Basics of Stock Market

What is meant by a Stock Exchange?
A Stock Exchange is a constituted body for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in Securities. Stock Exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception.

What is a Equity Share?
Total equity capital of a company is divided into equal parts of small denominations, each called a Share. For ex in a company the total equity capital of Rs.2,00,00,000 is divided into 20,00,000 units of Rs.10 each. Each such unit of Rs.10 is called as a Share. Thus, the company then is said to have 20,00,000 equity shares of Rs.10 each. The holders of such shares are members of the company and have voting rights.

What is a Debt Instrument?
Debt Instrument represents a contract where by one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In the Indian Securities Market, the term "bond" is used for debt instruments issued by the Central and State Governments and Public Sector Organizations and the term "debenture" is used for instruments issued by private corporate sector.

What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic, variables, called underlying. The underlying asset can be equity, index, forex, commodity or any other asset. Derivative products initally emerged as hedging devices against fluctuations in commodity prices and commodity linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spot light in post 1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990's they accounted for about two thirds of total transactions in derivative products.

What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India)that collects money from individuals/corporate investors and invests the same in a variety of different financial instruments or securites such as equity shares, Government Securities, Bonds, Debentures etc., Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the Public and invest on behalf of the investors. Mutual Funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a mutual fund in its prospectus are binding on the Mutual Fund Scheme. The investment objectives specify the class of securites a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commerical paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes, others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

What is an Index?
An index shows how a specified portfolio of share prices are moving in order to given an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

What is a Depository?
A depository is like a bank wherein the deposits are securities like Equity shares, debentures, bonds, government securities etc., in electronic form. A depository holds securities in an account. It transfers securities between accounts on the instruction of the accound holder. A depository further facilitates transfer of ownership of securities without having to handle securities. It also facilitates safe keeping of shares in electronic form.

What is 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 to the investor's account with his Depository Participant (DP)

Which are the depositories in India?
There are two depositories in India which provide Dematerialization of Securities. The National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL).

What are the benefits of participation in a Depository?
The benefits of participation in a depository 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 paper work involved in transfer of securities
Reduction in transaction cost
Ease of 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.
Transmission of Securities is done directly by the 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 credit into Demat Account of shares, arising out of split/consolidation/merger etc.,

Who is Depository Participant?
The depository provides its services to investors through its agents called Depository Participants (DP's). These agents are appointed by the Depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e., Banks, Financial Institutions and SEBI registered trading members can become DP's.

What is the role of the Primary Market?
The Primary Market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc., They may issue the securities in domestic market and/or international market.

What is an Initial Public Offer (IPO)?
An Intial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the firsttime to the public. This paves way for listing and trading of the issuer's securities. The sale of securities can be either through book building or through normal public issue.

What is meant by Market Capitalization?
The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g Company A has 120 million shares in issue. The current market price is Rs.100. The market capitalization of Company A is Rs.12000 million.

What is meant by Secondary Market?
Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary Market comprises of equity markets and the debt markets.

What is the role of the Secondary Market?
For the General investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, secondary equity markets serve as a monitoring and control conduit by facilitating value enchancing control activites, enabling implementation of incentive based management contracts, and aggregating information (via price discovery) that guides management decisions.

What is the difference between Primary Market and Secondary Market?
In the Primary Market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary Market is an equity trading venue in which already existing/pre issued securities are traded amond investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, over-the-couinter (OTC) is a part of dealer market.

What is the role of a Stock Exchange in Buying and Selling Shares?
The Stock Exchange in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the Internet based trading facility provided by the trading members of the NSE.

What is Screen Based Trading?
The trading on Stock Exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time cosuming and in-efficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nation wide, on-line, fully-automated Screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order form a counter party is found.

What is NEAT?
NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT) is a state of the art client server based application. At the server end all trading information is stored in an in memory data base to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

How does an investor get access to internet based trading facility?
There are many broker of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor's residence or anywhere else where the client can access he internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.

What is the Bid and Ask Price?
The Bid is the buyer's price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. The Ask (or offer) is what you need to know when you are buying i.e., this is the rate/price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted Ask price.

What are various types of Derivatives?
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts, such as futures of the Nifty Index.

Options: An option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types calls and puts options.

Calls: Call give the buyer, the right, but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts : Puts gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date.