Chapter - 1 Basics of Share Market Understand the Classification of Stock/Share: The term share is the portion of ownership of a company. Share represents a claim on the company's assets and earnings. As you acquire more shares, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. Holding a company's share means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock. A share is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your broker keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the broker. Now, trading with a click of the mouse or a phone call makes life easier for everybody. Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a ACC shareholder doesn't mean you can call up the Chairman/CEO and tell him how you think the company should be run. In the same line of thinking, being a shareholder of ACC doesn't mean you can walk into the factory and grab a free case of Cement! The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions. For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on. Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets. A company issue stock The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO). It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful. It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing. Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-12%. When one is investing in loan instruments like debentures or bonds or fixed deposits, and when one is an income-tax payer, it is the after-tax return which is the real return, not the rate of interest. The relevant rate of interest on the investor’s slab of income should be deducted from the earnings, and the actual return compared with returns from tax-sheltered instruments, such as tax- free bonds. Investment opportunities for NRIs in India All over the world you will find Indians, their roots are still strong and they have an unbreakable link with their native country. Most of the NRIs have families living in India and want to invest something for them. Many NRIS want to come back to India at a later date so want to invest here. Basically there are a few formalities that have to be completed by the NRIs after which they can invest in India. The main documents needed are PAN card, ID Proof and Address Proof, a KYC certificate for Mutual Fund investment above Rs.50,000/- and Passport size Photographs are required. They also need to open a Non-Resident External Account that is a Dollar Account, or Non- Resident Ordinary Account that is a Rupee Account is needed. The difference between these two accounts is that the investments made and the returns got from those investments, using the NRE account can be sent back to other countries. NRIs can invest directly in any mutual fund from their account. You can invest either one time investment or in systematic investment plan or quarterly, etc. The amount invested in Mutual funds can be repatriated fully. To make the investment the KYC forms is to be filled and then the investor will be sent a communication stating that the investor is verified. A copy of this letter has to be attached will all the transactions done in the mutual fund, whether it is investment or withdrawals for an amount above Rs.50, 000/-. The forms for investment can be downloaded from the site of the mutual fund and the NRI could sign the form and sent it back to the Mutual Fund Company, or a broker if he has appointed any or relative and sent it to the Fund Office. The NRIs can invest in share with a demat account, but they have to take RBI approval for each transaction. It can be tedious so it will be easier to invest in Mutual funds. Online Trading in Indian Stock Market The interest has opened a Pandora’s Box for the investors. Those who never thought about investing in stocks have now stated investing in the share and stocks. The internet trading has made it simpler and easy to understand, but the basic rules of trading or investing have not changed and you have to be smart enough to follow these rules so as not to have any losses. The basic rule of smart investing still holds. The rules and guidelines have to be followed to help them make money. The internet has opened a wide variety of websites and trading sites that gives an investor with daily market commentary, stock tips and trading fundamentals, it also provides trading and depository facilities. These services provided by the websites are not free and charge high rates. However, there are a few websites that offer opportunity for the new emerging group of willing investors to test their trading fundamentals and techniques and learn new ones. There are a few virtual stocks trading portal as well, which can help in learning the process of stock market well. These websites offer a new investor to experience the dynamics of real time stocks trading at zero cost and zero risk. You can learn to trade in equities of top Indian corporate in a virtual manner. You can learn and test main points of the online trading techniques and fundamentals. Generally, these sites offer virtual money through which they invest. They input the market data in real time basis and you can buy or sell order on both intraday and delivery basis in such websites. You can order at both limit and market rates. This way you can learn to trade without losing any money. The new generation Indian has lots of money that they want to invest as the lure of making money is there. The online websites has made it possible to them to make money from trading. Depository A depository is an entity which holds securities of investors in electronic form at the request of the investors through a registered Depository participant. It also provides services related to transactions in securities based on instructions given by the investors to depository participant. Depository system A major weakness in the Indian stock market has been the lack of depository services on modern lines . Depositories provide for maintenance of ownership records in a book entry form. Before the Depositories Ordinance introduced the depositories system in India, every share transfer required to be accomplished by a physical movement of share certificates to, and the registration with the company concerned. Depository participant A depository participant is a person or entity, which is registered with depositories such as NSDL and/or CDSL as also with SEBI and who offers services of holding your shares and effecting transfer (accepting credits in your account as well transferring shares from your account to that of some one else based on your instructions). Thus a depository participant acts as a custodian of your securities held in dematerialized or fungible form and carries out your instruction to transfer the same. The two models of the depository system are: 1. Dematerialization, wherein, by operation, there is no physical scrip in existence as neither the individual who owns the shares nor the depository keeps scrip’s. The depository maintains the electronic ledger of the securities under his control. 2. Immobilization, wherein the physical scrip’s are held in the depository vaults, supporting the book entry records kept on the computer. Two types of ownership are contemplated under the depository system and can be briefly put forth as follows: 1. A registered owner is the depository who holds the securities in his name. 2. A beneficial owner is the person whose name is recorded as such with the depository. Though the securities are registered in the name of the depository actually holding them, the rights, benefits and liabilities in respect of the securities held by the depository vest in the beneficial owner. The depository model is based on the deposit of securities by the owner of the securities with a certified depository. Subsequently, an entry is made in the name of the said owner, manifesting his ownership of the securities upon which the person depositing the securities becomes the beneficial owner in respect of the said securities. The service provided in relation to this by the depository is that of recording of allotment of securities or transfer of ownership of securities in the record of the depository. BSE and NSE The main focus of stock trading in India is on the companies that are registered with the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The Bombay Stock Exchange located at Dalal Street, Mumbai, is the Asia’s oldest stock exchange. It is also a symbolic head of the stocks trading in India and lists over 6000 companies. It has the largest number of companies and so it is the largest stock exchange in India due to this fact. In south East Asia it is the largest stock exchange. Another stock exchange in India the National stock exchange is also located in Mumbai and has the largest number of equity-based and derivative- based trades and the daily turnover is the largest in this exchange. Many other stock exchanges are also there in India, but they are small fish compared to these two large stock exchange. The BSE and NSE have the largest number of trading enlisted. India having such a large population and more and more people are investing in The demat account opened by the broker makes it possible for the investor not to actually visit the stock exchange, All the latest updates are given in the news and is also available online. The share certificates are now in form of virtual share certificates, these share certificates exist in actual database and not in physically. Those who are interested in buying and selling of the shares do so with the help of these demat accounts. They can buy and sell shares online sitting in their homes. Many important companies have taken a plunge in this type of brokerage. It has made possible for ordinary Indians to buy stocks and sell stocks without actually having to visit the stock exchanges. The process offered by them is simple and transparent those who have little extra money also can invest through this type of account. Unpredictable stock market It is not for weak and faint hearted to invest in the stock market. The art of trading is not there in everyone, you have to be alert as well as strong willed to invest in stocks. The markets are unpredictable so investing should be done wisely. There are many pundits trying to predict about the stock, but many times they are true and many times they are not true. When anyone’s predictions are not true, it is usually not publicized while the correct ones are publicized. It is not easy to make prediction of the Indian stock market. Even if someone knows about certain turns that the market may take, they won’t share it with you. The general tips are for everyone to know, but the secrets of trading are not passed by everyone. However, the best known secret in investing in stocks is to do it by observing the market. You can read the market trend and invest when you see the upward trend in the market. You can just ask about the point until which the market will rise or fall. If the market trend is rising, then how do you know when to buy? You should observe the market and during the rising trend should look for the signs of the changing trend. During the downward trend of the market, you should observe the signs of changing the trend to upwards. You should also observe for resistance in a rising market. If certain level is reached, then you should know through observation when the market breaks out. It means that the smart investors will wait for stability before buying or selling stocks or shares. To invest in stock is not a game and has to be taken seriously. It is a risky business and be smart to gain in this. Tips for investing in Stock market in India You have to invest widely in the stock market to get good return. The tips provided by many stock brokers can help you in getting good results. The tips are offered by experts who watch the market continuously and are able to analyze the market trend. These tips are based on expertise of the people giving tips, analysis and studying of market trends. The tips are offered keeping in mind the technical scrutiny, past experiences, and related things. The tips are sent through SMS during the trading hours. Some even send emails or talk on the phone and advise regarding investment. There are many sits also that show you the up and down trend of the stock market. Keeping track of wider index related to sensex India, like NSE Nifty and BSE Sensex can be had from these sites. You have to register to these sites and one you have registered you will be able to get the latest news about the fluctuation of the market, stock market shares and the up and down of any shares. These sites also offer advice by experts. You have to open a demat account through stock broker and this broker will guide you through the rest. You will find that share trading in India is easy if you are furnished with share trading tips and have complete information of stock market share and sensex India. When your account is open, then you can buy and sell shares and your ownership. The stock shares will be approved with the issuance of a legal document - a stock certificate, which is a record of the shares you hold. Many times you will get good returns whether your investment is big or small. You will get fast cash if the stock market turns to your favor. Do your research properly and register with a reputed stock broker who will uphold your interest. The attraction of Indian stock market The undeniable attraction in Indian stock market is like a lure for many people. You are not able to deny its attraction. Even if you suffer losses, the next day you are ready with to invest again in some other shares. It is just like the passion for gambling. You just can’t resist it. Even if you want to get up and leave you are pulled back again with its attraction. You are glued to TV sets with the latest stuck new and trend being televised. You watch the graph like a hawk ready to pounce on every upward going share. At the end of the day there is joy for some people and sorrow for the others. Those who have gained with shares are full of joy while those who have lost wait for the next day so that they can change their losses to gain. The thrill of investing is a thrill just like racing or gambling, you just can’t stay away from it. You watch the trend of a particular share for a week before you try to invest in it. The life of the stock broker is very thrilling as there are daily ups and downs. There is a huge data base, stock to be read thoroughly, graphs to be deciphered and watching people making million and people losing millions. There is no other excitement, which is so much full of thrill and enjoyment. It is like a game which has to be played regardless of whether you win or lose. You have to play it and you can’t resist it. It needs guts to play this money game, you have to keep your cool, be calm hold on to your nerves and react very fast to gain money. All of it is done within second so no late reactions. Once you get in the excitement of share trading, you won’t like to leave it. Stock market - The Mind Game The stock market is the game of the mind. You have to be mentally very strong and alert. You have to be consistent in your investment; you should not change your mind after placing the stop loss order. You have to put a stop loss order or cancel the same if you see that the market is going against you. Many people try to stop loss level to try and give time for market to move in the desired direction. However, you have to maintain the original stop loss level and try not to cancel it. If you cancel a stop loss order you are trying to hope that market will reverse its direction and move in the direction of your trade. It is not a wise move You have to be sure in your mind when you are trading. You have to think properly if you want to trade; unless you are fully satisfied you should not make any investment. Try to do popper research and consultation before investing in any stock. Whatever you buy, you buy don’t thinking or giving it proper consideration. If you reach a decision, then you have to abide by that decision. You should be firm in your thinking and do not change your mind or cancel the trade without adequate reasons. Even when a market reverses direction never let a profit run into a loss of capital, you ca do it by raising the stop loss level gradually. This system of gradually increasing the stop loss level will ensure that you roll your profits and cut losses. You should not make basic mistake of cutting the profits short out of fear, and roll the losses on the hope that the market will move in the desired direction. It is a mistake that has to be avoided at all levels. Be firm in your mind and use your stop loss orders effectively and gradually increase them to stay with the trend, until the stop loss order is triggered. Stock Market information The biggest technological revolution of out times is the internet. It has proved to be a blessing for all of us. Many things of which we just dreamt about, has become accessible to us. Trading is on feature that has become very common. Even sitting in a remote area you have access to all the information that would not have been possible a few years back. Complete information about company, latest data, statistics, possible tends all are available on the internet. Through the internet the companies list their stocks in the stock exchange. The stock exchange want to list maximum number of companies in their exchange as it makes it possible to get good returns if more companies are listed in the exchange. Buying stocks of any company and keeping them for a long time will be profitable for you if the company makes profit. In any particular exchange the companies’ get a trading symbol, this symbol is known as a ticker. When you know the ticker of a company you can get important details about the company. The exchange gives all the information about the company and you get to know the details of the company from exchange. You have many tools on the internet that helps you to make a sound decision regarding your investment. You have to plan your tactics properly, for this you can use both technical analysis as well as fundamental analysis pal according to your rational thinking. The long-term investor should plan the trading using technical analysis, but the short-term trader should use fundamental analysis. Historic research is done in technical analysis and it views the long- term prospects. Daily movement is not taken into consideration. On the other hand, fundamental analysis is a daily analysis and short-term trader will benefit from it. Study these analyses and then invest wisely.
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