Basics of Stock Market
From CA. Rachna Ranade Lectures
P.S. - It is not necessary to watch all the lectures to understand the notes. They are simple and easy.
Lecture 1
LTCG — long term capital gain If a person holds shares for more than one year and gains profit.
The dividend has been taxed as a change in law from 2020, STCG (Short term capital gain) is taxed at 15% and LTCG (1lakh and above) is taxed at 10%. For other securities, the LTCG is taxed at 10%.
In stock market the company decides whether to give dividend or not.
Promoter is the person who starts the company.
Face value - It is decided by the promoters of the company. It is the initial value of the shares in the market when company want to sell the shares. It has to be multiple of 1.
Demat account is required when we invest in Bombay Stock Exchange or National Stock Exchange. (Dematerialised from physical to digital, Rematerialize from digital to physical conversion of shares)
Issue price - When company increase the price of the share from face value,
Listing price - when listed in stock market for the first time.
Top line growth is nothing but the turnover growth of company and the bottom line is the profit growth.
While doing financial analysis look at the companies top line and bottom line growth from previous five years and if the bottom line growth shows more improvement than the turnover growth it is a good sign to invest in the company.
When there is stock split the face value of stock decreases the number of shares increases proportionately and the price of the stock decreases proportionately. Whenever there is a stock split in the market you buy shares not sell them.
Cheque companies fundamental before investing in essence cheque their past, the trend and their future.
Truth about stock market:
- Investing in stock market is not risky.
- Strong finance background is not required to invest in stock market.
- Big companies can also give good returns.
- You can start investing even with small amount of money.
Lecture 2
- Bonus shares — In bonus face value remains same. These are free shares issued by the company to the investors.
- Cum. Dividend - cumulative of dividend
- Ex. Dividend - exclusive of dividend
- Demand and supply in the market decides share price it is also known as market forces.
- Maximum number of shareholders in a private limited company can be 200.
- If a private limited company wants to convert to public limited company it must approach stock exchange.
- PAN India presence - Throughout India presence
- The shares get listed to the stock exchanges after 3 working days of it received by the person who has bought the IPO.
- In primary market the shares are sold directly by the company to the investor and in secondary market investor buys shares from other investors.
- After buying shares the receipt you get is known as contract note issued by broker which gives various details.
- LTP: Last traded price
Lecture 3
Previous closed - It is nothing but the latest traded price of the stock day before yesterday.
Pre opening market sessions were introduced for small investors to absorb heavy fluctuations from 9:00 to 9:15, People who are crazy about stock market used to start investing as soon as the stock market started at 9:00 o’clock so there used to be huge fluctuations in price therefore 9:00 to 9:15 was the period given for small investors.
In span of 9:00 to 9:15 again 9:00 to 9:07 you can place orders, 9:07 to 9:10 matching takes place, in essence number of people selling the stocks is matched to number of people buying, checked if there are enough stocks which can be sold to the buyers, etc. In the last minutes the trend is seen by everyone.
In aftermarket hours aftermarket stocks are sold which are executed next day morning at 9:15, usually these orders are placed by long term investors.
Gap up opening - If the share price opens higher than the closing price of previous day.
Gap down opening - if the share price opens lower than previous day’s closing price.
Unch - Unchanged price.
Bid price quantity - The amount of shares which people are buying and the best price available.
Offer price quantity - the amount of shares which people are selling and are available at that price.
Volume - it is the number of shares traded or changed hands in a day.
NSE & BSE prices for stocks can be different because of demand and supply.
· Corporate Actions:
Board meetings - meetings of the board of directors of company.
AGM/EGM - Annual general meeting and extraordinary general meeting with the shareholders.
Dividend - taxable for 10% given by the company to shareholders.
Bonus - one share free for every other share held. 5:3 5 shares free for 3 shares held, 4:25 4 shares free for every 25 shares held.
Splits - stock split.
For bonus the company announces the date way before giving it which is called announcement date.
The Date on which you get the bonus is known as announcement date you should have shares of the company giving bonus on this day in your demat account.
The last date to buy the shares to get bonus is the day before ex bonus date.
The secondary Stock market contains:
- Stock Exchange
- Investors
- Issuers
- Financial Intermediaries
- Regulator
In the secondary market the investor buys stock from other investors and in the primary market that stock is sold directly by the company.
There are 2 main exchanges:
NSE - National Stock exchange
BSE - Bombay Stock exchange
MCX-SX , MSEI - multi commodity exchange stock exchange.
Members of Stock Exchange are called brokers through whom we trade shares.
There are various categories of investors:
- RII: Retail Individual Investors. Less than or equal to 2 lakh
- HNI: High Net-worth Individuals. More than 2 lakhs
- DII: Domestic Institutional Investor
- FII/FPI: Foreign Institutional Investor or Foreign Portfolio Investor
Issuers: companies or entities that seek admission for their securities to be listed on Stock Exchange.
T+2 concept - It takes 2 working days after buying the stock for it to coming to Demat account and getting money also is t+2 after selling the shares.
Listed below are the clearing houses for stock markets through which the shares are exchanged between the investors.
NSCCL: National securities clearing corporation limited — for NSE
ICCL: Indian clearing Corporation limited — for BSE
MC: metropolitan clear — for MSEI
Depositories and depository participants (Brokers): Depositories convert physical shares into dematerialised shares. Listed below are two depositories:
National security depositary limited (NSDL)
Central depositary service Ltd (CDSL)
Before dematerialisation everything used to work by post so it would take 30 days for the share trade. In the process the seller used to send a certificate to sellers broker who used to send it further to company, company then used to change the name on the certificate and send it to buyers broker and then finally buyers broker would give that certificate to the buyer and it would be settled.
Hence depositories are the ones who have helped to decrease the settlement time to two days from 30 days.
Depository participant is nothing but the broker.
In secondary market 5% of shareholding of a particular company is the limit for individual investor, if you buy more than that you will have to disclose it to SEBI (Securities and Exchanges Board of India).
Contract note: It has number of shares, settlement date, trade date, price, name of the investors, tax applied, Security transaction tax (STT), etc.
IPO - Initial Public Offering
Lecture 4
There are two types of trading systems:
Open outcry: Under this system the traders gather physically and shout or bid and offer prices like in Scam 1992 series.
Online trading: Under this system the traders trade electronically and they are not physically located at the exchange.
Dalal (Broker) Street: BSE
Types of orders -
Market order: order at the current price going on in market. It is immediately executed.
Limit order: order at the price you feel is correct by bargaining.
Stop loss order: order based on the maximum loss you can bear. It is an order placed by a buyer which is lower than his buying price. It limits the losses.
Ideally you should apply stop loss.
What happens when you have placed a stop loss order but there is no buyer in the market?
- The order will remain unexecuted and you will undergo further losses.
Good till cancelled order: Brokers do not usually suggest this order type. The order that doesn’t get cancelled until we cancel it.
Good till day: An order which gets cancelled the same day. This order stays in order book if not executed or if executed appears in trade book. If the order remains unexecuted till the day ends it is cancelled.
After market order: Orders placed after the market is closed and executed next morning at 9:15.
Immediate or Cancel order (IOC): When trader is very eager then this order is placed. Limit and IOC never goes hand in hand. It is an order where the trader wants to immediately execute his buy/sell order. If it is not executed immediately the order is cancelled.
Modification of order: If you want to change the order you placed earlier.
There’re 2 types of books a trader maintains:
Order book: where orders are seen.
Trade book: where executed orders are seen.
There are 2 types of phases in the market:
Bull (going up) & Bear (going down)
Long on market (bullish) & Short on market (bearish)
Value of stock has corrected (stock price gone down)
Fact: China has reverse colour scheme on market for ex: red for bullish and green for bearish because red colour is auspicious for them.
Standalone: only one main company.
Consolidated: comparing to companies’ subsidiary.
Never catch a falling knife. Do not buy when share is falling.
Lecture 5
Short sell: (A trade where a trader sells first and buys later. It is preferred by the traders if they are bearish about the markets) Sell at a higher price and then buy lower price. The gap is your profit. Example: Sell at 200 per stock, 10 stocks which makes it is -ve 10 and buy at 150 those 10 stocks so +10 which finally becomes -10+10=0 but the profit remains (200–150=50) so 50*10=500. Short sell can be done on same day itself so MIS (Marginal Intraday Settlement) order.
Share auction: From 3:30 to 4:00 (post market session) Brokers take part in this to cover off on behalf of trader all the rest remaining orders. If a person does a short sell and doesn’t square off his position then his shares are auctioned.
If in auction market also the orders are not settled then money is exchanged considering the penalties.
4:00 pm to 9:00 am Aftermarket hours
If profit is earned in broker auction the profit goes to IEPF
and if loss then short seller has to pay for it.
IEPF: Investor education protection fund
Off market transfer: Shares are transferred to the other person outside the market. Just the ownership of shares is changed.
Stop loss is of two types:
Stop loss market: Shares are sold as soon as the stop loss is touched and at whatever price is available as soon as the stop loss is triggered.
Slippage: the amount that is varied after the stop loss is triggered or the triggered price.
Stop loss limit: Shares are sold at the price which you decide after trigger price is hit.
Circuit filter: Can be of 2, 5, 10, 20, 40%. (It is a price level beyond or below which a stock price cannot rise/fall on a single day. Common stage circuit filter is 5%, 10%, 20%.) Applied on previous day market price where it cannot go above or below the set percentage limit in a single day. If it goes up to the limit, then its upper circuit and if it goes to the limit below then it’s lower limit.
There are some companies for whom the stock filter is not applicable, on paper they show it but as soon as it opens the limit is totally increased. If the stock is listed in derivatives (futures and options) then the circuit filter is not applicable.
Debentures can also be listed on stock market.
Stock market is also known as cash segment.
Lecture 6
Fundamental analysis consists of Balance sheet study, future prospect study, Revenue and profit, financial Ratio, cash flow, government policy, management quality, currency, global market, Interest rate, etc. Final outcome will be buy or not to buy there is no sell coz they are investors.
Technical analysis: It is backbone study of fundamental analysis.
Advantages of T.A. –
· Price never lies: Bhaav bhagwan che, Ex: Yes bank.
· Trade signals
· Done quickly and easily.
· Trend analysis
· Define levels easily
· Suitable to any instrument or market.
2000 to 3000 charts per day done by host…
Market is supreme and always right, agree to it.
Types of charts:
· Line chart
· Bar chart
· Candlestick chart: open, high, low, close are the ones forming candlestick charts. If opens low and close high then green or red. High and low are shadow and open and close are body.
Trend Analysis: 3 trend in market upper (purely bullish, liked by investors), downwards (purely bearish, liked by traders), sideward(settled market)
Believe in the market don’t try to go in the opposite way.
Series of higher top and higher bottom (uptrend definition), Lower top Lower bottom series (Down trend).
Line chart clearly gives trend analysis and after a big trend down or up the market is sideward or consolidates.
Daily chart is for short term, weekly chart is for medium term and monthly chart is for long term.
Concept of support and resistance:
Support - Support is price level at which demand is thought to be strong enough to prevent the price from declining further.
Resistance - It is the price level at which selling is thought to be strong enough to prevent the price from rising further.
How to find support and resistance on charts?
- Horizontal line (High/Low) main
- Moving averages
- Trend line
- Fibonacci Level
Lecture 7
What happens at upper circuit?
There are all buyers but no sellers so chances of buying the stock are very less.
Upper circuit: The topmost price beyond which the share cannot move up on single day. It is typically characterized by all buyers and no/very few sellers.
Lower circuit: The lowermost price below which the share cannot move down on single day. It is typically characterized by all sellers and no/very few buyers.
Circuit filter exceptions:
1. Will not apply if stock is also listed in futures and options segment.
2. If it is the first day of listing on secondary markets.
Note- Whenever a big economy crashes it affects all the other economy. Stable government always helps (when the exit polls (survey might be wrong) start coming up see the market).
Thumb rule when you are trading for short term during elections: At the time of Pre-Election result there is buzz in market if single party is coming up then the market is going up and up but uncertainty is there but as things get certain the market comes back to its normal position. So, whenever you are being on any event always enter and exit before the event becomes certain.
CAG - Controller and Auditor General of India.
CRA - Credit rating Agency
Prime category borrowers are the ones who get loan faster as they can repay back the loan.
Bail out - The government pays money instead of company and saves it.
Scenario 2: Entire market crashing or rising - Market is halted temporarily for 1 HR or more depending on the percentage (10% then 15% means another 5% rise and finally 20% means another 5% rise after which market is closed for the day).
Lecture 8
Market Capitalisation: Number of shares × Market price per share. Top market cap - reliance industries, TCS, HUL. It is the total market price of the company at a given point of time it is calculated as above.
Blue chip companies - Top companies by market capitalisation.
Concept of ring trading - In this a group of connected people increased the price of the share without any base and then when people finally realise it the share crashes. It happens mostly on small cap shares.
Block deal or bulk deal: A deal where large number of shares change hands.
Large cap - >10000cr
Mid cap - 500–10000cr
Small cap - <500cr
Blue-chip stocks fit under large cap category.
Types of orders based on quantity-
- All or none - sell or buy all at once or leave it.
- Mf: minimum fill order. Minimum number of shares that you can settle on after placing the order for greater number of shares.
- DQ: Disclosed quantity. Order which enables buyers or seller to disclose only a part of the total quantity ordered. Generally used by large investors.
Bid-ask spread: The difference between the sellers best selling price offer for shares and the buyers buying price offer for shares. Kind of bargaining difference. Difference between the best buying price and best-selling price.
Indices - Sensex (Sensitivity index) (BSE) 30 stocks, Nifty (National fifty) (NSE) 50 stocks.
Market indices are generally a representative figures and stock will be chosen from multiple sectors for getting that representative figure.
Lecture 9
Free float: The number of shares freely floating × market price per share.
Freely floating shares: Shares which excludes the shares held by promoters.
Free float market capitalisation: It is calculated as number of shares freely floating × market price of the share and it’s representative.
A promoter keeps shares with him for the power of decision-making or he believes in the growth of company.
If promoter reduces his stake it’s a very bad sign except if they are bringing their stake down to 75% because according to SEBI rules as they cannot hold more than 75%.
Pledging of shares: The way we mortgage house we can pledge shares to take loan.
Note: Promoter is taking loan by pledging his own shares then it’s the bad sign as it shows promoter has no other option to take loan from anywhere like bank, sell property, etc.
Siphoning of fund: take funds from company’s money and fill promoters’ pockets done by promoters.
Promoters pledging shares: Promoters take a loan against shares held by them. Check in shareholding tab of company in Money control.
Even investors can pledge shares to buy other shares.
Mahurat trading: takes place on Diwali in the evening, no brokerage applied, for 1 hour. Pre market session is also there.
Composition of nifty and Sensex is done on semi-annual basis that is every 6 months. Exchanged give an intimation 4 weeks in advance.
Composition decided by India Index Services and Products Limited (IISL) which is the group company of NSE.
Investors can buy Nifty and Sensex as it is a product of futures and options. Heavy investment need and it is very risky.
Sectoral indices - They track the movement of specific sector. Nifty owns 67 indices according to the sectors known as sectorial indices. Ex: Bank Nifty/ (Bankex - Sensex Sector Indices), Nifty IT, Nifty FMCG, etc.
Nifty 500 has 500 companies.
World indices:
NASDAQ - USA (opens after we close at 7 pm)
JAPAN - NIKKEI (important as opens first)
HONGKONG - HANGSENG (imp. as opens first)
GERMANY - DAX (1 pm open)
FRANCE - CAC (1 pm open)
If you want to buy nifty then you will have to buy 75 minimum units of nifty. You can only buy nifty in lots, multiples of 75 or minimum 75. We need to pay token money and need not pay whole money while buying nifty. Token money is 10% of the total amount also known as margin in money.
Lot size: It is the minimum number of shares or any financial instrument which can be bought or sold and in multiples thereof. Ex: lot size of nifty is 75.
To invest in IPO minimum amount will be near about 15000 and there is particular lot size.
Lecture 10
Markets are divided. Into two parts:
1. Money markets
2. Capital market
Capital markets are divided into two parts:
1. Primary markets
2. Secondary markets
Primary markets:
IPO — Initial Public Offer
FPO — Follow on public offer or Further public offer. When a listed company comes up with a fresh funding offer.
OFS - Offer for Sale - promoter sells his own shares
Company can generate money from own funds or loan fund.
Net worth - It is Assets minus External liabilities.
Book value or Intrinsic value: The value of net worth of company divided by number of shares.
Historical cost convention: When a company asset is more valued presently than the value of it while it started or is in the books.
Merchant Banker: Helps in entire IPO process. Individual cannot open account. It does High level banking functions like fund raising, Mergers and acquisitions, etc. It gives presentation to institutional investors to get the price at which the IPO can be published.
Book building issue IPO: The IPO after calculation of the price band which is given to investors to apply for shares. and
Prospectus: The offer document where in all major details of the company will be mentioned. In simple terms companies’ history and geography plus the aims and visions given. SEBI looks and permits the prospectus. Draft Red Herring Prospectus (DRHP) is step one which is the prospectus given to SEBI and if permitted then red herring prospectus.
IPO Advantages:
- Tap larger market for Capital.
- It fosters competitive process.
- It diversifies ownership.
- Better disclosures can be given.
An IPO must be subscribed more than 90% or the IPO is dropped. Underwriter (mostly an institution) comes in here to subscribe for difference between minimum and maximum number of shares and is paid commission for it.
An IPO gets listed at 10 in the morning on the listing day.
Invest only in limits so that it does not spoil your sleep and put you on risk.
Do not use others money to invest in the stock market.
ICRA - Industrial Credit Rating Agency.
Lottery system gives you the allotment of shares in IPO in India which is if the IPO is subscribed at n number of times then 1 out of n number of times is the chance of you getting the shares.
Minors dematerialised account can also be opened.
Lecture 11
Price band - A price range given to the investors by company in IPO. It has floor price and ceiling price. Example - price band for d-mart is 290–300.
Always invest in the ceiling price or upper band of the IPO because when DII/FII’s invest after getting the company’s true value or more investors invest on a same price, the price is then fixed by the company at that point. All the people who bid lower to that are not considered to be given shares and all the bidders above that price point are returned the extra amount they have invested. If the IPO is subscribed 100% or more this is possible.
There are two types of issues:
- Fixed price issue
- Book building issue
Price determination for IPO: Criteria 90% Minimum subscription.
Example:
In c2 in spite of maximum bids at 300 company will fix the price at 295 to fulfil the criteria of 90%.
Pune stock exchange is also there but it is not operational like many other cities stock exchanges.
Book running lead managers are nothing but merchant bankers they keep the records of the bids.
Registrar and share transfer agents (RTAs): They transfer the shares from the companies account to your dematerialised account. They are given in prospectus of companies getting listed. Ex: Link Intime, etc.
You can apply for IPO from ASBA (Application supported by blocked amounts). ASBA is a facility through which amount does not get debited but just gets frozen in saving account itself.
Banker to the issue: It is where we need to send all the money for IPO. It is done by an ESCROW Account which is made for particular purpose.
Chittorgarh.com to check about any IPO.
Basic things which you must see before investing:
- Top line growth
- Bottom line growth
- Objectives of the issue
- EBITDA - Earning before interest tax depreciation and amortization
- Revenue top line - Operating expenses = Operating profit which is earning before interest and tax. After deduction of interest and it becomes profit before tax.
If you have a problem understanding any point, write to me at purvilgadhiya@gmail.com
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