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Getting Started in Share Market Trading. Things you should know

It is very interesting to invest in shares, though most of the people would like to start with small

money.

First of all, you need to know a little bit in detail about the stock market, then about the sharesand the mode of their trading. What are the risks involved and how to be smart in dealing with

shares?

• Stock Market – It is the place where the shares of listed companies are bought and sold.

In India, you have BSE and NSE as two big stock exchanges.

• Shares are bought and sold by you and me only through approved brokers.

• Approved brokers are mostly banks like the ICICI, HDFC, IDBI, UTI Bank, SHCI, are to

name a few.

• First you need to open an account with a bank, that has the Demat account facility.

• Go to the respective bank and open a Savings account with deposit of around Rs. 10,000.

• Tell the bank that you want to deal in shares and ask them to open a Demat account. Itwill be done automatically after signing a few forms.

• A Demat account is nothing, but the account where the shares bought by you will be kept

separately.

•

Only you could operate that account online, through Internet.

• You could open the online facility offered by the ICICI, HDFC or ShareKhan or othersand buy shares you wish and decide the quantity and the price.

• Here the bank will act as a broker . You online order for purchase would be carried out

 by the bank. They charge broker commission, much less compared to private brokers.

• It is very important for you to have enough balance to your credit in your savingsaccount.

•

As and when you buy on line, your  Demat account will be credited with those shares.The money for the purchase will be automatically deducted from your account by the

 bank.

• You also have to keep looking for opportunities to sell the shares that you have already bought and kept in your Demat account.

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• For buying and selling, it is necessary to familiarize which shares to be bought at what

 prices and sell them at what price.

• As and when you decide to sell (depending on the price quoted in the market) you couldsell them through online trading system.

• The moment you sell your Demat account will be debited with the number of shares sold

 by you.

• Your account will be credited with the amount for which you have sold.

• Depending on the amount of profit earned, tax will also be deducted by the bank (TDS).The bank will give you a TDS certificate by the year end, i.e., March 31, of that year 

which you could attach with the return to justify the tax payment.

• When the shares could be bought or sold?

Always sell the shares when the price is up and buy when the price is down. Every bodyhad to adapt to this formula.

• What profit should it give you?

You buy a share for a particular price. Take the amount as investment. Any bank will

lend you at ten per cent interest. It will give you 24 per cent return if the share price risesin such a way. Do not wait for the market to crash and start searching for buyers for the

 price you quote.

After selling, never look back and repent for what profit you have earned, had you

delayed the sale. Be happy that it did not happen otherwise. This is the best way, to sell.

• If you want to buy, look for 52 week low, look for the peer companies, their price andcompare it with the company you want to buy.

Look for the prospectus, future plans and the profit the company ought to make in the

next year. Take the perception or a change and buy.

• You cannot take profit in the buys. Losses do occur as long as you are at decent surplusfor which you have no reason to be unhappy.

• Share Market Trading can be classified into either of these categories - Day Trading,

Swing Trading and Position Trading. However, the common factor among all types of 

traders is that Stock market traders keep up with the news. The businesses and industriesreact to government actions, changes in oil prices, economic forecasts and world events.

The successful stock market trader stays informed about the circumstances outside a

company that could cause price fluctuations for the stock.• Day trading conditions the most intense approach to stock market trading. To be on top

of the fluctuations in stock prices, day traders spend hours together in monitoring the

market. Day traders could make dozens of trades any day, sometimes in a matter of minutes hoping to grab the wave of price change. They avoid the risks of long term buy

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and hold. Day trading could be exciting, the fast pace attracting risk takers. Yet this

strategy for stock market trading is only effective for day traders, who apply analysis

rather then emotion to trading decision. Savvy day traders could turn profits quick.Emotional traders usually lose fast and leave disenchanted.

• Swing trading uses a slightly longer time horizon than day trading, watching a stock for 

weeks or months before trading. This type of stock market trading relies on carefulmonitoring of fundamental and technical analysis. Swing traders often specialize in a

certain business or industry so that they become experts in the movement within those

stocks. They also have more time to study the company financial reports and industryforecasts. Since swing trading does not require hours of daily monitoring, it is a good

strategy for the trader who wants to make money from stock market trading without

turning it into a full time job. Even the study of reports could be done during the daily

commute or lunch hour so that the swing trader stays well informed.• Position trading works well for investors who want to be involved in the stock market

trading, but run short of time. Stocks are being held for months awaiting any changes in

the trend. Position traders keep up with the fundamental and technical analysis as well as

news events but apply a long term strategy to their stock market trading.

Derivatives, as the name indicates are the financial instruments which derive their value

from some other asset of monetary value called as “underlying asset”. This underlyingasset can be gold, currency, stock or any commodity. In short, derivative is not an asset 

in itself but an agreement or a contract to transfer the real asset in future whenever 

exercised!! The date and price of execution is mentioned in the contract as per agreement

 between the parties. There are varieties of derivatives available at present like futures,

options and swaps; futures and options being the most common ones. Before looking into

details here are few components of a derivative agreement which need to be introducedfirst.

• Holder: Holder is the buyer of derivative agreement. By buying an agreement, the buyer may agree to buy or sell the underlying asset.

• Seller: One who sells the contract to holder.

• Expiry date: The date at which agreement will get matured / exercised.

• Strike price: The price at which derivative will get exercised and is decided at the time

of entering into agreement (between buyer and seller).

• Premium: It is the price which buyer pays for buying an option contract. The premium isnot to be paid for futures contract.

• The reason of its appeal to investors which makes it different than other financial

instruments is that it is not an asset in itself but an agreement to convey the transfer of actual assets later in future. The catch here is why to enter an agreement to buy/sell assets

in future?? Why not buy the real asset (underlying asset referred here) directly from spot

market at current levels?? Why making an agreement to be executed in future date? The

answer is; derivates are usually seen as instruments for bringing in protection againstunexpected rise or fall in the price of underlying asset. Secondly, derivatives are used to

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yield better returns with lower capital investment as compared to the amount that will be

invested to buy the shares directly form the spot market.

• Types of derivative instruments:

• Forward Contract: It is an agreement to buy or sell the derivative at a known date in the

future at a price decided as per negotiation between the contracting parties. These are not

traded in exchanges.• Futures Contract: It is an agreement to buy or sell a financial instrument at a known

date in the future at a price as per negotiation between contracting parties. These are

traded on stock exchange.

• Option Contract: It is a contract that gives holder the right, but not the obligation to

exercise it. Call options give holder the right to buy while put option give the holder the

right to sell at the strike price at stipulated date as per agreement.

• Warrants: These are long term options having 3-7 years of expiration. Warrants areissued by companies for raising finance with no initial servicing costs like divided or 

interest. It is a type of security issued by corporation usually together with a bond or 

 preferred stock that gives holder the right to buy a certain amount of common stock at a

stated price. So it acts as a “sweetener offered along with the fixed-income securities”.• Swap Contract: Swaps are agreements between counterparties to exchange one set of 

financial obligations for another as per the terms of agreement.

• Swaptions: Swaptions are options on swaps. They give holder the right to enter into

having calls options and put options.

Given below are the types of orders which are used for buying and selling

of shares.

• Market order : When you put buy or sell price at market rate then the price gets

executed at the current rate in the market . The market order gets immediately executed

at the current available price.• In market order there is no need to mention the price; the shares will get executed at the

best current available price.

• If you wish to buy or sell shares at any specific price, i.e. market order is not suitable for 

you then you have to go for limit order.• Market order is for those who want to buy or sell immediately at the current available

 price.

• Limit order – It’s totally different from market order. In this, the buying or selling price

has to be mentioned and when the share price comes to that price your order will get

executed at the price mentioned by you.

• But here it’s not sure that the price will come to your limit order.

•

In day trading it’s risky because you have to close all your transactions before 3.30 pmand if in case the price doesn’t reach to your limit order, your order will be open and then

you have to go through (bare) heavy penalties. Importantly, limit order and stop loss

trigger price are used together.• Stop loss trigger price: Stop loss and trigger price are used to reduce the losses. This is a

very important term especially if you are day trading (intraday). Stop loss, as the name

indicates, is used to reduce the loss.

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• You can use a pivot calculator for simple stop loss calculation for delivery based trading

and intraday stop loss depends on how much you are ready to lose – the maximum

amount you are ready to lose- it also depends on the price movements of the scrip for that particular day

• Short selling is selling the shares which you do not own. The term “short” here

signifies that you do not hold the shares being sold. The first thought popping up in your mind would be – where do these shares come from which you are selling without

 possessing them in your portfolio of stocks. These come from your broker/brokerage firm

that lends you the shares in lieu of your investment as collateral. You short sell theseshares but subsequently you have to close the short by buying back the shares from

market and then return it to your broker/brokerage firm. You are also charged some

interest for the loan of shares you have taken. Below diagram describes the flow of shares

involved in short selling

•

• Short Selling

• Looking at the flow of shares in above flowchart, one would ponder why to borrowshares for selling in market and then transfer them back to the lender? The logic behind

shorting is very simple; earning profit margin. Let’s see how??• If you think a stock is overvalued and expect that the price would come down in future

for sure; you would wish to sell the shares at current levels at higher price. So you

 borrow the shares and sell them at higher price. And when the stock actually falls as youhad speculated; you buy it from market at lower price and return it to the lender and the

difference between the selling price (higher) and buy price (lower) is what you

earned in the deal. So at the end you must close the short by paying back the shares andthis is called as “covering the short”. Concluding this, investors who anticipate fall in the

 stock price go short to take advantage of market fall. An investor can hold the short for as

long as he wants but he is charged an interest as it is similar to a loan taken in the form of shares. Also if during the course of loan, the company declares dividend or rights issue, it

must be paid to the lender who is the actual owner of shares because you are just a

 borrower.

• Short selling is considered to destabilize markets directly or indirectly. In 2001, the stock  prices crashed heavily owing to short selling by big operators after which SEBI banned it.

After a gap of 6 years in December 2007 SEBI came up with updated norms of short

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selling to cover the loopholes and ultimately institutional investor were also permitted to

short sell.

• Concluding this, short selling no doubt gives you an opportunity to earn profit by takingadvantage of downturn of markets, it might bring in huge loss to your investment if stock 

 price moves up. Because in real sense, shorting is a bet against the current market trend.

When stock is at current higher levels, you are expecting it to fall down and entering thearena. Speculation is what makes shorting a riskier job. So beware of the dark side of 

shorting before you actually go for it!

Quarterly Results – Significance to the Share Holder

• Many a times we hear about companies coming up with quarterly results that tend to

create either euphoria or a silent shock in the market. Quarterly results are theannouncement by corporate, of the operational results at the end of each quarter. About a

decade ago, only annual results were declared by the companies but later on stock 

market regulators mandated the declaration of half yearly results and then subsequently

to quarterly results to bring in more transparency in the system. The figures representinghuge profits, losses, increase in revenues, percentages hike in annual growth are no doubt

important for the corporate business, but how much it is important for you as an investor is what we would discuss here.

•  Logically speaking, it makes no sense running a race and not being bothered about whether you win or loose. As an investor if you have invested your money in a company,it is very important to invest some of your time in knowing how the company has been

doing. It helps to judge company’s performance over a period of time and keep a track of 

its growth or decline before it is too late. For example suppose you are holding shares of 

a company showing continuous decline in revenues for past 3 quarters. So looking intothe results you decide to take out your money and invest somewhere else before the

company gets ruined totally. Thus analysing the results, you can judge company’s current performance and future prospects and ultimately plan your investments based on that. Itis as simple as tracking down your school report card which needs to be reviewed weekly

to know if you still need any improvement. However its significance varies with the type

of investor you are. It is more important for a short term investor or an intra-day trader than a long term investor as explicated below:

• Long term investors: It is important to note that long term objectives of a company do

not change every quarter. There might be many reasons due to which quarterly results of 

a company are not good. In short, a long term investor with investment period of 3-4years is hardly affected by the quarterly results and it might prove mere wastage of time

to keep analysing the results every three months. So a prudent long term investor will at

least not get panicked with poor quarterly results but tend to find out the reasons behindit. Long term investment can be considered as a long tunnel and there is always light at

the end of tunnel.

• Short term investors: A short term investor might get affected by quarterly results inreal sense. It has been seen over time that the markets are very sensitive to news of 

corporate results. The day blue chip companies like infosys declare its quarterly results;the BSE and NSE indices turn red or green depending on their results. These cause

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volatile sessions in the markets and hence short term investor or intra day traders may

land up in huge losses or end up making huge profits.

Volatility is one of the best phenomenon without which stock markets will loose itscharm. It is the tendency of fluctuation of market indices over a period of time; more is

the fluctuation, higher is the volatility. The ups and downs of stock prices is what that

adds spice to the market behaviour. This see-sawing effect has its own implications, bothgood and bad. Good, because prudent investors taking advantage buy on dips and sell on

highs for profit booking. On the flip side, greater volatility lowers investor’s confidence

in the market prompting them to transfer their investment in less risky options due to

unexpected market behaviour.

• Having observed the past major events of volatility, one can realise the root cause as

“unanticipated information” breaking out in the market. When this news stabilises,

volatility vanishes because the uncertainty related dies out.• Few examples from recent past:

• • Govt announced buying of shares/bonds of Indian companies through participatory

notes (PN).

• CRR and repo rates hike by RBI.• Satyam fiasco and Lehman’s bankruptcy news.

• Stringent IPO regulations.

• US recession fear. Jan 21, 2008 saw biggest ever fall of 1408 points due to volatilityon account of US fears of recession.

•  Now the question arises how this uncertainty leads to such aftershocks in market.

• Firstly, investments by FIIs have a major influence on movement of SENSEX which

came into limelight during general elections of 2004. Owing to fear of reforms due tonew government there was continued selling pressure by FIIs resulting in sharp decline in

the index. Later on when the news regarding these reforms stabilised, FIIs started buying

 back the shares they sold earlier. Thus aiming at profit booking and balancing the

 portfolio, FIIs keep relocating their funds from time to time. For example if they find

govt policies not in their favour, they would withdraw their investments from Indian

markets and invest in some other market leading to sudden crash in index.

• Secondly, Indian markets are sensitive to global markets. It has been observed that

many times if NASDAQ closes high, SENSEX opens in green. So an unwanted news

 broke out in US may show its effects in Indian markets leading to intra-day volatility.Thirdly, company specific news may cause volatile sessions in the market. From

recent example of Satyam computers ltd, markets were highly volatile due to investor’s

sentiment being in dilemma and anticipations about the future of company and relatedconglomerates.

• Fourthly, Political news and news related to finance tend to affect market sentiment.

Like RBI declaring CRR hikes, lowering interest rates prompt investor to relocate their 

investments accordingly. Likewise, news related to scams and frauds also create panicamongst investors making the markets volatile.

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• Volatility in acceptable limits is a sign of healthy markets as it leads to correction if there

is overvaluation of prices. At the same time there is huge risk associated. The crux is

that whatever you have in your portfolio of stocks, wind may start blowing againstyou anytime. So to play safe keep a margin to bear the volatility risk and don’t put all

your eggs in same basket as the basic rule of portfolio management says.

Corporate actions are the actions initiated at the corporate level having material impact 

on the company’s financial structure and ultimately the stakeholders who are the owners

of company. These actions are decided upon by the board of directors with intent of 

increasing the profitability of the company or for the benefit of the stakeholders. Why a

decision/action taken at the corporate level is important for a common investor is what is

explicated here.

• Following is the brief description of common corporate actions initiated by the

companies and reasons of such initiatives of the companies:• 1. Stock split and reverse spilt: Stock split involves splitting up of a stock into smaller 

units that reduces the stock price keeping market capitalisation remains the same. The

reason why companies split their stock is to make them more affordable to investors

 because stock price reduces after it is split. Likewise, reverse split increases the stock  price while reducing number of outstanding shares.

2. Spin-offs: Spin off means a company breaking up itself into smaller units. The

reason for such action is to maintain a focus on core competencies.

• 3. Buyback : Buyback is an action in which company offers to buys back its stock from

the current share holders at an attractive price. The reason is to reduce the shares

outstanding in the market or to reduce the stake of shareholders in company.

4. Dividend payouts: Dividend is the payment made to the investor for sharing the profits a company has made. It can be cash dividend or stock dividend where company

offers stock as a dividend to the current shareholders.

5. Mergers and acquisitions: Mergers is a event where two or more companies mergeinto one aiming to be more competitive and for more profitability. Likewise Acquisition

means a bigger company acquiring a smaller one for further expansion.

6. Bonus issue: It is an additional dividend given to the shareholders that can be in cashor in the form of stock. When companies have outstanding performance with surplus

 profit, they may decide to issue bonus to the shareholders.

7. Rights issue: It refers to offering additional shares to the current shareholders of thestock. This is done by companies to raise capital for further expansion which provide its

existing shareholders the right to buy the stock at discounted rates than price making it

more lucrative.

• Below instances of recent corporate actions from few of Indian companies would help get

a clearer picture of what corporate actions are;

• 1. SBI came up with rights issue for which the record date was fixed as 04-feb-2008.

The company fixed the right issue price as rs 1590 with aiming to raise Rs.16,736 crorefrom the existing shareholders. The right share ratio was set as 1:5 that means 1 right

share will be issued for every 5 shares held.

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2.  L&T came up with bonus issue of 1:1 for the record date was 03-oct-2008.

3. Visualsoft Technologies and Megasoft Limited decided to merge with an effective

date of 29-mar-2007. The record date for the same was 9-may-20074. DLF India ltd came up with a buy back offer 

Basics of Mutual Funds

• Money is merely a piece of paper until you realise the importance of saving and

making it grow spirally. There is plethora of investment avenues available at present, but what suits your objective is the one you should opt for. On a broader picture, a

common man can think of two options, either invest in shares offering glamorous returns

with an associated unknown risk or invest in the regular income debt options offering

lesser but safer returns.•  Now the question arises: Is there a way in middle so that you get good returns like equity

and safety of investment like fixed income options. Yes, a Mutual fund is what you

should look for.

•

Why Mutual funds?• What if you are a novice in the world of  stock markets but still want to invest? What if 

you don’t have enough risk appetite for the investments you want to make? What if you

don’t have time and skill to manage your portfolio and want some professionallyqualified people to invest on your behalf? What if you are a novice in the world of  stock 

markets but still want to invest?

• What are Mutual funds?• As implicit by name, mutual fund is a fund mutually held by the investors who are

the beneficiaries of the fund. It is a type of Investment Company which collects money

 from so many investors in common pool and then invests this capital raised in variety of 

options like bonds, equity, gold, real estate etc. At the core of it are professionally

qualified people called fund managers analysing the markets conditions and makinginvestment decisions with an objective of maximization of profit. Substantially all the

earnings of a MF are passed on to the investors in proportion to their investments. In lieu

of the services offered, the mutual fund also charges some fees from the investors. The

diagram below clearly indicates that investors invest in mutual fund that further makesinvestment in various options.

•

• Mutual Funds Basics

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• Having been through basics, one can infer that investing in mutual funds is an easy way

of playing safe in equity especially you being unaware of tactics of stock markets

 because it provides professional expertise of fund managers who make investmentdecisions based on constant study and market research. Besides this, it offers benefits like

diversification of portfolio. Since mutual fund is a collective investment vehicle, they

have an option to invest in different sectors of market like retail, real estate in addition tooptions like debt and commodities market. This reduces the risks to which an individual

investor would have been exposed if a particular sector is in period of downfall. The

simplicity of investment and various benefits offered have made them so popular that can be seen from their growth in past. They came into picture in 1963 with 67bn assets

under management (AUM) compared to current figures of 4609.49bn with total of 35

mutual funds available at present and still expected to grow in years to come.

Consider yourself a mutual fund company in which millions of investors have investedtheir trust, not just money with a hope of getting good returns on their investment. The

criticality lies in the soundness of fund’s management responsible for meeting the

expectations of the investors as well as fund’s financial goal. There are multiple key players at the background working together to achieve this common goal. These playersand their role is what we will be scanning through here.

Sponsor:•  A sponsor is an entity responsible for laying the foundation stone of a fund . In real sense,

it puts in the seed money in fund’s set up. Any registered company, a scheduled bank or financial institution can act as sponsor. As per SEBI norms it must possess a prerequisite

and good financial record in past . AMC and custodian are appointed by sponsor but once

AMC is constituted, sponsor is just the stakeholder of fund and is not liable for making

up any operational losses of the fund.

Board of trustees:• Mutual funds in India are constituted as trusts and have a board of trustees to run the

fund. AMC is a third party appointed by trustees for managing the money but the real

 power lies with the trust that is accountable for investor’s money held in the fund. They

can even sack the AMC if it is found doing unethical practices or underperforming.

Custodian:• It is an independent entity appointed for holding and safekeeping of the fund’s assets.

Bigger fish, bigger will be the pond. As the portfolio of securities for a mutual fund is so

 big it need a third party for receipt, delivery of securities and keeping an account of thesame. Most of the funds use banks as their custodians but one bank can act as custodian

of multiple funds. On a broader side when instead of common public, bigger players like

FIIs are the investors; the concept of domestic and global custodian comes into picture.• AMC:

Asset Management Company can be considered as the heart of any fund. It manages the

investments you have made. At the core are fund managers or portfolio managers

taking investment decisions on your behalf. They have access to critical market data that

helps them analyse the market conditions and explore investing opportunity to meet their 

financial objectives. In addition, it is responsible for maintaining a record of pricing and

accounting data. It also calculates NAV of the fund that is mandated by SEBI to be

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disclosed publicly on daily basis. The fund charges investors a fee called management

fees for the services offered by AMC.

• The ultimate aim any fund is benefit of investors and SEBI is keeping an eye on

above entities to ensure compliance of rules and regulations set for the investor’s

benefit. The fund regulations in India are considered the best in the world and one major 

strength lies in well coordinated structure with defined roles of sponsor, trustee, AMCthat tend to protect investor’s from risk of default.