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
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
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-
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
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
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
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.
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.
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.
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
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
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
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.