Contents
Introduction
Public limited companies are listed companies on stock exchanges. There is no cap for the maximum number of members and shareholders in a public limited company. Due to its feature of limited liability and a large capital base, it can get access to huge funds for its expansion and growth. Companies raise funds through IPO to which retail, HNIs, Institutions, etc. can subscribe.
So, companies invite common people(the public) to put their money into listed companies so that they can use the publicly raised funds to operate efficiently and sustainably, and, in return, investors get shares into the company’s capital called stocks. Stocks represent proportional ownership in the company, and the stock market provides a platform where investors can buy and sell ownership of such investible assets.
The Stock Market
The stock market is a public security market (capital market) that exists for issuing, and trading stocks (buying or selling) which is being operated by the stock exchanges of the country.
The efficient functioning of the stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public. The stock market acts as the barometer of the economy.
Types of markets
a) Primary market:
The primary market deals with the sale of new securities such as the issue of shares, debentures, bonds, etc.
Constituents of primary markets
- IPO (initial public offer)
- FPO (Further public offer)
- Right issue of existing shares
- Private placement
b) Secondary market:
The secondary market is the market where liquidity is high and entry and exit are unrestricted for investors/traders. This trading of already issued security of publicly listed companies happens through stock exchanges.
The stock market serves two very important purposes.
- To provide capital to companies so that they can use it to fund and expand their businesses. instead of borrowing the capital needed for expansion, the company avoids incurring debt and paying interest charges on that debt.
- Stock market gives “Investors” to the economy. Investors are very important for the economy as they execute and promote the flow of money (capital formation) in the economy.
- The more investors come into the market, it increases the share prices due to an increase in demand which results in an increase in market capitalization. And it gives liquidity to investors who want to exit.
Benefits for Investors
- First by making money out of Company’s profit i.e. through Corporate announcements such as dividends, bonus issues, etc.
- The other way, investors can make a book profit from buying and selling stock i.e. trading on the stock exchange.
However, there can be negative returns also. Hence, an investor should invest with proper information and research.
Market segments in the stock market
Capital Market Segment:
Trade of securities(equites) and ETF (exchange traded fund).
Futures and options(derivatives):
Trade of leverage products.
Stock Exchanges
Stock exchanges essentially provide the marketplace to facilitate the buying and selling of stocks among investors. In India, there are two primary exchanges and OTCEL (Over The-Counter Exchange of India). These exchanges are regulated by SEBI (Securities and Exchange Board of India).
The two primary exchanges are:
a) NSE (National Stock Exchange) and
b) BSE (Bombay Stock Exchange)
Over-The-Counter Exchange of India (OTCEL), It is the exchange for small and medium size companies where buyers and sellers of stocks commonly trade through a dealer. In India, the Money market operates as an OTC market.
The constituents of the Indian OTC market are,
a) CP (commercial paper),
b) CD (certificate deposits),
c) T-Bills (treasury bills), etc.
Stock Market Participants
There are a number of regular participants in stock market trading.
Regulator
The SEBI (Securities and Exchange Board of India) is the regulator of entire capital market in India, which oversees the market in order to protect investors and supervise the smooth functioning of the markets.
And for NRIs- RBI also plays its role as the regulatory participant relating to remittances from NRI.
Companies
The companies are the participants whose stocks got first listed and traded thereafter and contribute to economic development.
Market intermediaries
- Members and Stock exchange registers brokers
- Financial intermediaries: they are the entities that help in facilitating transactions between two parties in the market. Banks, AMCs, etc.
- Clearing intermediaries - They ensure the fulfillment of the trades and transactions. Their role is to match the debit and credit processes at the end to ensure the completion of the trade.
Investors and traders
They are individuals and corporations or organizations from a range of backgrounds who make the use of the stock market for their investing purpose.
Types of investors
- Retail investor: is an individual investor who deals in small investments.
- HNI’s: High Net-Worth Individual class of individuals has an investible surplus of more than Rs 5 crore (amount is subject to change).
- Domestic Institutions: Indian organizations or institutions that undertake investment in the Indian market.
- Asset management companies: they consist of the mutual fund companies e.
- Foreign Institutional Investors: they consist of foreign AMCs, hedge funds, and other investors.
- NRI’s: they refer to Investors of Indian origin but resident outside the country.
Depository and depositary participants
a) Depository There are only 2 depositories in India – CDSL (Central Depository Services Ltd) and NSDL (National Securities Depository Ltd) – who hold the Demat accounts. The share ownership certificates are credited to the investor’s Demat Account.
b) Depository participants or registered brokers, sub-brokers, discount brokers, etc. who may or may not also be acting as financial advisors, buying and selling stocks for their clients, who may be either institutional investors or individual retail investors. They charge commissions/fees for their services.
Important Stock Market Indexes
The key stock market indexes in Indian stock market are
NIFTY 50 comprises of top 50-Indian Companies listed on the NSE on the basis of M-cap (Market capitalization),
Nifty Bank comprises 12 top-performing banks listed on NSE on the basis of M-cap (Market capitalization),
SENSEX comprises the Top 30 Indian companies listed on BSE on the basis of M-cap (market capitalization).
Beginning or operating with investment in stock market
How buying of Shares work?
The first step an investor needs to do is to open his Trading & Demat account and be fully KYC compliant.
KYC (Know Your Client) is a standard that ensures and verifies a client's identity and knows their client's investment knowledge and financial profile.
The Demat and Trading account must be associated with any of the registered brokers (Depository Participant or DP), who is registered with the depository (CDSL or NSDL) and SEBI.
Modes of Trading in Stock market
a) Offline – Earlier trading was done in the ring, also known as pit trading, and as technology improved it shifted to online mode i.e. terminal trading.
b) Online – Through the broker’s platform or any other online modes like banking apps etc. BSE the terminal system is known as BOLT (BSE Online trading) and for NSE the terminal system is known as NEAT (National Exchange for Automated Trading).
How trades happen
- Investor first needs to login into his Trading account.
- Preparing the order ticket with the price and quantity of the stock.
- Order ticket generation.
- Order is sent to the broker's terminal and then the stock exchange.
- Price match happens and the trade is executed and shares are bought or sold.
- Settlement cycle of funds and securities
➢ Pay-in of Securities: The date when shares are transferred to the custodian or broker or sub-broker after an investor sells the shares is called the Pay-in date.
➢ Pay-in of Funds: The date when funds are transferred to the custodian or broker or sub-broker after an investor buys the shares is called the Pay-in date.
➢ T+2 Settlement cycle: After the investor buys or sells the shares it takes, 2 days for the shares to get credited to or debited from his Demat account.
➢ Pay-out of Securities: The date when the Stock Exchange delivers the shares to the buyer or the broker is called the pay-out date.
➢ Pay-out of Funds: The date when the settlement and clearing banks make payment to the seller or the broker is called the pay-out date.
- Delivery of shares to the buyer’s Demat account and funds to the seller’s bank account.
Types of Orders
Depending upon the style of investing an investor can place different types of orders to trade stocks more effectively.
Normal Orders:
These are basic orders that are placed for trade. These are further divided into.
a) Market Order: It is an order to buy or sell immediately at the current price prevailing in the market.
b) Limit Order: It is an order to buy or sell the shares at a price of the choice of the investor.
Special Orders:
As the name suggests these are some special types of orders.
a) Stop loss orders: These are orders that are placed by traders to prevent or minimize losses on positions they have taken.
b) All or None (AON): An all-or-none order ensures that you get either the entire quantity of stock you requested or none at all.
c) Immediate or Cancel (IOC): In this, the order executes a trade either immediately within a few seconds or the order gets cancelled automatically.
d) Good till Cancelled (GTC): In this type of Order, there is a time restriction that you can place on different orders.
e) Good till triggered (GTT): These are long-standing and valid until triggered or cancelled These are used for placing long-term target or stop-loss orders.
Branches of Research
There are two branches of Stock Research.
- Fundamental Research: The main purpose of fundamental research is to find the intrinsic value of the stocks. It involves the usage of stock-picking tools like ratio analysis (Earnings per share, Price Earnings, etc.) or valuation methodologies (Discounted Cash Flow, Dividend Discount models, etc.).
- Technical Research: It is one of the branches of research that involves the study of charts (price movement). It involves identifying a trend that can be either upward or downward by using various indicators like Volume, Support, Resistance, etc.
Corporate Announcements
Announcements made by a company mainly to reward its shareholders or for the general public.
- Dividends: Dividends are referred to as rewards offered to the shareholders of a company. It is paid out of a company’s accumulated profits.
- Bonus: Similar to dividends, there is a bonus announcement made by the company in which free shares are issued to the shareholders.
- Split: The stock which the investor holds gets split in proportion to face value. It is often done to boost the liquidity of the stock in the market.
- Rights: For a selected group of individuals (existing shareholders). The new shares in rights are issued for a price lower than what prevails in the market.
- Buyback: Can be seen as a technique of the company to invest in itself by buying shares from other investors in the market. An important tool of corporate restructuring and use of unused cash balances.
Learning and development courses/programs in stock market
An Investor has access to the following educational courses and can gain knowledge about the stock markets.
- NCFM certifications (NSE’s certification in Financial Markets) which is across three levels - Beginners, Intermediate, and Advanced. Naming a few, Fundamental Analysis certification, Technical Analysis certification, etc.
- The National Institute of Securities Market (NISM) is also a training institute established by SEBI in order to promote stock market education NISM offers varies
modules in its series of modules, which is a must for certain designations. Naming a few, NISM Series XV – Research Analyst, NISM series VIII – Derivatives, etc.
Author: Chirag Agarwal & Devrishi Jhalani (GDM 2022-24 Finance Division 1)
Mentored by: CA Bharat Dalal