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INTRODUCTION OF STOCK MARKET. Prepared By CA SANJEEV JAIN (B.C`OM(H), C.A, I.C.W.A). Shares are defined as ‘Total capital of the company divided into units of small denomination. Stock Exchange is a government recognized place where buying and selling of shares takes place.
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INTRODUCTION OF STOCK MARKET Prepared By CA SANJEEV JAIN (B.C`OM(H), C.A, I.C.W.A)
Sharesare defined as ‘Total capital of the company divided into units of small denomination. Stock Exchangeis a government recognized place where buying and selling of shares takes place. In India, presently we have 23 regional stock exchanges two national exchanges namely, The National Stock Exchange (NSE) and Over the Counter Exchange of India (OTC). Bombay Stock Exchange is the largest Stock Exchange in India where maximum number of transactions takes place. A company which intends to issue shares to the public has to get its shares listed on any of the stock exchanges. Listing means, the shares can be bought and sold on the stock exchange. Listed shares are categorized under Group A or Group B (Group A are rated higher than Group B) depending on the capital of the company and trading volume of the shares of the company.
Earlier share trading was done by exchange of physical share instruments between buyer and seller through an intermediary called registered share broker, transfer agent etc. Share certificate gets endorsed in favor of transferee by the authorized representative of the company on payment of some stamp duty. Stamp duty is payable by the transferee. Trading was done on trading floors of stock exchanges through open outcry system (Open outcry is a method of communication between professionals on a stock exchange which involves shouting and the use of hand signals to transfer information primarily about buy and sell orders), which was later on modified to screen based trading. It is a system whereby distant participants can trade with each other through computer network of the brokers either by placing the orders or by inputting the quotes. In both the above methods of share transfer by endorsement, the company reserves the right to reject the share transfer on account of certain deficiencies in the transaction.
Role of Primary Markets Serve to reduces the adverse selection process in raising capital 1. Underwriters (investment banks) certify firm type by taking firms public (IPO) 2. Rating agencies certify debt issues 3. Government provides strict framework for the registration process Reduces search costs – intermediaries (underwriters) find investors 1. Large institutions 2. Wealthy clients 3. Active household investors How does this relate to perfect capital markets (PCM)? 1. Rational expectations - a well-defined registration process with government supervision allows investors to have more homogenous beliefs 2. Transactions costs - Lower search costs reduces market frictions, and reputable underwriters communicate information efficiently
Role of Secondary Markets Liquidity: Investors trade time and risk, buying and selling financial instruments prior to maturity Search costs: Central trading locations reduce search costs Information production 1. Continuous trading – assets are priced daily 2. Low cost - look for stock price online Market discipline: addresses moral hazard issue of a firm changing type 1. Financial markets (FM) – react to “bad” news with lower stock prices 2. Market for corporate control (MCC)– lower stock prices make firms “good” targets for takeover
Most important sources for companies to raise money Allows businesses to go public and raise additional capital for expansion. Liquidity provided by the exchange allows investors to make quick money by buying and selling shares. If securities are held for a longer duration, say a year or more, the holder is entitled to earn dividend declared by the company out of its profits. So it is a win-win situation for both the corporate and the investor. However, this win-win situation may turn sour when the market index falls and share prices dip leading to loss of the holder of securities and even the company whose share price falls. Stock Market is affected by the dynamics of the economic/political activities in the country & rest of the world.
In India, there are two major Stock Exchanges: - a) National Stock Exchange (NSE) and b) Bombay Stock Exchange (BSE). Index of NSE is called Nifty and Index of BSE is called Sensex. Sensex is calculated on the basis of 30 different BSE listed companies. Nifty is determined on the basis of 50 different NSE listed companies. Sectoral Indices are those indices, which represent a specific industry sector. All stocks in a sectoral index belong to that sector only. Hence an index like the NSE Bankex is made of Banking Stocks. Sensex is calculated using free-float market capitalization method (Worth of the company in terms of its shares is called Market Capitalization and worth of the shares of the company which are available for trade on the stock exchange is called free float market capitalization)
Open: Opening price of the share in the morning. High: Highest price of the share during the day. Low: Lowest price of the share during the day. Close: Closing price of the share at day end. Volume: Quantity. Bid Price: Buying price. Offer Price: Selling price. Bid Quantity: Total number of shares available for buying. Offer Quantity: Total number of shares available for selling. Buying and Selling of Shares.
Shorting of Shares or Short Sell: First selling and then buying (this only happens in day trading) is called as shorting of shares or short sell. Share Trading: Buying and selling of shares is called share trading. Market Order: The market order gets immediately executed at the current available price. Squaring Off: This term is used to complete one transaction. T+2: Trading day plus 2 days. Transaction: One complete cycle of buying and selling of shares. Delivery Trading: In such type of trading, delivery of securities purchased is to be taken in the demat account. Stop Loss Order: They are limits set by traders at which they will automatically enter or exit trades. Insider Trading: It is trading of a corporation's stock or other securities by the corporate insiders such as officers, key employees, directors, or holders of more than 10% of the firm's shares.
It is the latest & current technology of share trading process of converting physical instruments in electronic form. A demat account is opened with a Depository Participant (DP). A depository participant is an agent of depository and a depository is a place where stocks of investors are held in electronic form. There are only two depositories in India- National Security Depository Ltd (NSDL) and the Central Depository Services Ltd (CDSL). There are more than 250 DPs registered with two depositories in India The securities on Demat appear as balances in depository account. These balances are transferable like physical shares. If required, these "demat" securities can be converted back into paper certificates.
Some investors do the trading by involving the brokers. They open demat account with the DP and use trading account of their broker for executing the transaction. While selling the shares, order is placed with the broker and delivery instruction is given to the DP. Demat account is debited by DP by the number of shares sold and payment is received from the broker. While buying the shares, depository account number is informed to the broker for crediting the shares in the account. In such cases, certain amount is set aside with the broker by the investor for doing the purchase transactions. Amount of money to be kept with the broker depends from broker to broker. This is called Offline Share Trading. • However, if the investor is doing trading himself, without involvement of broker, he needs to open three accounts: • Saving Bank Account- used for setting aside money for the sale/purchase transaction • Demat Account- used for holding the securities • Share Trading Account-used for sale/purchase of equity shares through the broker.
Hence, essential for an investor to open an account with a broker before he starts buying or selling securities. There are more than 8,000 SEBI registered brokers and sub-brokers, all providing a similar service, i.e., buying and selling securities. CHOOSING A BROKER: - a) Reputation b) Flexibility c) Broking Rates d) Different Modes of Transaction e) Service Quality OPEN YOUR DEMAT ACCOUNT: - you must filter the right choice before you open a demat account. There are several kinds of DPs operating in the market. They can be broadly classified as follows: a) Banks working as DPs such as HDFC Bank, ICICI Bank,etc. . b) Custodians such as Stock Holding Corporation of India Ltd., Infrastructure Leasing and Financial Services (IL & FS) c) Brokers acting as DPs like ShareKhan, Anand Rathi etc. d) Others would include Indiabulls and Foreign Banks.
How to select a DP of your choice a) Reputation b) Cost i) Annual Maintenance Charges ii) Charges for Debit in DEMAT Account iii) DEMAT & REMAT Charges iv) Charges of Pledge of Securities c) Accessibility Need for a banking account: Transactions involving shares require movement of money in and out of your account. Hence, bank accounts are mandatory along with broking and demat accounts. You may use your savings account for purchase and sale of shares by notifying the bank account details in your demat and broking account Three-in-One demat account: Some brokers and banks offer a ’Three In One’ demat account, where you open a demat, broking and bank account with the same entity, in case of a bank DP. Elsewhere, if the DP is a broker, an existing bank account can be used for the purpose of a ’ Three In One’ account. This ensures easy transfer of funds. However, in some cases the brokers insist on opening a bank account with a particular bank as they often have tie ups with that bank. These accounts or tie ups are beneficial as they provide a one stop solution to you, thereby saving your time and unnecessary paper work. This has also proven to be cost effective. E-trading platforms are also available in most cases where, ‘Three in One account’ facilities are available.
Requirements for opening a demat account:The following documents are required to open a demat account: - a) Proof of residence (NSDL and CDSL provide a list of acceptable documents which include electricity bill, phone bill, ration card, driving license etc.) b) Proof of identity (PAN card is mandatory) c) Bank account details (A cancelled cheque for capturing MICR) d) Nominee details Bank account details must get properly captured in a demat account as benefits like dividend and interest are directly credited in the bank account. Also, when you make an application for an IPO, you receive a direct credit in your account to the extent of shares not allotted. Requirements for opening a broking account:The following documents are essential to open a broking account: a) Proof of residence (A list of acceptable documents provided) b) Proof of identity (Since PAN is must, it is used as POI) c) Bank account details (cancelled cheque for direct debits and credits) Starting investments:Once you are through with this paper work, you are ready to start investing. Buying and selling shares on the market occurs from 9: 55 a.m. to 3:30 p.m. on all working days. Stock exchanges don’t work on Saturdays, Sundays and notified holidays.
This Diagram can be effectively used as a general guideline for identifying how your investments should be allocated. For example, if you fall in the red side, you’ll invest a higher slice of the pie in equities. On the other hand, if you’re playing it safe, you’ll invest more in debt instruments.
If your objective is to create wealth, you cannot afford to invest in low-risk low-return investments. Hence, in the long run, returns from equities far outperform all other investment classes. The figure below will tell you why equity investments must form a part of your asset allocation.
Nonfiancial corp. business: - Industry which does not deal with financial or investment-related goods or services.
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks. Column 3: Company Name & Type of Stock - This column lists the name of the company Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. Column 5: Dividend Per Share - This indicates the annual dividend payment per share. Column 6: Dividend Yield - The percentage return on the dividend.
Column 7: Price/Earnings Ratio Column 8: Trading Volume - This figure shows the total number of shares traded for the day Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day Column 11: Close - The close is the last trading price recorded when the market closed on the day. Column 12: Net Change - This is the value change in the stock price from the previous day's closing price.
The Bulls A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook". The Bears A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".
What causes an index to move up or down? Let us look at some of these factors: Economic Indicators: Economic indicators are one of the most important drivers of an index. GDP growth, balance of payments position, interest rates etc. are some of them. These have a direct bearing on the movement of indices. Hence, news related to strong trends in GDP growth would normally lead to an upward movement in an index primarily because any news related to growth of the economy is likely to positively impact almost all industries. If the Sensex has shown a CAGR of around 35 percent in last five years, it is because Indian economy has grown at more than 8 percent. Sentiment:Sentiment is a critical factor in the stock market. While it cannot be quantified like GDP growth, it makes a big impact on the index movement. Sentiment is nothing but perception of an economy, industry or maybe even a company. As there are several categories of investors including foreigners, Indian institutions and retail investors, each of them perceive the market to move in a particular way. Therefore, even though economic indicators may be positive, the index may trend downwards due to prevailing sentiment. Sentiment is purely psychological and in the short term, a positive sentiment helps the market to move upwards.
Industry Specific Factors: Sometimes, an index like the Sensex may go up, but a sectoral index may show an opposite trend. This is primarily because of news related to that sector. Inflation: Inflation is perceived to be a villain of the stock market. With a rise in the inflation rate, the government takes measures to control money supply. Taking liquidity out of the economy means hiking interest rates. This drags the indices down as on one hand increase in interest rates makes fixed income instrument attractive for the investors and on the other hand, reduced liquidity means lesser trading in the stock market. This double-edged sword curbs the growth in rate of return, which an investor would expect from stock market. Other Factors: There are several other factors as well which have an impact on an index. Government policies, fiscal environment, global factors etc. can all cause a serious impact. Due to larger foreign participation, Indian markets are no longer insulated from global risks. Any change in the international environment can affect movement in the stock market. It has been said that our markets are largely driven by overseas investments. While there may be no way to prove it, the fact remains that you need to keep track of the global environment.
