What is the Sensex The Sensex is the oldest index in the country.
It was born in 1875 It is the benchmark index for the Indian stock market. It is the most frequently used indictor while reporting on the state of the market. What is sensex made of: Thirty stocks. That's right. Just 30 stocks tell you how the market is faring. For one, they are the most actively traded stocks in the market. In fact, they account for 50% of the BSE's market capitalization Besides, they represent 13 sectors of the economy and are leaders in their respective industries. Who selects these 30 stocks? They are selected by the Index Committee. This committee consists of all sorts of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
How do they select these 30 stocks? 1. Some of the criteria they follow include: 2. The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year. 3. It should be among the top 150 companies listed by average number of trades (buying or selling of shares) and the average value of the trades (in actual rupee terms) per day over the past one year. 4. The stock must have been listed on the BSE for at least one year. The Nifty? What's that? Well, the National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index. The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex. In case you are shaking your head about 50 also being too small a number, let me remind you these 50 stocks account for around 60 percent of the market capitalization. Sectoral indices: The price of every stock price increases or decreases for two possible reasons: News about the company, like a product launch, closure of a factory, the government providing tax or duty exemptions to the sector so more profits expected, a feud among the company's top bosses, etc. This will be stock specific news. 2. News about the country, like testing a nuclear bomb, a terrorist attack, a budget announcement, etc. This will be called index news. 1. The job of an index is mainly to capture the news about the country. This will reflect the movement of the stock market as a whole. A good index will only capture news that is common to all stocks in India. This is what the Sensex and the Nifty do.
What about stock specific news then? This is where the sector-specific indices come into the picture. They reflect the performance of the stocks in a particular sector only For example, the BSE's IT Index captures the price movements of information technology stocks while its Bankex represents the change in the prices of bank stocks. So a look at the specific sector index will tell you about that particular sector. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up. mid-cap index: Mid-cap index that is made up of mid-sized companies. This index has run up smartly in recent months, rising even more than the Nifty, which shows that people have been investing more in smaller companies. This could be because the price for the stocks of bigger companies has increased recently.
The index has just one job: To capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down. If the Sensex rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates investors expect better earnings from companies. It is, therefore, also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too. In case you are wondering why a stock market index has a provocative term like Sensex, let me tell you it stands for something quite mundane -- The Bombay Stock Exchange Sensitive Index.
How to invest in an IPO:
If a brand new company or a company already in existence, but with no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an Initial Public Offering (IPO). It is the first time that it is approaching the public for money. That is why the company is also referred to as 'going public'. If a company that is already listed (has its shares for buying and selling on the stock exchange) is coming out with a fresh transaction of shares, it is called the new issue.
Then, there are the disinvestments -- where the government sells its stakes
in public sector companies in the market. Although these are not technically new issues, they too create a buzz in the market. Every company needs money A company needs money to grow and expand -- to purchase new machinery, land or even repay its loans. To do that, one of the options it has is to ask the public for money. It comes out with a public or new issue. The company offers shares and the public buys those shares. These shares are listed on the Stock Exchange. People who invest in the company get rewarded (as dividends) by the company, or sell the shares as the share price rises
How can I buy these shares? There are two ways: If you want the shares of a company that is already listed, you can buy them from the Stock Exchange through brokers. This is called buying from the secondary market. Buying from the primary market means that you buy them directly from companies when they make new issues of shares or come out with IPOs.
Why would you pick up shares through IPOs, rather than buy them from the market?
Because, often, companies issue their shares cheaply and, later, when these shares are listed on the Stock Exchange, they list at a premium (higher than the price at which they were issued). So you could make a lot of money if you sell those shares.
The trouble is, there are usually plenty of applicants for good IPOs. And they are heavily oversubscribed (the demand for the number of shares is more than the number being offered for sale). And although 25% of the issue has to be reserved mandatorily for the retail investor (those who apply for shares of a value less than Rs 50,000), even the retail portion is oversubscribed several times for good issues. In this scenario, lots are drawn and only a few individuals are allotted shares. Hence, you may not get the number of shares you asked for. There is also a chance that you may also not get an allotment at all, in which case your money will be returned to you. If you don't get any shares, your money will be returned to you within 21 days. This is true even if you get partial allotment (you get only some of the shares you applied for), and the extra money you have paid is returned. If you do get an allotment, your demat account will be credited with the shares. Once the shares are listed, you can sell them in the market and pocket the gains. Of course, you can also hold your shares for the long term if you want, but most people opt out if the price on listing is well above the price at which you were allotted the stocks. Remember, you need to have a demat account before applying for IPOs. Else your form will be rejected.
How to buy an IPO
. 1 IPOs are normally heavily advertised in the media. Not only because it is statutorily required but because companies want maximum publicity to ensure that their issues are a success. Before applying, be sure to read the prospectus for the issue. This is a document inviting the public to subscribe to the shares of the company and contains plenty of information on the company's financials, its track record, and what the management plans to do with the money that it is raising. 2. Get an application form. You can pick up the application forms at any broker's office -- they are even available on some street kiosks in your city's financial area. Do you have any agents who sell you mutual fund application forms or fixed deposit forms of companies? They too are a good source. Ask your family, friends or colleagues for their agents. The forms are all free. 3. Fill it up. Fill up the form -- the directions are given in the form -- and write a cheque for the amount you want to apply for. Every issue has a minimum number of shares that you must apply for, which is specified in the application form. Submit both within the time frame specified. 4. Submit the form. You will have to submit it to the collecting bankers (a list is given in the form), or to the collecting agents for the merchant bankers (financial players managing the entire issue for the company) to the issue.
5. You can buy online too If you have trading accounts with online brokerages (sharekhan, Kotak Securities, ICICI Direct, 5 paise to name a few), you can apply online. The process is simple, and detailed instructions are available on these brokers' web sites about how to proceed at every step. Typically, you have to go the site and click on Open IPO, where you will get the list of IPOs open for application. Once you select an issue, you will be directed to the Applications page, where the form can be filled in and submitted online.
Read this before you buy an IPO
What is a prospectus? Any company making a public issue is required to file its prospectus with the Securities and Exchange Board of India, the market regulator. A prospectus is the document that contains all the information you need about the company. It will tell you why the company is coming is out with a public issue, its financials and how the issue will be priced. There are two types of prospectus. 1. Draft Offer Document This is first filed with SEBI. SEBI may specify changes, if any, to be made. After the changes are made, it is filed with the Registrar of Companies or the Stock Exchange. The Draft Offer Documentªmust be filed with SEBI at least 21 days before the company files it with the RoC/ Stock Exchange. 2. Red Herring Prospectus This one does not have details of either the price or the number of shares being offered or the amount the IPO plans to raise. That's because this kind of prospectus is used in book building issues, where the details of the final price are known only after the bidding is concluded. All IPOs launch their issues through the book building method.
How to read it The problem with a prospectus is that it is massive. The Red Herring Prospectus for the Punjab National Bank issue, for instance, is 280 pages. How on earth will any ordinary investor sift through this mass? Here are the main sections youªneed to look at and what each will tell you: i. Table of contents It tells you where to find what in the prospectus. ii. Risk factors These will tell you, in some detail, all the risks the company and the issue are exposed to. For instance, this section tells you whether there are any legal cases against the company or its directors. It will inform you if the company's associate companies are losing money and what could affect the company's business in the future. For example, the PNB prospectus specifically mentions that the business may suffer ifªthe financial institution, IFCI, merges with PNB without the government agreeing to the concessionsªPNB has demanded. iii. Capital structure This section will tell you the current capital structure of the company, how many new shares will be issued, etc. This is important, as issuing new shares could lower the Earnings Per Share (EPS = net profit/ number of shares) till the expansion starts generating returns. iv. Objective of the issue Why is the company raising money? It's good if the company has specific investment plans. If it says it wants money for working capital (assets of the company like cash and securities minus liabilities such as loans), there's no real check on where the money will be used.
v. Business This section will tell you all about the company's business and its strategy. The section on 'Management's discussion and analysis of financial condition and results of operations' will tell youªwhat the company management feels about the state of their business. Check on competitive pressures in the business andªhow the company has fared in the past. vi. Regulations and policies Flip through this section as it tells you if there are any government restrictions on the business. In bank issues, for instance, this section will tell you about the restrictions on dividend payment, restrictions on Foreign Institutional Investment holdings of shares and other such information, which could have a bearing on the attractiveness of the issue. vii. Issue structure and issue procedure These sections will explain the basis of allocation, who can apply, the book building procedure, etc. viii. Basis for issue price This section will give you reasons for the pricing of the issue by comparing it with other companies in the same business, and by comparing the ratios. For instance, it will tell you what the average price-earnings ratio (PE = market price/ EPS) for the industry is. Later, when the company announces the issue price, you can compare the PE with the industry average. Remember, it isªnot enough for a company to do well -- it is also necessary to see whether the issue is attractively priced. The recent Jet Airways IPO, for instance, was widely seen by analysts as being highly priced. ix. Financials Finally, don't forget to check out the financials of the company, including the auditor's comments.
What's a share? Every business has its assets and liabilities. Assets are the machinery, buildings, land, furniture, stocks, cash, investments, etc. Liabilities are what the company owes other people. Bank loans and money owed to people from whom things have been bought on credit are some examples. Assets - Liabilities = Capital Capital is the amount the owner has in the business. As the business grows and makes profits, it adds to its capital. This capital is subdivided into shares (or stocks). So if a company's capital is Rs 10 crore (Rs 100 million), it could be divided into 1 crore (10 million) shares of Rs 10 each. Part of this capital, or some of the shares, is held by the people who started the business, called the promoters. The other shares are held by investors. These investors could be people like you and me or mutual funds and other institutional investors.
1. You own a part of the business
When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there. The good news is, since you own part of the company, you are entitled to a share in its profits. The bad news is that you are also expected to bear the losses, if any. That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever. 2. In the short-run, the price of the share can wildly fluctuate Let's say the company fixes the price of each share at Rs 10. This is called the face value of the share. When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall. The value of a share in the market at any point of time is called the 'price of the share' or the 'market value of a stock'. A share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value) or even Rs 9 (lower than the face value).
3. Always invest for the long-term The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high. That is why you must buy in a bear market. (This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen). The best time to sell is in a bull market, (when the sentiment is high and the prices of shares are rising. ) That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them. Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps. 4. Decide how much you want to invest Always remember one basic rule in finance -- if something gives you higher returns, that's usually because it carries a greater risk. That's the reason why not-so-good companies will pay you a higher rate of interest for your deposits. The same reasoning goes for stocks too -- they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk. If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks. .
5. Don't rely solely on 'good advice' A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself. It doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in a soup. When you hear of a 'hot tip', dig further. Take a look at the company's profit and loss statement, which would have been audited by chartered accountants. There is a wealth of information here. To understand the information in a Profit & Loss Account, Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding.. 1. Earnings per Share (EPS): How well the company is doing Company XYZ Ltd. Capital: Rs 100 crore (Rs 1 billion). Capital is the amount the owner has in the business. As the business grows and makes profits, it adds to its capital. This capital is subdivided into shares (or stocks). The capital is divided into 100 million shares of Rs 10 each. Net Profit in 2003-04: Rs 20 crore (Rs 200 million). EPS is the net profit divided by the total number of shares. EPS = net profit/ number of shares EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share Lesson to be learnt
If a company's EPS has grown over the years, it means the company is doing well, and the price of the share will go up. If the EPS declines, that's a bad sign, and the stock price falls.
Companies are required to publish their quarterly results. Keep an eye out for these results; check for the trend in their EPS.
2. Price earnings ratio (PE ratio): How other investors view this share Two stocks may have the same EPS. But they may have different market prices. That's because, for some reason, the market places a greater value on that stock. PE ratio is the market price of the stock divided by its EPS. PE = market price/ EPS Let's take an example of two companies. Company XYZ Ltd Market price = Rs 100 EPS = Rs 2 PE ratio = 100/ 2 = 50 Company ABC Ltd Market price = Rs 200 EPS = Rs 2 PE ratio = 200/ 2 = 100 In the above cases, both companies have the same EPS. But because their market price is different, the PE ratio is different. Lesson to be learnt
In the case of EPS, it is not so much a high or low EPS that matters as the growth in the EPS. The company's PE reflects investors' expectations of future growth in the EPS. A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.
How to make money in shares:
Compare this with your bank fixed deposit. Your FD will only fetch you around five to six percent per annum, but you can be sure of getting your money back. When you put your money in a bank deposit, you loan the money to a bank for a fixed return (rate of interest) and a fixed tenure (number of months or years). At the end, you get back your original amount and you are paid interest on the same. When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder or part-owner in the company. The good news is that since you own a part of the assets of the company, you are entitled to a share in the profits those assets generate. The bad news is that you are also expected to bear the losses, if any. Now, if you are a shareholder, there are two ways you can benefit from the profits of the company: capital appreciation or dividend. Dividend Usually, a company distributes a part of the profit it earns as dividend. For example: A company may have earned a profit of Rs 1 crore in 2003-04. It keeps half that amount within the company. This will be utilised on buying new machinery or more raw materials or even to reduce its borrowing from the bank. It distributes the other half as dividend. Assume that the capital of this company is divided into 10,000 shares. That would mean half the profit -- ie Rs 50 lakh -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend would then be Rs 500 per share. If you own 100 shares of the company, you will get a cheque of Rs 50,000 (100 shares x Rs 500) from the company. Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50 percent. It's important to remember that this dividend is a percentage of the share's face value. This means, if the face value of your share is Rs 10, a 50 percent dividend will mean a dividend of Rs 5 per share However, chances are you would not have paid Rs 10 (the face value) for the share.
Let's say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. That, in percentage terms, means you got just five percent as your dividend and not the 50 percent the company announced. Or, let's say, you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. That means, in percentage terms, you got just 55.55 percent as dividend yield and not the 50 percent the company announced. Capital Gain As the company expands and grows, acquires more assets and makes more profit, the value of its business increases. This, in turn, drives up the value of the stock. So, when you sell, you will receive a premium over (more than) what you paid. This is known as capital gain and this is the main reason why people invest in stocks. They want to make money by selling the stock at a profit. It is not as easy as it sounds. A stock's price is always on the move. It could either appreciate (increase in value) or depreciate (decrease in value) with respect to the price at which you purchased it. If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent. Or, if you buy a stock for Rs 10 and sell it for Rs 9, you lose Rs 1, or your loss is 10 percent.
Now look at both: Dividend and Capital Gain If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent. Add the Rs 5 per share you have received as dividend, and your total return will be Rs 10 plus Rs 5 = Rs 15 or 150 percent (Rs 15 divided by Rs 10 multiplied by 100). If you buy a stock for Rs 10 and sell it for Rs 9 after a year, you would lose Rs 1 per share. However, you would have got Rs 5 as dividend. So you would net Rs 4 as earnings from the company.
In percentage terms, your return would be 40 percent (Rs 4 divided by Rs 10 multiplied by 100). Tax One last point. If you are a tax payer, the finance minister has made it very easy for you to invest in the stock market. There is no tax on dividend. Neither will you be taxed on long-term capital gains. This means, if you buy a share, hold it for at least a year and sell it at a profit, you don't have to pay any tax on the profit your make. If you sell it within a year, the short-term capital gains tax is only 10 percent. Contrast this with fixed deposits, where you have to pay tax on the interest at your marginal tax rate. This means that, if you are in the 30 percent tax bracket and your interest income exceeds Rs 12,000 in a year, you'll have to pay tax on your interest income at that rate (including the surcharge, the cess, etc, the rate works out to almost 35 percent). Investing in stocks may be more risky, but it is more tax-friendly. Besides, there is the potential to get a higher return on your investment.
Net sales Expenditure Operating 1442.9 1183.2 21.9 1571.6 profit Other income 29.7 40.1 -25.9 33.8 PBIDT* 1472.6 1223.3 20.4 1605.4 Interest 9.4 -71 NA 80.9 Depreciation 152.2 185.6 -18 149.5 PBT 1311 1108.7 18.3 1374.9 Tax 393.7 338.2 16.4 484 Deferred tax -29.5 3.2 NA -1.8 PAT 946.8 767.3 23.4 892.7 (excluding
4Q05 4Q04 Chg 3Q05 3864.6 3200.3 20.8 3731.3 2421.7 2017.1 20.1 2159.7
Chg 3.6 12.1 -8.2 -12.1 -8.3 -88.4 1.8 -4.6 -24.8 NA 6.1
FY2005 14498.9 8453.6 6045.3 148 6193.3 186.8 618.7 5387.8 1833.1 -10.5 3564.7
extraordinary) Extraordinary Items Profit / Loss on sale of investments VRS Adjustment TOTAL EXTRAORDINARY INCOME / (EXPENSE) PAT (Including Extra Ordinary) EPS (Rs Share) Equity Capital (In Cr Shares) OPM (%)
-38.2 0.0 0.0 0.0
-2.2 28.6 -30.8 -2.2
NA -100.0 -100.0 -100.0
-0.2 -100 -138.2 -100 -138.4 -100
908.6 17.1 553.7 37.3
628.9 44.5 20.8 369.2 37 NA NA NA
890.5 16.1 553.7 42.1
2.0 NA NA NA
3474.2 62.7 553.7 41.7
Column I, II and III Just by glancing at the results for the fourth quarter, you can easily see that Tisco made a Profit After Tax of Rs 946.8 crore. Is that profit high or low? Is it good enough? To answer those questions, you will have to compare the quarterly numbers with those of the same quarter in the previous year. To make comparisons easy, companies provide these numbers too. The second column gives the figures for the fourth quarter of FY 2004, and we can compare those figures with the numbers for Q4, FY 2005. The results of the comparison (the percentage change) are given in the third column. Unfortunately, it's a column the companies don't usually give and we have to work it out by ourselves.
From the third column, we see that Tisco's net sales have grown 20.8% in Q4, FY 2005, compared to Q4, FY 2004. Expenditure rose by 20.1% and Operating Profit by 21.9%. PAT rose by 44.5%. So you can check out the growth in each item by comparing it with the numbers in the corresponding quarter of the previous year. Column IV We've also taken the figures for Q3, FY 2005 because sometimes conditions in the business change dramatically and comparing numbers over a year may not make much sense. For example, steel prices have gone up very substantially in the past year, so everyone knows that Tisco's fourth quarter results will be much better than the results in the fourth quarter of last year. But comparing Q4 with Q3 may give a better idea. However, the risk in comparing quarters sequentially is that in seasonal businesses that may not make much sense. Take for instance a company making ice cream. The sales in the winter quarter will be much lower than those in the earlier quarter. Column V This gives the change in Tisco's Q4 results compared with Q3.
Column VI The sixth column gives the full year's figures for FY 2005.
1. The first thing you should do is take out the "extraordinary" items when calculating PAT. Extraordinary items are one-off items that won't recur, so they unnecessarily inflate or lower profits. In Q4, FY 2005, for instance, the PAT number we should take is Rs 946.8 crore, which excludes extraordinary items, rather than the Rs 908.6 crore which includes extraordinary items. Clearly, in Q4, FY 2005, Tisco had an extraordinary expense that dragged profit down by Rs 38.2 crore.
2. The second thing you need to do is consider profits apart from "Other Income". That's because "Other income" is often income that is not strictly related to the business. If, the only reason a steel company is making profits is due to high "other income" from its investments, it's not a good sign. Notice how in Tisco's case, the Operating Profit has gone up 21.9%, which isn't bad at all. 3. The most important number for investors, of course, is the Earnings Per Share. Notice how Tisco's EPS has come down to Rs 17.1 for the quarter against Rs 20.8 in the corresponding period of the previous year. Why is EPS lower in spite of higher profits? That's because Tisco has increased its capital in the meantime (see from the table how capital has gone up from Rs 369.2 crore to Rs 553.7 crore) and consequently the number of shares has gone up. And because EPS is nothing but PAT divided by the number of shares, Tisco's EPS has come down. 4. The Operating Margins have fallen from 42.1% in Q3 to 37.3% in Q4. That's because raw material costs have increased---see how expenditure has risen 12.1% in Q4 compared to Q3 (column 5, row 2). That's also the reason why Operating Profits declined in Q4 compared to Q3, in spite of net sales being higher by 3.6%. Why you need a stock broker:
You must have heard this question quite often: How was the market today? The person asking this question could be referring to the debt market (comprising fixed income instruments like fixed deposits and bonds), the forex market (where currencies are bought and sold), or the stock market (where shares are bought and sold). The stock exchanges. The stock market will have either one or a number of stock exchanges. In India, the most famous are the Bombay Stock Exchange and the National Stock Exchange.
The NSE is the country's largest exchange, which means it sees the most amount of shares bought or sold in a day. The BSE stands second but is the oldest; it was established way back in 1875. Presently, the stock market in India consists of twenty three regional stock exchanges and two national exchanges, namely, the National Stock Exchange (NSE) And Over the Counter Exchange of India (OTC) The Bombay Stock Exchange (BSE) is the largest Stock Exchange, in the country, where maximum transactions, in terms of money and shares take place. The other major stock exchanges, are Calcutta, Madras and Delhi Stock Exchanges. Other one at Ahmedabad, Jaipur, Bangalore, Kanpur, Rajkot, Hyderabad, Cochin, Pune, Bhubaneshwar, Guwahti, Indore, Mangalore, Ludhiana, Patna, Saurashtra, Vadodara, Coimbatore, Meerut, and Surat.
What makes up a stock exchange? Its members, the stock brokers People like you and me just cannot go to a stock exchange and buy and sell shares. If we want to do so, we have to get in touch with someone who is a member of the stock exchange. Which means we need to talk to a stockbroker. Stockbrokers buy and sell shares for themselves to make a profit. They also buy and sell shares on behalf of people like you and me and take a commission for doing so. Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator. SEBI's main function is to make sure those who invest in the stock market follow the rules and no scams take place. It is supposed to act as a watchdog on behalf of the investors. Stock exchange building is called Jeejeebhoy Towers. That's the home of the BSE.
HOW DOES TRADING TAKES PLACE?
Trading of shares in a stock exchange takes place through Registered Stockbrokers, Transfer Agent etc.
Buyer gets in touch with a Broker, and gives him all the details of shares he wants to buy. Then the broker strikes a requisite deal and receives share certificate, and transfer form. After deducting, documents to the buyers. As for seller, he also gets in touch with a broker and gives him details alongwith share certificates and transfer forms. Once the deal is struck, broker receives the payment and deducts his commission. Each stock exchange has certain listed and permitted securities that are traded on its floor. Floor Trading Apart, from NSC, and OTC, trading takes place mainly through on open outcry system on the trading floor of the exchange during the official trading hours. There are several "notional" trading posts for different securities where the buyer and seller get in contact with each other. These buyers and seller, are authorised Brokers or Agents or a shareholder. Buyer make their bids and sellers make their offers, and bargains are closed at the mutually agreed upon prices. In stock, where jobbing is done, the "jobber", plays an important role. This is floor trading, where buyer and seller transact face to face using a variety of signals. Screen based Trading In a screen-based system, the trading ring is replaced by the computer screen and distant participants can trade with each other through the computer network. A large number of participants, geographically separated can trade simultaneously at high speeds. The screen based trading systems are of two types: A) Quote Driven System, and B) Order Driven System Under the quote driven system for trading, market makes input two way quotes in the system. Market players, then contact the market makers over telephone, negotiable, and trace. Under the order driven system, client place their orders with the brokers, which are then fed, into the system. These are then automatically matched according to certain rules
PROCEDURE WITH REGARD TO TRANSFER OF SHARES
Transfer of shares, is one of the most important right, of a member. Even Articles of Association, of a company, cannot take away this right, although it can place certain restrictions on transfer of shares.
One of the common restriction on transfer in a private company is the preemption clause which states that the intending transfer, must first after the shares to the existing members of the company, so long as a member can be found to purchase them at a fair price. Transfer of shares, involves, two types of transaction, namely : -Buying of shares, i.e. transferee -Selling of shares, i.e. transferor
BUYING OF SHARES 1. Shares may be brought directly, from the seller, or through a broker. Generally, shares are brought, through a broker in stock exchange, as it is not possible for buyer and seller to come in direct content, because of voluminous trading. Thus the first method is locate a broker. 2. Then, the buyer gives all the details to the broker, regarding : - the name of company of which he wants to buy shares, - maximum price at which he is willing to buy , - Commission to be paid to broker and any advance money. - Number of shares to be purchased. All these are negotiable, as the buyer may change his opinion, on an advice given by broker. 3. Then, the broker, will hunt for the shares, the buyer wants to buy, at quoted price. The buying may take place on the trading floor of stock exchange, or at any other place. Once the order is fulfilled, broker will send a "contact rate" to the buyer, containing details and specifications. 4. Share certificates will be received by the broker, through clearing house of the stock exchange, or directly from the selling broker. This certificate will be duly accompanied by a transfer deed signed by transferor, and stamped, and authenticated by a witness. 5. When, the share certificate is delivered to the buyer; he will pay the balance money (purchase consideration) to the broker. 6. If buyer wants to retain the shares, he will then fill up the transfer deed, stamp them properly, and shall lodge the share certificates and transfer deeds with the company. 7. Finally after scrutinizing, the transfer deed, and share certificate, the company will register the name of transferee in register of members, as a member. On completion of this, the transferee acquires the status of member. 8. A buyer who does not wish to retain the shares, and wants to sell them further, may ask for a "Blank Transfer form" from the transfer, which will not have name
a of transferee. This enables the buyer to further sell it. This practice is common to stock exchange. SELLING OF SHARES 1. The seller may directly sell the shares, to a buyer, but here also, it is generally preferred to image services of broker. 2. An Order , i.e. "Sale order" will be placed, alongwith:- Share Certificate - Transfer deed, and - Details like minimum price etc. 3. On receiving, all such things, the broker will hunt for a buyer, and strike the deal over the trading floor of stock exchange or at any other place. 4. Once the negotiations are complete, broker will hand over the share certificate, and transfer form to the buyer, and take the payment. Finally, the payment will be handed over to the seller, after deducting commission. If, seller was a member of the company, his name will be struck off, from the register of member, once; company receives the share certificates and transfer forms.
FUNCTIONING OF STOCK EXCHANGE
Listing of shares, on a stock exchange, means, such shares can be bought and sold, in stock exchange. A Company, which intends to issue shares, through prospectus, shall have to apply to one or more stock exchanges, for getting its shares listed. The detailed and elaborate procedure of getting the shares listed on a stock exchange is monitored by SEBI. The SEBI, issues guidelines and notifications, from time to time, with regard to listing of securities. Once the shares are listed, the are divided into two categories: 1. GROUP "A" SHARES 2. GROUP "B" SHARES GROUP "A" SHARES: are referred to as " Cleaned Securities " or " specified shares". The facility for carrying forward a transaction from one account period to another is available for these shares. Group "A" shares represent companies, with huge amount of capital, and equally a large scope for investment. These shares are frequently traded and command higher price earning multiples. GROUP "B" SHARES: are referred to as, Non cleaned securities or non-specified shares. For these groups facility of carrying forward is not available. Whenever a share is moved from Group "B" to Group "A" its market price rises; likewise, when a share is shifted from Group "A" to Group "B", its market price declines. There are some criteria and guide lines, laid down by stock exchange, for shifting stocks from the non-specified list to the specified list.
VARIOUS ORDERS AND TRANSACTIONS: SETTLEMENT CYCLES There are various types of orders, which can be placed by the buyer or seller. They are: Market Order A market order is to be executed as soon as possible at the best prevailing price in the market. Limit order A limit order is constrained by the price limits specified by the investor. The seller specifies the minimum price that the security must fetch, and the buyer specifies the maximum price that he is willing to pay.
A Day order A day order remains valid only for the day when it is placed. If the order is not executed on that day, it automatically lapses. A Week order A week order is one, which is active for a week A Month order A month order is an order, which is valid for one month. An open order An open order is an order, which is valid for one month. An open order remains in effect until it is executed or cancelled. Similarly there are certain types of transactions, which are allowed on the stock exchanges. They are: Transactions for Spot delivery The delivery and payment is effected within the time or on the date stipulated when entering into the transaction or within fourteen days, whichever is shorter. Transaction for Hand delivery These transactions also referred to as the transaction for "the account", are cleared and settled through the clearing house. Transactions for special delivery The delivery and payment is effected within any time exceeding fourteen days following the date of the contact as may be stipulated when entering into the transaction, provided the same is permitted by the governing board or the president of the exchange.
A Company proposing to raise resources by a public issue should first select the type of securities i.e. share and /or debentures to be issued by it. The decision regarding the issue of shares to be made at par or premium should be decided keeping in view the SEBI guidelines. The whole process of issue of shares can be divided into two parts: - Pre issue activities, and - Post issue activities All activities beginning with the planning of capital issues, till the opening of the subscription list are pre issue activities, while all activities subsequent to the opening of the subscription list may be called post issue activities. The various steps involved in public issue of shares are enumerated below: 1. COMPLIANCE WITH THE SEBI GUIDELINES Before making any issue of capital, it is to be ensured that the proposed issue complies with the provision of the SEBI guideline for disclosure and investor protection with regards to Pricing of issue, promoters, Contribution, lock in period, reservation, etc. 2. HOLDING OF GENERAL MEETING If it is required by the Articles of Association, that consent of shareholder is to be obtained, then meeting of the shareholder will be called. 3 INTIMATION TO STOCK EXCHANGE A copy of the Memorandum and Articles of Association of the company is to be sent to the Stock Exchanges where the shares are to be listed, for approval. 4. APPOINTMENT A Company, which issues shares, has to appoint one or more Merchant Bankers, who act as Lead Managers to the public issue. The company may, also appoint Registrars, underwriter, brokers etc 5. DRAFTING OF PROSPECTUS Apart from the notice of offer to issue shares to public prospectus should also disclose: - Justification of Premium, if called. - Net Asset value (NAV) - High and Low price of the shares of the company for the last two years. - Highlights of the issue, as well as the "Risk Factors". - A clause that company shall refund the entire application money if minimum subscription is not received. - A statement by the lead managers that in their opinion the assets of the underwriters are adequate to meet their obligations.
6. APPROVAL OF PROSPECTUS The draft prospectus alongwith the application form for issue of shares should be approved by the solicitors/legal advisors/stock exchange & [where application has been made seeking permission for shares to be draft in] of the company to ensure that it contains all disclosures and information as required by various statutes, rules, notifications, etc. 7. APPROVAL OF BOARD OF DIRECTORS After the concerned parties / agencies have approved the draft prospectus and the application form, the board of directors of the company should approve the final draft, before filing with the Registrar of companies. 8. REGISTRATION OF PROPECTUS WITH ROC Before the prospectus is issued to the public it must be filed with the Registrar of companies, duly signed thereon by every director or proposed director of the company. The prospectus must be registered with ROC within 3 months of vetting by SEBI. 9. APPLICATION TO STOCK EXCHANGE TO LIST SHARES Before filing prospectus with the Registrar of companies, the company should submit on application to the Stock Exchange (s) for enlistment of securities offered to the public by the said issue. The fact that an application has / have been made to the stock exchange must be stated in the prospectus. 10. PRINTING AND DISTRIBUTION OF PROSPECTUS AND APPLICATION FORMS After Receipt of Acknowledgement card from the SEBI and the intimation from Registrar of Companies regarding registration of prospectus, the company should take steps to issue the prospectus within 90 days of it's registration with ROC For this compliance, requisite steps for printing and distribution amongst Banker, Underwriter public etc. should be made. 11. ANNOUNCEMENT AND ADVERTISEMENT Announcement regarding the proposed issue should be made at least ten (10) days before the subscription list opens. No advertisement should include Brand Names for the issue except the normal commercial name of the company or commercial brand names of the company or commercial brand names of it's products already in use. 12. SUBSCRIPTION LIST As stipulated by SEBI guidelines the subscription list for public issue is to be kept open
for atleast 3 working days and for a total period of not exceeding 10 working days, which is to be disclosed in prospectus as well. 13. SEPARATE BANK ACCOUNT A SEPARATE Bank account is opened for the purpose of collecting the proceeds of the issue. Further, the date of opening and closing of the subscription list should be intimated to all the collecting and controlling branches of the bank with whom the company has entered into an agreement for the collection of application forms. 14. MINIMUM SUBSCRIPTION As per the SEBI guidelines, if the company does not receive 90% of the issue amount from the public subscription including development from underwriters within 120 days from the date of the issue, the amount of subscription received is required to be refunded to the applications. In case of disputed development also, subscription is required to be refunded if 90% of the issued amount plus accepted Development from underwriters if any is not received within 120 days of the issue of prospectus. All money received from the applicants for shares is required to be repaid forthwith without interest and if any such money is not so repaid in the next 10 days (after the expiry of 120 days), the directors of the company are jointly and severally liable to repay that money, with interest from the expiry of the 130 days. The company should refund the amount within 10 weeks of the closing of the subscription list and pay interest, if refunds are delayed by more than 8 days after this period. 15. ALLOTMENT OF SHARES A return of allotment in Form no.--- 2 of the companies (central government's) General Rules and Form, 1956 should be filed with Registrar of companies within 30 days of the date of allotment alongiwith the fees payable, as prescribed in schedule X of the Act. In case, the issue is over-subscribed, the basis of allotment has to be decided in consultation with the stock exchange authorities as per the guidelines laid down by the stock exchanges. 16. OVER SUBSCRIPTION The Over-subscribed amount should after the finalisation of allotment, be refunded to the applicants within 10 weeks of the closure of subscription list. If the money is not so refunded, the company is liable to refund the money with interest as specified from the expiry of the 8 days after 10 weeks of the closure of subscription list. 17. COMPLIANCE REPORT
As stipulated by SEBI guidelines within 45 days of the closure of issue, a report in the prescribed form alongwith a compliance certificate from statutory auditor/ practicing charted accountant or by a company secretary in practice is to be forwarded to SEBI by the lead managers. 18. ISSUANCE OF SHARE CERTIFICATES As per section 113, the company should deliver the share certificate within 3 months after the allotment of shares.
How the stock exchange protects you Stock exchanges make sure your transactions are safe and secure and brokers follow the rules while trading. The function of stock exchanges is to ensure brokers have enough capital (money) to enable them to conduct their business satisfactorily. Of course, that hasn't been able to prevent scams, but that's another story. You also have a better chance of getting a good price. Let's suppose you have a stock which very few people want to buy. But when your sell order is placed on the BSE, it is viewed by thousands of brokers on their computer screens and, if the right price, someone may decide to buy. Sell or buy orders in an exchange reach a large audience and that can work to your benefit. When you buy or sell stocks through a stock exchange, your trades are guaranteed. Suppose, for example, your broker has sold stocks on your behalf to another broker and the second broker's business fails. In this case, your trade is protected and you will get your money back because all trades on a stock exchange are guaranteed by the Clearing Corporation, which settles transactions between brokers. Internationally, some of the most well-known stock exchanges are the New York Stock Exchange, the NASDAQ or the US stock exchange where the shares of mostly technology companies are listed, and the London Stock Exchange.