Before you actually start investing and trading, it would be advisable to understand a few basic concepts related to business and finance. Presented in the simplest terms, these would give you an insights that can improve your investing decisions…
A few things you must know
|A few things you must know|
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.
1.1 Primary markets:
The primary market is that part of the capital markets that deals with the issuance of new securities.
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.
2. What are shares?
In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT’s. In British English, the usage of the word share alone to refer solely to stocks is so common that it almost replaces the word stock itself.
In simple Words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.
By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.
A company’s stock price reflects what investors think about the stock, not necessarily what the company is “worth.” For example, companies that are growing quickly often trade at a higher price than the company might currently be “worth.” Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price.
Quick Facts on Stocks and Shares
Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues
Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer no
guarantee of any returns and can lose value, even in the long run
Investments in stocks can generate returns through dividends, even if the price
How does one trade in shares ?
Every transaction in the stock exchange is carried out through licensed members called brokers.
To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.
The general investors should identify a sub-broker for regular trading in shares and place his order for purchase and sale through the sub-broker. The sub/broker will transmit the order to his broker who will then execute it.
What are active Shares ?
Shares in which there are frequent and day-to-day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.
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.
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.
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 (more…)
4. Who is a broker?
A stockbroker is person who is licensed to trade in shares. Brokers also have direct access to the sharemarket 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. (more…)
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;
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 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 credit of shares into demat account, arising out of split/consolidation/merger etc.
· 5.6 How do I select a DP?
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:
Convenience – Proximity to the office/residence, business hours.
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?
Cost – The service charges levied by DP and the service standards. (more…)
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?
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. what are dividends.
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.
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 investment. Set your own rules and more importantly, follow them . 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. (more…)