, a broker can lie to you, and give you a forged contract note claiming the order was matched at Rs 200 when it was actually matched at Rs 150. Or worse, a broker can lie to you, give you a forged contract note claiming to have matched an order at Rs 150, pocket your money, and never give you the shares!

There are four things that you can do in order to control this. First, only deal with direct NSE/BSE members, and not with various shadowy agents. There are even ‘‘illegal markets’’ in the country, where brokers and dealers talk to each other by telephone and do trades. It is in your best interest to keep away from such non-transparent kinds of trading.

Second, it is your responsibility to exercise care and judgment in choosing a well-functioning, well reputed stockbroker. This is just like other situations where you choose to do business with some company. For instance, before you deal with a bank, it is your job to worry about the health of the bank. In similar fashion, you should be careful about the stockbroker that you patronise. If you see your broker fumbling about handling your transaction properly, dump him. There are roughly 1500 brokerage firms, with over 15,000 offices across the country, so you have plenty of choice.

Third, if you ever get suspicious, then both NSE and BSE operate the following free service. Every contract note that you get from the broker contains a unique ID number. You can call a NSE or a BSE helpline, read out this unique ID number to the person on the phone, and get a verification of the trade particulars from the exchange. If your broker has been forging contract notes, then you can detect it in this fashion.

Fourth, regularly check your depository statement to verify that securities are appearing in it like they are supposed to. It is possible to do this over the Internet.

What if a broker goes bust? What happens to my money or securities?

NSE and BSE operate ‘‘investor protection funds’’ which will reimburse you for money due to you from a broker that goes bust, subject to a limit of Rs 10 lakh per investor. This number is ten times bigger than the protection offered in the banking system, where the Deposit Insurance Corporation promises to pay each individual depositor of a bank upto Rs 1 lakh of deposits in case a bank goes bust.

This system works flawlessly — provided you have genuine contract notes. If you had been duped in the first place, and been given forged contract notes, then you are out of luck. Sometimes, when a brokerage firm goes bust, people have tried to create forged contract notes to try to grab money from the investor protection fund. Don’t bother trying this; it doesn’t work.

Next week: Indexes, Demat, Debt Market, Derivatives