Buying Shares Meaning
Buying shares refers to the process of purchasing shares of a company, keeping in mind the sequence of steps to be followed. When an investor, be it an individual or entity, purchases shares of a company, the latter gets an opportunity to raise funds to explore, expand, and grow its business. The former, on the other hand, gain share in the profits of the firm.
Knowing how to buy shares in a company 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.
Table of contents
- 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.
How Does Buying Shares Work?
Buying shares is an important step to getting involved with a company. It is a way to build wealth. Systematic investment is crucial to building wealth over a longer tenure. The share prices do not remain constant. 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.
In the process of buying shares online or offline, there are mainly five parties involved.
- The company is the one whose share one wants to purchase. The stocks or shares must be a 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.. If the company is not publicly listed, one cannot buy its shares.
- The exchange is where the shares trade. Without the exchange, which is the ultimate trading platform, investors cannot buy shares.
- Brokers work as authorized parties in the trade. The exchange permits brokers to trade on behalf of investors.
- The depository banks work as safekeepers of the shares on behalf of investors.
- Last on the list are investors, who are willing to buy or sell a share.
All the parties play a vital role in accomplishing a share transaction.
How To Buy Shares?
Buying the best shares is what all investors look up to. However, here is a list of steps involved in purchasing shares:
- Open a Brokerage Account
Investors, be they individuals or entities, have to open a brokerage account, which helps in a convenient share transaction. When one opens this account, they are open to multiple options regarding buying or selling of stock. These offer both taxable as well as tax-advantaged accounts.
The brokerage firms assist and guide the investors through the whole process and also lets them explore the best buying shares schemes and options. These include direct stock purchase plans, full-service brokerage, etc. While the former is chosen when individuals or entities know which stock they want to invest in, the latter is selected when they require additional services from the brokerage firm.
- Explore Available Stocks
Once a person opens a brokerage account and there’s a brokerage service provider to assist, they are exposed to a number of stocks that are available for sale. While some are growth stocks or value stocks, a few of them are dividend stocks.
A growth stock is one that signifies company shares that are indicative of rapid and constant growth. On the contrary, the value stocks are those available at huge discounts and keep going until they are appropriately valued in the market. The dividend stocks, however, are the ones that make investors eligible for earnings in the form of returns on their investment, called dividends.
- Execute Trade
Once the brokerage account is opened and the stocks to invest in are decided on, the next step is to execute the order. There are two types of trades that can occur here – market order and limited order.
The former is the one where investors instruct brokers to buy the stocks at the lowest price available. On the contrary, the latter is initiated when the investors ask brokers to execute a trade only when the prices fall below a particular range within a specified time.
- Play Safe
The brokerage firm one associate with helps in identifying ways of keeping the investors safe, no matter how volatile the market becomes. One of the best buying shares tips or recommendations is to use the dollar-cost averaging technique. Per this, the investors fix an amount to buy stocks at regular intervals and may pay less on average within the specified time. This spreading out of buying shares keeps them off from extreme highs and lows of the market.
- Be Careful With Stock Selling
Most people sell their stocks when they need money. However, in the rush of obtaining funds, they end up being careless at selling the assets. This is what should be avoided. Hence, it is important to have a plan and strategy to make sure the deals cracked are fruitful.
Mr. X wants to purchase Facebook shares, which are trading at $207. How will he do that?
Step 1: Mr. X will open a brokerage 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.. 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, the shares take a few days to credit to the brokerage account.
Advantages & Disadvantages
While buying shares has a lot of advantages for the companies issuing the shares and the individuals and entities buying them, it also has some risks associated with it. One of them is to be well aware of the market fluctuations to book the right share transaction deals at the right time.
- 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).. 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 one has faith in a company and they like how the company has been performing, buying a share is the easiest way to involve with the company. It offers investors buying ownership in a particular company.
- Market fluctuation, as discussed earlier, is the main risk. One never knows when the prices of the stocks in question would increase or decrease.
- The level of company risk is high. In case, the company suffers and incurs a loss, it will affect the share prices. This deterioration in the prices affects the investors automatically as they are the share buyers.
- There are rules to follow to ensure buying shares remains an ethically and legally sound process.
Frequently Asked Questions (FAQs)
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.
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.
By funding start-ups and intermediaries, purchasing ESOPs directly from employees or promoters, or contributing to AIF and PMS plans that unlisted purchase shares, one can invest in the top unlisted companies in India. Illiquidity, capital loss, a lack of dividends, and dilution risk are some of the dangers.
This article is a guide to Buying Shares meaning. Here, we explain how to buy shares along with the advantages, disadvantages, and an example. You may learn more about financing from the following articles: –