STOCK MARKET FUNDAMENTALS

A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physical entity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment.

What is electronic trading?
Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fully automated screen-based processes. Their workstations are connected to a Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's central computer and are matched electronically.

HOW MANY EXCHANGES ARE THERE IN INDIA

The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. There are 20 other regional Exchanges, connected via the Inter-Connected Stock Exchange (ICSE). The BSE and NSE allow nationwide trading via their VSAT systems.

INDEX

An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements. An Index comprises stocks that have large liquidity and market capitalisation. Each stock is given a weightage in the Index equivalent to its market capitalisation. At the NSE, the capitalisation of NIFTY (fifty selected stocks) is taken as a base capitalisation, with the value set at 1000. Similarly, BSE Sensitive Index or Sensex comprises 30 selected stocks. The Index value compares the day's market capitalisation vis-a-vis base capitalisation and indicates how prices in general have moved over a period of time.

WHY DOES ONE NEED BROKERS?

As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can operate in the stock market. One can trade by executing a deal only through a registered broker of a recognised Stock Exchange or through a SEBI-registered sub-broker.

CONTRACT NOTE

A contract note describes the rate, date, time at which the trade was transacted and the brokerage rate. A contract note issued in the prescribed format establishes a legally enforceable relationship between the client and the member in respect of trades stated in the contract note. These are made in duplicate and the member and the client both keep a copy each. A client should receive the contract note within 24 hours of the executed trade. Corporate Benefits/Action.

EX DATE AND EX-DIVIDENT DATE

ex-dividend date:
The date on or after which a security begins trading without the dividend (cash or stock) included in the contract price.

ex-date:
The first day of the no-delivery period is the ex-date. If there is any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits.

WHAT IS BONUS ISSUE

While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonus he will hold three.

SETTLEMENT STOCK

The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday.At the end of this period, the obligations of each broker are calculated and the brokers settle their respective obligations as per the rules, bye-laws and regulations of the Clearing Corporation.If a transaction is entered on the first day of the settlement, the same will be settled on the eighth working day excluding the day of transaction. However, if the same is done on the last day of the settlement, it will be settled on the fourth working day excluding the day of transaction.

ROLLING SETTLEMENT

The rolling settlement ensures that each day's trade is settled by keeping a fixed gap of a specified number of working days between a trade and its settlement. At present, this gap is five working days after the trading day. The waiting period is uniform for all trades. When does one deliver the shares and pay the money to broker?As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. Simliarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase but in any case before the pay-in day.

AUCTION

An auction is conducted for those securities that members fail to deliver/short deliver during pay-in. Three factors primarily give rise to an auction: short deliveries, un-rectified bad deliveries,un-rectified co. objec.

IS THERE A SEPERATE MARKET FOR AUCTIONS?

The buy/sell auction for a capital market security is managed through the auction market. As opposed to the normal market where trade matching is an on-going process, the trade matching process for auction starts after the auction period is over.

BAD DELIVERY MEAN?

SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery may pertain to a transfer deed being torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the company or the transfer. Bad delivery exists only when shares are transferred physically. In "Demat" bad delivery does not exist. What are company objections?A list documenting reasons by a company for not transferring a share in the name of an investor is called company objections. Rejection occurs due to a signature difference, or fake shares, or forgery, or if there is a court injunction preventing the transfer of the shares.

WHAT SHOULD ONE DO WITH COMPANY OBJECTION

The broker must immediately be notified. Company objection cases should be reported within 12 months from the date of issue of the memo for the original quantity of share under objection.

WHAT IS EQUITY

Funds brought into a business by its shareholders is called equity. It is a measure of a stake of a person or group of persons starting a business.

FUNDAMENTAL ANALYSIS

The analysis of factual information like financial figures, balance sheet, and other information publicly available is known as fundamental analysis. This information is used to derive a fair price of the share of the company. The faithful fundamentalists believe that the market incorporates all facts relating to the financial performance of the company. But a systematic analysis will ensure a more accurate valuation of the price. Fundamental analysts use tools such as ratio analysis (P/E, MV/BV) and discounted cash flow analysis in order to arrive at the fair value of a company and hence its share.

FINANCIAL RATIOS

A ratio is a comparison of two figures. They are culled from the financial statements of a company. These help in assessing the financial health of a company. It could be a ratio between an item from a balance sheet versus another item on the balance sheet. Or it could be a ratio between one figure of the balance sheet with a figure from Profit and Loss account or it could be comparison of one year's figure with a figure from the previous year.For example Return on Equity = Net profit (A Profit and a Loss figure) divided by Net Worth (a balance sheet figure) in percentage terms.

VARIOUS RATIOS

There are many financial ratios. Some of the better known include:Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet its current obligations. Liquidity ratios by establishing a relationship between cash and other current assets to current obligations give measure of liquidity.e.g. Current ratio [CR] = Current Assets/Current liabilities.A high CR ratio (>2.5) indicates that a company can meets its short term liabilities.Leverage Ratios: Leverage ratio indicates the proportion of debt and equity in financing the firm's assets. They indicate the funds provided by owners and lenders.e.g -----Debt-equity ratio (D-E ratio) total long term debt/net worth.A high D-E ratio indicates that the company's credit profile is bad.Activity Ratios: Activity ratios are employed to evaluate the efficiency with which firms manage and run their assets. They are also called turnover ratios.e.g-- Sales Turnover ratio = sales/total assets .A Sales Turnover ratio indicates how much business a company generates for every additional rupee invested.Profitability Ratios: These ratios indicate the level of profitability of the business with relation to the inputs or capital employed. Some better-known profit ratios include operating profit margin (OPM). Operating profit margin is a measure of the company's efficiency, either in isolation or in comparison to its peers

WHAT IS EPS,P/V,BV,MV/PV

Earning Per Share (EPS): EPS represents the portion of a company's profit allocated to each outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by the total number of shares outstanding during that period. It is one of the measures of the profitability of common shareholder's investments. It is given by profit after tax (PAT) divided by number of common shares outstanding.Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and earning per share.Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital + reserves & surplus) divided by number of shares outstanding.Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a security and Book Value of the security.

TECHNICAL ANALYSIS

Technical analysis is the study of historic price movements of securities and trading volumes.Technical analysts believe that prices of the securities are determined largely by forces of demand and supply. Share prices move in patterns which are easily identifiable. Crucial insights into these patterns can be obtained by keeping track of price charts, leading to predictions that a stock price may move up or down. The belief is that by knowing the past, future prices can predicted.

DEMAT

Demat is a commonly used abbreviation of Dematerialisation, which is a process whereby securities like shares, debentures are converted from the "material" (paper documents) into electronic data and stored in the computers of an electronic Depository (SEE next page).You surrender material securities registered in your name to a Depository Participant (DP). These are then sent to the respective companies who cancel them after dematerialisation and credit your Depository Account with the DP. The securities on dematerialisation appear as balances in the Depository Account. These balances are transferable like physical shares. If at a later date you wish to have these "Demat" securities converted back into paper certificates, the Depository can help to revive the paper shares.

PROCEDURE FOR DEMATERIALIZATION OF SECURITIES

Check with a DP as to whether the securities you hold can be dematerialised. Then open an account with a DP and surrender the share certificates.

DEPOSITARY??

A Depository is a securities "bank," where dematerialised physical securities are held in custody, and from where they can be traded. This facilitates faster, risk-free and low cost settlement. A Depository is akin to a bank and performs activities similar in nature.At present, there are two Depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services (CDS). NSDL was the first Indian Depository. It was inaugurated in November 1996. NSDL was set up with an initial capital of Rs 124 crore, promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), National Stock Exchange of India Ltd. (NSEIL) and the State Bank of India (SBI).

DEPOSITARY PARTICIPANT

NSDL carries out its activities through business partners - Depository Participants (DPs), Issuing Corporates and their Registrars and Transfer Agents, Clearing Corporations/Clearing Houses? NSDL is electronically linked to each of these business partners via a satellite link through Very Small Aperture Terminals (VSATS). The entire integrated system (including the VSAT linkups and the software at NSDL and at each business partner's end) has been named the "NEST" (National Electronic Settlement & Transfer) system. The investor interacts with the Depository through a Depository Participant of NSDL. A DP can be a bank, financial institution, a custodian or a broker.