How to Buy Shares? (Step by Step Guide with Examples)

Buy Shares Meaning

Having knowledge of how to buy shares is very crucial for a person who wants to have exposure to the equity market. Equity markets are volatile and the timing is very important. Shares trade in exchanges, but you just can’t go and buy a share from the exchange and there are several steps involved in purchasing a share.

Parties Involved

Mainly five parties are involved in a share transaction.

First: The Company whose share you want to purchase should be listed security. If the company is not listed, that means if the company is not public, then you can’t purchase its shares.
Second: There should be an exchange where the shares will be traded. Without exchange, that is a trading platform, you can’t buy shares.
Third: Broker works as the authorized party in the trade. Exchange gives permission to brokers for trading on behalf of investors.
Fourth: Depository Bank works as a safe keeper of the shares on behalf of investors.
Fifth: We need investors who are willing to either buy or sell a share.

All the above-mentioned parties are required to successfully complete the transaction of purchasing a share.

How to Buy Shares?

There are several steps involved in it:

Step #1 – Choose a Broker

Choosing a Broker. There are several brokers in the market. You need to choose your broker wisely. Every broker charges commission, so you need to check the market properly and choose a broker who charges less commission and execute trade faster.

Step #2 – Create a Demat & Trading Account

Creating a Demat and Trading account. This step is very important and is the most crucial step. You need to open a Trading account with your Broker. This account will help you to trade on equities. Trading means buying and selling of shares. You need a platform where you can purchase and sell shares. So trading account gives you that platform.

DEMAT account is with the depository. They help you to preserve your shares. Earlier shares used to be in paper format, now they are all digitalized. So you need to have a bank where the digitalized shares will be stored. So the depository bank acts as a storage house for the digitalized shares.

Step #3 – Choose the Shares You want to Buy

Choosing the company whose share you want to purchase. Choosing the correct share is very important. Proper analysis should be done before buying. We should purchase shares whose market price is below its 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, then the share price will increase and meet its intrinsic value. So we should purchase the share as it is under-priced now.

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Step #4 – Transfer Money to your Brokerage Account

Transfer money from your Bank Account to Brokerage Account. Without money, you can’t trade.

Step #5 – Buy the share & Pay Commission to Broker

Buying the share and paying commission for it. Once you buy a share from your trading account. It takes 2 to 3 days as per market norms for shares to get credited in your Demat account. This time is called settlement time. In the depository bank, the earlier owner’s name will be removed and the new owner’s name will be added. So it takes a few days.

Step #6 – Shares get Credited to Demat Account

Shares will be credited in your Demat account and will stay there forever until and unless you are selling it.

Example of Buying Share

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

Solution

Step 1: Mr. X will have to open a Trading and Demat account. Say Mr. X choose ABC as the broker and sets up a trading account with him. Every broker has tied with depository banks and the broker will help Mr. X to open an account with depository bank.

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

Step 3: Now Mr. X will have to buy the shares of Facebook using his own online trading platform or by giving instructions to a broker on the client’s behalf. If Mr. X wants shares at a fixed price, then he will have to give limit orders. If he wants to buy shares at any price prevailing in the market, then he can give market order.

Step 4: Once bought, money from his brokerage account will be used. It takes a few days depending on the market for the shares to get credited in the Demat Account.

Benefits

Shares are a great way to gain exposure to the equity market. The equity market has got several sectors that comprise the economy of a country. So if a person feels that the Auto sector is going to rise then that person should purchase a share of a company from the Auto sector or invest in ETF of the auto sector.
Systematic Investment in shares for a longer period has always been proved to be beneficial in the past. If you analyze data from the past 20 years then you will see that on an average the equity market has provided more returns than 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 actually 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 get 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. Proper research should be conducted while choosing the broker and also during the stock selection.