Buy Shares Meaning

Knowing how to buy shares is crucial for a person who wants exposure to the equity market. Equity markets are volatile, and the timing is critical. Shares trade in exchanges, but you cannot go and buy a share from the exchange. Instead, there are several steps involved in purchasing a share.

Parties Involved

Mainly five parties are involved in a share transaction.

Key Takeaways

  • A person must understand how to buy shares and get exposure to the equity market. Shares are volatile, and timing is essential. Shares trade in exchanges, but one cannot go and buy a share from the exchange. Instead, there are a few steps engaged in purchasing a share. Five parties are involved in the share transaction: the company, exchange (trading platform), broker, depository bank, and investors.Shares are one of the approaches to creating wealth. Share prices are not fixed. Therefore, one should wait for the best opportunity to purchase and buy shares.

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  • First: The company whose share you want to purchase should be listed security Listed SecurityListed security refers to a financial instrument such as stocks, bonds, derivatives, etc., registered with and readily tradable on the stock exchanges like NASDAQ and NYSE.read more. If the company is not listed, you cannot buy its shares if it is not public.Second: There should be an exchange where the shares will be traded. Without exchange, a trading platform, you cannot buy shares.Third: Brokers work as the authorized party in the trade. Exchange permits brokers to trade on behalf of investors.Fourth: Depository banks work as safe-keepers of the shares on behalf of investors.Fifth: We need investors willing to buy or sell a share.

All the parties mentioned above are required to complete purchasing a share.

How to Buy Shares?

Example of Buying Share

Mr. X wants to purchase Facebook shares, which are trading at $207. How will he do that?

  • Choosing a Broker There are several brokers in the market. It will help if you prefer your broker wisely. Every broker charges a commission, so you need to check the market correctly and choose a broker who charges less and executes trade faster. Create a Demat and Trading Account This step is crucial and is the most crucial step. But first, you need to open a trading account with your broker. This account will help you to trade on equities. Trading means buying and selling shares. So, you need a platform where you can purchase and sell shares. So, a trading account gives you that platform.A demat account with the depository helps you preserve your shares. Earlier shares used to be in the paper format now. They are all digitized. So, it would help if you had a bank where they would store the digitized shares. So, the depository bank acts as a storage house for digitized shares. Choose the Shares You Want to Buy Choosing the company whose share you want to purchase. Selecting the correct share is very important. One should do a proper analysis before buying. We should buy shares whose market price is below their Intrinsic Value (IV). Intrinsic value is the actual price that the share should have. So, if the intrinsic value is more than the share price running in the market, the share price will increase and meet its intrinsic value. So, we should purchase the share as it is underpriced now. Transfer Money to your Brokerage Account Transfer money from your bank account to a brokerage account. Without money, you cannot trade. Buy the Share and Pay Commission to Broker Buying the share and paying a commission for it. Per market norms, once you buy a share from your trading account, it takes 2 to 3 days for shares to get credited to your Demat account. This time is called settlement time. The depository bank will remove the earlier owner’s name and add the new owner’s name. So, it takes a few days. Shares get Credited to Demat Account Shares will be credited to your Demat account and will stay there until and unless you sell them.

There are several brokers in the market. It will help if you prefer your broker wisely. Every broker charges a commission, so you need to check the market correctly and choose a broker who charges less and executes trade faster.

This step is crucial and is the most crucial step. But first, you need to open a trading account with your broker. This account will help you to trade on equities. Trading means buying and selling shares. So, you need a platform where you can purchase and sell shares. So, a trading account gives you that platform.A demat account with the depository helps you preserve your shares. Earlier shares used to be in the paper format now. They are all digitized. So, it would help if you had a bank where they would store the digitized shares. So, the depository bank acts as a storage house for digitized shares.

Choosing the company whose share you want to purchase. Selecting the correct share is very important. One should do a proper analysis before buying. We should buy shares whose market price is below their Intrinsic Value (IV). Intrinsic value is the actual price that the share should have. So, if the intrinsic value is more than the share price running in the market, the share price will increase and meet its intrinsic value. So, we should purchase the share as it is underpriced now.

Transfer money from your bank account to a brokerage account. Without money, you cannot trade.

Buying the share and paying a commission for it. Per market norms, once you buy a share from your trading account, it takes 2 to 3 days for shares to get credited to your Demat account. This time is called settlement time. The depository bank will remove the earlier owner’s name and add the new owner’s name. So, it takes a few days.

Shares will be credited to your Demat account and will stay there until and unless you sell them.

Solution

Step 1: Mr. X will open a trading and Demat account. Mr. X chooses ABC as the broker and sets up a trading account. Every broker has ties with depository banks, and the broker will help Mr. X open an account with the depository bank.

Step 2: Mr. X will transfer money from his bank to the broker account. The broker also helps clients by giving them a margin. They can buy shares more than the money they have in a broker’s account and pay back the broker later.

Step 3: Now, Mr. X will have to buy the shares of Facebook using his online trading platform or by giving instructions to a broker on the client’s behalf. If Mr. X wants shares at a fixed price, he will provide limit ordersLimit OrdersLimit order purchases or sells the security at the mentioned price or better. In the case of sell orders, it will be triggered at a limit price or higher, whereas for the buy orders, it will be triggered only at a limit price or lower.read more. However, if he wants to buy shares at any price prevailing in the market, he can give a market order.

Step 4: Once bought, he will use money from his brokerage account. Depending on the market, it takes a few days for the shares to get credited to the Demat account.

Benefits

  • Shares are a great way to gain exposure to the equity marketEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more. The equity market has several sectors that comprise a country’s economy. So, if a person feels that the auto sector is going to rise, that person should purchase a share of a company from the auto sector or invest in an ETF.Systematic investment in shares for a longer period has always been beneficial. If you analyze data from the past 20 years, you will see that, on average, the equity market has provided more returns than the debt market.If you have faith in a company and like how the company is performing, then buying a share is the easiest way to be involved with the company. It is buying ownership in a particular company. So, it gives you the right to be involved with the company.

Conclusion

Buying a share is an important step to getting involved with a company. Shares are a way to build wealth. Systematic investment is crucial to building wealth over a longer tenure. Share prices are not fixed. So one should wait for the best opportunity to purchase and sell shares. One should conduct proper research while choosing the broker and during the stock selection.

This article is a guide to steps to Buy Shares and their meaning. We discuss how to buy shares of a company, the parties involved, an example, and benefits. You may learn more about financing from the following articles: –

One must place a pre-market order with the calculation at 9.00 AM. One must calculate the current market price X 1.05 = buy share price.

To buy shares, one must first obtain a PAN card. Then, get a Demat account and an online trading account. Next, one must link a bank account and start trading.

One must invest in the top unlisted public company by investing in start-ups and intermediaries, purchasing ESOPs directly from promoters or employees. In addition, one must invest in PMS and AIF schemes that raise unlisted shares. Illiquidity, capital loss, no dividends risk, and dilution risk are involved in purchasing an unlisted public company.

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