Chapter – 01

1. Introduction:

Introduction to the stock market:

India stock exchanges are a structured marketplace for the proper conduct of
trading in company stocks and other securities. There are 21 recognized stock exchanges in
India, including the Over the Counter Exchange of India for providing trading access to small
and new companies. The main service of the Indian Stock Exchanges all over the country is
to provide nation- wide services to investors and to facilitate the issue and redemption of
securities and other financial instruments.

Stock exchanges:
The introduction of the concept of the stock exchanges in India came with the breaking
of the American Civil War and the idea materialized first in 1874 with the foundation of the
Bombay Stock Exchange at the Dalal Street in Mumbai. Currently, in all the Indian
exchanges the trading system is computerized for more efficient and transparent trading.
There has been a significant boom in the degree of development and volume of trading in the
stock exchanges.

The two most important exchange house of the Indian stock market are the Bombay
Stock Exchange and the National Stock Exchange. Many of the regional stock exchanges
have obtained the membership of these two stock exchanges in India. The index of the
Bombay Stock Exchange, BSE Sensex is a value – weighted index composed of 30
companies.

Another significant feature of the India Stock Exchange is the regulatory agency,
Securities and Exchange Board of India or SEBI which supervises the activities of stock
market, regulates the functioning of stock exchanges and intermediaries and registers Foreign
Investors trading in Indian scrip.

Stock Exchanges are organized marketplace, either corporation or mutual organization,

where members of the organization gather to trade company stocks or other securities. The
members may act either as agents for their customers, or as principals for their own accounts.

Stock exchanges also facilitate for the issue and redemption of securities and other
financial instruments including the payment of income and dividends. The record keeping is
central but trade is linked to such physical place because modern markets are computerized.
The trade on an exchange is only by members and stock broker do have a seat on the
exchange.
List of Stock Exchanges In India:
 Bombay Stock Exchange
 National Stock Exchange
 Regional Stock Exchanges
 Ahmadabad Stock Exchange.
 Bangalore Stock Exchange.
 Bhubaneswar Stock Exchange.
 Calcutta Stock Exchange.
 Cochin Stock Exchange.
 Coimbatore Stock Exchange.
 Delhi Stock Exchange.
 Guwahati Stock Exchange.
 Hyderabad Stock Exchange
 Jaipur Stock Exchange.
 Ludhiana Stock Exchange.
 Madhya Pradesh Stock Exchange.
 Madras Stock Exchange.
 Magadha Stock Exchange.
 Mangalore Stock Exchange.
 Meerut Stock Exchange.
 OTC Exchange of India.
 Pune Stock Exchange.
 Saurashtra Kutch Stock Exchange.
 Uttar Pradesh Stock Exchange.
 Vadodara Stock Exchange.
1.1 BACKGROUND OF THE STUDY:

The internet’s arrival and its subsequent popularity in India have made
online trading in India, which is about the online purchase and sale of shares, one of
the extremely popular means of trading. Both beginner and experienced traders and
investors in India are milking this opportunity by trading online in futures and
options, stocks and currencies worldwide. Such opportunities are in the form of
reduced brokerage and commission, better broking services etc.

Constructive uses of new technologies have always contributed positively

towards improving human life standards and the economy of a country. Such as
online trading, in equity markets it increased trade volumes and number of investors
trading in stock markets.
Online trading was started in India in the year 1995. Where a new system is
formed which allows the investor to trade through an internet site where the major
financial products and services like Equities. Mutual fund, Life insurance, Share
trading, Commodity trading are directly available for the customer.

For carrying out online trading in India, you have to open an online demat
and trading account, followed with online trading software. For this purpose you
would require a depository participant. This is time consuming and inefficient. This
imposed limits on trading volumes and efficiency. In order to provide efficiency,
liquidity and transparency NSE and BSE introduced nationwide online fully
automated “SCREEN BASED TRADING SYSTEM”.
1.2 BACKGROUND OF THE TOPIC:

TRADING:
The dictionary or the literal meaning of the “TRADING” is buying or
selling of goods and services in the context of secondary market the “TRADING”
means “buying or selling of securities”. The trading can be done in two ways. They
are:
A. Offline trading
B. Online trading

a) Offline trading:
Offline trading is a traditional trading technique. Offline trading can be
done with the help of broker (an intermediary between the investor and the
market). The investor will not have any idea about the market and he has to
place the orders with the help of broker or through a phone call to broker or
written statement.
The broker is the only person who knows the fluctuations in prices of
securities in the market. In this offline trading if the investor sells securities he
has to give delivery slips and if he buys then he has to cheque to the broker.
The entire process is handled by national stock exchange. Now, the transaction
will take T+2 days means transaction plus 2 days (working). Otherwise the
scrips will be auctioned. After the transaction the scrips are transferred to
concern demat account and the amount is added to the concern investor’s
account.

b) Online trading:
Online trading is the emerging trading technique in the India. Online trading is
done through the Internet. The investors can place the orders directly from
home. In this the investors account, demat account and banking account are
integrated with one other.

The actual definition of “online trading” is as explained below:

“Online trading is a service offered on the internet for purchase and sale of shares. In
the real world you place orders on your stockbroker either verbally (personally or
telephonically) or in a written form (fax).” In online trading, you will access a
stockbroker’s website through your internet enabled PC and place orders through the
broker’s internet based trading engine. These orders are routed to the stock exchange
without manual intervention an executed thereon in a matter of a few seconds.
The net is used as a modem of trading in internet trading. Orders are
communicated to the stock exchange through website.
In India:
Internet trading started in India on 1st April 2000 with 79 member seeking
permission for online trading. The SEBI committees on internet based securities
trading services has allowed the net to be used as an Order Routing System (ORS)
through registered stock brokers on behalf of their clients for execution of
transaction. Under the ORS the client enters his requirements (security, quantity,
price buy/sell) on broker’s site.

Objectives:

Internet trading is expected to

 Increase transparency in the markets,

 Enhance market quality through improved liquidity, by increasing quote
continuity and market depth,
 Reduce settlement risks due to open traders, by elimination of mismatches,
 Provide management information system.

Requirements for online trading:

 For investors:

1. Installation of a computer with required specification

2. Installation of a mode
3. Telephone connection
4. Registration for on-line trading with broker
5. A bank account
6. Depository account
7. Compliance with SEBI guidelines for net trading

 For stock brokers:

1. Permission from stock exchange for net trading

2. Adequate back up system
3. Secured and reliable software system
4. Communication of order (trade confirmation to investor by e-mail)
5. Issue of contract notes within 24 hours of the trade execution.
 Demat account:

Stocks in demat account remain in dematerialized form.

Dematerialization is the process of converting physical shares into electronic
format. A demat account number is required to enable electronic settlement of all
the trades. Demat account functions like a bank account, where you hold your
money and respective entries are done in bank passbook. In a similar form,
securities too are held in electronic form and are debited or credited accordingly.
A demat account can be opened with no balance of shares. You can have a zero
balance in your account.

How does online demat account work:

There are two Depositories in India – the National Securities

depositories Limited (NSDL) and the Central Depository Services Limited
(CDSL), through whom the shares are held by the various depository participant.
When you buy or sell shares, respective DP credits or debit your account
accordingly.

Following are the documents which are required for opening a demat
account:

 PAN Card
 Identity proof
 Proof of residence (electricity bill, phone bill, ration card, driving license etc.)
 Bank account details (A cancelled cheque for capturing MICR)
 A recent passport size photograph

How to open a Demat Account :

 For opening demat account, you need to reach to depository participant and
fill up the account opening form and submit it along with necessary
documents and a recent passport size photograph. You must carry original
documents for verification.

 The DP will provide you with rules and regulations and terms and condition
for opening the account along with the charges for the same.

 A member from the DP will contact you for in – person verification and
check the details provided in the account opening form.
  Once the application is processed, The DP will provide you with an account
number and client ID. You can now access your demat account online with
specified details.

Equity:

Equity is a share in the ownership of a company. Equity represents a claim on the

company’s assets and earnings. As you acquire more equity, your ownership stake in the
company becomes greater. Whether you say shares, equity, it all means the same thing.

Debt vs. Equity:

Why does a company issue stock? Why would the founders share the profits with
thousands of people when they could keep profits to themselves? The reason is that at some
point every company need to raise money. To do this, companies can either borrow it from
somebody or raise it by selling part of the company, which is known as issuing stock. A
company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit
under the umbrella of debt financing. On the other hand, issuing stock is called equity
financing. Issuing stock is advantageous for the company because it does not require the
company to pay back the money or make interest payments along the way. All that the
shareholders get in return for their money is the hope that the shares will someday be worth
more than what they paid for them. The first sale of a stock, which is issued by the private
company itself, is called the initial public offering (IPO).

It is important that you understand the distinction between a company financing

through debt and financing through equity. When you buy a debt investment such as a bond,
you are guaranteed the return of your money (the principal) along with promised interest
payments. This isn’t the case with an equity investment. By becoming an owner, you assume
the risk of the company not being successful –just as a small business owner isn’t guaranteed
a return, neither is a shareholder. As an owner, your claim on assets is less than that of
creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder,
don’t get any money until the banks and bondholders have been paid out; we call this
absolute priority. Shareholders earn a lot if a company is successful, but they also stand to
lose their entire investment if the company isn’t successful.
HOW DOES TRADING TAKES PLACE?

Trading of shares in a stock exchange takes place through Registered Stock brokers,
Transfer Agent etc. Buyer gets the 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 along with share certificates and transfer forms.
Once the deal is struck, broker receives the payment and deducts his commission.

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 authorized 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 system are of two types:

 Quote driven system, and

 Order driven system,

Under the QUOTE DRIVEN system for trading, market makers 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, in to the system. These are then automatically matched according to certain rules.
Risk:

It must be emphasized that there are no guarantees when it comes to individual stocks.
Some companies pay out dividends, but many others do not. And there is no obligation to pay
out dividends even for those firms that have traditionally given them. Without dividends, an
investor can make money on a stock only through its appreciation in the open market. On the
downside, any stock may go bankrupt, in which case your investment is worth nothing.

Although risk might sound all negative, there is also a bright side. Taking on greater
risk demands a greater return on your investment. This is the reason why stocks have
historically outperformed other investments such as bonds or saving account. Over the long
term, an investment in stocks has historically had an average return of around 10-12%.

Different types of stocks

Common stock:

Common stock is, well, common. When people talk about stocks they are usually
referring to this type. In fact, the majority of stock is issued is in this form. We basically went
over features of common stock in the last section. Common shares represent ownership in a
company and a claim (dividends) on a portion of profits. Investors get one vote per share to
elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns
than almost every other investment. This higher return comes at a cost since common stock
entail the most risk. If a company goes bankrupt and liquidates, the common shareholders
will not receive money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock:

Preferred stock represents some degree of ownership in a company but usually

doesn’t come with the same voting rights. (This may vary depending on the company.) With
preferred shares, investors are usually guaranteed a fixed dividend forever. This is different
than common stock, which has variable dividends that are never guaranteed. Another
advantage is that in the event of liquidation, preferred shareholders are paid off before the
common shareholder (but still after debt holders). Preferred stock may also be callable,
meaning that the company has the option to purchase the shares from shareholders at any
time for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A good way to
think of these kinds of shares is to see them as being in between bonds and common shares.
How do Stock Price Change:

Stock prices change every day as a result of market forces. By this we mean that share
prices change because of supply and demand. If more people want to buy a stock (demand)
than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a
stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes
people like a particular stock and dislike another stock. This comes down to figuring out what
news is positive for a company and what news is negative. There are many answers to this
problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what
investors feel a company is worth. Don’t equate a company’s value with the stock price. The
value of a company is its market capitalization, which is the stock price multiplied by the
number of shares outstanding. To further complicate things, the price of a stock doesn’t only
reflect a company’s current value, it also reflects the growth that investors expect in the
future.

How to Read a Stock/quote:

Stock Symbol:

This is the unique alphabetic name which identifies the stock. If you watch financial
TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside
this symbol. If you are looking for stock quotes online, you always search for a company by
the ticker symbol.

52-Week High and Low:

These are the highest and lowest prices at which a stock has traded over the previous
52 weeks (one year). This typically does not include the previous day’s trading.

Security Name and Type of Stock:

This column lists the name of the company. If there are no special symbols or letters
following the name, it is common stock. Different symbols imply different classes of shares.
For example, “eq” means the shares are equity.

Total Traded Quantity:

This figure shows the total number of shares traded for the day . it’s the volume for
the day.
Day High and Low:

This indicates the price range at which the stock has traded at throughout the day. In
other words, these are the maximum and the minimum prices that people have paid for the
stock.

Close:

The close is the last trading price recorded when closed on the day. Keep in mind, you
are not guaranteed to get this price if you buy the stock the next day because the price is
constantly changing (even after the exchange is closed for the day). The close is merely an
indicator of past performance and except in extreme circumstances serves as a ballpark of
what you should expect to pay.

Net Change:

This is the rupee value change in the stock price from previous day’s closing price.
When you hear about a stock being “up for the day,” it means the net change was positive.

Order Book:

On the right hand side you see “Buy Qty”,”Buy Price”. This shows the top 5 bid and
ask figures at which the security is trading. This basically shows the demands and supply of a
particular stock. It’s actually shows the market breadth which will give you number of buyers
and sellers.