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first step to investing in the

W

hy should I put my hard earned money into shares when I am not sure of a return? If there’s a science to investing then why do we call investing a risk? And if it’s not a risk, then why do people end up losing money from their investments in shares? In this booklet we have tried to answer the questions you might have about investing in shares. When is investing in shares a risk and when does it become a science? How can you be assured that your investment in shares is safe? And more… More importantly, we’ve tried to explain some basic concepts that most investors take for granted but that are crucial knowledge for a person just entering into the financial jungle. So concepts like risk premium, dividend, stock split etc have been explained in a simple manner for the benefit of the first-timers. Not only that this handy booklet also seeks to educate the would-be investors in the various aspects of share trading, both offline and online. We hope the booklet shall succeed in satisfying your desire for knowledge of the share market as well as in lending you a helping hand as you take your FIRST STEP into the world of investing.

Tarun Shah
CEO—Sharekhan

1

5

CONTENTS
1: Why must I invest in shares?
O Invest to create wealth O Shares—the best investment option O Benefits of share investing are many

9
2: How do I buy and sell shares?
O Invest through primary and secondary markets O A beginner's guide to the stock market O Placing an order to buy and sell shares

21
3: How do I select the right shares?
O Science of investing in shares O Components of fundamental research O Learning to judge an IPO

29
4: How can I minimise risks and maximise returns?
O Types of risk involved in investing in shares O Reducing risk O Become a successful investor

37
5: How can I benefit from online trading?
O Using your computer to trade O Trading online is convenient O Benefits of trading on sharekhan.com

PLUS

8 pages of trading jargon

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First Step to Investing in the Share Market

This booklet is distributed as part of the Sharekhan First Step to Investing Program. It is meant for private circulation ONLY and is not for sale. First Step to Investing in the Share Market is meant to introduce new investors to the stock market. It is not intended to be taken as the basis for an investment decision!

in shares?
IN THIS CHAPTER:
O Invest to create wealth O Shares—the best investment option O Benefits of share investing are many
1. Why must I invest in shares?

Why must I invest

4

5

First Step to Investing in the Share Market

Why need I invest?
The basic question “Why need I invest?” merits attention before we move on to the bigger question of why one should invest in shares. Simply put, you want to invest in order to create wealth. While investing is relatively painless, its rewards are plentiful. To understand why you need to invest, you need to realise that you lose when you just save and do not invest. That is because the value of the rupee decreases every year due to inflation. For example, if you ran a household within a budget of Rs100,000 in 2000, to run the same household today (assuming the same set of expenses) you would probably need Rs125,000--that's Rs25,000 added to your budget because of inflation! Thus you need to generate an additional Rs25,000 and that can be possible only by
INFLATION: general rise in prices and wages caused by an increase in the money supply and demand for goods, and resulting in a fall in the value of money. Inflation occurs when most prices rise by some degree across the economy.

INVESTING money.

your

hard-earned

shares are attractive as much for the appreciation in the share prices as for the dividends their companies pay out. Tax advantages: shares appear as the best investment option if you also consider the unbeatable tax benefits that they offer. First, the dividend income is tax-free in the hands of investors. Second, you are required to pay only a 10% shortterm capital gains tax on the profits made from investments in shares, if you book your profits within a year of making the purchase. Third, you don't need to pay any long-term capital gains tax on the profits if you sell the shares after holding them for a period of one year. The capital gains tax rate is much higher for other investment instruments: a 30% short-term capital gains tax (assuming that you fall in the 30% tax bracket) and a 10% long-term capital gains tax. Easy liquidity: shares can also be made liquid anytime from anywhere (on sharekhan.com you can sell a share at the click of a mouse from anywhere in the world) and the gains can be realised in just two working days. Considering the high returns, the tax advantages and the highly liquid nature, shares are the best investment option to create wealth.

RETURNS ON DIFFERENT TYPES OF INVESTMENT BETWEEN 1980 AND 2005

So what are the various investment options?
One can invest in various financial instruments like equities (popularly referred to as shares), bank fixed deposits, National Savings Certificates etc as well as in gold, real estate et al. Out of these shares are the best option for individual investors.

Stock Market

17% p.a
Bank Fixed Deposits

Why shares?
Historically shares have outperformed all the other investment instruments and given the maximum returns in the long run (see the table on page 7). In the twenty-fiveyear period of 1980-2005 while the other instruments have barely managed to generate returns at a rate higher than the inflation rate (7.10%), on an average shares have given returns of about 17% in a year and that does not even take into account the dividend income from them. Were we to factor in the dividend income as well, the shares would have given even higher returns during the same period.

9% p.a
Gold

5.7% p.a
During this time Inflation grew at

7.1% p.a
* From 1982 to 2005

*

Source: Data compiled from the RBI handbook of Statistics, NCDEX
Disclaimer: Investments in equity related securities involves a high degree of risk. Please read the Risk Disclosure Document as prescribed by Sebi before investing.

Are there any other benefits of investing in shares?
Dividend income: investments in

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1. Why must I invest in shares?

1. Why must I invest in shares?

7

First Step to Investing in the Share Market

OPENING AN ACCOUNT WITH SHAREKHAN

Shares are the best investment option for individual investors due to the following benefits: 1) Possibility of high returns 2) Easy liquidity 3) Unbeatable tax benefits 4) Income from dividends

How do I buy and sell
IN THIS CHAPTER:
O Invest through primary and secondary markets O A beginner's guide to the stock market O Placing an order to buy/sell shares

shares?
2. How do I buy and sell shares?

8

1. Why must I invest in shares?

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First Step to Investing in the Share Market

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKETS
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. In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is a term used for stock exchanges, where stocks are bought and sold after they are issued to the public.

Every IPO highlights the price band as part of the book-building process

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2. How do I buy and sell shares?

2. How do I buy and sell shares?

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First Step to Investing in the Share Market

How does the stock market function?
In order to understand how the stock market operates, you should have knowledge about the role of following institutions / organistions: a. Stock exchanges, b. Brokers, c. Registrars, d. Depository exchanges and their participants, and e. Securities and Exchange Board of India (Sebi) a. Stock exchanges A stock exchange is the marketplace where companies are listed and where the trading happens. There are different stock exchanges in the country, the pre-dominant being the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). b. Brokers A stock exchange functions through its members called brokers. If you want to buy or sell a share, you contact a broker. Each stock exchange has a limited set of brokers and these brokers contact each other using trading terminals to find out who is interested in the share you want to buy or sell. Brokers have

terminals linked to the BSE or the NSE and they directly purchase or sell shares using these terminals. The entire transaction happens electronically or through websites like www.sharekhan.com. Some brokers also authorise a sub-broker to conduct the transactions on behalf of them. Since brokers are providing a service they charge you for the same. This payment is not a flat rate, but a commission of the transaction value. Brokerages normally range from 0.5% to 1% for delivery-based transactions and from 0.10% to 0.25% for intra-day

transactions. c. Registrars The registrar for each company maintains records of all the shareowners of the company and the number of shares that they own. Whenever a transaction takes place, the registrar updates the shareholders database. d. Depository exchanges and their participants Depository exchanges are organisations that hold shares of investors, on request, in electronic form through a registered depository participant (DP). It can be compared with a bank as it holds securities in an account, transfers securities between accounts on the instruction of the account holder, facilitates the transfer of ownership without the account holder needing to handle securities and makes the safekeeping of shares easy. The agent through which a depository exchange interfaces with the investor is known as a depository participant. You can create a demat account with a DP, who will keep an account of all the shares you own. This is much like the banking system, where you just create an account and have a passbook which

PRIMER
NSDL/CDSL: the National Securities Depository Ltd (NSDL) and the Central Depository Securities Ltd (CDSL) are like the Reserve Bank of India in the sense that they are the clearing and holding house for all the demat transactions. DP: depository participants are like banks in that they are agents of NSDL or CDSL in providing depository services.

updates you on the money you own and the transactions you have made. In your demat account you own shares in an electronic format and your account gets updated as you buy and sell shares. e. Sebi The regulatory body that governs all stock market transactions is the Securities and Exchange Board of India. Sebi ensures the legality of all transactions and that the stock exchange players follow all the rules and regulations set by it and/or the government. Sebi also looks into investor complaints against companies. It is quasi-judicial and can try cases and pass judgments against companies. It also looks into mergers and acquisitions of companies. Sebi has enacted the Prohibition of Insider Trading Regulations, 2002 which is applicable to all mar-

BROKERAGE RATES ON SHAREKHAN.COM

0.5 %
for delivery-based transactions

0.1 %
for intra-day transactions

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2. How do I buy and sell shares?

2. How do I buy and sell shares?

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First Step to Investing in the Share Market

ket intermediaries. SSKI Investor Services (the parent company of Sharekhan) complies and follows the prescribed procedures in order to prevent the misuse of price sensitive information, which an employee/director/officer of the company may have access to.

You can, for example, walk into any of our 250 share shops across 120 cities in India and get your orders executed. You can, on the other hand, even trade online through our site sharekhan.com. For advanced traders we also have a special online trading software called What all do I need SpeedTrade. before I can start You can also call on investing in shares? our Dial-n-Trade To start investing in number, which is shares you need to serviced by a dedicatopen a stock-broking ed call centre, and account with a regisplace an order with a tered broker and a Dial-n-Trade execudemat account with a tive. DP. When you buy a When you open a share, you specify the Sharekhan FirstStep company whose account, you get everyshares you want to thing you need to start Warren Buffet, buy, the quantity of investing in shares. Investment Guru shares you want to Sharekhan is a registered broker with both the BSE and buy and the price at which you want the NSE, and being a DP it also pro- to buy them. If you don't specify the vides you a free demat account price, the shares will be bought at the market rate prevalent at that along with your trading account. time. The process of selling a share is How do I actually place an similar to the process of buying a order to buy or sell shares? To facilitate the buying and selling share. Again here you have to specof shares, Sharekhan offers multiple ify the company, the number of shares to sell and the price at which trading channels.

you want to sell them. If you don't specify the price, the shares will be sold at the prevailing market price.

Do I know whom I am buying from?
When you buy a share, you are basically placing an order through your broker. The stock exchange keeps a note of these transactions and at the end of the day starts a process of settle-

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2. How do I buy and sell shares?

“

“

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

ment which ensures that the shares you bought come into your account and the person who sold them to you (through his broker of course) has that number of shares removed from his demat account. This process of settlement is called a settlement cycle and the time taken for this is currently T+2 days. That is, the settlement will occur two days after you make the trade. If you have an online trading

DYNAMICS OF THE SHARE MARKET
Investors buy and sell shares through a stock exchange.

A fixed process is followed for easy transfer of money and shares. It is termed as a settlement cycle of “T+2” or “Trade + 2 days”, which means that if you buy shares on Monday then you get delivery of the shares after two working days, ie on Wednesday. Similarly if you sell shares on Monday then you will receive your money on Wednesday.

2. How do I buy and sell shares?

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First Step to Investing in the Share Market

account and a demat account with Sharekhan then this settlement process happens as a paperless transaction.

PRIMER
SENSEX: this is the common name for the Bombay Stock Exchange Sensitive Index. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. NIFTY: NIFTY is the common name for the index consisting of 50 large capitalisation stocks on the Indian National Stock Exchange (NSE).

How can I know the current price of any stock?
Whenever you are buying or selling a share, you will encounter certain terms related to share prices. These terms deal with the individual price movements of a single share as well as the price movements of all the shares. For every share, typically there are four price parameters. 1. Open: this is the price at which the share opened on a particular day, that is the price at which the first purchase of the share was made during that day. 2. High: this is the highest price that a share went up to on a given day, or the highest price the investors paid for that share. 3. Low: this refers to the lowest price that a share fell to during a day, or the lowest price an investor paid for that share. 4. Close: this is the price at which the share closed on that day or the price for the last trade of that day.

of your stock, and the stock's opening and closing prices of the previous days. You can also trade in shares without specifying the price—this is known as a market order. In this case the trade happens at the market price at that point of time.

How can I track the stock market?
The BSE Sensex (Bombay Stock Exchange Sensitive Index) measures the movement of 30 most actively traded shares on the BSE. These 30 companies represent a cross-section of sectors of the economy. Similar to the BSE Sensex is the

Nifty or the S&P CNX Nifty, which measures the movement of the NSE. This index tracks 50 stocks, which represent about 60% of the market capitalisation of the NSE. The upward or downward movement of the Sensex or Nifty is a typical indication of whether the share prices are going up or down in general. If the Sensex goes up on a particular day, it doesn't mean that the share prices of all companies would have gone up on that day. Tracking the movement of stock indices over a longer period is an important part of intelligent investing.

PRIMER
Face value: this is the nominal value that is assigned to a share at the time of issue. It is used in determining the dividend to be given to the shareholders. Apart from its use in determining dividend, face value has lost its relevance in the modern day and has no link with the market price. Offer price: the price at which a company sells its shares to the people. Market price: the price at which a share is traded on stock exchanges daily and which governs our investment value. Dividend: the face value of a share determines the dividend or the sharing of the company’s annual profits with its shareholders.

At any given point of time, the share price will fluctuate between the highs and the lows, sometimes reaching new highs, sometimes falling to new lows. When trading in shares, you need to mention the price point at which you want to buy or sell. To specify the price point, it helps if you know the statistics or the trends

EXAMPLE OF DIFFERENT TYPES OF SHARE PRICES
Stock
UTV Software Comm Ltd Jet Airways (India) Ltd

Face value
Rs10 Rs10

Price band
Rs115 to Rs130 Rs950 to Rs1,125 Rs775 to Rs900 Rs270 to Rs315

Offer price
Rs130 Rs1,100 Rs850 Rs315

Listing market price
Rs150 Rs1,155 Rs1,199 Rs425

Tata Consultancy Services Ltd. Rs1 Biocon Ltd. Rs5

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2. How do I buy and sell shares?

2. How do I buy and sell shares?

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First Step to Investing in the Share Market

How do I earn from my investment in shares?
Shares can give you returns in two forms. a. Appreciation in share prices You buy shares with the belief that their price will increase and that when this happens you will be able to sell off your shares and earn profit. For example, if you bought a share for Rs100 three years ago and it is Rs500 today, then you have earned Rs400 in three years.

shares, you could earn quite a bit from the dividend itself. The best thing about dividends is that they are tax-free in the hands of investors. Dividend yield stocks are known to give returns higher than fixed deposits [dividend yield = (dividend per share / market price of the share) x 100]. Sharekhan informs its customers of good dividend yield stocks from time to time.

What are the expenses during a transaction? b. Dividend When a company makes profits, it Every share transaction attracts can choose to share part of its prof- some tax or the other. Some of the its with its shareholders by paying main expenses are as follows. out dividend. This dividend is paid a. Capital gains tax as a percentage of the face value of If you purchase a share and sell it at the share. For example, a company may TRADETALK: splitting the stocks declare a dividend WHY DO SOME STOCKS HAVE DIFFERENT FACE VALUES? of 25%. Then if the The face value of a share is typically Rs10, but many times the face value face value of its can even be Rs100 or Rs5 or Rs2. The selection of the face value depends share is Rs10 you on the offer price or the price band and sometimes the face value is will get Rs2.50 for changed when the stock is split at a later date. If the company announces an issue of Rs50 crore and the face value of every share you own each share is Rs10, the company will have to issue 5 crore shares. If the of that company, face value if Rs100, the company will have to issue 50 lakh shares. irrespective of the Often it happens that a company's price rises so rapidly market price. that many people end up buying only one or two shares. In such cases the In itself this company splits the face value of the stock. So if a Rs10 share is being tradmight not be much, ed at Rs5,000, splitting the stock into two will double the number of shares but over a longer that are available in the market. Because of reduced face value, the market period of time or if prices will fall (not necessarily in the same ratio) and people would be able you have a lot of to buy more shares of the company.
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2. How do I buy and sell shares?

First Step to Investing in the Share Market

a price higher than the purchase price and if this sale is within a year of the purchase, then a 10% capital gains tax is levied on the profit that you make. For example, if you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July 1, 2005, then you have to pay a tax of 10% on the Rs50 profit that you make. If you sell after a year of purchase, there is no tax on the long-term gains. b. Securities transaction tax Securities transaction tax (STT) is levied by the government on every transaction you do on a stock exchange. You don’t have to pay this separately; it’s collected by your broker. As per the Union Budget 2005 the STT will be 0.10% on delivery-based transactions and 0.02% on intra-day transactions. c. Brokerage Brokers get a commission on every

trade that they do for you. This commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for delivery-based transactions and 0.10% for intraday transactions. On the brokerage amount you are required to pay a service tax to the government (to be collected by the broker). The brokerage varies depending on the service that the broker provides you. Some brokers, such as Sharekhan, offer its clients regular updates on companies, multiple means to transact and customer service support. d. Depository fees Since most of the shares exist in a dematerialised form, every time you buy or sell shares the transactions are being noted by your DP. The DPs normally levy a charge which is an annual charge or a charge on each transaction.

You can either apply for shares through an IPO or trade in shares in the stock market. To buy/sell shares in the stock exchange, investors have to go through brokers. Sebi is the regulatory body for the stock market. It protects investors and also handles their complaints against companies. Investing in stocks can provide you with two types of gains: appreciation in stock price and dividends. To calculate returns, you must also be aware of transaction taxes and other charges like brokerages etc. Sensex and Nifty are some of the key indices you can use to track the overall stock market movement.
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2. How do I buy and sell shares?

right shares?
IN THIS CHAPTER:
O Science of investing in shares O Components of fundamental research O Learning to judge an IPO
3. How do I select the right shares?

How do I select the

21

First Step to Investing in the Share Market

How do I know which stocks to buy or sell?
Your investment decisions should not be based on rumours, gut feel or emotions; but should be taken after a careful study of facts. Most investors who have made their money in the stock market are those who have been patient, have backed their investments with logic and have never lost sight of common sense. Typically there are two ways of selecting the right stock: (1) fundamental research and (2) technical analysis.

1. Fundamental research This requires you to rate a stock based on its historical performance and growth parameters. This type of research involves a careful scrutiny of the financials of a company. 2. Technical analysis This requires you to predict the trend in the market or the price of a company based on historical price movements, using certain statistical parameters. Sharekhan offers a selection of stocks based on both fundamental and technical research techniques with different time frames for both types of calls.

What are the components of fundamental research?
A fundamental researcher looks at the performance of a company over a period of time as well as its future growth prospects. He might compare this data with that of the other companies in the same sector and measure the same against a stock market index. Most of the data necessary for doing fundamental research comes from the quarterly and annual reports of companies as well as from the analysis of their stock prices. A fundamental researcher studies the following: (1) annual reports and (2) ratios like EPS, PER etc.

What is there in an annual report?
The annual report of a company provides a wealth of information about the company. In an annual report investors must look for the Profit & Loss (P&L) statement and the Balance Sheet.

i. The P&L statement
The P&L statement gives you the figures relating to the company's income, expenditure, earnings before interest, depreciation, tax and amortisation (EBIDTA), and net profit. Income, Expenditure and Net profit are the main heads of the P&L statement.

RESEARCH-BASED ADVICE FROM SHAREKHAN
Sharekhan provides newsletters and analytical reports to help you decide which shares to select and when to buy or sell them. Account holders get research-based investment advice with recommendations to buy shares of companies whose prospects are good. These recommendations are termed as Stock Ideas. Sharekhan’s customers also get a host of services including timely research reports (Sharekhan Stock Ideas), which read like the one shown on the right. A Sharekhan Stock Ideas report has the following details: 1) Cluster that the company belongs to (see page 25) 2) Recommendation: whether to Buy, Sell or Hold 3) Price target: price the stock is expected to go up to 4) Current market price of the stock
4

1 2 3

Sharekhan account holders can also expect regular updates on each of our recommendations.

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3. How do I select the right shares?

3. How do I select the right shares?

23

First Step to Investing in the Share Market

A) Income: the total earnings of the company from varied sources. This can include sales, income from dividends, interest received, profit from asset sales, stock variation (which refers to the closing stock in inventory) and so on. However attention should be paid to the Sales figure, which pertains to the core business of the company.

A B

C D
A typical Profit and Loss Statement is divided into

B) Expenditure: the actual three sections: Income, expenditure and profitability money spent on operational expenses (like raw material ii. The Balance Sheet consumed, labour costs etc). The The Balance Sheet gives you an Other expenses are interest on serv- insight into the assets of the comicing a debt, depreciation etc. pany, its existing liabilities and how C) Operating profit (popularly referred to as EBIDTA): deducting Operational expenses from Sales gives you the Operating profit. D) Net profit: after deducting interest cost, depreciation cost and taxes from Operating profit you get the profit after tax or the Net profit. Sometimes one-off or non-recurring items such as the sale of land or investments may boost a company’s net profit. Investors need to assess whether the profit is driven by core operation and is sustainable. its funds are utilised. It can also contain the details of the sources of the funds (equity capital, reserves, debt etc).

How do ratios help in fundamental analysis?
Using the data from the annual report and ratios like EPS and PER, it is possible for you to judge the financial health of a company. i. EPS: earnings per share—this ratio reflects how much the company is earning per share that it has distributed. The EPS is calculated as the total net profit divided by the total

24

3. How do I select the right shares?

3. How do I select the right shares?

25

First Step to Investing in the Share Market

8
PROMOTERS FINANCIALS

PARAMETERS TO JUDGE AN
1

Good investing principles demand that you study the minutest of details prior to investing in an IPO. Here are some parameters you should evaluate.

IPO
2 3

INVESTING VS TRADING
You are INVESTING in shares when you buy them with the objective of holding them for a long period (typically two to five years). On the other hand, you are TRADING in shares if you buy them with the intention of selling them in a short period (a day to few weeks). As an investor when you buy shares, you pay the money equivalent to the amount and the price of the shares you have bought and you take delivery of the shares in your demat account. Whereas a trader typically buys and sells shares on the same day and hence does not take delivery of his shares in his demat account. The process of buying and selling on the same day is also termed as intra-day trading.

Is the company a family-run business or is it professionally owned? Even with a familyrun business, what are the credibility and professional qualifications of those managing the company? Do the top-level managers have enough experience (of at least five years) in the specific type of business?

INDUSTRY OUTLOOK
The products or services of the company should have a good demand and scope for profit.

BUSINESS PLANS

number of shares that have been issued. For example, if a company has profits of Rs100 million and has issued 10 million shares, its EPS is 10. The EPS is used to gauge a company's profitability per unit of shareholder ownership. You can use the ratio to compare two companies in the same sector. For example, companies A and B both earn Rs100, but company A has ten shares outstanding, while company B has 50 shares outstanding. It means that company A has an EPS of 10 and company B has an EPS of 2. As a general rule, a higher EPS drives up the stock price of a company. However the EPS should not be viewed in isolation and should also be analysed along with the industry

average as well as the EPS of the other companies in the same sector. ii. PER: while the EPS looks at the profitability of a company, the PER (ie the price/earnings ratio) is the market price equivalent. The PER refers to the market price divided by the EPS. Thus in the above example if the EPS is 10 and the market price is 50, then the PER is 50/10 = 5. Meaning, the share of the company is trading at a multiple of 5. This ratio is typically compared with that of the other companies in the same sector and you get to know whether the company is on the fast track or is a slow runner. While comparing the PERs it is better to stick to the companies in a particular industry and not compare across industries.

4

Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible.

Check the progress made in terms of land acquisition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organisation.

RISK FACTORS

5

The offer document will list out specific risk factors such as the company’s liabilities, court cases or other litigations. Examine how these factors will affect the operations of the company.

6

KEY NAMES
7
Every IPO will have lead managers and merchant bankers. You can figure out the track record of the merchant banker through the Sebi website.

PRICING

Compare the company’s PER with that of similar companies. With this you can find out the P/E Growth ratio and examine whether its earning projections seem viable.

LISTING

8

You should have access to the brokers of the stock exchanges where the company will be listing itself.

Sound research can keep your investments safe. Make use of the research reports and newsletters (Stock Ideas, Sharekhan ValueLine, Investor’s Eye etc) that you begin to receive from the Sharekhan Research team after opening a Sharekhan FirstStep account. Also study the Annual Report and the other documents of the company you want to invest in.
3. How do I select the right shares?

26

3. How do I select the right shares?

27

minimise risks and maximise returns?
IN THIS CHAPTER:
O Types of risk involved in investing in shares O Reducing risk O Become a successful investor
4. How can I minimise risks and maximise returns?

How can I

29

First Step to Investing in the Share Market

What are the risks involved in investing in shares?

specific risks?

There are two types of risk associat- With careful scrutiny and proper ed with this kind of investment: homework, it might be easy to idencompany specific risk and market tify and be forewarned of the risks a company may be carrying. risk. Specifically check out for the The set of risks that deals with a company and its sector is referred to mergers and acquisitions that do not have a real synergy or are a as company specific risk. Examples of company specific nightmare after reconciliation ( A O L - T i m e risk: bad manageHewlett ment, bad marketing WHAT FOOLISH INVESTORS DO Warner, strategies, sector disPackard-Compaq). PART I turbances that have Also be suspiINVEST ALL THEIR SAVINGS cious of diversificaan impact on indus- Canceling tions that do not try etc. your subreally add value to External factors scription a company's core (economic, global to magaoffering. factors) that affect zines, eatA third kind of the market as a whole ing out only once a week and then using are referred to as the money saved to invest in risk would be with the companies that market risk. stocks is a bad idea. Examples of marPersonal finances need to be have bet their stakes ket risk: political totally in order before you invest. on a single product instability, high infla- Ensure that you do not have any offering and are debt and all your loans have been tion, rupee high on repaid. Even your credit card depreciad e b t . should not have any outstanding. tion, rising Likewise Then save every month. And think of interest rates, companies investments in terms of requirements global incidents that depend on (education of children, marriage etc). The money left over is like wars and disasresearch could be the only money you ters that throttle the prone to higher risk, have for the stock nation's economy etc. if the research doesn't market. come to fruition. While you can do your How do I identify company homework, Sharekhan is there

to help you with its own set of Stock WHAT FOOLISH INVESTORS DO PART II Ideas, which are our best picks in today's DO NOT KEEP market, chosen after TRACK OF THEIR a careful analysis of INVESTMENTS their fundamentals F o o l i s h investors are and a close scrutiny clueless about of the risks associat- the stock market movements. The ed with them. market may seem intimidating,

hand. Read Sebi's bulletins and track companies whose shares prices are very volatile.

Why invest in shares if its risky?

Yes, there are risks involved in investing but you need to spend a few min- in shares and the utes everyday to constantly be in returns are also not How do I identitouch with the market. Keep a fy sector certain, notebook and jot down important driven but underpoints. There are many other software risks? standing the tools that will help you keep If steel prices risks and learning track of your portfolio. rise, auto companies how to manage them get affected. If low cost hold the key to achieving Chinese products invade the higher returns from shares. country's market, then local fast So at what point is the risk moving consumer goods companies safe enough to take and at what might find no takers for their products. The changing nature of the industry itself may lead to dipping stock prices; a print publication may see revenue loss if everyone moves to reading on the Internet.

How do I predict market risk?
It is difficult to predict market risks. The only thing we can say here is that start noticing all the small signs early. If the election results are feared to lead to a fall in the stock market, notice the signals before-

“

Prevailing wisdom is that markets are always right, I assume thay are always wrong
George Soros, Chairman, Soros Fund Management

”
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4. How can I minimise risks and maximise returns?

4. How can I minimise risks and maximise returns?

First Step to Investing in the Share Market

point does it become WHAT FOOLISH INVESTORS DO worth the extra return that the share risky? Risk is the PART III may generate. chance that an STOCK PRICES, If, on the other investment's actual EVALUATE hand, the investment return will be differ- NOT BUSINESSES We frequently in shares has the ent than expected. mistake the potential to give This includes the cart for the returns of 20% possibility of losing horse; that is (12% more than the some or all of the we look at a investoriginal investment. company’s stock price but don't risk-free Higher risk means a consider if the company itself is ment), you might go greater opportunity doing good fundamentally! Instead for it. This 12% of looking at its share prices, start e x t r a for high taking notice of the company's denotes returns and growth prospects, financial parameters, leadthe risk prea higher potenership status, debt position and other such factors. These will automatimium. The risk tial for loss. cally determine the rise or premium you select The risk premium fall in the company's will depend on your is the extra return that stock price. risk appetite, ie the degree the stock market provides of risk that you can tolerate. over the risk free rate to comIdeally before investing in a pensate for market risk. company you would want to make So if you are getting a risk-free return of 8% from an investment in a note of all the possible scenarios government bonds or provident (decrease in price by 10%, increase funds and an investment in shares by 10%, increase by 50% and so might give you 10%, then you on) and assign a probability to each might decide against investing in scenario. Next compare the probabilities shares as the risk (associated with the particular share) may not be with that of getting risk-free returns

WHAT SMART INVESTORS DO?
Investing the same amount at regular intervals (eg every month) is known as systematic investing. With this approach you buy more shares when prices are low and fewer shares when prices are high. As a result you may lower your average cost per share over time. For example, making a one-time investment puts much more weight on the specific market conditions at that one point—such as a share price of an equity. Spreading out your investments over regular intervals puts time on your side. Systematic investing in action Let's say you invest Rs10,000 each month in the company PQR Ltd. In May PQR Ltd’s share price is Rs10 a share, so your systematic investment that month buys you 1,000 shares. Rs10,000/Rs10 a share = 1,000 shares In June the share price drops to Rs5 a

share, so your investment that month gets you 2,000 shares. Rs10,000/Rs5 per share = 2,000 shares Systematic investing balances the different costs for the shares you purchased. If you had invested all Rs20,000 in May, you would only have 2,000 shares now, instead of 3,000. Of course if you had invested all Rs20,000 in June, you would have 4,000 shares. Although cost averaging does not assure a profit or protection against risk, it is a logical, smart approach that can help you even out the fluctuations in the market.

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4. How can I minimise risks and maximise returns?

4. How can I minimise risks and maximise returns?

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First Step to Investing in the Share Market

and maximise returns?
1. DON’T ATTEMPT TIMING THE MARKET 4. AVOID HOT TIPS
You may have overheard some news about a stock or your friend may advise that a particular stock is all geared to move up. Avoid such tips like the plague and your investments will remain safe. Buy when stocks are falling, sell when these are rising. This works well when you are a long-term investor and there is an extended bear or bull run. Don't try to second guess or predict that the market will fall today and rise tomorrow. Even seasoned investors cannot do that!

How can i minimise risk

any problem in one sector would affect all stocks in the sector. As a thumb rule, if you have investments of up to Rs50,000 invest in two to three stocks. For about Rs150,000 invest in three to five stocks, for around Rs500,000 have five to seven stocks, and around ten stocks for higher amounts.

8. DON’T INVEST ALL YOUR SAVINGS

Always maintain a core set of reserves. You should never touch these reserves for investing, so that even in the worst case you still have some money. Typically these reserves should be your salary of about six months.

9. BE REALISTIC!

5. BLUE-CHIPS ARE SAFE BETS

2. DON'T TRY TO GUESS THE MARKET'S FAVOURITES

Your instincts might tell you that pharma or technology stocks are hot due to certain policies or events, but remember millions of investors have already guessed that and bought these stocks. The prices of these stocks would therefore be at a higher level when you buy them. Instead focus on the long term and don't get swayed by short-term events.

Blue-chip companies are there because they have done well in the past and have a high market capitalisation. It is a likely guess that they will maintain their track record and give you higher returns even in future. Therefore invest in companies that have a good track record.

Analyse the reason why you are investing in shares, ie why you require the money. For a better lifestyle? For your child's future education? For retirement planning? Once you have answered that, ask yourself how much appreciation do you need to get that amount? Work towards this amount and you won't be disappointed.

6. SLOW AND STEADY STREAM OF INVESTMENTS
Set aside a certain portion of your earnings every month and invest that sum in shares irrespective of the market conditions. This way, over a period of time you can amass a substantial number of shares of the stocks in your portfolio.

10. BE LEVEL-HEADED

3. AIM FOR THE LONG HAUL

Short-term investing is prone to higher risks. When investing in stocks, aim to get good returns after a period of three to five years at the minimum. Also churn your portfolio periodically and based on the progress that a company makes in a quarter or in six months, decide whether to hold the stock or get out of it.

7. THINK PORTFOLIO
Don't put all your earnings in a single stock. Try to have a diverse portfolio of stocks. This way even if one stock doesn't do well, you are still well protected. Also invest across sectors, since

Invest wisely, don't get swayed by rumours and allow Sharekhan to be your guide at all t i m e s . Investment success won't happen overnight, so avoid overreacting to shortterm market swings.

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4. How can I minimise risks and maximise returns?

4. How can I minimise risks and maximise returns?

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First Step to Investing in the Share Market

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First Step to Investing in the Share Market

and then do the evaluation. Thus if WHAT FOOLISH INVESTORS DO an investment in a company is PART IV expected to provide 50% returns SKIMP ON RESEARCH with almost a 75% probability, this One of the would be much better than a safe main reasons investment with returns of just why people 10%. lose money in Again even within stocks if one the stock marstock provides higher returns with a ket is because they invest on higher risk and another provides the basis of rumours or a hot tip lower returns with a lower risk, passed by a friend. Before investthen you could go for the stock with ing in a company always do lower returns, since at the end of the research on it. day you want to be with The BSE and NSE websites have an investment that has the a wealth of information on each highest return per unit of company; you can even check out the company's website and download its annual risk.
reports. Analyse the financial details and only after all this decide on making an investment in the company.

Risk associated with investing in shares can be classified into company specific risk and market risk. You can reduce the risk by investing systematically in fundamentally strong companies.

online trading?
IN THIS CHAPTER:
O Using your computer to trade O Trading online is convenient O Benefits of trading on sharekhan.com
5. How can I benefit from online trading?

How can I benefit from

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4. How can I minimise risks and maximise returns?

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First Step to Investing in the Share Market

How does one trade online?
Just like offline trading, online trading also involves three main intermediaries and one ancillary institution. I A broker, I An exchange, I Yyour bankers, and I Your depository participant. In this form of trading, your broker provides you an Internet broking account which allows you to buy and sell shares at your convenience. To put it simply, the broker is providing an interface on the computer that acts like a broker. So you no longer have to call

your broker to place a trade. Just go online to your account, select the shares you want to buy or sell and execute the trade! It's as simple as that. During this trade, your bankers provide the feature of transferring money from or to your bank account. The brokers then collect this trade information in real time using software at their end and forward it to the exchange. The exchange executes the trade and informs the broker. The broker in turn informs you and also ensures that your depository account gets updated; and in case of selling shares it places the value of

shares you sold in your account. You can transfer this amount back to your bank or use it for buying shares.

grated with your bank, your depository and digital contracts. It thus eliminates all paperwork. 2. Instant credit and transfer Online trading gives you instant credit money transfer to and from your bank account, enabling you to trade surplus credit without delay. 3. Trade from anywhere A major benefit of online trading is the facility of trading from anywhere. Even when you are in a new place, just connect to the Internet, log on to your account on sharekhan.com and start trading. 4. Real-time portfolio tracking Online trading provides autoupdate of trades executed by you and gives you real-time information on your investments and the current value of your portfolio. Sharekhan provides portfolio tracking service to its clients absolutely free of cost. 5. After-hour orders You can place orders even when the market is closed. The order gets queued up and gets executed the next time the markets open. 6. Get live quotes Online trading provides you live, minute-by-minute streaming quotes

How do I start trading online?
There are three basic steps in trading online. 1. Go to your broker and open an online account. During this stage you also need to take a depository account. 2. Ensure that you have a bank account with a bank that facilitates online transactions (ie allows for net banking). Most leading banks such as HDFC Bank and Citibank allow this. 3. Once you open an account, you get a username and password for checking your account details as well as another password for carrying out your actual transactions. This ensures a double layer of security. Using these details you go to your broker's website (sharekhan.com in your case), log on to your account and start trading.

WHY SHOULD I TRADE ONLINE?
Why should I trade online? Online trading is a highly convenient and transparent medium that ensures that you are in total control of your investments. Does online trading have security risks? Millions of customers trade online daily. No security risk has been reported on any of those online transactions. Do I have to be computer savvy? If you can check your e-mail, then you can trade online. Online trading on sharekhan.com is also very userfriendly. Is the brokerage different for those who trade online? The brokerage is almost the same as in case of offline trading. However you are required to pay a small amount as account opening fee. But you will realise that the savings in time and the flexibility that your online trading account shall offer will make up for that expense!
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5. How can I benefit from online trading?

What are the benefits of trading online?
Online trading is quite convenient for the following reasons. 1. Freedom from paperwork Your online trading account is inte-

5. How can I benefit from online trading?

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First Step to Investing in the Share Market

and using the software you can create appropriate filters to watch the movement of the stocks that you are interested in. 7. Host of features a click away Place limit orders, check your port-

folio and calculate your earnings, check your depository account, transfer money from your bank to the broking account and vice versa, at just a click of your mouse.

HOW SAFE IS ONLINE TRADING ON SHAREKHAN.COM?
“VERY!” Because we have an effective security system in place:
1. Strong encryption: we use a 128-bit encryption to ensure a secure connection. The most advanced encryption technology, Secure Socket Layer (SSL), is used to ensure that the information transmitted between the trading engine and the customer across the Internet is safe and cannot be accessed by any outsider. In addition firewalls, internal controls and procedures put in place have made the entire system robust. 2.Password protection: to trade on your account, you will need to provide a user ID and a password to enter the secure area of the site (sharekhan.com) as well as an additional password to place trades. The user ID and password allotted to a customer are kept completely confidential. 3.Fully integrated: third, if the transaction system requires no manual intervention, you further improve the safety in the transactions. sharekhan.com is one of the very few fully integrated online trading sites. This eliminates the possibility of any manual intervention. Which means orders are directly sent to the exchanges, ensuring that you get the best and right price each time.

The advantages of trading in shares online are many. You can buy or sell shares from the convenience of your home/office. Online trading also removes the hassle of doing paperwork. You can even place orders when the market is closed.
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5. How can I benefit from online trading?

First Step to Investing in the Share Market

6 benefits of trading on sharekhan.com
1

Check your demat account and account statement Track the market’s pulse
Get live quotes of companies, know the number of shares available for buying/selling and track the overall market movements. Check the balance of shares available in your demat account. You can also track the status of the orders placed online.

4

5 2

Transfer money to/from your online bank account
Transfer money to your Sharekhan account. When you buy/sell shares, money will be debited/ credited to your Sharekhan account. You can also transfer money from Sharekhan account back to your online bank account.

Access research reports (Sharekhan ValueLine) and get stock-picking advice for both short-term and longterm investing needs.

Get research based advice

6

3

Apply for an IPO
Now you don’t have to fill lengthy forms or stand in a queue to apply for an IPO. Instead you can apply for an IPO from the comfort of your home or office through sharekhan.com.

Buy and sell shares online. You can place market as well as limit orders and get instant confirmation for orders that get executed.

Buy and sell shares

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5. How can I benefit from online trading?

5. How can I benefit from online trading?

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First Step to Investing in the Share Market

Trade Jargon
A brief introduction to some terms you are likely to encounter as you start investing...
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Trade Jargon

ARBITRAGE: free lunch—the opportunity to profit from two offsetting transactions with zero risk. Arbitrage basically involves spotting price differentials for the same asset at different places at a given time and simultaneously buying at a place where it is cheaper and selling where it is more expensive. A transaction of this nature obviously means that the profits are made with zero risk. ASK: this is the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted price at which an investor can buy shares; also called the offer price. AUCTION SHARES: the securities put up for auction by the exchanges are of those transactions that remain incomplete due to non-delivery of securities by sellers. This is to ensure that a buyer receives the securities due to him. The

non-delivery can arise on account of short delivery, bad deliveries and company objections that go unrectified. In the process an exchanges purchases the requisite quantity in the auction market and gives them to the buyer and the costs are borne by the seller. If the shares could not be bought in the auction, ie shares are not offered for sale in the auction, the transactions are squared up as per Sebi guidelines. BID: this is the highest price an investor is willing to pay to buy a stock. BLUE-CHIPS: the term blue-chips refers to stocks of renowned companies with established and stable businesses. Such companies have a steady earnings stream and are preferred by market players because of the predictability and stability of their earnings. BOND: simply put, a bond is an IOU of

BEAR: an investor who believes that a security, a sector or the overall market is about to fall (opposite of bull). A bear has a pessimistic view of the market. A weak and declining market is known as a bear market. When bears are active, stock prices tend to decline. BULL: an investor who believes that a particular security, a sector or the overall market is about to rise (opposite of bear). A bull has an optimistic view of the market. A strong and rising market is known as a bull market. When bulls swing into action, the prices tend to rise.

Trade Jargon

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First Step to Investing in the Share Market

sorts. It is an agreement under which a sum is repaid to an investor after an agreed period of time. Bonds are thought of as safe and reliable instruments. Bonds provide a worry-free stream of income. But this class of securities includes a wide array of instruments with varying degrees of risk and reward. BONUS ISSUE: issue of new shares at zero cost to existing shareholders. This is carried out by creating fresh equity by capitalising the reserves that a company has built through its operations. BOOK VALUE: ratio of net worth of a company to the outstanding equity share capital. It represents the net worth available for each outstanding share of a company. Book value stands for the money that the owner of a single share would realise. In other words, the book value of a company is very similar to the net asset value (NAV) of a fund. However the book value can at times be a very conservative estimate of the value that a shareholder can realise, as assets are valued at cost. BOOK BUILDING PROCESS: a process by which the offer price of an IPO is determined based on actual demand from investors. Book building is called so because it refers to the collection of bids from investors which is based on an indicative price range (floor price). The issue price is fixed after the bid closing date. It is a process of securing the optimum price for a company's

share. The issuing company decides the price of the security by asking investors how many shares they want to buy and at what price they would be interested in buying them. The book building process allows for price and demand discovery. In book building the demand for the share is known before the issue closes. A placement process is typically followed with an offer to the public at large at the same price. BSE SENSEX: the BSE SENSEX, as it is popularly referred to, is short for the BSE Sensitive Index or Sensex. First compiled in 1986 it is a Market Capitalisation-Weighted index of 30 component stocks with the base April 1979 = 100. It represents a sample of large, well established and financially sound companies. These companies account for around one-fifth of the market capitalisation of the BSE. The Sensex is essentially a small sub-set of the A group scrips. The index is widely reported in both the domestic and international print and electronic media and is widely used to measure the performance of the Indian stock markets. The Sensex also has the largest social recall attached with it. BUY-BACK: a method by which a company uses surplus cash to cancel its own shares. This process also enables promoters to increase their stake in the company. This is typically done when the company feels that the stock is under priced and the prospects are bright. Buybacks are much in vogue in global mar-

BREAK EVEN: this is the point of no profit, no loss. This happens when the present net value of a project is zero. The break-even point reveals the minimum level of operations when the existing value of outflows equals the existing value of inflows. In terms of sales, the present value formula works out to be: break-even sales = (fixed cost) / (sales - variable cost). The analysis of the level of sales at which a project would just break even is called break-even analysis.

kets and have now their feet established in the Indian markets too. CAPEX: capital expenditure—this is the expenditure that a company undertakes towards building up capital like plants, machinery etc. These expenses do not pertain to a single year as the benefits accrue over a larger time frame. Thus these are normally not charged to the profit and loss account of a single year but amortised over a period of time. CAPITAL GAIN: the returns from a stock emanate from two sources: dividend (a tax-free and risk-free source) and appreciation in the share price. The gain that accrues to a shareholder due to the appreciation in price is called capital gain. CASH EPS: cash earnings per share— cash earnings are the sum of net profit and depreciation. Depreciation is non-

cash expenditure. It is just a book entry, an amount set aside to account for the use of assets. In order to compute the cash profits (Cash EPS) accruable to each share, we add back depreciation to the net profit. CIRCUIT BREAKER: there are limits within which a stock can move during a single day. These are called circuit breakers, which are mechanisms to curb excessive volatility. At present a stock cannot move more than 16% in either direction during one single trading session. If there are more buyers beyond +16%, then trading stops. This applies in the reverse direction as well. CONTRACT: contract is an agreement between two parties to buy and sell an index at a fixed time in future at a price fixed today. Contract value is derived by multiplying the Sensex with 50 and the Nifty by 200.

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Trade Jargon

Trade Jargon

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First Step to Investing in the Share Market

CREDIT RATING: credit rating is an exercise conducted by a rating organisation to explore the credit worthiness of the issuer with respect to the instrument being issued or a general ability to pay back debt over specified periods of time. The rating is given as an alphanumeric code that represents a graded structure or creditworthiness. Typically the highest credit rating is that of AAA, the lowest being D (for default). CUM DIVIDEND: you must have heard of stocks quoting cum dividend. It means before dividends. A stock trading cum-dividend allows its purchaser/transferor the right to receive dividend. The cum-dividend date is set by the stock exchanges. DEBENTURE: akin to promissory notes, debentures are instruments for raising long-term debt capital. Debenture holders are the creditors of the company. The obligation of the company towards its debenture holders is similar to that of a borrower who promises to pay interest and capital at specified times.

DEMAND PULL: the use of advertising to generate consumer interest and demand. DEMAT: demat or dematerialisation is the conversion of physical share certificates into an electronic format. The shares are credited in the investor's account with his depository participant. Demat protects the shareholder from all the risks associated with physical certificates, such as loss, theft, mutilation and forgery as well as the risk that arises from handling large volumes of paper. Shares can be immediately transferred from one person to another. Demat eliminates the need to fill transfer deeds and affix share transfer stamps. DEPOSITORY: a depository is like a bank as it holds the securities of investors in electronic form. A depository holds securities (like shares, debentures, bonds and units) of investors in electronic form. Investors can deposit/withdraw and transfer securities from their accounts. Besides holding securities, a depository also provides services related to transactions in securities.

DEPOSITORY PARTICIPANT (DP): a DP is a member of a depository through whom investors deal with a depository exchange. EARNING PER SHARE: earnings per share—it is the ratio of net profit to the outstanding equity capital. EPS stands for the net profit on each outstanding share. This is very useful while determining the value of a company’s business. This is because the shareholders pay a price for these earnings that the business generates for the shareholders. EQUITY DILUTION: whenever the equity capital of a company is increased by way of a rights/preferential issue, the equity is diluted. Following an equity dilution, there is more paper floating in the market. Whether it is good or bad depends on the issue price and the future servicing capacity of that equity. ESCROW: an account in which money is placed in trust with a third party and that can be used only for specific purposes or used by a specific entity after the fulfillment of certain conditions. EX DIVIDEND: a stock is ex dividend when it is quoting after the announcement of dividends. An ex-dividend stock does not allow its purchaser/transferor the right to receive the last dividend declared. The ex-dividend date is set by the stock exchanges. FACE VALUE: this is the nominal value that is assigned to a share at the time of

issue. It is used in determining the dividend to be given to the shareholders. Let’s understand this with an example. A company declares a dividend of 50%. Assuming that the face value of its share is Rs10 and the current market price of its share is Rs100, the amount per share that a shareholder is entitled to is Rs5, ie 50% of Rs10 (and not 50% of Rs100). Apart from its use in determining dividend, face value has lost its relevance in the modern day and has no link with the market price. In today’s context, even Rs10/share is not sacrosanct as the shares are split and they can have face values of less than Rs10. FUTURES: a futures contract is a legally binding contract to make or take delivery of a specified quantity of a specified instrument on a specific date in the future, at a price agreed at the time of dealing. When two parties enter into a futures contract, the buyer of the contract assumes the obligation to buy a specified quantity of a specified instrument from the seller at a specified price on a future date. The contract is binding on both the parties. GAAP: Generally Accepted Accounting Principles (GAAP) is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting. HEDGING: taking positions in securities so that each offsets the other. For example, if you buy security A and sell

DIVIDEND YIELD: annual dividend paid on a share of a company divided by the current share price of the company. Dividend yield stocks are for safe investors, who look at pure returns from a stock and not capital appreciation.

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Trade Jargon

Trade Jargon

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First Step to Investing in the Share Market

security B so that the overall risk of your exposure is reduced, then it is called hedging. A perfect hedge produces a risk-free portfolio. HOLDING COMPANY: when a company holds shares in another company, the former is refereed to as the holding company for the latter. INSIDER TRADING: trading on information which is not really available to the general public. LIABILITY: a financial obligation that (is pending) must be made at a specific time. Equity and debt are both liabilities that a company owes to the respective investors. LIMIT ORDER: this is an order to buy or sell a stock at a pre-determined price only. The order will get executed only if the market price reaches the price-point

at which you are willing to buy/sell a stock. LIQUIDITY: the ability of a security to get converted into cash without any loss of time or value is called its liquidity. In the stock market, a good indicator of the liquidity of a stock is the volume of shares that get traded in the exchanges. MARGIN REQUIREMENTS: margin is the amount of money, or collateral, that a member will be required to lodge with the clearing corporation as a percentage of his total value of trades. Margins strengthen the risk management system as they help in maintaining the market integrity and averting payment defaults by the members. MARK TO MARKET: the value of investments (especially secondary market securities) undergoes a change over

time. Hence the acquisition price does not reflect the true worth of these assets. It is prudent to take the current value of the investments. MARKET CAPITALISATION: market capitalisation is the market value of the equity of a company. Simply put, it is the number of outstanding shares multiplied by the market price of the company. It is also the currency which can be used in case of acquisitions. MARKET MAKER: a member of an exchange who quotes simultaneous bid and offer prices for an issue of securities. Usually market makers undertake to offer quotes in certain securities, thereby creating liquidity in the security. MARKET ORDER: this is an order to buy or sell a stock at the market price. MARKET VALUE: the market value refers to the current resale value of a security. The market value of a security is easily computed as the closing price multiplied by the shares outstanding. NET WORTH: shareholders’ funds comprise equity share capital and the reserves/surpluses of their company. Net worth is the funds that shareholders own—their equity in other words. It represents the capital infused by shareholders and the accumulated net profits after paying out dividends (retained earnings). Hence in the event the business is wound up, the net worth is what the shareholders get.

OFFER FOR SALE: when an existing shareholder of a company offers shares to the general public through a prospectus. ORDER ROUTING SYSTEM: in an order routing system a broker offering Internet trading facility provides an electronic template (space) for the customer to enter the name of the security being bought or sold, the quantity and the price specifications. Once the broker’s system receives this information, it is checked electronically against the customer’s account and is routed to the appropriate exchange for execution by the broker. After the order is executed, the customer receives a message confirming the order. The customer’s portfolio and ledger account will also be updated online. PRICE/EARNINGS RATIO: this ofttracked ratio is the ratio of the price per share to the earnings per share. This indicates the number of years that will be required to recover the amount paid for the shares of a company when the latter’s earnings are constant over a period of time. This is a widely used benchmark for stocks and associates a fundamental variable (earnings) with a market variable (price). RECORD DATE: a date set by a company on which it checks the records of its shareholders to allocate their entitlements (of rights, dividend etc). RIGHTS ISSUE: issue of additional equity to existing shareholders of a company. The existing shareholders have the

INTERNET BROKING: Internet based trading on conventional stock exchanges uses the Internet as a medium for communicating client orders to the exchanges through broker websites. These sites may serve a variety of functions from allowing full trading through the website to features like on-line stock quotes, information and analysis etc. Sebi has allowed Internet trading in India, albeit in a limited form. The Sebi Committee on Internet-based Securities Trading and Services has allowed the Internet to be used as an order routing system through registered stockbrokers on behalf of clients, for trading in the securities market.

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Trade Jargon

Trade Jargon

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First Step to Investing in the Share Market

NET PROFIT: net profit sports various names, including bottom line and profit after tax. In simple terms net profit stands for the money that a business makes after paying off all its costs, both operational and capital, and tax. In other words, it belongs to the shareholders. It can be either given to the shareholders as dividend or retained to further the business.

DISCLAIMER
This booklet has been prepared by SSKI Investor Services Pvt. Ltd. (SHAREKHAN). It is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this booklet should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of SHAREKHAN.

right to exercise this option to subscribe to these shares. RISK PREFERENCE: each individual has a personal tolerance for risk. To set an investment course that you will be comfortable with, you need to think about your willingness to accept declines in the value of your investments and you will need to consider your investment goals. SETTLEMENT: the mechanism through which all parties to a transaction get their receivables, ie either funds or shares, is known as clearing and settlement or simply settlement. SHARE SWAP: an arrangement by which shares of one company are swapped for another in a specified ratio. SHAREHOLDER VALUE: an ethos of managing that calls for a business to be run with the objective of maximisation of the wealth of the shareholders. SHORT POSITION: it occurs when a person sells stocks he does not yet own. Eventually the shares must be bought

back to close out the transaction. This technique is used when an investor believes the stock price will drop. SHORT SALE: it suggests selling a stock that is not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually the investor must buy the stock back in the open market. SPECULATION: it suggests taking large risks, especially with respect to trying to predict the future or gambling, in the hope of making quick, large gains. STOCK OPTION: an option given to a person to buy a stock at a predetermined price on a future date. TREND: trend is a basic direction in which the prices are moving. Trends are of three types, namely Uptrend, Downtrend, Sideways trend. VOLATILITY: the sharp movement, up or down, in the price of a security, or in the overall prices prevailing in the market.

SSKI Investor Services Pvt. Ltd. (Sharekhan) A-206, Phoenix House, Phoenix Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400013. Tel: 022-2498 2000

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Trade Jargon

Trade Jargon

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