1. What are Markets?
A stock market is a market for the trading of company stock/ shares, and derivatives. This includes securities listed on a stock exchange as well as those only traded privately. Market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.
It also enables corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. As a result, idle resources (of investors) are transferred to those who need them (corporates). Markets, thus, provide channels for reallocation of savings to investments and entrepreneurship.
1.1 Primary markets:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO)
What are the types of issues in primary market?
Primary market Issues can be classified into four types.
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- Initial Public Offer
- Follow on Offer
- Rights Issue
- Preferential Issue
1.2 Secondary markets:
The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. In the secondary market, securities are sold by and transferred from one investor or speculator to another.
The secondary market is where you can purchase securities from the seller as opposed to the issuer of such a security. Hence securities that are initially issued in the primary market by companies are traded on the secondary market.
The secondary market comprises of two broad segments viz. Equity and Debt. Equity shares are the most widely traded form of securities. There are various ways in which equity shares are issued such as IPOs, rights issues and bonuses.
How are share prices determined?
The share prices, the prices at which the shares trade are determined by supply and demand. If there are more buyers than sellers, then the price will rise and if there are more sellers than buyers it will fall. In turn that supply and demand is determined by a number of other factors including:
General market sentiment
- Movements on international markets
- Economic events and Government decisions
- Company news and performances
- Interest rates
- Speculation and rumor
2. What are shares?
A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company increases. The terms share, equity and stock mean the same thing and can be used interchangeably.
Types of Shares
Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share. Voting and Non-Voting shares are also known as Class A and B shares.
The most common form of shares is ordinary (equity) shares. One can also buy preference shares, options and partly paid shares.
There are a number of different types of shares such as ordinary or preference shares which have different properties.
Preference shares are those shares in a company with rights in various ways superior to those of ordinary shares; for example, priority to a fixed dividend and priority over ordinary shares in the event of the company being wound up.
When a share is issued, the person applying for it must pay to the company, in cash or equivalent value, the amount of its nominal value together with any premium required by the company. Shares are fully paid when the whole amount has been received by the company.
Shares may also be issued on the basis that only part of their price is to be paid initially, with the remainder being required when called for by the company.
For more experienced investors, derivatives such as options and warrants provide further diversification. However, when the majority of investors invest in shares, they buy ordinary shares.
3. What is a stock exchange?
A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.
The Bombay Stock Exchange Limited, or BSE has a nation-wide reach with a presence in 417 cities and towns of India. Its index or market indicator is known as the Sensex. It gives a general idea regarding the movement of the stocks; whether they have gone up or have gone down. If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up.
The S&P CNX Nifty, or simply Nifty, is the leading index for large companies on the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy, and representing approximately 47% of the traded value of all stocks on the National Stock Exchange of India
4. Who is a broker?
A stockbroker is person who is licensed to trade in shares. Brokers also have direct access to the share market and can act as your agent in share transactions. For this service they charge a fee. They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts.
In addition a stock broker can plan, implement and monitor your investment portfolio, conduct research and help you optimize your returns.
5. What is a Demat A/c?
Investors who wish to trade in the market need to have a dematerialized, or demat, account. In India, the government has mandated two entities –National Securities Depository, or NSDL, and Central Depository Services (India), or CDSL – to be the custodian of dematerialized securities.
- 5.1 What do you mean by dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor’s account with its DP.
- 5.2 Can I dematerialize any share certificate?
You can dematerialize only those certificates that are already registered in your name and are in the list of securities admitted for dematerialization.
- 5.3 What is a depository?
A depository can be compared to a bank. A depository holds securities like shares, debentures, bonds, government securities, and units, among others of investors in electronic form. A depository also provides services related to transactions in securities.
- 5.4 How can I avail the services of a depository?
A depository interfaces with the investors through its agents called depository participants, or DPs. If an investor wants to avail of services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank’s services.
- 5.5 What are the benefits of opening a demat account?
The benefits of opening a demat account are:
- Immediate transfer of securities;
- No stamp duty on transfer of securities;
- Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.;
- Reduction in paperwork involved in transfer of securities;
- Reduction in transaction cost;
- Nomination facility;
- Change in address recorded with DP gets registered electronically with all companies in which investor
holds securities eliminating the need to correspond with each of them separately;
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- Transmission of securities is done by DP eliminating correspondence with companies;
- Convenient method of consolidation of folios/accounts;
- Holding investments in equity, debt instruments and government securities in a single account;
- Automatic credits of shares into demat account, arising out of split/consolidation/merger etc.
- 5.6 How do I select a DP?
A. You can select your DP to open a demat account just like you select a bank for opening a savings account. Some of the important factors for selection of a DP can be:
B. Convenience – Proximity to the office/residence, business hours.
C. Comfort – Reputation of the DP, past association with the organization, whether the DP is in a position to give the specific service you may need?
D. Cost – The service charges levied by DP and the service standards.
A. What are the documents that I will require?
Proof of identity (copy of any one proof):
- Passport
- Voter ID Card
- Driving license
- PAN card with photograph
- Identity card/document with applicant’s photo, issued by
- Central/State government and its departments,
- Statutory/Regulatory Authorities,
- Public sector undertakings,
- Scheduled commercial banks,
- Public financial institutions,
- Colleges affiliated to universities (this is valid only till the time the applicant is a student),
- Professional bodies such as ICAI, ICWAI, ICSI, Bar Council etc, to their members; and
- Credit cards/debit cards issued by banks.
Proof of address (copy of any one proof):
- Ration card
- Passport
- Voter ID card
- Driving license
- Bank passbook
- Verified copies of electricity bills/ residence telephone bills (not more than two months old)/ Leave and license agreement/ agreement for sale.
- Self-declaration by High Court and Supreme Court judges,
- Giving the new address in respect of their own accounts.
- Identity card/document with address, issued by
- Central/State government and its departments,
- Statutory/Regulatory Authorities,
- Public sector undertakings,
- Scheduled commercial banks,
- Public financial institutions,
- Colleges affiliated to universities (this is valid only till the time the applicant is a student),
- Professional bodies such as ICAI, ICWAI, ICSI, Bar Council etc, to their members; and
Passport-size photograph
Copy of PAN card
One must remember to take original documents to the DP for verification. Your DP will carry-out “in-person verification” of account holder(s) at the time of opening your account.
B. Other Information
Q: How long does the dematerialization process take?
A: Dematerialization will normally take about 30 days.
Q: Can I dematerialize my debt instruments, mutual fund units, and government securities also in my demat account?
A: You can dematerialize and hold all such investments in a single demat account.
Q: Can my electronic holdings be converted back into certificates?
A: If you wish to get back your securities in physical form, all you have to do is to request your DP for rematerialisation of the same. ‘Rematerialization’ is the term used for converting electronic holdings back into certificates. Your DP will forward your request to the depository. After verifying whether you have the necessary balance, the depository will intimate the registrar, who will print the certificates and dispatch the same to you.
6. Buying and selling of dematerialized securities
What is the procedure for selling dematerialized securities?
The procedure for selling dematerialized securities is very simple. After you have sold the securities, you would instruct your DP to debit your account with the number of securities sold by you and credit your broker’s clearing account. This delivery instruction has to be given to your DP using the delivery instruction slips given to you by your DP at the time of opening the account. Procedure for selling securities is given here below:
- You sell securities in any of the stock exchanges through a broker;
- You give instruction to your DP to debit your account and credit the broker’s (clearing member) account before the deadline time specified by your DP;
- Before the pay-in day, your broker gives instruction to its DP for delivery to clearing corporation;
- Your broker receives payment from the stock exchange (clearing corporation);
- You receive payment from the broker for the sale of securities.
How can I purchase dematerialized securities?
For receiving demat securities you may give a one-time standing instruction to your DP. This standing instruction can be given at the time of account opening or later. Alternatively, you may choose to give separate receipt instruction every time some securities are to be received. The transactions relating to purchase of securities are summarized below:
- You purchase securities through a broker;
- You make payment to your broker who arranges payment to clearing corporation on the pay-in day;
- Your broker receives credit of securities in its clearing account (clearing member account) on the pay-out day;
- Your broker gives instructions to its DP to debit its clearing member account and credit your account;
- You receive shares into your account. However, if standing instructions are not given at the time of opening the account, you will have to give ‘Receipt Instructions’ to your DP for receiving credit.
You should ensure that your broker transfers the securities from its clearing member account to your depository account, before the book closure. If the securities remain in the clearing account of the broker, the company will give corporate benefits (dividend or bonus) to the broker. In that case, you will have to collect the benefits from your broker.
7. How to receive income from shares?
The income received from shares is called a dividend.
We invest in shares to make money – either through a share’s capital growth, i.e. the amount by which the share price increases in value over time, or through the dividends it pays to its shareholders. Dividends are payments made by companies to shareholders from their profits. Not all companies pay dividends. Dividends are usually paid twice a year and are in effect the yield from your investment. Some growth companies plough most of their profits back into generating more business rather than paying out dividends to investors.
How would I get my dividend/interest or other cash entitlements?
The concerned company obtains the details of beneficiary holders and their holdings from the depository. The payment to the investors will be made by the company through the ECS, or Electronic Clearing Service, facility or by issuing warrants on which your bank account details are printed. The bank account details will be those, which you would have mentioned in your account opening, form or changed thereafter.
How would I get my bonus shares or other non-cash entitlements?
The concerned company obtains the details of beneficiary holders and their holdings from NSDL. Your entitlement will be credited by the company directly in your depository account.
8. How to make investment decisions?
The stock market has, perhaps, the most exciting investment opportunities for the investor community. At the same time, it could be unnerving and scary. In fact, equity investment has always remained a big challenge, not only for retail but institutional investors, too. Moreover, investors’ discomfort generally increases with a rise in market volatility. You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.
In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.
To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.
A long-term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.
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