What is an Equity Share?
The word “share” is self-explanatory. Share is a type of asset which represents a share of ownership in a company. So anyone who owns a share is a part owner of that particular company. They are commonly known as ordinary shares. An equity share owner has the right to vote during Investor meetings. They also have the ownership of control over the working of the company. The extent of ownership is limited to the proportion of the shares held by an individual. The returns on share-holding are dividend pay-outs and capital appreciation.
What are the various types of shares available?
Primarily, there are two types of shares: Equity and Preference Shares. Preference share owners have a two-pronged preference. Preference shares have a fixed percentage of dividends that has to be paid out in case the company has made profits and decided to pay dividends. Preference share owners will receive their dividends, first, at the pre-fixed rate. In case there is any surplus left, that is then distributed amongst the Equity shareholders. Also in case of the company being wound up, Preference shareholders are paid off before Equity Shareholders. Preference shareholders have sub-types like Cumulative, Non-cumulative, Redeemable, Non-redeemable etc.
Where can investors buy shares from?
Shares can be purchased in two ways. If a company is issuing shares for the first time, any individual can apply through an IPO (Initial Public Offering). In case the company already has shares listed on any stock exchange(s), an investor can buy shares from there. But the point to remember is that individual investors cannot deal directly with any exchange. So one needs to open a demat account and a trading account with a broker who is registered with that exchange to start investing in shares.
What are primary and secondary market?
Let us assume that there is a company who so far was a Limited Liability Partnership firm or a Private Limited Company. They wish to become a Public Limited Company and invite investors to purchase shares (stake) in their business. For this, they have to invite subscriptions to their IPO or Initial Public Offering. Anyone purchasing these shares directly from the issuing company, through an IPO, is said to have invested in Primary Market. After the subscription closes, the shares are listed on one or many stock exchanges. Any investor purchasing shares from the stock exchange is a Secondary Market investor.
What are the functions of the Capital Market?
Capital Markets in India have a multi-faceted role; the most important one being the role of an intermediary to help mobilisation and channelization of funds from investors to borrowers. This ensures adequate liquidity in the system. Corporates, industrial units and various other institutions have a ready source of raising funds to run their businesses, fuelling entrepreneurial growth. For this they have to be accountable and transparent to the investors. Capital Markets are also indicators of the National Economy. Foreign investors track and invest in our country on the basis of the performance of these capital markets.
What is a Stock Exchange?
A Stock Exchange primarily is a huge and organised intermediary dealing in stocks, who connects anonymous buyers to anonymous sellers so that they can trade with each other. It helps businessmen raise funds for their ventures. On the other hand, it provides opportunity to others to mobilise their savings and earn good returns. To be traded on a stock exchange, the company must be first listed. If it is listed, it is under severe scrutiny to protect the rights of the investors. Stock exchange is also a platform for price discovery of listed assets.
How does the Stock Exchange function?
‘A’ wants to buy 50 shares of IJK Ltd. at ₹ 45/- per share. ‘B’, in his portfolio, has 50 shares of IJK Ltd. which he wishes to sell at ₹ 47/-. Both enter their requests on the trading platform through their respective brokers. The shares traded at ₹46/-. This is known as price discovery. Initially, stock exchanges had an open trading floor where participants yelled and shouted to trade their stocks. But now things are professional and the marketplace is computerized. Order-matching and price discovery happen on a real-time basis due to the speed provided by technology.
How many Exchanges are there in India?
There are over twenty stock exchanges in India. But only, two of them are prominent on the global financial map: the NSE (National Stock Exchange of India) and the BSE (Bombay Stock Exchange). Both these stock exchanges are headquartered in India’s financial capital – Mumbai. Apart from the NSE and BSE, India also has a few recognised Regional Stock Exchanges like Ahmedabad Stock Exchange, Delhi Stock Exchange, Calcutta Stock Exchange, OTC Exchange of India, The Inter-Connected Stock Exchange of India (ISE), Madras Stock Exchange etc.
What are the popular stock exchanges in India?
The two most popular Stock Exchanges in India are NSE and BSE. BSE is the oldest stock exchange in India which commenced operations in 1875. The indices on these two stock exchanges are closely monitored by investors in India and world over. They are the largest in terms of recognition and trading volumes in India. Hence, movements in these markets are considered as indicators of the performance of the national economy as a whole. Their trading platforms, screens and security measures are considered as one of the best ones in the world.
What is the Market timing for Equity?
Officially the Equity Markets function from 9:00 AM to 4:00 PM IST. Markets work from Mondays to Fridays except declared holidays. The pre-open session for order entry and modification takes place from 9:00 AM to 9:08 AM. Post which there is ‘order matching and confirmation’ that takes place till 9:15 AM. The opening bell is rung at this point and there is a continuous trading session till the closing bell rings at 3:30 PM. Closing and post-closing formalities take place from 3:30 PM to 4:00 PM. A separate block trading session begins for 35 minutes at 9:15 AM.
Whom should I contact for my Stock Market related transactions?
In case an individual wishes to trade in the stock markets, he/she should be a member/account holder with a stock broker. The stock broker has to be affiliated to that particular exchange as a trading member. Stock brokers can be individuals or even firms and companies. Any employee of such a company who directly deals in stocks is a stock broker. Like any other market, there are organised as well as unorganised players in the broking industry. So, if one wishes to trade in shares he or she has to contact the stock broker with whom they have a demat and trading account.
Why does one need a broker?
A broker is an intermediary between the investors and the exchange. He is an agent who is licensed to deal in stocks on behalf of the investors. They also have to mandatorily register themselves with the Securities and Exchange Board of India (SEBI). They provide very valuable services and important information to investors. They help investors manage their stock portfolios. At times they even give advice on buying, holding or selling stocks depending on various fundamental and technical market trends.
Am I required to sign any agreement with the broker or sub-broker?
Any formal working relationship needs a written document as evidence. Similarly, if a corporate or an individual wishes to deal in shares and wants to tie-up with a stock-broker, they need to sign an agreement form. This acts as a pre-condition to allowing the broker and/or sub-broker to act as the investor’s agent. This agreement form is officially known as “Member – Client Agreement Form”. This form is generally accompanied by a host of other identity and address proof documents to ensure credibility.
What is a Member–Client Agreement form?
As the name suggests, a Member – Client agreement form is a written contractual agreement between an investor and his/her broker. Through this form, the investor agrees on the broker acting as his agent to deal in the stock exchanges. The forms are easily available on the official websites of BSE and the NSE. The form is quite detailed and mentions of terms and conditions regarding participation in various market segments, margin accounts. The agreement document is compulsorily executed on a Non-Judicial stamp paper or on other accepted papers franked from the Stamp Offices.
What is electronic/internet trading?
Electronic or internet trading is akin to online banking or net-banking. If an investor is a keen tracker of the stock market, he or she can themselves trade in stocks by using the internet. If your broker has it available, you can avail of the online trading facility. The broker shall provide you with an ID and a password, using which you can login. You can view your portfolio and even buy or sell stocks proactively. Such investors should also be trained adequately in using the software/portal. The entered orders are executed after routing them through the trading member (broker).
How to execute an order?
Every investor is given an ID and password. This account is linked to your trading account. When you login during a live session, all current stock prices are visible on the screen. Other details like current index position, volumes and highs/lows are also visible. Your current portfolio, too, can be viewed. With a few clicks of the mouse, you can place a buying request; it is then processed by the broking house. Your fund account is debited and stock is deposited in the demat account. The details of the transaction are available on your page and can also be printed.
What is Bid and Ask Rate?
On a trading screen, one can see the live rate and also the best Bid and Ask rates for a particular stock. For example, the current stock price of one share of IJK Ltd is ₹ 45/-, the bid rate, ₹ 43/- and the ask rate, ₹ 46/-. This means that the share last traded at ₹ 45. Further buyers wish to buy the same at varied buy (bid) prices like ₹ 42, ₹ 42.50, ₹ 43. The best bid is the highest bid (₹ 43). Likewise, further sellers wish to sell it at varied sell (ask) prices like ₹ 46, ₹ 46.50, ₹ 47. The lowest ask price is the best ask price. Bid/ask prices are constantly refreshed and entered into the system. When prices match, deals are executed.
What is Market Order and Limit Order?
Stock prices fluctuate rapidly. Hence there could be a difference in prices at the point in time the order was entered and when it was actually executed. Trading screens give you the option of Market/Limit order. If you choose market order and enter the trade into the system, you have to bear the risk of the order being executed at a different price due to time lapse. If you opt for Limit order option, then you can specify a maximum limit for a buy transaction and a minimum limit for a sell transaction. If, the market price does not fall within the limits, the order is unexecuted.
What is Stop Loss Order and Stop Buy Order?
Many investors want to take positions but cannot track the market constantly. So they make use of Stop Loss/Stop Buy orders in case they have a threshold price in mind. For example: The Current share price of IJK Ltd. is ₹ 50. You are extremely busy but wish to save yourself from a sharp decline. You initiate a stop-loss order at ₹ 48. This means that if the price falls down to ₹ 48, a stop loss is triggered and the shares will be automatically sold at the next best price, for example ₹ 47.95. The same fundamental is applicable for stop buy orders.
What causes stock prices to change?
The price determination of any asset is fundamentally based on the demand to supply ratio. The same principle applies to change in stock prices. Shares of IJK Ltd. are currently trading at ₹ 50. There is positive news about the company and many investors wish to buy it. The sellers too would not want to sell. This simply means that the demand is rising but supply cannot match up. Buyers may go on bidding at higher prices to purchase the stock at any cost, thus increasing the share price.
What is the right time to invest in Equity?
The best time to invest in Equity is when one has the means. Equity investment requires discipline and patience to invest for a long term. Never be a part of the herd mentality. Greed can damage investments. It is difficult to time the market. The best of the people have been grossly inaccurate. One also needs to be objective about equity investment. Markets are very sentiment driven but as they say ‘Never make promises when you are too happy and never make decisions when you are too sad.
What is meant by bullish and bearish trend?
Most animals hunt either for food or for self-defence. They attack their opponents in different ways. A bull attacks an opponent by using its horns and thrusting it into the air. A bear hits and pushes its opponent down with its paws. Similarly when the general outlook of the market is positive, it is said that the trend is bullish i.e. upwards. If they general outlook of the market is negative, it is said that the trend is bearish i.e. downwards.
What is Buying and Selling?
These are the simplest terms in the Equity market. You have surplus funds and wish to expand your investment horizon. You have been tracking a particular sector and have narrowed down on 2-3 companies in that sector which show high growth potential. So you invest i.e. Buy the shares of those companies. Likewise, if you wish to restrict your losses or are in urgent need of money you can divest your current shareholding i.e. Sell the shares of those companies which are giving the least returns or making the maximum losses.
What does one mean by “taking a position”?
‘Taking a position’ simply means taking a stance. The investor is either bullish or bearish on the markets. If he is bullish, he will buy stocks of particular corporates that he has identified (which shall give him the maximum returns). He will hold on to them till it reaches his expected price and then sell it off. This is known as taking a long position. If one is bearish, he can borrow shares to sell them now with a view to purchase them later at a lower price. This is known as taking a short position.
What is a contract note?
A contract note is a document issued by brokers after completing a transaction. It has legal validity and is a piece of evidence. Moreover, it provides all the details of the transaction. It mentions details like details and SEBI registration details of the broker, name and signature of authorized signatory, signature of the broker, unique identification number, transaction details like contract number, date of issue, time period for settlement, order number, trade number, trade time, quantity and particulars of shares dealt, brokerage and mandatory deductions etc.
What are the additional charges other than brokerage that can be levied on the investor?
An investor has to pay quite a few charges to deal in the stock markets. Some charges have been levied by the Government whereas others are levied by the brokers. Government taxes, obviously, are uniform; but charges levied by brokers differ from broker to broker and also depend on the services availed by the investor. Government charges include three major taxes which are Security Transaction Tax (STT), Stamp Duty and Service Tax. The variable charges charged by the broker include regular brokerage, brokerage for intraday trades, statement charges, annual maintenance charges etc.
What is a no-delivery period?
Sometimes corporates declare dividends or issue bonus shares. When the news of this development spreads in the market, the prices can fluctuate. Moreover it will be difficult for the company to ascertain as to who is eligible for the bonus share or dividends and who is not. So the company in accordance with SEBI and the concerned stock exchange will announce a “No-delivery” period. In this period, people can trade in the shares, but the delivery happens only after the “No delivery” period is over. The date the “No delivery” period starts is known as the Ex-Date.
What is a settlement cycle?
Once an investor has purchased or sold shares, the trades need to be settled. This means that the buyer who has already paid for the shares should get the shares in his demat account and the seller who has sold the shares should get the money due to him. The stock exchange as an intermediary is responsible for all the settlements. Every stock exchange has a Clearing House which is formed, specifically, for ensuring smooth settlement. So, in short, a settlement cycle is the time frame or period within which the buyers receive their shares and the sellers receive their money.
What is a rolling settlement?
Settlement of shares and money needs to be done after the execution of the trades. The trade happens on a day which is coded as ‘T’. Earlier, in Indian markets, The Account Period system was followed wherein transactions done during this week were netted and were settled together on a pre-determined date in the following week. But large volume movements of shares and money required an easier system. Rolling settlement is a mechanism wherein settlement happens on T + x number of days. The ‘x’ number of days are working days (that excludes holidays). Indian markets are following the global norm of a T+2 type of settlement.
When does one deliver the shares and pay the money to broker?
As mentioned above, in India, we follow a T+2 DvP i.e. Delivery versus Payment settlement system. The pay-in and pay-out happen on T+2 days. So, if a transaction has taken place on a Wednesday, the settlement shall happen on Friday (except if Thursday or Friday is a holiday). The buyer of the shares has to make the payment to the broker prior to Friday i.e. T+2. Similarly, the seller of the shares has to deliver the shares prior to Friday i.e. T+2. The broker then has to transfer the funds/shares to the clients’ accounts within 24 hours of the pay-out.
What is short selling?
In the simplest of terms it means selling those shares that the seller doesn’t own at that point. Mr Kumar thinks the stock of IJK Ltd. is over-valued. He expects the price to fall on a particular day and wishes to cash in on the opportunity. He borrows a few shares of IJK Ltd. from any one of the Approved Intermediaries (AI), pays them a rent like charge to them for the same. He sells them in the morning. The price falls as expected and he buys the shares at the lower price to return them to the AI.
What is an auction?
If an investor has tried to make money by short selling, he would have to mandatorily deliver the shares on or before T+2. In case, he cannot, then he is penalized. Some other counter-party who was the buyer obviously wouldn’t have got his delivery of shares. So the exchange holds an auction session and buys the shares from whoever is ready to sell, at whatever price (subject to upper limit of 20% from previous day’s closing price) and deliver it to the share buyer on T+3.
Is there a separate market for auctions?
Auction market is a very special market and the only participants allowed are those who are the members of the stock exchange (except for that member whose client has defaulted). It is held every working day from 2:00 to 2:45 PM. The auction bidding range is ±20% of the previous day’s closing price. The exchange is obligated to buy at any price within the range and ensure the delivery of shares to the buyer. The defaulter’s broker is sent an auction note stating that the client has to pay a price called the Auction Penalty.
What happens if the shares are not bought in the auction?
As discussed earlier, the stock exchange is obligated to buy the shares from the auction market and deliver the same to the concerned investor. But what if there are no fresh sellers in the auction market? In this situation, the stock exchange has no option but to settle the transaction in cash. The settlement happens at the Close out rate. Close out rate is calculated as: the higher of the – highest price of the share from when you sell to the Auction day or 20%.
What is bad delivery?
Most shares today are traded in the demat form. But some still exist in the physical form. When in physical form, there are high chances of Bad Delivery. It refers to the inability to transfer the stock because the paperwork is faulty or damaged or both. Common reasons for Bad Delivery include absence of Company seal, damaged company seal, overwriting, correction, alterations, torn certificates, illegible details, unattested certificates etc. No broker can accept a bad delivery and impose the same on his client.
What are company objections?
Shares can be transferred to your name in two cases. The first being, if you have purchased the shares and the second one being, if you have legally inherited the shares from someone. In either of the cases, the company (whose shares are being transferred) cannot process the transfer, they return the shares back. While returning, the reasons behind the rejection/return are also mentioned. These are known as Company Objections. In simplest of terms, the company has objected to the transfer of shares for XYZ reasons.
What should one do with company objections?
In case the transfer is happening due to a secondary market transaction, then the investor has to contact the seller via his own broker. If things can be sorted out with rectification measures, then fine, or else there arises a need for complete replacement with good shares. If that doesn’t work, there is a strong mechanism in place you can use, which is provided by the stock exchange. In case it is a matter of inheritance, then the individual has to directly deal with the transferor to get the discrepancies sorted.
Who has to replace the shares in case of company objections?
More often than not, the fault of the Company Objections lies with the transferor. There are serious possibilities of a bad delivery in case the transferor is holding the shares in the Physical form. In case the transferor/seller defaults for good, the stock exchange is obligated to settle the matter either by delivering the shares to the investor or making amends using cash settlements. If share certificates are lost in transit then special care has to be taken to stop the transfer and apply for duplicate certificates.
What are the rights of the investor?
Equity Capital investors are those who bear the maximum quantum of risk. Nonetheless, they are entitled to certain rights as a single unit and as a part of a group. As an individual you have the right to receive company documents, receive dividends, participate in the AGMs, receive bonus and rights issues, participate and vote. As a part of a group, an investor can request for an Extraordinary General Meeting, apply for a poll to resolve a matter, apply to the Company Law Board, if there is misconduct.
What are the obligations of the investor?
Rights and Responsibilities are two sides of the same coin. If an investor enjoys so many rights, then he has to be responsible as well. Responsibility primarily has to be to fight any complacency. It is the primary responsibility of an investor to remain informed about the happenings of the company. Moreover he has to be vigilant about what is going on and what should go on. It is also his fundamental duty to be proactive enough to attend the meetings and vote in them.
What are the tax implications of investing in Indian equities?
There are two considerations here – One being the tax implications of the sale of shares and the other being the tax implications of dividend distribution. If an investor holds a particular lot of shares for a period of 12 months and above, the holding period is considered as Long Term. Sale of long term, listed shares that are sold through a stock broker are totally exempt from Long Term Capital Gains Tax. Also, all transactions done on the stock exchange platform attract STT (Securities Transaction Tax). If listed shares are sold before 12 months of date of purchase/allotment, then the sale attracts a Short Term Capital Gains Tax. Dividend income is completely exempted from tax but the company, on your behalf, pays a Dividend Distribution Tax (DDT).