Trading Procedure in a Stock Exchange (2024)

The stock exchange refers to a virtual body meant to regulate and control the buying and selling of securities. This market is based on trading, simply the buying and selling of shares of certain companies, known as stocks. There are specific steps that need to be followed to trade and settle these stocks. Some famous stock exchanges of India include the Bombay Stock Exchange and the National Stock Exchange.

Overview of the Stock Exchange

• Also known as the stock market, it is a virtual form of trading, buying and selling shares in companies

• Transactions in the stock market can only be made with the help of brokers or authorised members

• The stock market needs to be recognised by the country’s government where it is operating

• There are four main kinds of stock: Preferred Stock, Common Stock, Growth Stock, and Yield Stock

• There are various features and functions of the stock market

• The stock market works as a facilitator of liquidity. This means that the shares can be converted into cash as per those who invest

• The stock exchange is also a valuable feature of economic growth in the country due to the increase in the number of investors

• It also helps in the pricing or valuation of the securities, thus benefiting the investors.

• A stock exchange also helps in speculative activities in the market for those who want to take part in profitable investments by observing the market

• Due to the requirement of stock market to be recognised by the government, this body is a safe one for investors

• Many steps are involved in the trading of shares in the stock market.

Important Terms in Stock Exchange

• Bear: It refers to those speculators who take a negative outlook towards the market and predict the fall in market prices

• Bull: These are speculators who predict a rise in prices and adopt a positive market view

• Broker: A broker is a person who is simply a middleman. They carry out all orders on transaction on behalf of the investors

• Bonds: These are fixed-income investments that companies or the government issue to buyers

• Dematerialisation: It refers to the conversion of physical certificates to electronic ones

• Depository: This is a company or organisation that holds all securities electronically.

Steps of Trading Procedure

• The trading procedure involves the following five steps:

1. Selecting a Broker: The stock market involves trading through only authorised brokers. These brokers can be individuals, companies, or even partnerships. To begin the trading process, one should select a registered broker.

2. Opening a Demat Account: De mat is short for dematerialised. The Demat account is opened with the help of depositories, which include brokers and banks. It is through this account that trading activities take place. This is an electronic system. The depository helps keep the investor or account holder informed about their transactions and the status of their investments.

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3. Placing an Order: Once a Demat account is opened, investors can place orders in different ways, such as through brokers or themselves. The order comprises the buying and selling of shares in the stock market.

4. Execution of the Order: Once an order is placed, it is executed by the broker. Once executed, a contract note is issued, which informs the investor of all transaction details or orders, such as date, time, and amount.

5. Settlement: This is the final step in the trading procedure. It involves the actual transfer of securities between the buyer and the seller. This also needs to be carried out by the broker. The two main kinds of settlement are On-the-spot settlement, where funds are immediately transferred and exchanged on the second working day of the transaction, and Forward settlement, which implies that the transfer or exchange will be carried out at some point in the future.

Conclusion

Stock exchange refers to a body where shares of companies are bought and sold. It operates only in areas where the government recognises it. There are four kinds of stock: preferred stock, growth stock, yield stock, and common stock. There are several steps involved in the trading procedure of the stock exchange. The process begins with selecting an individual or company to trade, known as a broker. Then, a Demat account is opened, an order is placed, which is then carried out by the broker and is ultimately settled by the buyer and seller. The stock exchange helps in economic growth as well as increasing liquidity.