Basics of Share Trading

by | Nov 9, 2011 | Business And Finance

One of the most lucrative methods of generating money is via trading in shares. Share refers to a claim on the company’s assets and earnings. In financial markets, a share is a unit of account for various financial instruments including stocks, mutual funds and limited partnerships. When you buy stock in a corporation, you own part of that company. Higher the number of shares an individual acquires, greater is his ownership stake in the company. Shares are also known as equity, or stock. Trading of shares is also known as buying and selling of shares or demand and supply of shares or bid and offer of shares. So when you hold some shares of a company, you become the ‘shareholder’ of that company.

Share trading can be carried out mainly in two ways, online share trading and offline share trading. Online Share Trading is conducted with the help of computer, internet connection and a trading/demat account which is a special online trading account for online share trading. Offline Share Trading is conducted with the help of broker or via phone connections. This kind of trading is done by another person called a broker on behalf of the individual as per the instructions given by the individual. The broker will do the buying and selling of shares on behalf of the individual. For this kind of a share trading too, a demat account is required.

Shares or stocks are bought and sold or traded on stock exchanges. These stock exchanges are places where buyers and sellers meet and decide on a price on a unit of share of a company. Companies sell stock, which are shares of ownership, in order to raise money and provide funding for the expansion and growth of the business. They do this by giving up part of their ownership (shares) in exchange for the required cash. When a company pays out profits to the shareholder, the money received is called a “dividend”.

There are two types of exchanges. Some are physical spaces where buy and sell of shares is carried out on a trading floor, requiring the physical presence of the traders. Some exchanges are virtual which are composed of a network of computers that facilitate trades to be made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. There are two main types of stocks/shares, namely, common stock and preferred stock.  Common shares are securities representing equity ownership in a company, providing voting rights, and entitling the holder to get a share of the company’s success through dividends and/or capital appreciation. However, the dividends my vary and are never guaranteed. Preferred shares are securities representing ownership in a company with guaranteed fixed dividend forever. However, preferred share holders do not enjoy the same voting rights as common shareholder. A main advantage of this type of share is that in the event of liquidation, common shareholders have rights to a company’s assets only after preferred shareholders are paid off.

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