This Write up is to meant for the new BEE's, who like to learn something about stock market.
What is meant by stock market?
A stock market is a private / public market where securities of companies and their derivatives are traded at a predefined / agreed price. Usually these securities are listed on stock exchanges. A stock market consists of few stock exchanges where the listing and trading takes place. All stock markets are regulated by some organization designated by the Govt.
How does a stock market function?
A stock market has many members who co ordinate for various activities in the process of placing orders, their execution and settlement etc. A person who desires to buy / sell shares in the stock market, can place his order through the broker either in the traditional manner or can place an online order himself through the terminal provided by the broker.
When an order is placed, the order is sent to the exchange and then the order resides in the Exchange system till all conditions of the order have been met with. When the conditions of the order are fulfilled, the order is executed and the shares purchased / sold are delivered to the buyer / obtained from seller through the broker. The whole settlement process takes place through NSCCL (National Securities Clearing Corporation limited), the official clearing agent for the stock market in India.
Who regulates the stock market?
In India, the stock markets are regulated by SEBI (Securities and Exchange Board of India). There are several stock exchanges in the country out of which the two most prominent exchanges are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). The signature index for BSE is Sensex while for NSE, it is NIFTY.
What is Rolling Settlement?
Rolling Settlement is the mechanism adapted by the Indian Stock markets for faster settlement of trades. In Rolling Settlement, trades executed during the day are settled on net obligations basis. In India, settlement of trades executed is done on T+2 basis where T stands for Trading day and +2 stands for two working days excluding the trade day. Net the effect of shares bought or sold is on the third day from trade day.
In this kind of settlement, two trading days are considered for settlement where Saturday, Sunday, Bank Holidays and trading holidays are not considered as working days for settlement. Hence, a trade done on Monday will get settled on Wednesday.
What is dematerialization?
Dematerialization is the process by which an investor can get the physical share certificates converted into electronic shares of equivalent number and value. Dematerialization takes place though a depository participant who assists an investor to get the shares dematerialized.
In this process, once the physical shares have been converted into electronic shares, they are credited to the client’s demat account which is with the depository participant. An investor can get those shares dematerialized into his / her account only if those share certificates are registered on his / her name.
Why invest in shares?
Investing in shares is like investing into ownership of a company which no other investment instrument can give you. Unlike any other investment instrument which either give you fixed income or meager returns and no owned share in the same, equity investment gives you an opportunity to become a part of the company ownership and also gives you regular returns on your investment as dividend income or through price changes.
Investing in equity also allows you to enjoy the flexibility of staying invested as long as you wish to, take advantage of the price movements and thus utilize the liquidity. In an overall view, equity investment is better than any other investment.
Can I invest in any share?
By the virtue of investing in shares, you can invest into any share but since investing in equity is like owning a part of the company, you should be careful about which share are you investing your money. The profits that you earn from such investment, will largely depend on the shares that you have purchased. If you have invested in a low earning share, no matter much you invest, it is not going to fetch you the same kind of return as a high earning share.
How do I buy / sell shares?
In order to buy / sell a share, you need to first become a client of one of the stock market members who are commonly known as stock brokers. But before you sign up with a stock broker / financial services provider, you need to understand the importance and sensitivity of the relationship between the stock broker and yourself so that you are familiar with the rules and regulations abiding in the relationship.
Once you have chosen your stock broker / financial services provider, you need to open an account with the same, get quotes for the share that you wish to buy and place orders either by calling up or online.
When am I ready to buy shares?
Before you put your money into shares, you need to be aware that investing in shares is not only rewarding but also risky so you need to make sure that the surplus money available with you at hand may not be required in near future. This is so because to reap the benefits of investing in shares, you need to stay invested for a considerable time period.
Once you are clear about the above mentioned facts, you are ready to buy your first share.
How much does a share cost?
The price of a share is preset by the exchange. The demand and supply factors of the market determine the price at which a share is bought or sold. A share can cost anywhere from less than Rs. 10 to an amount even above Rs. 2000.
If you are keen on buying a share of a company, you can either refer to any of the news papers that provide such information or find it online thorough online trading platforms provided by your broker or even calling up to your broker in order to assist you in the same.
Can I put all my surplus money in shares?
The answer to this is all dependent on your age, your financial requirements and future goals.
If you are young, surplus money at hand that is not likely to be required in near future, can stay invested for few years, then you can invest all that in shares.
But if you are retired / likely to retire soon / old, have no other source of income or earn meager income, surplus money at hand that is not likely to be required in near future, you should not resort to investing all that in shares, instead you can diversify your investments into bonds, fixed deposits, Govt. securities etc. and a lesser exposure in equity investment.
Ø Concepts & Terms you should familiarize with
Ø Margin trading
Margins are collected to safeguard against any adverse price movement and it is usually a percentage of the transaction value. In share trading, you can buy shares only up to the margin amount existing in your account. i.e. you cannot exceed your margin limit to place an order.
I order to take advantage of price movements, even though you don’t have enough margin in your account, Margin trading has been introduced for the facility of investors. Margin Trading is a facility provided by a broker to the client where a client can place orders for a value exceeding the margin amount available in the account. In margin trading, a part of the required margin is given by the client while the rest is funded by the broker.
Ø Different types of orders that can be placed
There are various types of orders that can be placed in equity investment; such orders have been listed below:
- Delivery order: An order where shares are delivered into the client’s demat account for settlement and they cannot be sold on the same day of order placement. Once can only sell such shares once their delivery has been received.
- Intra day order: An order where shares are bought and sold on the same trading day and there is not delivery of shares into the client’s demat account for settlement. For such orders, settlement is done on net payment basis where only monetary effect are given to the client’s account.
- Market Order: An order placed at current market price of a share in order to get instant execution of the order. This order is placed when an investor expects the share price to rise sharply and is thus keen on buying it. Such orders may get executed at market price when your order is placed but their can be some difference in the price at which your order was executed as there could be a price change while you placed your order.
- After Market Order: An order that can be placed to buy or sell a share even when the market session is over. Such orders are executed when the next market session opens for trading. After Market orders can be placed within a specific time period which varies between different brokers.
o Limit Order: An order that is placed to buy or sell a share with a price limit in it so that your order gets executed at a price level favorable to you. In a Buy order, limit has to be lesser than the current price and in sell order, it has to be more than the current price.
For example, you wish to place an order for a share whose current price is Rs.125 and you want to buy it at any price lower than the current price, then the limit for your order should be Rs.124 at least so that your order gets executed only after the limit has been achieved and gets executed at Rs. 124 or any lower price.
But if you wish to sell the same share, you would always prefer to get the best price for it to make maximum possible profit out of it. So, in the sell order, your limit should be Rs.126 at least so that your order gets executed only after the limit has been achieved and gets executed at Rs. 126 or any higher price.
o Stop Loss Order: An order that allows you to decide the maximum loss that you are ready to bear in intra day trading. As in intra day trading, you enter and exit the position within the same trading session, Stop Loss order is placed to safe guard against potential losses that may occur once your order is executed.
Suppose you place a buy order at Rs.125 and it gets executed, in order to minimize the losses if any adverse price movement takes place; you need to place a reverse stop loss order. This order will be a sell order with the same quantity of stock that you have received as a result of the buy order. Now you need to specify the price at which you think you would like to exit the position which can be Rs. 120 and also the price at which your order should enter the market which can be Rs.123. This price (Rs.123) is called trigger price. If you think that the price may fall, from the current market price, then you can put this trigger in stop loss order to make sure that it enters the market only after the trigger price has been reached.
Ø Circuit Filters
A circuit filter is a measure introduced by SEBI to determine fixed price bands for different securities within which they can move in a day. If there’s any breach beyond / below these price bands, it will result in temporary halt in trading for those securities.
Circuit filters are based on the previous close price of the security and as previous close price of the same can be different on BSE and NSE; so can be the circuit filters.
Ø Short selling:
The concept of short selling simply means selling a share that you don’t own. In short selling, an investor sells a share that he / she doesn’t own but is expecting the price of the same to decline.
It is generally practiced in intra day trading & FNO trading where the sell position is covered by buying a stock so that the net monetary benefit gets affected in the account and no delivery of shares is required.
Ø Auction of shares:
Auction of shares is a methodology adapted by the exchanges to make sure that the buyers get delivery of the shares due to them as a result of short delivery. Short delivery of shares generally takes place due to short selling by seller’s who don’t possess the required number of shares.
In this process, the exchange buys shares from the seller’s broker who lends such shares to the seller and delivers it at an agreed price to the buyer. The seller in such case has to bear the monetary loss / expenses incurred in the auction.
Ø Insider Trading:
Insider Trading is basically trading / investing in any particular security based on unpublished information which is price sensitive for that security. Usually such information comes from people who are associated with the source of such information and want to make profit from such information.
Insider trading is prohibited and an offense punishable by law.
