What is equity trading?



It is simply buying and selling of equities. However, unlike other commodities, equities are not traded everywhere, and are traded only in special market places called exchanges.



What is an exchange?



An exchange is a mechanism through which buyers and sellers of equities are brought together. These days, this is largely electronic and done with computers. Investors cannot, however, participate directly in the exchange and can participate only through members of the exchange, popularly referred to as brokers.



How does the exchange works?



An exchange has pre-specified timings. During that time, all the members of the exchange link up to a central computer through their remote terminals. The members then place bids to buy equities, or make offers to sell equities. Other members who can match the bid or the offer confirm their acceptance, and the transaction is completed. Members of stock exchanges place bids and offers on behalf of their clients, who are the investors.



Why are brokers required?



Investing in equities is quite risky. The broker is a professional, who knows the risk and can advise the investor accordingly. Secondly, an exchange will become an unwieldy mechanism if the entire universe of investors were to go and start making bids and offers. Reducing the number of individuals is a way of keeping control. Third, equity trading can also be abused. To prevent these abuses, exchanges as well as the Government has a number of regulations in place. Restricting activity to the members of the exchange will enable the regulations to be followed, preventing abuse of the system.



How are shares traded?



Like in any other buying or selling, once the broker confirms the trade, if you are buying the share, you pay the broker the value of the shares and take delivery of the shares. If you are selling the shares, you hand over the equities to the broker and the broker will pay you for your shares.



When settlement does happen?



Each exchange has its own settlement period within which the entire process of delivery and purchase should be completed. Typically, the process is completed in a week to ten days time.



Which shares to Buy and sell?



An index is an indicator of how the stock market is doing on the whole. An index comprises a basket of stocks. The collective value of these stocks on a given date is taken and given a score of 100. From that day onwards, the value of these stocks is tracked and its score relative to 100 is computed. The stocks selected are based upon a number of parameters that the creators of the index decide. Equally, the valuation is also done using complex mathematical principles. Periodically, the list of shares used for computing the index also undergoes a change. These changes are decided by the index creators based on the parameters they have set for the stocks for inclusion.An index shows whether the stock market, on the whole, is appreciating in value or declining in value.The movement of the index itself is no indicator for individual shares. You may find that a particular share may be increasing in its price even when the index is down and vice versa. The index is only an indicator of the general trend The common indexes in Indian stock markets are the SENSEX, the index for stocks listed on the Bombay Stock Exchange and Nifty, the index for stocks listed on the National Stock Exchange.



What is an index?



Buying and selling shares involve a fair amount of research. These involve assessing how well the company is managed, how the company is performing compared to others in the industry, how the industry itself is doing, the financial performance of the company, the interest of the lay public in the company, etc. It is best that you consult an expert in such analysis, before you decided to buy or sell a particular share. Such investment advice is also provided by your share brokers.



How Long to hold on the shares?



Historically, it has been demonstrated that investments in equities offer the best long term returns and hence the highest opportunity to enhance your capital. Thus, the longer you stay invested in the equity markets, the better will be your returns. However, this holds true for the equity market as a whole, and not necessarily for shares of individual companies. The value of shares of specific companies are subject to various pulls and pressures which could cause a share that is highly valued one day, to drop its value overnight, as a result of unpredictable factors ranging from Government policy to acts of omission and commission by the management of the company.It is advisable that you periodically, at least once in a year, evaluate your holdings and decide whether to continue with them or change them.

However, one very important thumb rule which the professionals offer is, never to get emotional about a share. In other words, do not hold on to the share of a company whose value is declining, just because its history has been very good!



Are investment in shares safe?



Any investment is prone to a certain degree of risk. Shares, as a class of investment have the highest element of risk. The only services riskier than shares are lotteries and other games of chance. These risks arise as a result of factors described earlier. However, today there is strong legislation, procedures and a regulatory authority - Securities Exchange Board of India (SEBI), which to a large extent prevents risk as a result of misleading the investing public.



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Derivatives :



What are derivatives?



Derivative as the name suggests are the financial contracts which derive their value from the underlying. The underlying may be the security or an index. Thus derivative instruments have no independent value. Rather their values are dependent on the price of the underlying instruments which they represent.



What are forward contracts?



Forward Contracts are contracts where two parties agree to do a trade at a future date at the pre determined or agreed price and quantity. Thus the trade takes place at a future date but the terms of the trade are determined previously



What are the problems of forward contracts?



Forward Contracts are between two parties, Hence these are individual contracts which are settled between the two parties to the contracts. However these are not traded on the stock exchange. Hence they are illiquid. They also suffer from the counterparty risk as in case of default by one party, there is no settlement guarantee as they are not traded on the exchange.



What are future contracts?



Future Contracts have come into existence to tide over the problems of the forward contracts. Future contracts are standardized contracts with standard conditions and terms. They are traded on the stock exchange and settlement of the contracts takes place through the clearing corporation of the stock exchange, which assumes the counterparty risk. This it acts as a buyer to the seller and a seller to the buyer and in case of default of any of the parties, the settlement is guaranteed by the clearing corporation.



What is an Index future Contract?



An Index future contract is where the underlying security is not an individual share but the Index such as Sensex, Nifty, IT Index, Bank Index and so on. These contracts derive their value from the value of the underlying index.



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What is a Depository :



A depository is an entity which holds securities of investors in electronic form at the request of the investors through a registered Depository participant. It also provides services related to transactions in securities based on instructions given by the investors to depository participant.



How many Depositories are registered with SEBI?



At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (I) Limited (CDSL) are registered with SEBI.



Who is a depository participant?



A depository participant is a person or entity, which is registered with depositories such as NSDL and/or CDSL as also with SEBI and who offers services of holding your shares and effecting transfer (accepting credits in your account as well transferring shares from your account to that of some one else based on your instructions). Thus a depository participant acts as a custodian of your securities held in dematerialized or fungible form and carries out your instruction to transfer the same.



Is it compulsory for every investor to open a depository account to trade in the capital market?

Around 99.9% of the securities settlement takes place in dematerialized mode. Therefore, in view of the convenience in settlement through dematerialized mode, it is advisable to have a beneficiary owner (BO) account to trade at the exchanges and to hold the securities.





How are transfers made by DP?





DPs issue Delivery Instruction Slips (or DIS) to all account holders. These are like cheque leaves. Whenever you want to transfer shares from your account to another account, you are required to fill the relevant details such as security identification number, number of shares you want to transfer, date of transfer, account to which shares need to be transferred etc. and submit this slip to your DP. The DP would then affect the transfer. You can give standing instructions to your DP for all credits to your account, whereby you need not give instructions to your DP each and every time for accepting credit to your account.



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Stocks Glossary :



Account Period Settlement:



The settlement process where the buy and sale transactions done for a particular period (week or fortnight) are aggregated and only the net obligations are settled after the period is over. Indian securities market had weekly account period settlement before rolling settlement.



Allotment:



A letter sent to the successful application about allotment of shares/debentures against his application.



American Depository Receipts (ADRs):



A certificate issued in the United States in lieu of foreign security. ADRs are traded in US markets for all intents and purposes.



American option:



A put or call option that cane be exercised any time before the expiration date.



Asset Management Company:



The company that handles day to day management and operations of a Mutual Fund.



Arbitrage:



The process of benefiting out of price differential in the same scrip between two markets or because of price difference in the scrip in the underlying market and futures or derivative markets.



Arbitration:



Settlement of claims differences or disputes between member of a stock exchange and another member and between a member and his clients, sub-brokers, etc., through appointed arbitrators. It is a quasi-judicial process that is faster and an inexpensive way of resolving a dispute. The stock exchange facilitates the process of arbitration between the members and their clients in accordance with the bye-laws of the exchange.



Ask :



The price which the seller of the security wants to sell the shares owned by him.



Auction:



An auction is a mechanism utilized by the stock exchange to fulfill its obligation to a counter party member when a member fails to deliver agreed securities or make the payment. Through auction, the stock exchange arranges to buy good securities and deliver them to the buying broker or arranges to realize the cash and pay it to the selling broker



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options :



What are options?



An option contract is the right to buy or sell a pre-determined number of securities at an agreed price. Thus the buyer of an option contract has a right to buy or sell but not the obligation to do so from the seller or writer of the option at a price which is fixed at the time of trade.



What is option premium?



Option premium is the fee or the price of option. It is payable by the buyer of the option to the seller or writer as the writer is under obligation to honor the terms of option if the buyer insists on the same. Thus buyer of the option has a right to exercise the option while writer of an option has an obligation to fulfill it.



What are different types of options?



Options are of two types. ‘Call option” gives buyer of the option, a right but not the obligation to buy a pre determined number of shares at the agreed price and “Put option” will give buyer of the put option a right but not the obligation to sell a pre determined number of shares at the agreed price. An option can be a European option or American option. In case of a European option, the holder of the option can exercise his right to buy or sell only on the expiration day of the contract while in case of an American option, the buyer of option can exercise his right any time before the expiration day.



What is an Index Option Contract?



An Index option contract is where the underlying security is not an individual share but the Index such as Sensex, Nifty, IT Index and so on. Thus the buyer of a call option on Nifty has a right to buy the Index at a predetermined price on or before a future date. All future index contracts are cash settled.



What is In the Money Option Contract?



An In the Money Option contract is when in which the strike price of the option is less than the current market price of the underlying security (for a call option) or above the current market price of the underlying security (for a put option). Such an option has intrinsic value.



What is Out of the Money Option Contract?



An Out of the money call option is a call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security. These contracts would become worthless and would not be exercised by the option holder.



What is at the money Option Contract?



An at the money contract is when the strike price of an option is equal to or nearly equal to the market price of the underlying security.