Buying and selling stocks of a company is done electronically through authorized brokers, or stock brokerage companies, who are registered with the stock market regulator, Securities and Exchange Board of India (SEBI).

Understanding how to buy and sell stocks is key to investing in the share market, for traders who wish to build a well-balanced investment portfolio.

In order to buy and sell shares of a company, you will need a demat and a trading account. For this, you will have to approach a broker, or a sub broker, registered with SEBI. The regulator issues them a registration number that begins with the letters “INB” (broker), “INS” (sub-broker), or “INF” (broker), which are essential to verify their authenticity.

Broker’s registration number is usually found on their official website, and you may verify it by checking it on SEBI’s website. Once you’ve selected your preferred broker, you may choose to open a demat and trading accounts either online or visit the bank’s branches offering demat services.

The broker, or sub-broker, with whom you sign a “Member Client Agreement”, to execute trades on your behalf, will help you open a demat account. A demat account stores your shares, or securities, in a dematerialized form, or in an electronic form.

When you buy and sell shares and other securities, the transactions are reflected in your digital demat account. A demat account is opened in the name of an investor for the purpose of holding and transferring shares.

Following documents are required to open a demat/trading account:

Two to three passport-size photographs.

Proof of identity: PAN card, Aadhaar card, passport, voter ID card, driving license, etc.

Proof of address: Ration card, passport, voter ID card, driving license, bank passbook, electricity bill, etc.

Proof of bank account: Name of the bank, account number, or a canceled cheque.

Note: Demat accounts are of two types, namely repatriable and non-repatriable demat accounts. A repatriable demat account allows traders to take funds abroad, whereas funds cannot be repatriated in a non-repatriable demat account.

A trading account acts as a bridge between your demat and bank account. A trading account is simultaneously created while opening a demat account, and the KYC is done with the same documents submitted earlier. Once the trading account is created, you can buy and sell shares of a company.

For example, when you buy a certain number of shares of a company, you fund your trading account to initiate the transaction. The shares you purchase are then stored in your demat account.

Similarly, when you sell a certain number of shares you own, the amount is credited to the trading account. If you wish, you can then transfer the amount from your trading account to the bank account.

Overall, the process of buying and selling of shares takes place in three steps.

Trading: The process of buying and selling shares of a company. Investors choose which stocks to buy or sell, and execute the trading order. Every stock broker is registered with a clearing house—National Securities Depository Limited (NSDL) or Central Depository Security Limited (CSDL), or both—which acts as a bridge between investors and the company for ensuring a smooth transaction.

Clearing: Depository organizations match the trading order. In the process of buying, the number of shares equivalent to the amount is transferred from the seller to the buyer’s demat account. Similarly, a seller will receive the fund in the trading account.

Settlement: The process of buying and selling stocks from the trader’s account may take nearly 2-3 working days for the transaction to reflect in their trading account.

There are mostly two most common types of trading order you’ll have to choose from:

Market order. This type of order instructs the broker to buy stock immediately at the current price available in the stock market. However, the price at which investors place a market order to buy or sell shares of a company doesn’t necessarily match with the order executed as stock prices are volatile and change in milliseconds.

Limit orderIndore Stock. In this type of trading order, investors name their price and the amount of shares they wish to buy or sell. It is only when the price of a share falls to a desired level, the order is executed. The trade gets canceled if the stock doesn’t reach the specified price before the limit order expires.

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Investors need to be prudent in the process of buying and selling stocks in the share market to maintain a well-balanced investment portfolio. However, stock markets are volatile and stock prices change every millisecond. Investors must make their own investment decisions and only after consulting financial advisors as may be necessary.