An Ultimate Guide To Stock Market For Beginners : Basics, Indices, Regulator, DP , Broker, Dividents

Investing in equities is an important investment that we make in order to generate inflation beating returns. Having said that, how do we go about investing in equities? Clearly before we dwell further into this topic, it is ex-tremely important to understand the ecosystem in which equities operate.

Shares Up and Down

What is Stock Market ?

Just like the way we go to the neighborhood kirana store or a super market to shop for our daily needs, similarly we go to the stock market to shop (read as transact) for equity investments. Stock market is where everyone who wants to transact in shares go to. Transact in simple terms means buying and selling. For all practical purposes, you can’t buy/sell shares of a public company like Infosys without transacting through the stock markets.

The main purpose of the stock market is to help you facilitate your transactions. So if you are a buyer of a share, the stock market helps you meet the seller and vice versa.

Now unlike a super market, the stock market does not exist in a brick and mortar form. It exists in electronic form. You access the market electronically from your computer and go about conducting your transactions (buying and selling of shares).

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Also, it is important to note that you can access the stock market via a registered intermediary called the stock broker. We will discuss more about the stock brokers at a later point.

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There are two main stock exchanges in India that make up the stock markets. They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Besides these two exchanges there are a bunch of other regional stock exchanges like Bangalore Stock Exchange, Madras Stock 

Exchange that are more or less getting phased out and don’t really play any meaningful role anymore.

Stock Market Participants and the need to regulate them:

The stock market attracts individuals and corporations from diverse backgrounds. Anyone who transacts in the stock market is called a market participant. The market participant can be classified into various categories. Some of the categories of market participants are as follows:

1.Domestic Retail Participants – These are people like you and me transacting in markets

2.NRI’s and OCI – These are people of Indian origin but based outside India

3.Domestic Institutions – These are large corporate entities based in India. Classic example would be the LIC of India.

4.Domestic Asset Management Companies (AMC) – Typical participants in this category would be the mutual fund companies such as SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC etc.

5.Foreign Institutional Investors – Non Indian corporate entities. These could be foreign asset management companies, hedge funds and other investors

Now, irrespective of the category of market participant the agenda for everyone is the same – to make profitable transactions. More bluntly put – to make money.

The Regulator

In India the stock market regulator is called The Securities and Exchange board of India ofen referred to as SEBI. The objective of SEBI is to promote the development of stock exchanges, protect the interest of retail investors, regulate the activities of market participants and financial intermediaries. 

Securities & Exchange Board of India, SEBI

In general SEBI ensures…

1.The stock exchanges (BSE and NSE) conducts its business fairly

2.Stock brokers and sub brokers conduct their business fairly

3.Participants don’t get involved in unfair practices

4.Corporate’s don’t use the markets to unduly benefit themselves (Example-Satyam Computers)

5.Small retail investors interest are protected

6. Large investors with huge cash pile should not manipulate the markets

7.Overall development of markets

SEBI has prescribed a set of rules and regulation to each one of these entities. The entity should operate within the legal framework as prescribed by SEBI. The specific rules applicable to a specific entity are made available by SEBI on their website. They are published under the ‘Legal Framework’ section of their site.

The stock broker

The stock broker is probably one of the most important financial intermediaries that you need to know. A stock broker is a corporate entity, registered as a trading member with the stock exchange and holds a stock broking license. They operate under the guidelines prescribed by 

SEBI.

A stock broker is your gateway to stock exchanges. To begin with, you need to open something called as a ‘Trading Account’ with a broker who meets your requirement. Your requirement could be as simple as the proximity between the broker’s office and your house. At the same time it can be as complicated as identifying a broker who can provide you a single platform using which you can transact across multiple exchanges across the world. 

A trading account lets you carry financial transactions in the market. A trading account is an account with the broker which lets the investor to buy/sell securities.

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Depository and Depository Participants :

When you buy a property the only way to identify and claim that you actually own the property is by producing the property papers. Hence it becomes extremely important to store the property papers in a safe and secure place.

Likewise when you buy a share (a share represents a part ownership in a company) the only way to claim your ownership is by producing your share certificate. A share certificate is nothing but a piece of document entitling you as the owner of the shares in a company.

Before 1996 the share certificate was in paper format however post 1996, the share certificates were converted to digital form. The process of converting paper format share certificate into digital format share certificate is called “Dematerialization” ofen abbreviated as DEMAT.

The share certificate in DEMAT format has to be stored digitally. The storage place for the digital share certificate is the ‘DEMAT Account’. A Depository is a financial intermediary which offers the service of Demat account. A DEMAT account in your name will have all the shares in electronic format you have bought. Think of DEMAT account as a digital vault for your shares.

As you may have guessed, the trading account from your broker and the DEMAT account from the Depository are interlinked.

So for example if your idea is to buy Infosys shares then all you need to do is open your trading account, look for the prices of Infosys and buy it. Once the transaction is complete, the role of your trading account is done. Afer you buy, the shares of Infosys will automatically come and sit in your DEMAT account. At present there are only two depositaries offering you DEMAT account services. They are The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited. 

There is virtually no difference between the two and both of them operate under strict SEBI regulations.

Just like the way you cannot walk into National Stock Exchange’s office to open a trading account, you cannot walk into a Depository to open a DEMAT account. To open a DEMAT account you need to liaison with a Depository Participant (DP). A DP helps you set up your DEMAT account 

with a Depository. A DP acts as an agent to the Depository. Needless to say, even the DP is governed by the regulations laid out by the SEBI.

What is IPO ?

An IPO is a sale of shares to the public by a private company for the first time. Investing in an IPO has become very simple with the emergence of online bidding, and a complimentary rise of online payment solutions. Investing in IPOs can be very profitable if you make sound choices based on analysis of the company’s prospects. This article is a guide on how you can invest in an IPO.

The Index

Luckily you need not actually track these selected companies individually to get a sense of how the markets are doing. The important companies are pre packaged, and continuously monitored to give you this information. This pre packaged market information tool is called the ‘Market Index’.

There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange and CNX Nify representing the National Stock exchange.

S&P stands for Standard and Poor’s, a global credit rating agency. S&P has the technical expertise in constructing the index which they have licensed to the BSE. Hence the index also carries the 

S&P tag.

What Are The Practical uses of the Index :

Some of the practical uses of Index are discussed below .

Information – The index reflects the general market trend for a period of time. The index is a broad representation of the country’s state of economy. A stock market 

index that is up indicates people are optimistic about the future.

Benchmarking – For all the trading or investing activity that one does, a yardstick 

to measure the performance is required. Assume over the last 1 year you invested 

Rs.100,000/- and generated Rs.20,000 return to make your total corpus Rs.120,000/- . How do you think you performed? Well on the face of it, a 20% return looks great. However what if during the same year Nify moved to 7,800 points from 6,000 points generating a return on 30%? Well suddenly it may seem to you, that you have underperformed the market! If not for the Index you can’t really figure out how you performed in the stock market. You need the index to benchmark the performance of a trader or investor. Usually the objective of market participants is to outperform the Index.

Trading - Trading on the index is probably one of most popular uses of the index. Ma-

jority of the traders in the market trade the index. They take a broader call on the 

economy or general state of affairs, and translate that into a trade. For example imagine this situation. At 10:30 AM the Finance Minister is expected to deliver his budget speech. An hour before the announcement Nify index is at 6,600 points. You expect the budget to be favorable to the nation’s economy. What do you think will happen to the index? Naturally the index will move up. So in order to trade your point of view, you may want to buy the index at 6,600. Afer all, the index is the representation of the broader economy.

Portfolio Hedging – Investors usually build a portfolio of securities. A typical portfo-

lio contains 10 – 12 stocks which they would have bought from a long term perspective. While the stocks are held from a long term perspective they could foresee a prolonged adverse movement in the market (2008) which could potentially erode the 

capital in the portfolio. In such a situation, investors can use the index to hedge the portfolio. We will explore this topic in the risk management module.

Commonly used terms :

Bull Market (Bullish) – If you believe that the stock prices are likely to go up then you are said to be bullish on the stock price. From a broader perspective, if the stock market index is going up during a particular time period, then it is referred to as the bull market.

Bear Market (Bearish) – If you believe that the stock prices are likely to go down then you are said to be bearish on the stock price. From a broader perspective, if the stock market index is going down during a particular time period, then it is referred to as the bear market.

Trend - A term ‘trend’ usually refers to the general market direction, and its associated 

strength. For example, if the market is declining fast, the trend is said to be bearish. If the market is trading flat with no movement then the trend is said to be sideways.

Read this ultimate guide to stock market for beginners. This covers many topics of share market which are very important for beginners. Those who want to learn basics of share market, this article will be hellpful.#StockMarket #stocks #sharemarket https://t.co/lUZRDU9g4v

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Face value of a stock – Face value (FV) or par value of a stock indicates the fixed denomination of a share. The face value is important with regard to corporate action. Usually when dividends and stock split are announced they are issued keeping the face value in perspective. For example the FV of Infosys is 5, and if they announce an annual dividend of Rs.63 that means the divi-

dend yield is 1260%s (63 divided by 5).

What Are Dividends?

Dividends are paid by the company to its shareholders. Dividends are paid to 

distribute the profits made by the company during the year. Dividends are paid on a per share basis. For example, during the financial year 2012-13 Infosys had declared a dividend of Rs.42 per share. The dividend paid is also expressed as a percentage of the face value. In the above case, the face value of  Infosys was Rs.5/- and the dividend paid was Rs.42/- hence the dividend payout is said to be 840% (42/5).

It is not mandatory to pay out the dividends every year. If the company feels that instead of paying dividends to shareholders they are better off utilizing the same cash to fund new project for a better future, then can do so.

Besides, the dividends need not be paid from the profits alone. If the company has made a loss during the year but it does hold a healthy cash reserve, then the company can still pay dividends from its cash reserves.

Sometimes distributing the dividends may be the best way forward for the company. When the growth opportunities for the company have exhausted and the company holds excess cash, it would make sense for the company to reward its shareholders thereby repaying the trust the 

shareholders hold in the company.

The decision to pay dividend is taken in the Annual General Meeting (AGM) during which the directors of the company meet. The dividends are not paid right afer the announcement. This is because the shares are traded throughout the year and it would be difficult to identify who gets the 

dividend and who doesn’t. 

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