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Basics of Broking

By : Kaushal Mandalia
Associate Financial Planner
M LEARNING
S Made Simple Kaushal@thefinancialplanners.in
What is Equity Market

Share = Share
Equity Market Share Market
In Business

Profit is divided Business earns


Among shareholders PROFIT

Profit =
Earning Per Share Equity Represents Portion of BUSINESS
(PROFIT) which is GROWING

M LEARNING Kaushal@thefinancialplanners.in
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How to EARN From Equity Market

Equity RETURNS =
Price GAP (Capital Earnings) + Dividend

Selling Price Less Buying Price Share in Profit

Advise Based Broking…. Pick fundamentally strong


Minimize Loss, Maximize Gains Company based on Advise

If you Believe that Corporate Profits will grow


Rest is IRRELAVENT…. M LEARNING
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Traditional Business V/s Equity Market

Traditional Business Equity Market


• Bottom-line = Profit • Bottom-Line = Profit
• Time, Energy and Money Needed
• Only Money Required. No
requirement of Time and Energy
• Large Capital Required
• Small Capital Required
• Exit Route is Long and difficult
• Shortest Possible Exit Route
• Control on daily operation
• No Control Required. Best of the
required
Best Brains are doing that for
you.
M LEARNING Kaushal@thefinancialplanners.in
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Bottom Line of Investment…
Earning Savings

Fixed Deposit Equity Market


in Bank @ 10%

Bank lends this money to


Businessman and earned
15% Interest Whether you invest in
Debt Market or Equity
Market, Money flows
to Business Sector
only.
Money Finally Invested in
Business M LEARNING
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Equity Market – Classification

Exit Route

M LEARNING Entry Route


S Made Simple
Who is Broker?

• Broker is an intermediary who facilitates Entry or


Exit into Equity Market

• They levy fees on Transactions (Buy or Sell)


which is called Brokerage.

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What is Stock Exchange

• A Place where one can trade his/her Shares. It’s a formal or


Organized BAZAAR.

• Two Main Stock Exchanges


• Bombay Stock Exchange (BSE)

• National Stock Exchange (NSE)

• National Stock Exchange is the World’s Third Largest Stock


Exchange in terms of Number of Trades after NASDAQ and NYSE

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Electronic Trading

• Eliminates the need of physical trading floors

• Fully Automated. One can trade from anywhere.

• Workstations are connected to stock exchange’s central


computer via VSAT (Very Small Aperture Terminus)

• The orders placed by brokers reach exchange’s central computer


and matched electronically.

• Completely Hassle FREE.

M LEARNING Kaushal@thefinancialplanners.in
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What is INDEX?

• Weighted Average of Selected Stock Price.

• Measure of Market Trends.

• Comprises stocks that have large liquidity and market


capitalization.

• Two Main Index


• BSE’s Sensex and NSE’s NIFTY

• Other Examples
• BSE Midcap, BSE Small Cap etc,
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Kaushal@thefinancialplanners.in S Made Simple
ORDER Execution
• Select a broker and enter into broker client agreement and fill client
registration form.

• Get a trade confirmation through phone and ask for the contract note on the
end of the day.

• Contract note describes the rate, date, time at which the trade is transacted
and brokerage rate.

• Contract Note establishes a legally enforceable relationship between the


client and the member.

• Client must receive contract note within 24 hours of trade execution.

M LEARNING Kaushal@thefinancialplanners.in
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IMPORTANT TERMS

M LEARNING Kaushal@thefinancialplanners.in
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Book Closure / Record Date

• When shares of a joint stock company invariably change hands during


trading, identifying owner of share becomes difficult.

• So when a company declares dividend (Share in Profits) there has to be


a cut off date for such benefits to be transferred to the share holders.
This date is termed as “Book Closure Date” or “Record Date”.

• It is the date after which company will not handle any transfer of
shares request until the benefits are transferred.

Analogy :For E.g. a company policy says, Candidate joining before 15th Sept of the year are
qualified for Performance Appraisal to be conducted at the end of Financial Year.

Kaushal@thefinancialplanners.in
Book Closure Announcement

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Source : Moneycontrol as on 31st October 2008 S Made Simple
No Delivery Period, Ex Dividend Date, Ex Date

• No Delivery Period
• Once company declares record date, Exchange set up No Delivery Period – A time
during which only trading is permitted and all trades are settled after the period
gets over.

• Ex Dividend Date
• The date on or after which a security begins trading without the dividend included
in the contract price.

• Ex Date
• The first date of the No Delivery Period.

• The buyers of the shares on or after Ex Date will not get any
M LEARNING
benefits of Dividend or Bonus. S Made Simple
Buy Back

• A process by which a company buys back its shares.


• No of ways in which company can buy back
• From existing Shareholders on proportionate basis
• Thro’ tender offer from open market
• Thro’ Book Building Process
• From Stock exchange or
• From ODD lot holders.(Odd lot is any transaction less than 100 shares are
generally called Odd Lots)
• A Company can not buy back thro’ negotiated deals on or off
stock exchange, through spot transaction or thro’ any private
arrangement, clearing and settlements.

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Pay in and Pay Out

Pay In Date Pay In Date

Funds made available


Securities transferred to Exchange
to Exchange

Buyer
Seller

Securities Transferred
Funds transferred to Buyer
to Seller

Pay Out Date


Pay Out Date
Stock Exchange
Short Selling

• A Legal Trading Strategy.

• Normal Process : First Buy and then Sale


• Assumption : Price will go up in near future.

• Short Selling : First Sell and then Buy.


• Assumption : Price will go down in near future.

M LEARNING Kaushal@thefinancialplanners.in
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Auction
• Auction is conducted for those securities that members fall to deliver / short
deliver during pay-in
• There are three factors which give rise to auction
• Short Deliveries
• Un-rectified Bad Deliveries
• Un-rectified company obligations
• The buy / sell auction for a capital market is managed thro’ auction market
• If the shares are not bought at auction, i.e. if the shares are not offered for
sale, exchange squares up the transaction as per SEBI guidelines. Square-up
happens at the highest price from the relevant trading period till the auction
day or at 20% above the last available closing price whichever is higher.

Kaushal@thefinancialplanners.in
Fundamental Analysis

• Analysis of Historical Data.


• Analyzing factual information like
• Financial Statement
• Management and Competitive Advantage
• Industry Current Scenario and Future Outlook
• Finding out Intrinsic (True) Value of Stock and analyze
whether stock is overpriced or underpriced.
• Perfect Blend of Macro and Micro Analysis.
• Recommended For Long Term Investment. M LEARNING
S Made Simple
Technical Analysis

• In stock market, share price is fluctuating and resulting


in a TREND.

• This TREND is predictable in NEAR FUTURE (If showing


any pre-determined pattern)

• The analysis of Price Trend is called Technical Analysis.

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Example – Technical Analysis

Source : Angel Technical Analysis research as on 30th October 2008

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Key Ratios

• PE ratio

• Market Value to Book Value Ratio

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PE Ratio
Reliance Industries Ltd
• PE ratio = Price per Share /
Earning per Share

• In other words, it indicates how


much money you need to
invest to get one rupee earning
per share.

• Lower the ratio better the


investment proposition.
Kaushal@thefinancialplanners.in
Lowest PE Ratio Scripts

Company Name Last Price EPS PE Ratio


(Rs) (Rs)
Southern Gas Lt 231.45 1090.22 0.21
Singer India 5.76 16.66 0.35
Bombay Oxygen 5371.55 10759 0.50
IFB Industries 20.05 24.29 0.83
Amtek India 34.90 30.92 1.13
CEAT 39.70 32.41 1.22

Source : Moneycontrol as on 31st October 2008

M LEARNING Kaushal@thefinancialplanners.in
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Highest PE Ratio

Company Name Last Price EPS PE Ratio


(Rs) (Rs)
KGN Industries 1573.75 0.74 2126
TCI Industries 1180.30 1.41 837.09
UTV Software 474.90 1.41 336.81
Fortis Health 59.60 0.20 298
IndiaNivesh 631.55 4.82 131.03
Reliance Natural 43.55 0.43 101.28

Source : Moneycontrol as on 31st October 2008

M LEARNING Kaushal@thefinancialplanners.in
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Price to Book Value

• This ratio is used to find whether stock is undervalued


or overvalued.

• Ratio = Price of Share / Book Value of Share

• Book Value = Net Worth.

• If ratio <1, Its undervalued, if Ratio is > 1, its


overvalued.

M LEARNING Kaushal@thefinancialplanners.in
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Most Undervalued Stocks

Company Name Last Price Book Value PBV Ratio


(Rs) (Rs)
MTNL 65.70 189.23 0.35
Allahbad Bank 48.70 117.47 0.41
Parshvnath 40.55 97.81 0.41
Bajaj Hind 45.25 101.43 0.45
Essar Shipping 33.50 72.08 0.46
Videocon Ind 120 243.14 0.49

Source : Moneycontrol as on 31st October 2008

M LEARNING Kaushal@thefinancialplanners.in
S Made Simple
Most Overvalued Stocks

Company Name Last Price Book Value PBV Ratio


(Rs) (Rs)
Asian Paints 956.75 96.80 9.88
Divis Lab 1096.65 135.03 8.12
ABB 535.65 76.06 7.04
NMDC 143.83 20.91 6.88
Glenmark 282.15 41.10 6.87
GlexoSmithKline 1070.35 160.67 6.66

Source : Moneycontrol as on 31st October 2008

M LEARNING Kaushal@thefinancialplanners.in
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Demat - Meaning

• Demat is an abbreviation of Dematerialization which is a process


whereby securities like shares, debentures are converted from
physical form to electronic form.

• There are two depository participants


• NSDL and CDSL

• The Depository provides its services to investors through its


agents called Depository Participants (DP’s).

M LEARNING Kaushal@thefinancialplanners.in
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Arbitrage

• Its an act of buying securities in One Market and


Selling in Another Market at Higher Price.

• It takes advantage of a price differential existing


in the prices of the same commodity or security
in two or more different markets.

M LEARNING Kaushal@thefinancialplanners.in
S Made Simple
IPO and Book Building

 An IPO is an abbreviation for initial public offer. Its applicable


when any company issues shares for the first time to Retail
Investors and Financial Institutions.

 Book Building process


 A Process of Price Discovery thro Bids from Retail Investors and Financial
Institutions

 Only Price Range is Provided. Allotment price is decided once book is


closed.

M LEARNING Kaushal@thefinancialplanners.in
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Learning..

Kaushal@thefinancialplanners.in
INVESTOR’S PSYCHOLOGY

M LEARNING Kaushal@thefinancialplanners.in
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A Small Complication

• Equities are unique assets that investors feel

more comfortable buying at higher price and

selling at lower price.

M LEARNING Kaushal@thefinancialplanners.in
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Investor psyche - wrong emotion dominates at the
wrong time

M LEARNING Kaushal@thefinancialplanners.in
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When everyone is GREEDY you should be
FEARFUL and when Everyone is FEARFUL You
should be GREEDY
WARREN BUFFET

M LEARNING Kaushal@thefinancialplanners.in
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Sentiments V/s Business Efficiency..
Long Term Earnings..

M LEARNING Kaushal@thefinancialplanners.in
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Important Parameters for Investing in Equity Market

• Set your Objective


• Long Term or Short Term,
• Dividend Earning or Taking advantage of Short Term Fluctuation
• Diversify
• Diversify among sectors and companies. Select 10 Different Stocks
• Always Minimize Risk
• Use STOP LOSS as feature to minimize losses
• Avoid TIPS
• Check Fundamentals and Technical
• Check Key Ratios
• Price to Book Value
• PE Ratio Kaushal@thefinancialplanners.in M LEARNING
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Landmark Study by Hood and Bee bower

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Thank You.

M LEARNING
S Made Simple Visit : www.finance-sapm.blogspot.com