first step to investing in the

share
market
W
hy should I put my hard earned money into shares
when I am not sure of a return? If there’s a science to
investing then why do we call investing a risk? And if
it’s not a risk, then why do people end up losing money from their
investments in shares? In this booklet we have tried to answer the
questions you might have about investing in shares. When is invest-
ing in shares a risk and when does it become a science? How can
you be assured that your investment in shares is safe? And more…

More importantly, we’ve tried to explain some basic concepts that

most investors take for granted but that are crucial knowledge for
a person just entering into the financial jungle. So concepts like risk
premium, dividend, stock split etc have been explained in a simple
manner for the benefit of the first-timers. Not only that this handy
booklet also seeks to educate the would-be investors in the various
aspects of share trading, both offline and online.

We hope the booklet shall succeed in satisfying your desire for

knowledge of the share market as well as in lending you a helping
hand as you take your FIRST STEP into the world of investing.

Tarun Shah
CEO—Sharekhan

1
5 CONTENTS
1: Why must I invest in shares?
v Invest to create wealth
v Shares—the best investment option
v Benefits of share investing are many

9
2: How do I buy and sell shares?
v Invest through primary and secondary markets
v A beginner's guide to the stock market
v Placing an order to buy and sell shares
21

3: How do I select the right shares?

v Science of investing in shares
v Components of fundamental research
v Learning to judge an IPO

29

4: How can I minimise risks and maximise returns?

v Types of risk involved in investing in shares
v Reducing risk
v Become a successful investor

37
5: How can I benefit from online trading?
v Using your computer to trade
v Trading online is convenient
v Benefits of trading on sharekhan.com

PLUS 8 pages of trading jargon

3
 First Step to Investing
in the Share Market

Why must
I invest
This booklet is distributed as part of the Sharekhan First Step to Investing Program.
It is meant for private circulation ONLY and is not for sale.
in shares?
IN THIS CHAPTER:
v Invest to create wealth
First Step to Investing in the Share Market is meant to introduce new investors to the
v Shares—the best investment option
stock market. It is not intended to be taken as the basis for an investment decision!
v Benefits of share investing are many

4 1. Why must I invest in shares? 5

 First Step to Investing
in the Share Market
Why need I invest?
The basic question “Why need I
invest?” merits attention before we
move on to the bigger question of
why one should invest in shares.
Simply put, you want to invest in
order to create wealth. While
investing is relatively painless, its
rewards are plentiful. To under-
stand why you need to invest, you
need to realise that you lose when
you just save and do not invest.
That is because the value of the
rupee decreases every year due to
inflation. For example, if you ran a
household within a budget of
Rs100,000 in 2000, to run the same
household today (assuming the
same set of expenses) you would
probably need Rs125,000--that's
Rs25,000 added to your budget
because of inflation! Thus you need
to generate an additional Rs25,000
and that can be possible only by
INFLATION: gen-
eral rise in prices
and
caused by an
wages
increase in the
money supply
and demand for
goods, and
resulting in a fall
in the value of
money. Inflation occurs when most prices
rise by some degree across the economy.
6 1. Why must I invest in shares?
INVESTING your hard-earned
money.
So what are the various invest-
ment options?
One can invest in various financial
instruments like equities (popularly
referred to as shares), bank fixed
deposits, National Savings
Certificates etc as well as in gold,
real estate et al. Out of these shares
are the best option for individual
investors.
Why shares?
Historically shares have outper-
formed all the other investment
instruments and given the maxi-
mum returns in the long run (see the
table on page 7). In the twenty-five-
year period of 1980-2005 while the
other instruments have barely man-
aged to generate returns at a rate
higher than the inflation rate
(7.10%), on an average shares have
given returns of about 17% in a year
and that does not even take into
account the dividend income from
them. Were we to factor in the divi-
dend income as well, the shares
would have given even higher
returns during the same period.
Are there any other benefits of
investing in shares?
Dividend income: investments in
shares are attractive as much for the RETURNS ON DIFFERENT
appreciation in the share prices as for TYPES OF INVESTMENT
the dividends their companies pay out.
BETWEEN
Tax advantages: shares appear as 1980 AND 2005
the best investment option if you
also consider the unbeatable tax Stock Market
benefits that they offer. First, the
dividend income is tax-free in the
hands of investors. Second, you are
required to pay only a 10% short-
17% p.a
term capital gains tax on the profits
made from investments in shares, if Bank Fixed Deposits
you book your profits within a year
of making the purchase. Third, you
don't need to pay any long-term
capital gains tax on the profits if
9% p.a
you sell the shares after holding
them for a period of one year. The Gold
capital gains tax rate is much high-
er for other investment instruments:
a 30% short-term capital gains tax
(assuming that you fall in the 30%
5.7% p.a
tax bracket) and a 10% long-term
capital gains tax.
During this time
Easy liquidity: shares can also be Inflation grew at
made liquid anytime from anywhere *
(on sharekhan.com you can sell a
share at the click of a mouse from
anywhere in the world) and the
7.1% p.a * From 1982 to 2005
gains can be realised in just two
working days. Source: Data compiled from the RBI
handbook of Statistics, NCDEX
Considering the high returns, the Disclaimer: Investments in equity related securi-
tax advantages and the highly liquid ties involves a high degree of risk. Please read the
Risk Disclosure Document as prescribed by Sebi
nature, shares are the best invest- before investing.
ment option to create wealth.
1. Why must I invest in shares? 7
 First Step to Investing
in the Share Market

OPENING AN ACCOUNT WITH SHAREKHAN

Shares are the best investment option for individual investors

due to the following benefits:
How do I buy and sell
shares?
1) Possibility of high returns
2) Easy liquidity
3) Unbeatable tax benefits
4) Income from dividends

IN THIS CHAPTER:
v Invest through primary and secondary markets
v A beginner's guide to the stock market
v Placing an order to buy/sell shares

8 1. Why must I invest in shares? 2. How do I buy and sell shares? 9

 First Step to Investing
in the Share Market

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKETS

In the primary market securities are issued to the public and the proceeds go to the
What are the different ways in 2) Trade in the secondary market, ie issuing company. Secondary market is a term used for stock exchanges, where
which I can invest in shares? stock exchanges stocks are bought and sold after they are issued to the public.
There are basically two ways in Once the offer price is fixed and
which you can invest in shares: the shares are issued to the people,
stock exchanges facilitate the trad-
1) Purchase shares from the primary ing of shares for the general public.
market (ie IPOs) Once a stock is listed on an
The first time that a company’s exchange, people can start trading
shares are issued to the public, it is in its shares. In a stock exchange the
by a process called the initial public existing shareholders sell their
offering (IPO). In an IPO the com- shares to anyone who is willing to
pany offloads a certain percentage buy them at a price agreeable to
of its total shares to the public at a both parties. Individuals cannot buy
certain price. or sell shares in a stock exchange
Most IPOs these days do not directly, they have to execute their
have a fixed offer price. Instead they transactions through authorised
follow a method called the book- members of the stock exchange who
building process, where the offer are also called stock brokers.
price is placed in a band or a range
with the highest and the low-
est value (refer to the newspa-
per clipping on this page).
The public can bid for the
shares at any price in the
band specified. Once the bids
come in, the company evalu-
ates all the bids and decides
on an offer price in that
range. After the offer price is
fixed, the company either
allots its shares to the people
who had applied for its
shares or returns them their
money.
Every IPO highlights the price band as part of the
book-building process

10 2. How do I buy and sell shares? 2. How do I buy and sell shares? 11
 First Step to Investing
in the Share Market
How does the stock market
function?
In order to understand how the
stock market operates, you should
have knowledge about the role of
following institutions / organistions:
a. Stock exchanges,
b. Brokers,
c. Registrars,
d. Depository exchanges and their
participants, and
e. Securities and Exchange Board of
India (Sebi)
a. Stock exchanges
A stock exchange is the marketplace
where companies are listed and
where the trading happens. There
are different stock exchanges in the
country, the pre-dominant being the
National Stock Exchange (NSE)
and the Bombay Stock Exchange
(BSE).
b. Brokers
A stock exchange functions through
its members called brokers. If you
want to buy or sell a share, you con-
tact a broker. Each stock exchange
has a limited set of brokers and
these brokers contact each other
using trading terminals to find out
who is interested in the share you
want to buy or sell. Brokers have
12 2. How do I buy and sell shares?
terminals linked to the BSE or the
NSE and they directly purchase or
sell shares using these terminals.
The entire transaction happens elec-
tronically or through websites like
www.sharekhan.com.
Some brokers also authorise a
sub-broker to conduct the transac-
tions on behalf of them.
Since brokers are providing a
service they charge you for the
same. This payment is not a flat
rate, but a commission of the trans-
action value. Brokerages normally
range from 0.5% to 1% for deliv-
ery-based transactions and from
0.10% to 0.25% for intra-day
BROKERAGE RATES ON
SHAREKHAN.COM
0.5 %
for delivery-based
transactions
0.1 %
for intra-day
transactions
transactions.
c. Registrars
The registrar for each company
maintains records of all the share-
owners of the company and the
number of shares that they own.
Whenever a transaction takes place,
the registrar updates the sharehold-
ers database.
d. Depository exchanges and their
participants
Depository exchanges are organisa-
tions that hold shares of investors,
on request, in electronic form
through a registered depository par-
ticipant (DP). It can be compared
with a bank as it holds securities in
an account, transfers securities
between accounts on the instruction
of the account holder, facilitates the
transfer of ownership without the
account holder needing to handle
securities and makes the safekeep-
ing of shares easy.
The agent through which a
depository exchange interfaces with
the investor is known as a deposito-
ry participant.
You can create a demat account
with a DP, who will keep an
account of all the shares you own.
This is much like the banking sys-
tem, where you just create an
account and have a passbook which
PRIMER
NSDL/CDSL: the National Securities
Depository Ltd (NSDL) and the Central
Depository Securities Ltd (CDSL) are like
the Reserve Bank of India in the sense that
they are the clearing and holding house for
all the demat transactions.
DP: depository participants are like banks
in that they are agents of NSDL or CDSL in
providing depository services.
updates you on the money you own
and the transactions you have
made. In your demat account you
own shares in an electronic format
and your account gets updated as
you buy and sell shares.
e. Sebi
The regulatory body that governs
all stock market transactions is the
Securities and Exchange Board of
India. Sebi ensures the legality of all
transactions and that the stock
exchange players follow all the rules
and regulations set by it and/or the
government.
Sebi also looks into investor
complaints against companies. It is
quasi-judicial and can try cases and
pass judgments against companies.
It also looks into mergers and
acquisitions of companies.
Sebi has enacted the Prohibition
of Insider Trading Regulations,
2002 which is applicable to all mar-
2. How do I buy and sell shares? 13
 First Step to Investing
in the Share Market

ket intermediaries. SSKI Investor
Services (the parent company of
Sharekhan) complies and follows
the prescribed procedures in order
to prevent the misuse of price sensi-
tive information, which an employ-
ee/director/officer of the company
may have access to.
You can, for example, walk into
any of our 250 share shops across
120 cities in India and get your
orders executed.
You can, on the other hand, even
trade online through our site
sharekhan.com. For advanced
traders we also have a
you want to sell them. If you don't
specify the price, the shares will be
sold at the prevailing market price.
Do I know whom I am buying
from?
When you buy a share, you are basi-
cally placing an order through your
ment which ensures that the shares
you bought come into your account
and the person who sold them to
you (through his broker of course)
has that number of shares removed
from his demat account. This
process of settlement is called a set-
tlement cycle and the time taken for

“
special online trading broker. this is currently T+2 days. That is,
What all do I need Only buy software called The stock exchange keeps a note the settlement will occur two days
before I can start SpeedTrade. of these transactions and at the end after you make the trade.
investing in shares? something You can also call on of the day starts a process of settle- If you have an online trading
To start investing in that you’d our Dial-n-Trade
shares you need to
be perfectly number, which is DYNAMICS OF THE SHARE MARKET
open a stock-broking
account with a regis-
tered broker and a
demat account with a
DP.
When you open a
“
happy to
hold if the
market shut
down for 10
serviced by a dedicat-
ed call centre, and
place an order with a
Dial-n-Trade execu-
tive.
When you buy a
Investors buy and sell shares through a stock exchange.

Sharekhan FirstStep share, you specify the

account, you get every- years. company whose
thing you need to start Warren Buffet, shares you want to
investing in shares. Investment Guru buy, the quantity of
Sharekhan is a regis- shares you want to
tered broker with both the BSE and buy and the price at which you want
the NSE, and being a DP it also pro- to buy them. If you don't specify the
vides you a free demat account price, the shares will be bought at
along with your trading account. the market rate prevalent at that
time.
A fixed process is followed for easy transfer of money and shares.
How do I actually place an The process of selling a share is
It is termed as a settlement cycle of “T+2” or “Trade + 2 days”, which means that
order to buy or sell shares? similar to the process of buying a
To facilitate the buying and selling share. Again here you have to spec- if you buy shares on Monday then you get delivery of the shares after two work-
of shares, Sharekhan offers multiple ify the company, the number of ing days, ie on Wednesday. Similarly if you sell shares on Monday then you will
trading channels. shares to sell and the price at which receive your money on Wednesday.

14 2. How do I buy and sell shares? 2. How do I buy and sell shares? 15
 First Step to Investing
in the Share Market
account and a demat account with
Sharekhan then this settlement
process happens as a paperless
transaction.
How can I know the current
price of any stock?
Whenever you are buying or selling
a share, you will encounter certain
terms related to share prices. These
terms deal with the individual price
movements of a single share as well
as the price movements of all the
shares. For every share, typically
there are four price parameters.
1. Open: this is the price at which
the share opened on a particular
day, that is the price at which the
first purchase of the share was
made during that day.
2. High: this is the highest price
that a share went up to on a given
day, or the highest price the
investors paid for that share.
3. Low: this refers to the lowest
price that a share fell to during a
day, or the lowest price an investor
paid for that share.
4. Close: this is the price at which
the share closed on that day or the
price for the last trade of that day.
16 2. How do I buy and sell shares?
PRIMER
SENSEX: this is the common name for the
Bombay Stock Exchange Sensitive Index.
It consists of the 30 largest and most
actively traded stocks, representative of
various sectors, on the Bombay Stock
Exchange.
NIFTY: NIFTY is the common name for the
index consisting of 50 large capitalisation
stocks on the Indian National Stock
Exchange (NSE).
At any given point of time, the
share price will fluctuate between
the highs and the lows, sometimes
reaching new highs, sometimes
falling to new lows.
When trading in shares, you
need to mention the price point at
which you want to buy or sell. To
specify the price point, it helps if
you know the statistics or the trends
of your stock, and the stock's open- Nifty or the S&P CNX Nifty, which
ing and closing prices of the previ- measures the movement of the NSE.
ous days. This index tracks 50 stocks, which
You can also trade in shares represent about 60% of the market
without specifying the price—this is capitalisation of the NSE.
known as a market order. In this The upward or downward
case the trade happens at the mar- movement of the Sensex or Nifty is
ket price at that point of time. a typical indication of whether the
share prices are going up or down in
How can I track the stock mar- general.
ket? If the Sensex goes up on a partic-
The BSE Sensex (Bombay Stock ular day, it doesn't mean that the
Exchange Sensitive Index) measures share prices of all companies would
the movement of 30 most actively have gone up on that day. Tracking
traded shares on the BSE. These 30 the movement of stock indices over
companies represent a cross-section a longer period is an important part
of sectors of the economy. of intelligent investing.
Similar to the BSE Sensex is the
PRIMER
Face value: this is the nominal value that is assigned to a share at the time of issue. It is used
in determining the dividend to be given to the shareholders. Apart from its use in determining
dividend, face value has lost its relevance in the modern day and has no link with the market
price.
Offer price: the price at which a company sells its shares to the people.
Market price: the price at which a share is traded on stock exchanges daily and which gov-
erns our investment value.
Dividend: the face value of a share determines the dividend or the sharing of the company’s
annual profits with its shareholders.
EXAMPLE OF DIFFERENT TYPES OF SHARE PRICES
Stock Face value Price band Offer price Listing market
price
UTV Software Comm Ltd Rs10 Rs115 to Rs130 Rs130 Rs150
Jet Airways (India) Ltd Rs10 Rs950 to Rs1,125 Rs1,100 Rs1,155
Tata Consultancy Services Ltd. Rs1 Rs775 to Rs900 Rs850 Rs1,199
Biocon Ltd. Rs5 Rs270 to Rs315 Rs315 Rs425
2. How do I buy and sell shares? 17
 First Step to Investing
in the Share Market

How do I earn from my invest- shares, you could earn quite a bit
ment in shares? from the dividend itself. The best
Shares can give you returns in two thing about dividends is that they
forms. are tax-free in the hands of
a. Appreciation in share prices investors. Dividend yield stocks are
You buy shares with the belief that known to give returns higher than
their price will increase and that fixed deposits [dividend yield = (div-
when this happens you will be able idend per share / market price of the
to sell off your shares and earn share) x 100].
profit. For example, if you bought a Sharekhan informs its customers
share for Rs100 three years ago and of good dividend yield stocks from
it is Rs500 today, then you have time to time.
earned Rs400 in three years.
What are the expenses during a
b. Dividend transaction?
When a company makes profits, it Every share transaction attracts
can choose to share part of its prof- some tax or the other. Some of the
its with its shareholders by paying main expenses are as follows.
out dividend. This dividend is paid a. Capital gains tax
as a percentage of the face value of If you purchase a share and sell it at
the share. For exam-
ple, a company may TRADETALK: splitting the stocks
declare a dividend WHY DO SOME STOCKS HAVE DIFFERENT FACE VALUES?
of 25%. Then if the The face value of a share is typically Rs10, but many times the face value
face value of its can even be Rs100 or Rs5 or Rs2. The selection of the face value depends
share is Rs10 you on the offer price or the price band and sometimes the face value is
will get Rs2.50 for changed when the stock is split at a later date.
every share you own If the company announces an issue of Rs50 crore and the face value of
each share is Rs10, the company will have to issue 5 crore shares. If the
of that company,
face value if Rs100, the company will have to issue 50 lakh shares.
irrespective of the Often it happens that a company's price rises so rapidly
market price. that many people end up buying only one or two shares. In such cases the
In itself this company splits the face value of the stock. So if a Rs10 share is being trad-
might not be much, ed at Rs5,000, splitting the stock into two will double the number of shares
but over a longer that are available in the market. Because of reduced face value, the market
period of time or if prices will fall (not necessarily in the same ratio) and people would be able
you have a lot of to buy more shares of the company.

18 2. How do I buy and sell shares?

 First Step to Investing
in the Share Market

a price higher than the purchase
price and if this sale is within a year
of the purchase, then a 10% capital
gains tax is levied on the profit that
you make. For example, if you
bought a share for Rs100 on
January 1, 2005 and sold it for
Rs150 on July 1, 2005, then you
have to pay a tax of 10% on the
Rs50 profit that you make. If you
sell after a year of purchase, there is
no tax on the long-term gains.
b. Securities transaction tax
Securities transaction tax (STT) is
levied by the government on every
transaction you do on a stock
exchange. You don’t have to pay
this separately; it’s collected by your
broker. As per the Union Budget
2005 the STT will be 0.10% on
delivery-based transactions and
trade that they do for you. This
commission varies from broker to
broker; at sharekhan.com the bro-
kerage is 0.5% for delivery-based
transactions and 0.10% for intra-
day transactions. On the brokerage
amount you are required to pay a
service tax to the government (to be
collected by the broker). The bro-
kerage varies depending on the serv-
ice that the broker provides you.
Some brokers, such as Sharekhan,
offer its clients regular updates on
companies, multiple means to trans-
act and customer service support.
d. Depository fees
Since most of the shares exist in a
dematerialised form, every time you
buy or sell shares the transactions
are being noted by your DP. The
DPs normally levy a charge which is

How do I select the

0.02% on intra-day transactions. an annual charge or a charge on
each transaction.
c. Brokerage

right shares?
Brokers get a commission on every

You can either apply for shares through an IPO or trade in

shares in the stock market. To buy/sell shares in the stock
exchange, investors have to go through brokers. Sebi is the
regulatory body for the stock market. It protects investors and
also handles their complaints against companies. Investing in
stocks can provide you with two types of gains: appreciation IN THIS CHAPTER:
in stock price and dividends. To calculate returns, you must v Science of investing in shares
also be aware of transaction taxes and other charges like bro- v Components of fundamental research
kerages etc. Sensex and Nifty are some of the key indices you v Learning to judge an IPO
can use to track the overall stock market movement.

20 2. How do I buy and sell shares? 3. How do I select the right shares? 21
 First Step to Investing
in the Share Market

How do I know which stocks to
buy or sell?
Your investment decisions should
not be based on rumours, gut feel or
emotions; but should be taken after
a careful study of facts. Most
investors who have made their
money in the stock market are those
who have been patient, have backed
their investments with logic and
have never lost sight of common
sense.
Typically there are two ways of
selecting the right stock: (1) funda-
mental research and (2) technical
analysis.
1. Fundamental research
This requires you to rate a stock
based on its historical performance
and growth parameters. This type of
research involves a careful scrutiny
of the financials of a company.
2. Technical analysis
This requires you to predict the
trend in the market or the price of a
company based on historical price
movements, using certain statistical
parameters.
Sharekhan offers a selection of
stocks based on both fundamental
and technical research techniques
with different time frames for both
types of calls.
What are the components of
fundamental research?
A fundamental researcher looks at
the performance of a company over
a period of time as well as its future
growth prospects. He might com-
pare this data with that of the other
companies in the same sector and
measure the same against a stock
market index. Most of the data nec-
essary for doing fundamental
research comes from the quarterly
and annual reports of companies as
well as from the analysis of their
stock prices. A fundamental researcher
studies the following: (1) annual reports
and (2) ratios like EPS, PER etc.
What is there in an annual report?
The annual report of a company
provides a wealth of information
about the company. In an annual
report investors must look for the
Profit & Loss (P&L) statement and
the Balance Sheet.
i. The P&L statement
The P&L statement gives you the
figures relating to the company's
income, expenditure, earnings
before interest, depreciation, tax
and amortisation (EBIDTA), and
net profit. Income, Expenditure and
Net profit are the main heads of the
P&L statement.

RESEARCH-BASED ADVICE FROM SHAREKHAN

A Sharekhan Stock Ideas report has the following
Sharekhan provides newsletters and details:
analytical reports to help you decide
1) Cluster that the company belongs to (see page 25)
which shares to select and when to buy
or sell them. Account holders get 2) Recommendation: whether to Buy, Sell or Hold
research-based investment advice with 3) Price target: price the stock is expected to go up to
recommendations to buy shares of com- 1 4) Current market price of the stock
panies whose prospects are good. These 2
3
recommendations are termed as Stock 4
Ideas.
Sharekhan’s customers also get a
host of services including timely Sharekhan
account holders
research reports (Sharekhan Stock can also expect
Ideas), which read like the one shown regular updates
on the right. on each of our
recommendations.

22 3. How do I select the right shares? 3. How do I select the right shares? 23
 First Step to Investing
in the Share Market

A) Income: the total earn-

ings of the company from
varied sources. This can A
include sales, income from
dividends, interest received,
profit from asset sales, B
stock variation (which
refers to the closing stock in
inventory) and so on.
However attention should
be paid to the Sales figure, C
which pertains to the core busi-
D
ness of the company.
A typical Profit and Loss Statement is divided into
B) Expenditure: the actual three sections: Income, expenditure and profitability
money spent on operational
expenses (like raw material ii. The Balance Sheet
consumed, labour costs etc). The The Balance Sheet gives you an
Other expenses are interest on serv- insight into the assets of the com-
icing a debt, depreciation etc. pany, its existing liabilities and how
its funds are utilised. It can also con-
C) Operating profit (popularly tain the details of the sources of the
referred to as EBIDTA): deducting funds (equity capital, reserves, debt etc).
Operational expenses from Sales
gives you the Operating profit. How do ratios help in funda-
mental analysis?
D) Net profit: after deducting inter- Using the data from the annual
est cost, depreciation cost and taxes report and ratios like EPS and PER,
from Operating profit you get the it is possible for you to judge the
profit after tax or the Net profit. financial health of a company.
Sometimes one-off or non-recurring
items such as the sale of land or i. EPS: earnings per share—this ratio
investments may boost a company’s reflects how much the company is
net profit. Investors need to assess earning per share that it has distrib-
whether the profit is driven by core uted. The EPS is calculated as the
operation and is sustainable. total net profit divided by the total

24 3. How do I select the right shares? 3. How do I select the right shares? 25
 First Step to Investing
in the Share Market
8
PARAMETERS TO
JUDGE AN
Good investing principles demand that you study the minutest of details prior
to investing in an IPO. Here are some parameters you should evaluate.
PROMOTERS
Is the company a family-run business or
is it professionally owned? Even with a family-
run business, what are the credibility and pro-
fessional qualifications of those managing the
company? Do the top-level managers have
enough experience (of at least five years) in the
specific type of business?
4 Check the progress made in terms of land acqui-
FINANCIALS
Why does the company require
the money? Is the company
floating more equity than
required? What is the debt com-
ponent? Keep a track on the
profits, growth and margins of
the previous years. A steady
growth rate is the quality of a
fundamentally sound company.
Check the assumptions the pro-
moters are making and whether
these assumptions or expecta-
tions sound feasible.
7 merchant banker through the Sebi website.
PRICING
Compare the company’s PER with
that of similar companies. With this
you can find out the P/E Growth
ratio and examine whether its earn-
ing projections seem viable.
26 3. How do I select the right shares?
IPO
1 is also termed as intra-day trading.
2
INDUSTRY OUTLOOK
The products or services of the com-
pany should have a good demand and
scope for profit.
3 shareholder ownership.
BUSINESS PLANS
sition, clearances from various departments,
purchase of machinery, letter of credits etc. A
higher initial investment from the promoters
will lead to a higher faith in the organisation.
5 company B has 50 shares outstand-
RISK FACTORS
The offer document will list out specific risk factors
such as the company’s liabilities, court cases or other
litigations. Examine how these factors will affect the
operations of the company.
6 comparing the PERs it is better to
KEY NAMES
Every IPO will have lead managers and merchant
bankers. You can figure out the track record of the
8 the research reports and newsletters (Stock Ideas, Sharekhan
LISTING
You should have access to the bro-
kers of the stock exchanges where the
company will be listing itself.
INVESTING VS TRADING
You are INVESTING in shares when you buy them with the objective of holding them for a long
period (typically two to five years). On the other hand, you are TRADING in shares if you buy
them with the intention of selling them in a short period (a day to few weeks).
As an investor when you buy shares, you pay the money equivalent to the amount and the
price of the shares you have bought and you take delivery of the shares in your demat account.
Whereas a trader typically buys and sells shares on the same day and hence does not take
delivery of his shares in his demat account. The process of buying and selling on the same day
number of shares that have been average as well as the EPS of the
issued. For example, if a company other companies in the same sector.
has profits of Rs100 million and has
issued 10 million shares, its EPS is ii. PER: while the EPS looks at the
10. The EPS is used to gauge a com- profitability of a company, the PER
pany's profitability per unit of (ie the price/earnings ratio) is the
market price equivalent. The PER
refers to the market price divided by
You can use the ratio to compare the EPS. Thus in the above example
two companies in the same sector. if the EPS is 10 and the market price
For example, companies A and B is 50, then the PER is 50/10 = 5.
both earn Rs100, but company A Meaning, the share of the company
has ten shares outstanding, while is trading at a multiple of 5.
ing. It means that company A has an This ratio is typically compared
EPS of 10 and company B has an with that of the other companies in
EPS of 2. As a general rule, a higher the same sector and you get to know
EPS drives up the stock price of a whether the company is on the fast
company. track or is a slow runner. While
However the EPS should not be stick to the companies in a particu-
viewed in isolation and should also lar industry and not compare across
be analysed along with the industry industries.
Sound research can keep your investments safe. Make use of
ValueLine, Investor’s Eye etc) that you begin to receive from
the Sharekhan Research team after opening a Sharekhan
FirstStep account. Also study the Annual Report and the other
documents of the company you want to invest in.
3. How do I select the right shares? 27
 How can I
minimise risks and
maximise returns?
IN THIS CHAPTER:
v Types of risk involved in investing in shares
v Reducing risk
v Become a successful investor

4. How can I minimise risks and maximise returns? 29

 First Step to Investing
in the Share Market

What are the risks involved in specific risks? to help you with its hand. Read Sebi's bul-
investing in shares? own set of Stock WHAT FOOLISH INVESTORS DO letins and track com-
There are two types of risk associat- With careful scrutiny and proper Ideas, which are our PART II panies whose shares
ed with this kind of investment: homework, it might be easy to iden- best picks in today's DO NOT KEEP prices are very
company specific risk and market tify and be forewarned of the risks a market, chosen after TRACK OF THEIR volatile.
risk. company may be carrying. a careful analysis of INVESTMENTS
The set of risks that deals with a Specifically check out for the their fundamentals F o o l i s h Why invest in
investors are
company and its sector is referred to mergers and acquisitions that do and a close scrutiny clueless about shares if its risky?
as company specific risk. not have a real synergy or are a of the risks associat- the stock market movements. The Yes, there are risks
Examples of company specific nightmare after reconciliation ed with them. market may seem intimidating, involved in investing
risk: bad manage- ( A O L - T i m e but you need to spend a few min- in shares and the
ment, bad marketing WHAT FOOLISH INVESTORS DO Warner, Hewlett How do I identi- utes everyday to constantly be in returns are also not
strategies, sector dis- PART I Packard-Compaq). fy sector touch with the market. Keep a certain,
notebook and jot down important
turbances that have
INVEST ALL THEIR SAVINGS
Also be suspi- driven points. There are many other software
but under-
an impact on indus- Canceling cious of diversifica- risks? tools that will help you keep standing the
try etc. your sub- tions that do not If steel prices track of your portfolio. risks and learning
External factors scription really add value to rise, auto companies how to manage them
(economic, global to maga- a company's core get affected. If low cost hold the key to achieving
factors) that affect zines, eat- offering. Chinese products invade the higher returns from shares.
the market as a whole ing out A third kind of country's market, then local fast So at what point is the risk
only once a week and then using
are referred to as the money saved to invest in risk would be with moving consumer goods companies safe enough to take and at what

“
market risk. stocks is a bad idea. the companies that might find no takers for their prod-
Examples of mar- Personal finances need to be have bet their stakes
ket risk: political totally in order before you invest. on a single product
ucts. The changing nature of the
industry itself may lead to dipping
Prevailing
instability, high infla- Ensure that you do not have any offering and are stock prices; a print publication wisdom is that
tion, rupee
deprecia-
debt and all your loans have been
repaid. Even your credit card
high on
d e b t .
may see revenue loss if everyone
moves to reading on the Internet.
markets are
tion, rising
should not have any outstanding.
Then save every month. And think of Likewise always right, I
interest rates, companies How do I predict market risk? assume thay are

”
investments in terms of requirements
global incidents
like wars and disas-
(education of children, marriage
etc). The money left over is
that depend on
research could be
It is difficult to predict market risks.
The only thing we can say here is
always wrong
ters that throttle the the only money you prone to higher risk, that start noticing all the small signs George Soros,
nation's economy etc. have for the stock if the research doesn't early. If the election results are Chairman, Soros
market.
come to fruition. feared to lead to a fall in the stock Fund Management
How do I identify company While you can do your market, notice the signals before-
homework, Sharekhan is there

30 4. How can I minimise risks and maximise returns? 4. How can I minimise risks and maximise returns? 31
 First Step to Investing
in the Share Market

point does it become WHAT FOOLISH INVESTORS DO worth the extra WHAT SMART INVESTORS DO?
risky? Risk is the return that the share Investing the same
PART III amount at regular inter-
chance that an may generate.
investment's actual EVALUATE STOCK PRICES, If, on the other vals (eg every month) is
return will be differ- NOT BUSINESSES hand, the investment known as systematic
We frequently investing.
ent than expected. mistake the in shares has the
With this approach
This includes the cart for the potential to give
you buy more shares
possibility of losing horse; that is returns of 20% when prices are low and
some or all of the we look at a (12% more than the fewer shares when
original investment. company’s stock price but don't risk-free invest- prices are high. As a
Higher risk means a consider if the company itself is ment), you might go result you may lower
greater opportunity doing good fundamentally! Instead for it. This 12% your average cost per
of looking at its share prices, start
for high taking notice of the company's e x t r a share over time.
returns and growth prospects, financial parameters, lead- denotes For example, making
a higher poten- ership status, debt position and other the risk pre- a one-time investment
tial for loss. such factors. These will automati- mium. The risk puts much more weight on the specific mar- share, so your investment that month gets
The risk premium cally determine the rise or premium you select ket conditions at that one point—such as a you 2,000 shares.
is the extra return that fall in the company's will depend on your share price of an equity. Spreading out your Rs10,000/Rs5 per share = 2,000 shares
stock price.
the stock market provides risk appetite, ie the degree investments over regular intervals puts time Systematic investing balances the dif-
over the risk free rate to com- of risk that you can tolerate. on your side. ferent costs for the shares you purchased. If
pensate for market risk. Ideally before investing in a you had invested all Rs20,000 in May, you
So if you are getting a risk-free company you would want to make Systematic investing in action would only have 2,000 shares now, instead
return of 8% from an investment in a note of all the possible scenarios Let's say you invest Rs10,000 each month of 3,000. Of course if you had invested all
government bonds or provident (decrease in price by 10%, increase in the company PQR Ltd. Rs20,000 in June, you would have 4,000
funds and an investment in shares by 10%, increase by 50% and so In May PQR Ltd’s share price is Rs10 a shares.
might give you 10%, then you on) and assign a probability to each share, so your systematic investment that Although cost averaging does not
month buys you 1,000 shares. assure a profit or protection against risk, it is
might decide against investing in scenario.
Rs10,000/Rs10 a share = 1,000 shares a logical, smart approach that can help you
shares as the risk (associated with Next compare the probabilities
In June the share price drops to Rs5 a even out the fluctuations in the market.
the particular share) may not be with that of getting risk-free returns

32 4. How can I minimise risks and maximise returns? 4. How can I minimise risks and maximise returns? 33
 First Step to Investing
in the Share Market

How can i minimise risk any problem in one sector would affect
all stocks in the sector. As a thumb rule,
if you have investments of up to
8. DON’T INVEST ALL YOUR SAVINGS
Always maintain a core set of reserves.
You should never touch these reserves for

and maximise returns? Rs50,000 invest in two to three stocks.

For about Rs150,000 invest in three to
five stocks, for around Rs500,000 have
investing, so that even in the worst case
you still have some money. Typically
these reserves should be your salary of
five to seven stocks, and around ten about six months.
1. DON’T ATTEMPT TIMING THE MARKET 4. AVOID HOT TIPS stocks for higher amounts.
Buy when stocks are falling, sell when You may have overheard some news 9. BE REALISTIC!
these are rising. This works well when about a stock or your friend may advise Analyse the reason why you are
you are a long-term investor and there is that a particular stock is all geared to investing in shares, ie why you
an extended bear or bull run. Don't try move up. Avoid such tips like the plague require the money. For a better
to second guess or predict that the mar- and your investments will remain safe. lifestyle? For your child's
ket will fall today and rise tomorrow. future education? For retire-
Even seasoned investors cannot do that! 5. BLUE-CHIPS ARE SAFE BETS ment planning? Once you
Blue-chip companies are there because have answered that, ask
2. DON'T TRY TO GUESS THE MARKET'S FAVOURITES they have done well in the past and have yourself how much
Your instincts might tell you that a high market capitalisation. It is a likely appreciation do you
pharma or technology stocks are hot guess that they will maintain their track need to get that amount?
due to certain policies or events, but record and give you higher returns even Work towards this
remember millions of investors have in future. Therefore invest in companies amount and you won't be
already guessed that and bought these that have a good track record. disappointed.
stocks. The prices of these stocks would
therefore be at a higher level when you 6. SLOW AND STEADY STREAM OF INVESTMENTS 10. BE LEVEL-HEADED
buy them. Instead focus on the long Set aside a certain portion of your earn- Invest wisely, don't
term and don't get swayed by short-term ings every month and invest that sum in get swayed by
events. shares irrespective of the market condi- rumours and allow
tions. This way, over a period of time Sharekhan to be
3. AIM FOR THE LONG HAUL you can amass a substantial number of your guide at all
Short-term investing is prone to higher shares of the stocks in your portfolio. t i m e s .
risks. When investing in stocks, aim to Investment suc-
get good returns after a period of three 7. THINK PORTFOLIO cess won't hap-
to five years at the minimum. Also churn Don't put all your earnings in a single pen overnight,
your portfolio periodically and based on stock. Try to have a diverse portfolio of so avoid overre-
the progress that a company makes in a stocks. This way even if one stock acting to short-
quarter or in six months, decide whether doesn't do well, you are still well pro- term market
to hold the stock or get out of it. tected. Also invest across sectors, since swings.

34 4. How can I minimise risks and maximise returns? 4. How can I minimise risks and maximise returns? 35
 First Step to Investing
in the Share Market

36
 First Step to Investing
in the Share Market

and then do the evaluation. Thus if WHAT FOOLISH INVESTORS DO

an investment in a company is PART IV
expected to provide 50% returns
with almost a 75% probability, this SKIMP ON RESEARCH
would be much better than a safe One of the
main reasons
investment with returns of just
why people
10%. lose money in
Again even within stocks if one the stock mar-
stock provides higher returns with a ket is because
higher risk and another provides they invest on
lower returns with a lower risk, the basis of rumours or a hot tip
then you could go for the stock with passed by a friend. Before invest-
ing in a company always do
lower returns, since at the end of the research on it.
day you want to be with The BSE and NSE websites have
an investment that has the a wealth of information on each
highest return per unit of company; you can even check out the com-
risk. pany's website and download its annual
reports. Analyse the financial
details and only after all this
decide on making an
investment in the
company.

How can I benefit from

online trading?
Risk associated with investing in shares can be classified into
company specific risk and market risk. You can reduce the
risk by investing systematically in fundamentally strong com-
panies.

IN THIS CHAPTER:
v Using your computer to trade
v Trading online is convenient
v Benefits of trading on sharekhan.com

37 4. How can I minimise risks and maximise returns? 5. How can I benefit from online trading? 38
 First Step to Investing
in the Share Market

How does one trade online? your broker to place a trade. Just go shares you sold in your account. grated with your bank, your depos-
Just like offline trading, online trad- online to your account, select the You can transfer this amount back itory and digital contracts. It thus
ing also involves three main inter- shares you want to buy or sell and to your bank or use it for buying eliminates all paperwork.
mediaries and one ancillary institu- execute the trade! It's as simple as shares.
tion. that. 2. Instant credit and transfer
n A broker, During this trade, your bankers How do I start trading online? Online trading gives you instant
n An exchange, provide the feature of transferring There are three basic steps in trad- credit money transfer to and from
n Yyour bankers, and money from or to your bank ing online. your bank account, enabling you to
n Your depository participant. account. The brokers then collect 1. Go to your broker and open an trade surplus credit without delay.
this trade information in real time online account. During this stage
In this form of trading, your bro- using software at their end and for- you also need to take a depository 3. Trade from anywhere
ker provides you an Internet ward it to the exchange. account. A major benefit of online trading is
broking account which allows you The exchange executes the trade 2. Ensure that you have a bank the facility of trading from any-
to buy and sell shares at your con- and informs the broker. The broker account with a bank that facilitates where. Even when you are in a new
venience. To put it simply, the bro- in turn informs you and also online transactions (ie allows for place, just connect to the Internet,
ker is providing an interface on the ensures that your depository net banking). Most leading banks log on to your account on
computer that acts like a broker. account gets updated; and in case of such as HDFC Bank and Citibank sharekhan.com and start trading.
So you no longer have to call selling shares it places the value of allow this.
3. Once you open an account, you 4. Real-time portfolio tracking
WHY SHOULD I TRADE ONLINE? get a username and password for Online trading provides auto-
Why should I trade online? checking your account details as update of trades executed by you
Online trading is a highly convenient and transparent well as another password for carry- and gives you real-time information
medium that ensures that you are in total control of ing out your actual transactions. on your investments and the current
your investments. This ensures a double layer of secu- value of your portfolio. Sharekhan
Does online trading have security risks? rity. Using these details you go to provides portfolio tracking service
Millions of customers trade online daily. No security risk your broker's website to its clients absolutely free of cost.
has been reported on any of those online transactions. (sharekhan.com in your case), log
on to your account and start trad- 5. After-hour orders
Do I have to be computer savvy? ing. You can place orders even when the
If you can check your e-mail, then you can trade online. market is closed. The order gets
Online trading on sharekhan.com is also very user- What are the benefits of trading queued up and gets executed the
friendly.
online? next time the markets open.
Is the brokerage different for those who trade online? Online trading is quite convenient
The brokerage is almost the same as in case of offline trading. However you are for the following reasons. 6. Get live quotes
required to pay a small amount as account opening fee. But you will realise that the 1. Freedom from paperwork Online trading provides you live,
savings in time and the flexibility that your online trading account shall offer will Your online trading account is inte- minute-by-minute streaming quotes
make up for that expense!

39 5. How can I benefit from online trading? 5. How can I benefit from online trading? 40
 First Step to Investing
in the Share Market

and using the software you can cre-
ate appropriate filters to watch the
movement of the stocks that you are
interested in.
7. Host of features a click away
Place limit orders, check your port-
folio and calculate your earnings,
check your depository account,
transfer money from your bank to
the broking account and vice versa,
at just a click of your mouse.

HOW SAFE IS ONLINE TRADING ON SHAREKHAN.COM?

“VERY!” Because we have an effective security system in place:
1. Strong encryption: we use a 128-bit encryption to ensure
a secure connection. The most advanced encryption technol-
ogy, Secure Socket Layer (SSL), is used to ensure that the
information transmitted between the trading engine and the
customer across the Internet is safe and cannot be accessed
by any outsider. In addition firewalls, internal controls and
procedures put in place have made the entire system robust.

2.Password protection: to trade on your account, you will

need to provide a user ID and a password to enter the secure
area of the site (sharekhan.com) as well as an additional password to place trades. The
user ID and password allotted to a customer are kept completely confidential.

3.Fully integrated: third, if the transaction system requires no manual intervention,

you further improve the safety in the transactions. sharekhan.com is one of the very
few fully integrated online trading sites. This eliminates the possibility of any manual
intervention. Which means orders are directly sent to the exchanges, ensuring that
you get the best and right price each time.

The advantages of trading in shares online are many. You can

buy or sell shares from the convenience of your home/office.
Online trading also removes the hassle of doing paperwork.
You can even place orders when the market is closed.

41 5. How can I benefit from online trading?

 First Step to Investing
in the Share Market

6 benefits of trading on sharekhan.com

1 4
Check your demat account
and account statement
Check the balance of shares
Track the market’s pulse available in your demat account.
You can also track the status of
Get live quotes of companies,
the orders placed online.
know the number of shares avail-
able for buying/selling and track the
overall market movements.
5 Transfer money to/from
your online bank account
2 Transfer money to your
Sharekhan account. When you
buy/sell shares, money will be
debited/ credited to your
Sharekhan account. You can
Get research based advice also transfer money from
Access research reports (Sharekhan Sharekhan account back to
ValueLine) and get stock-picking your online bank account.
advice for both short-term and long-
term investing needs.
6
3 Apply for an IPO
Now you don’t have to fill
lengthy forms or stand in a
queue to apply for an IPO.
Buy and sell shares Instead you can apply for an
Buy and sell shares online. You IPO from the comfort of your
can place market as well as home or office through
limit orders and get instant sharekhan.com.
confirmation for orders that
get executed.

43 5. How can I benefit from online trading? 5. How can I benefit from online trading? 44
 First Step to Investing
in the Share Market

ARBITRAGE: free lunch—the opportu- non-delivery can arise on account of

nity to profit from two offsetting trans-
actions with zero risk. Arbitrage
basically involves spotting price differ-
entials for the same asset at different
places at a given time and simultane-
ously buying at a place where it is
cheaper and selling where it is more
expensive. A transaction of this nature
obviously means that the profits are
short delivery, bad deliveries and com-
pany objections that go unrectified. In
the process an exchanges purchases the
requisite quantity in the auction market
and gives them to the buyer and the
costs are borne by the seller. If the shares
could not be bought in the auction, ie
shares are not offered for sale in the auc-
tion, the transactions are squared up as

Trade
made with zero risk. per Sebi guidelines.

ASK: this is the lowest price an investor
will accept to sell a stock. Practically
speaking, this is the quoted price at
which an investor can buy shares; also
called the offer price.
BID: this is the highest price an investor
is willing to pay to buy a stock.
BLUE-CHIPS: the term blue-chips refers
to stocks of renowned companies with

Jargon
AUCTION SHARES: the securities put
up for auction by the exchanges are of
those transactions that remain incom-
plete due to non-delivery of securities by
sellers. This is to ensure that a buyer
receives the securities due to him. The
established and stable businesses. Such
companies have a steady earnings
stream and are preferred by market
players because of the predictability and
stability of their earnings.
BOND: simply put, a bond is an IOU of

A brief introduction to some terms you are likely to
encounter as you start investing...
BEAR: an investor who believes that a secu-
rity, a sector or the overall market is about to
fall (opposite of bull). A bear has a pessimistic
view of the market. A weak and declining
market is known as a bear market. When
bears are active, stock prices tend to decline.

BULL: an investor who believes that a partic-

ular security, a sector or the overall market is
about to rise (opposite of bear). A bull has an
optimistic view of the market. A strong and
rising market is known as a bull market. When bulls swing into action, the prices
tend to rise.

45 Trade Jargon Trade Jargon 46

 First Step to Investing
in the Share Market
sorts. It is an agreement under which a
sum is repaid to an investor after an
agreed period of time. Bonds are
thought of as safe and reliable instru-
ments. Bonds provide a worry-free
stream of income. But this class of secu-
rities includes a wide array of instru-
ments with varying degrees of risk and
reward.
BONUS ISSUE: issue of new shares at
zero cost to existing shareholders. This
is carried out by creating fresh equity by
capitalising the reserves that a company
has built through its operations.
BOOK VALUE: ratio of net worth of a
company to the outstanding equity
share capital. It represents the net worth
available for each outstanding share of
a company. Book value stands for the
money that the owner of a single share
would realise. In other words, the book
value of a company is very similar to the
net asset value (NAV) of a fund.
However the book value can at times be
a very conservative estimate of the value
that a shareholder can realise, as assets
are valued at cost.
BOOK BUILDING PROCESS: a
process by which the offer price of an
IPO is determined based on actual
demand from investors. Book building is
called so because it refers to the collec-
tion of bids from investors which is
based on an indicative price range (floor
price). The issue price is fixed after the
bid closing date. It is a process of secur-
ing the optimum price for a company's
47 Trade Jargon
share. The issuing company decides the
price of the security by asking investors
how many shares they want to buy and
at what price they would be interested in
buying them. The book building process
allows for price and demand discovery.
In book building the demand for the
share is known before the issue closes. A
placement process is typically followed
with an offer to the public at large at the
same price.
BSE SENSEX: the BSE SENSEX, as it is
popularly referred to, is short for the
BSE Sensitive Index or Sensex. First
compiled in 1986 it is a Market
Capitalisation-Weighted index of 30
component stocks with the base April
1979 = 100. It represents a sample of
large, well established and financially
sound companies. These companies
account for around one-fifth of the mar-
ket capitalisation of the BSE. The
Sensex is essentially a small sub-set of
the A group scrips. The index is widely
reported in both the domestic and inter-
national print and electronic media and
is widely used to measure the perform-
ance of the Indian stock markets. The
Sensex also has the largest social recall
attached with it.
BUY-BACK: a method by which a com-
pany uses surplus cash to cancel its own
shares. This process also enables pro-
moters to increase their stake in the
company. This is typically done when
the company feels that the stock is under
priced and the prospects are bright. Buy-
backs are much in vogue in global mar-
BREAK EVEN: this is the point of no profit, no loss. This happens when the
present net value of a project is zero. The break-even point reveals the mini-
mum level of operations when
the existing value of outflows
equals the existing value of
inflows. In terms of sales, the
present value formula works
out to be: break-even sales =
(fixed cost) / (sales - variable
cost). The analysis of the level
of sales at which a project
would just break even is
called break-even analysis.
kets and have now their feet established
in the Indian markets too.
CAPEX: capital expenditure—this is the
expenditure that a company undertakes
towards building up capital like plants,
machinery etc. These expenses do not
pertain to a single year as the benefits
accrue over a larger time frame. Thus
these are normally not charged to the
profit and loss account of a single year
but amortised over a period of time.
CAPITAL GAIN: the returns from a
stock emanate from two sources: divi-
dend (a tax-free and risk-free source)
and appreciation in the share price. The
gain that accrues to a shareholder due to
the appreciation in price is called capital
gain.
CASH EPS: cash earnings per share—
cash earnings are the sum of net profit
and depreciation. Depreciation is non-
cash expenditure. It is just a book entry,
an amount set aside to account for the
use of assets. In order to compute the
cash profits (Cash EPS) accruable to
each share, we add back depreciation to
the net profit.
CIRCUIT BREAKER: there are limits
within which a stock can move during a
single day. These are called circuit
breakers, which are mechanisms to curb
excessive volatility. At present a stock
cannot move more than 16% in either
direction during one single trading ses-
sion. If there are more buyers beyond
+16%, then trading stops. This applies
in the reverse direction as well.
CONTRACT: contract is an agreement
between two parties to buy and sell an
index at a fixed time in future at a price
fixed today. Contract value is derived by
multiplying the Sensex with 50 and the
Nifty by 200.
Trade Jargon 48
 First Step to Investing
in the Share Market
CREDIT RATING: credit rating is an
exercise conducted by a rating organisa-
tion to explore the credit worthiness of
the issuer with respect to the instrument
being issued or a general ability to pay
back debt over specified periods of time.
The rating is given as an alphanumeric
code that represents a graded structure
or creditworthiness. Typically the high-
est credit rating is that of AAA, the low-
est being D (for default).
CUM DIVIDEND: you must have
heard of stocks quoting cum dividend. It
means before dividends. A stock trading
cum-dividend allows its
purchaser/transferor the right to receive
dividend. The cum-dividend date is set
by the stock exchanges.
DEBENTURE: akin to promissory
notes, debentures are instruments for
raising long-term debt capital.
Debenture holders are the creditors of
the company. The obligation of the
company towards its debenture holders
is similar to that of a borrower who
promises to pay interest and capital at
specified times.
DIVIDEND YIELD: annual dividend
paid on a share of a company divided by
the current share price of the company.
Dividend yield stocks are for safe
investors, who look at pure returns from
a stock and not capital appreciation.
49 Trade Jargon
DEMAND PULL: the use of advertising
to generate consumer interest and
demand.
DEMAT: demat or dematerialisation is
the conversion of physical share certifi-
cates into an electronic format. The
shares are credited in the investor's
account with his depository participant.
Demat protects the shareholder from all
the risks associated with physical certifi-
cates, such as loss, theft, mutilation and
forgery as well as the risk that arises
from handling large volumes of paper.
Shares can be immediately transferred
from one person to another. Demat
eliminates the need to fill transfer deeds
and affix share transfer stamps.
DEPOSITORY: a depository is like a
bank as it holds the securities of
investors in electronic form. A deposi-
tory holds securities (like shares, deben-
tures, bonds and units) of investors in
electronic form. Investors can deposit/with-
draw and transfer securities from their
accounts. Besides holding securities, a deposi-
tory also provides services related to transac-
tions in securities.
DEPOSITORY PARTICIPANT (DP): a DP
is a member of a depository through
whom investors deal with a depository
exchange.
EARNING PER SHARE: earnings per
share—it is the ratio of net profit to the
outstanding equity capital. EPS stands
for the net profit on each outstanding
share. This is very useful while deter-
mining the value of a company’s busi-
ness. This is because the shareholders
pay a price for these earnings that the
business generates for the shareholders.
EQUITY DILUTION: whenever the
equity capital of a company is increased
by way of a rights/preferential issue, the
equity is diluted. Following an equity
dilution, there is more paper floating in
the market. Whether it is good or bad
depends on the issue price and the future
servicing capacity of that equity.
ESCROW: an account in which money
is placed in trust with a third party and
that can be used only for specific pur-
poses or used by a specific entity after
the fulfillment of certain conditions.
EX DIVIDEND: a stock is ex dividend
when it is quoting after the announce-
ment of dividends. An ex-dividend stock
does not allow its purchaser/transferor
the right to receive the last dividend
declared. The ex-dividend date is set by
the stock exchanges.
FACE VALUE: this is the nominal value
that is assigned to a share at the time of
issue. It is used in determining the divi-
dend to be given to the shareholders.
Let’s understand this with an example.
A company declares a dividend of 50%.
Assuming that the face value of its share
is Rs10 and the current market price of
its share is Rs100, the amount per share
that a shareholder is entitled to is Rs5,
ie 50% of Rs10 (and not 50% of
Rs100). Apart from its use in determin-
ing dividend, face value has lost its rele-
vance in the modern day and has no link
with the market price.
In today’s context, even Rs10/share is
not sacrosanct as the shares are split and
they can have face values of less than
Rs10.
FUTURES: a futures contract is a legally
binding contract to make or take deliv-
ery of a specified quantity of a specified
instrument on a specific date in the
future, at a price agreed at the time of
dealing. When two parties enter into a
futures contract, the buyer of the con-
tract assumes the obligation to buy a
specified quantity of a specified instru-
ment from the seller at a specified price
on a future date. The contract is binding
on both the parties.
GAAP: Generally Accepted Account-
ing Principles (GAAP) is a combination
of authoritative standards set by stan-
dard-setting bodies as well as accepted
ways of doing accounting.
HEDGING: taking positions in securi-
ties so that each offsets the other. For
example, if you buy security A and sell
Trade Jargon 50
 First Step to Investing
in the Share Market

security B so that the overall risk of your at which you are willing to buy/sell a time. Hence the acquisition price does OFFER FOR SALE: when an existing
exposure is reduced, then it is called stock. not reflect the true worth of these assets. shareholder of a company offers shares to
hedging. A perfect hedge produces a It is prudent to take the current value of the general public through a prospectus.
risk-free portfolio. LIQUIDITY: the ability of a security the investments.
to get converted into cash without ORDER ROUTING SYSTEM: in an
HOLDING COMPANY: when a any loss of time or value is called its liq- MARKET CAPITALISATION: market order routing system a broker offering
company holds shares in another com- uidity. In the stock market, a good indi- capitalisation is the market value of the Internet trading facility provides an elec-
pany, the former is refereed to as the cator of the liquidity of a stock is the equity of a company. Simply put, it is the tronic template (space) for the customer
holding company for the latter. volume of shares that get traded in the number of outstanding shares multiplied to enter the name of the security being
exchanges. by the market price of the company. It bought or sold, the quantity and the price
INSIDER TRADING: trading on infor- is also the currency which can be used in specifications. Once the broker’s system
mation which is not really available to MARGIN REQUIREMENTS: margin case of acquisitions. receives this information, it is checked
the general public. is the amount of money, or collateral, electronically against the customer’s
that a member will be required to lodge MARKET MAKER: a member of an account and is routed to the appropriate
LIABILITY: a financial obligation that with the clearing corporation as a per- exchange who quotes simultaneous bid and exchange for execution by the broker.
(is pending) must be made at a specific centage of his total value of trades. offer prices for an issue of securities. Usually After the order is executed, the customer
time. Equity and debt are both liabilities Margins strengthen the risk manage- market makers undertake to offer quotes in receives a message confirming the order.
that a company owes to the respective ment system as they help in maintaining certain securities, thereby creating liquidity in The customer’s portfolio and ledger
investors. the market integrity and averting pay- the security. account will also be updated online.
ment defaults by the members.
LIMIT ORDER: this is an order to buy MARKET ORDER: this is an order to PRICE/EARNINGS RATIO: this oft-
or sell a stock at a pre-determined price MARK TO MARKET: the value of buy or sell a stock at the market price. tracked ratio is the ratio of the price per
only. The order will get executed only if investments (especially secondary mar- share to the earnings per share. This
the market price reaches the price-point ket securities) undergoes a change over MARKET VALUE: the market value indicates the number of years that will
refers to the current resale value of a be required to recover the amount paid
INTERNET BROKING: Internet based trading security. The market value of a security for the shares of a company when the
on conventional stock exchanges uses the Internet is easily computed as the closing price latter’s earnings are constant over a
as a medium for communicating client orders to multiplied by the shares outstanding. period of time. This is a widely used
the exchanges through broker websites. These benchmark for stocks and associates a
sites may serve a variety of functions from allow- NET WORTH: shareholders’ funds fundamental variable (earnings) with a
ing full trading through the website to features comprise equity share capital and the market variable (price).
like on-line stock quotes, information and analy- reserves/surpluses of their company. Net
sis etc. Sebi has allowed Internet trading in India, worth is the funds that shareholders RECORD DATE: a date set by a com-
albeit in a limited form. own—their equity in other words. It pany on which it checks the records of
The Sebi Committee on Internet-based represents the capital infused by share- its shareholders to allocate their entitle-
Securities Trading and Services has allowed the holders and the accumulated net profits ments (of rights, dividend etc).
Internet to be used as an order routing system after paying out dividends (retained
through registered stockbrokers on behalf of clients, for trading in the securi- earnings). Hence in the event the busi- RIGHTS ISSUE: issue of additional
ties market. ness is wound up, the net worth is what equity to existing shareholders of a com-
the shareholders get. pany. The existing shareholders have the

51 Trade Jargon Trade Jargon 52

 First Step to Investing
in the Share Market

NET PROFIT: net profit sports various names,

including bottom line and profit after tax. In sim-
ple terms net profit stands for the money that a
business makes after paying off all its costs, both
operational and capital, and tax. In other words, it
belongs to the shareholders. It can be either given
to the shareholders as dividend or retained to
DISCLAIMER
further the business. This booklet has been prepared by SSKI Investor Services Pvt. Ltd. (SHAREKHAN). It is subject
to changes without prior notice and is intended only for the person or entity to which it is addressed to and may con-
tain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other
use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of
right to exercise this option to subscribe back to close out the transaction. This any financial instrument or as an official confirmation of any transaction.
Though disseminated to all the customers simultaneously, not all customers may receive this report at the same
to these shares. technique is used when an investor
time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.
believes the stock price will drop. The information contained herein is from publicly available data or other sources believed to be reliable. While we
RISK PREFERENCE: each individual would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated
has a personal tolerance for risk. To set SHORT SALE: it suggests selling a companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the
information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affil-
an investment course that you will be stock that is not actually owned. If an iates from doing so. We do not represent that information contained herein is accurate or complete and it should not be
comfortable with, you need to think investor thinks the price of a stock is relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken
about your willingness to accept going down, the investor could borrow as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each
declines in the value of your investments the stock from a broker and sell it. recipient of this booklet should make such investigations as it deems necessary to arrive at an independent evaluation
of an investment in the securities of companies referred to in this document (including the merits and risks involved),
and you will need to consider your Eventually the investor must buy the and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed
investment goals. stock back in the open market. or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our
views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion
from the information presented in this report.
SETTLEMENT: the mechanism SPECULATION: it suggests taking
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resi-
through which all parties to a transac- large risks, especially with respect to try- dent of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or
tion get their receivables, ie either funds ing to predict the future or gambling, in use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licens-
or shares, is known as clearing and set- the hope of making quick, large gains. ing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all juris-
dictions or to certain category of investors. Persons in whose possession this document may come are required to
tlement or simply settlement. inform themselves of and to observe such restriction.
STOCK OPTION: an option given to a SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions
SHARE SWAP: an arrangement by person to buy a stock at a predetermined in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related
securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any
which shares of one company are price on a future date.
company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or
swapped for another in a specified ratio. any third party involved in, or related to, computing or compiling the information have any liability for any damages of
TREND: trend is a basic direction in any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of
SHAREHOLDER VALUE: an ethos of which the prices are moving. Trends are SHAREKHAN.
managing that calls for a business to be of three types, namely Uptrend,
run with the objective of maximisation Downtrend, Sideways trend.
of the wealth of the shareholders.
VOLATILITY: the sharp movement, up
SSKI Investor Services Pvt. Ltd. (Sharekhan)
SHORT POSITION: it occurs when a or down, in the price of a security, or in A-206, Phoenix House, Phoenix Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400013.
person sells stocks he does not yet own. the overall prices prevailing in the Tel: 022-2498 2000
Eventually the shares must be bought market.

53 Trade Jargon Trade Jargon 54