How it unfolds, step by step
The setup
Two investors and one business, Example Manufacturing. One investor offers to sell ten of its shares at ₹200 each. The other is willing to buy them. Nothing about the company changes while they talk.
What happens next
The two orders match. The trade value is ₹2,000 before charges. The money reaches the selling investor through settlement. Settlement is the process that works out who owes what, and then moves the money and the shares. The business does not get a fresh ₹2,000. Four different jobs were done here, and they are not the same job. The broker gave access to the trading system. The exchange was the venue where the two orders could meet. Clearing and settlement moved the money and the shares. The demat account showed the buyer's ten shares. A demat account is the electronic record of the shares you hold.
What it means — and does not
The buyer now owns ten shares. That is a claim on a business, not a promise of a return. If the price later reads ₹220, the holding is worth ₹2,200. The change is ₹200 before charges, not ₹2,200. And it is only on paper until the shares are sold. None of this shows whether the purchase was a sensible one. A quoted price records where somebody traded. It does not measure what a business is worth. A low price per share is not the same thing as a cheap company. A popular company is not automatically a suitable one to own.
What this does not establish
This describes an ordinary trade between two investors, in shares that already exist. It stops applying to a fresh issue of shares by the company itself. In that case the money really does fund the business. It also leaves out what happens when a seller fails to deliver. The exchange handles that through a separate process of its own. And it stops short of your own position. Knowing how the process works does not remove market risk. The maths above is the same whether the price later reads ₹220 or ₹170.
Things to check
5Who receives the money in this trade — the selling investor, or the company?
Which of the four jobs is which: broker access, exchange venue, clearing and settlement, demat record?
A holding worth ₹2,200 cost ₹2,000. What is the change before charges?
What does the quoted price not say about the business behind it?
Separate the transfer between investors from the company's own finances.
Common mistakes
4Reading the value of a holding as the profit. Ten shares at ₹220 is ₹2,200 of value and ₹200 of change before charges.
Assuming a purchase on the exchange funds the company. Buying from another investor pays that investor.
Treating a low share price as a cheap company. The price of one share says nothing on its own about what the whole business costs.
Counting an unsold position as a finished result. Charges on the later sale reduce whatever cash comes back.
Ten shares bought at ₹200 are quoted at ₹220 each. What has the holder gained before charges?
- ₹2,200 — the value of the ten shares at the quoted price
- Nothing certain, because the company has not paid anything out
- ₹200, and only on paper
Show the answer
C. ₹200, and only on paper
₹2,200 is what the holding is worth. The change is the difference between that and the ₹2,000 paid. The first answer is tempting because it is the number the screen leads with. But the screen is showing a total, not a gain. The ₹200 is only on paper until the shares are sold, and the sale charges would reduce it.
Frequently asked
3Is an index the whole market?
No. An index is a basket of securities picked under a published method. Its movement sums up that basket. It does not sum up every listed business, and it does not sum up what any investor actually went through.
Do I need to trade while I am learning?
No. You can read the order sums, compare the statements and use the calculators without placing a trade.
Is a rising price proof of a good company?
No. A price move on its own does not show that the business is a good one. It does not show that the price being paid is sensible either. A business can report better results while its share price falls. What people expect, what borrowing costs, or the price already paid may all have changed.