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Wednesday, December 23, 2009

What are the different ways in which I can invest in shares?

There are basically two ways in which you can invest in shares:
1) Purchase shares from the primary market (ie IPOs)
The first time that a company’s shares are issued to the public, it is
by a process called the initial public offering (IPO). In an IPO the company
offloads a certain percentage of its total shares to the public at a certain price.
Most IPOs these days do not have a fixed offer price. Instead they follow a method called the bookbuilding process, where the offer price is placed in a band or a range
with the highest and the lowest value (refer to the newspaper clipping on this page).
The public can bid for the shares at any price in the band specified. Once the bids
come in, the company evaluates all the bids and decides on an offer price in that
range. After the offer price is fixed, the company either allots its shares to the people who had applied for its shares or returns them their money.
2) Trade in the secondary market, ie stock exchanges
Once the offer price is fixed and the shares are issued to the people,
stock exchanges facilitate the trading of shares for the general public.
Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly, they have to execute their transactions through authorised members of the stock exchange who are also called stock brokers

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