Share Market Trading Explained in Simple and Clear Words

The share market is one of the most popular avenues for investing and generating wealth over the long term. Share market trading, in particular, has gained massive popularity among retail investors in recent years. However, for many new participants, the concept of share market trading might seem daunting or complex. To make it easy for beginners, this article will break down what share market trading is, how it works, and the key concepts associated with it, such as bonus shares and dividend payouts.

What is Share Market Trading?

Share market trading revolves around the buying and selling of shares or stocks of companies. Share market trading involves purchasing these shares which represent ownership in a company. When you buy shares of a company, you own a part of that company.

The share market provides a platform where investors and traders engage in transactions related to these shares. There are primarily two stock exchanges in India to operate in—the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Globally, many countries have their exchanges, such as NASDAQ or the New York Stock Exchange (NYSE) in the United States.

Share market trading differs from long-term investing in that trading primarily focuses on short-term price movements. Traders aim to earn profits by capitalizing on fluctuations in share prices within a few seconds, hours, days, or weeks.

Primary Components of Share Market Trading

To better understand the concept of share market trading, let’s break it into its primary components:

1. Buying and Selling of Shares

Share market trading starts with the straightforward act of buying and selling. For example, if you believe the price of a company’s share is going to rise, you buy the stock with the intention of selling it at a higher price later. Alternatively, traders can sell shares first (short selling) and aim to buy them back at a lower price.

2. Stock Exchanges

Stock exchanges are the platforms where trading takes place. Different companies are publicly listed on these exchanges, and their shares can be bought and sold.

3. Trading Accounts

To start trading, you need two things:

• A Demat Account: where shares you purchase are stored electronically.
• A Trading Account: which allows you to buy and sell shares effortlessly through an online or offline brokerage platform.

4. Price Movements

The price of shares constantly fluctuates due to supply and demand, economic conditions, company performance, and global events. Traders rely on charts and technical analysis to predict short-term movements in price to make better decisions.

5. Types of Share Market Trading

Share market trading can be divided into the following types:

• Intraday Trading: All positions are bought and sold within the same trading day. Traders focus on daily price movements to earn profits.
• Swing Trading: Positions are held for a few days, anticipating small or medium-term price changes.
• Long-Term Trading: Although primarily considered investing, long-term trading refers to holding stocks for several months or years to profit from sustained growth.

How Does the Share Market Trading Work?

Understanding how share market trading works is essential for beginners. Here’s a simplified explanation:

• Choose a Brokerage Platform: To start trading shares, you need to register with a brokerage firm that provides access to stock exchanges. Popular brokerage firms offer mobile apps and online platforms for easy trading.
• Research and Analysis: Before buying or selling shares, traders often conduct research and perform technical and fundamental analysis. This helps them predict price movements and select profitable opportunities.
• Place Orders: Once you’ve decided on a share to trade, select the quantity and price. You can opt for a market order (buy/sell at current price) or a limit order (buy/sell at a specific price).
• Monitor Share Prices in Real-Time: Trading platforms provide real-time data on share prices, helping traders stay updated on their positions.
• Book Profits or Limit Losses: Once the share price reaches your target level, you can sell the share to book profits. Using stop-loss orders helps to minimize losses in case the market moves in the opposite direction.

What Are Bonus Shares?

Bonus shares are closely related to share market activities because they benefit investors who already own company shares. So, let’s take a closer look at this term:

Bonus shares are additional shares that a company issues to its existing shareholders without any additional cost. Instead of paying dividends in cash, the company rewards its shareholders with extra shares.

For example, if a company announces a 1:1 bonus share issue, it means every shareholder will get 1 additional share for every share they own. If you own 100 shares, you’ll receive an additional 100 shares, making your total 200 shares.

Bonus shares are issued to improve liquidity in the market, reward existing shareholders, and convey the company’s positive financial health.

Why Do Companies Issue Bonus Shares?

Here are some reasons a company may decide to issue bonus shares:

• Enhancing Shareholder Confidence: Bonus shares signal that the company is doing well. This helps to improve shareholder trust and interest in the company.
• Retaining Earnings: Instead of paying dividends in cash, the company uses bonus shares to compensate shareholders while retaining capital to fund growth and expansion.
• Improving Share Liquidity: Bonus shares enlarge the overall number of shares in the market. This increases trading activity and liquidity.

Benefits of Share Market Trading

Share market trading offers many benefits. Let’s look at the major advantages:

1. Wealth Creation

Traders who can identify profitable opportunities in the market often generate significant wealth. Although risky, the potential for high returns on your investment is undeniable.

2. Liquidity

Stock markets are highly liquid. This means shares can be bought and sold quickly, allowing traders to access their funds without long waiting periods.

3. Diverse Opportunities

The share market offers a wide variety of companies to trade in sectors such as IT, banking, healthcare, and energy. Traders can diversify their activities and portfolio to minimize risks.

4. Leverage in Trading

Many brokerage firms provide margin trading, meaning traders can invest using borrowed funds to maximize returns when they expect favorable price movements.

Risks Associated with Share Market Trading

While share market trading holds immense potential for financial gains, it comes with its fair share of risks:

1. Market Volatility

Share markets are extremely volatile. Prices can move dramatically, making it difficult for traders to predict trends perfectly.

2. Emotional Trading

Fear and greed can lead to poor decisions. Novice traders often panic during downturns or hold onto losing positions for too long, leading to heavy losses.

3. Lack of Knowledge

Trading requires adequate research and knowledge about the stock market, technical analysis, and company fundamentals. Failure to understand these factors can lead to losses.

Some Tips for Beginners in Share Market Trading

1. Start Small

As a beginner, avoid investing large amounts. Start with a small sum and increase it gradually as you gain experience.

2. Educate Yourself

Learn the basics of share market trading, including stock analysis, risk management, and chart patterns. Knowledge is the key to making informed decisions.

3. Use Stop-Loss and Target Orders

Always set a stop-loss to limit losses. Similarly, determine your profit target and stick to it.

4. Diversify Your Trades

Don’t trade all your funds in one stock or sector. Diversification helps reduce risks associated with adverse price movements.

Conclusion

Share market trading is a dynamic and exciting way to participate in the economy and earn profits. While traders require a strong understanding of market mechanisms and strategies, the ease of access via online platforms has made trading accessible to almost everyone.

Concepts like bonus shares further make investing in shares more appealing as they provide investors with added benefits and showcase the health and growth of a company. However, beginners need to tread cautiously. Starting small, conducting thorough research, and avoiding emotional decisions are fundamental principles of successful trading.

The share market presents a world of opportunities for those ready to explore it. No matter your level of experience, there’s always something new to learn and room to grow in the exciting landscape of stock trading. So, take your first step, and who knows? You might just uncover your potential as a successful share market trader!