SHARE MARKET FOR BEGINNERS

Earlier, stockbrokers would converge around Banyan trees to conduct trades of stocks. As the number of brokers increased and the streets overflowed, they simply had no choice but to relocate from one place to another. Finally in 1854, they relocated to Dalal Street, the place where the oldest stock exchange in Asia – the Bombay Stock Exchange (BSE) – is now located. It is also India’s first stock exchange and has since then played an important role in the Indian stock markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian economy and finance is measured.

In 1993, the National Stock Exchange or NSE was formed. Within a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment.

This shows that stock markets in India have a strong history. Yet, at the face of it, especially when you consider investing in the stock market, it often seems like a maze. But once you start, you will realize that the investment fundamentals are not too complicated.

So Let’s Start With Share Market Basics.

WHAT IS SHARE MARKET?

A share market is where shares are either issued or traded in.

A stock market is similar to a share market. The key difference is that a stock market helps you trade financial instruments like bonds, mutual funds, derivatives as well as shares of companies. A share market only allows trading of shares.

The key factor is the stock exchange – the basic platform that provides the facilities used to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.

THERE ARE TWO KINDS OF SHARE MARKETS – PRIMARY AND SECOND MARKETS.

Primary Market:

This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange.

A company enters primary markets to raise capital. If the company is selling shares for the first time, it is called an Initial Public Offering (IPO). The company thus becomes public.

Secondary Market:

Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price or at whatever price the two parties agree upon.

Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process.

HOW TO BUY SHARES?

First, you need to open a trading account and a demat account. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares.

We offer various trading tools to buy and sell shares that caters to our diversified set of traders and investors :

Online trading: Want to take charge of your stock investing decisions? Our robust online trading system will help buy shares online with sheer ease and convenience. To buy shares, log in to your trading account using your User ID, Password and Security Key/Access code.

KEAT PRO X: A jet speed online trading software to buy and sell shares online and real time

Kotak Stock Trader: Just tap and buy stocks on the go using your smartphone.

Dealer assisted trading: Looking for some guidance to buy a stock? This is an assisted trading service which will help you make an informed investment decision.

Call and Trade: Don’t have access to your laptop or computer. You can call us and buy shares over the phone.

Fastlane: A light and fast Java based trading platform that makes share trading easy even on slow and age old computers

Xtralite: An extra light and a superfast trading website that’s works best even if you have a slow internet connection.

WHAT ARE THE FINANCIAL INSTRUMENTS TRADED IN A STOCK MARKET?

Now that we have understood what a stock market is, let us understand the four key financial instruments that are traded:

Bonds:

Companies need money to undertake projects. They then pay back using the money earned through the project. One way of raising funds is through bonds. When a company borrows from the bank in exchange for regular interest payments, it is called a loan. Similarly, when a company borrows from multiple investors in exchange for timely payments of interest, it is called a bond.

For example, imagine you want to start a project that will start earning money in two years. To undertake the project, you will need an initial amount to get started. So, you acquire the requisite funds from a friend and write down a receipt of this loan saying 'I owe you Rs 1 lakh and will repay you the principal loan amount by five years, and will pay a 5% interest every year until then'. When your friend holds this receipt, it means he has just bought a bond by lending money to your company. You promise to make the 5% interest payment at the end of every year, and pay the principal amount of Rs 1 lakh at the end of the fifth year.

Thus, a bond is a means of investing money by lending to others. This is why it is called a debt instrument. When you invest in bonds, it will show the face value – the amount of money being borrowed, the coupon rate or yield – the interest rate that the borrower has to pay, the coupon or interest payments, and the deadline for paying the money back called as the maturity date.

Mutual Funds:

These are investment vehicles that allow you to indirectly invest in stocks or bonds. It pools money from a collection of investors, and then invests that sum in financial instruments. This is handled by a professional fund manager.

Every mutual fund scheme issues units, which have a certain value just like a share. When you invest, you thus become a unit-holder. When the instruments that the MF scheme invests in make money, as a unit-holder, you get money.

This is either through a rise in the value of the units or through the distribution of dividends – money to all unit-holders.

Secondary Market:

The share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the share market. Consider the previous example; your project is successful and so, you want to expand it.

Now, you sell half of your company to your brother for Rs 50,000. You put this transaction in writing – ‘my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company. He is now a shareholder. Suppose your brother immediately needs Rs 50,000. He can sell the share in the secondary market and get the money. This may be more or less than Rs 50,000. For this reason, it is considered a riskier instrument.

Shares are thus, a certificate of ownership of a corporation. Thus, as a stockholder, you share a portion of the profit the company may make as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value.

Derivatives:

The value of financial instruments like shares keeps fluctuating. So, it is difficult to fix a particular price. Derivatives instruments come handy here.

These are instruments that help you trade in the future at a price that you fix today. Simply put, you enter into an agreement to either buy or sell a share or other instrument at a certain fixed price.

WHAT DOES THE SEBI DO?

Stock markets are risky. Hence, they need to be regulated to protect investors. The Security and Exchange Board of India (SEBI) is mandated to oversee the secondary and primary markets in India since 1988 when the Government of India established it as the regulatory body of stock markets. Within a short period of time, SEBI became an autonomous body through the SEBI Act of 1992.

SEBI has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.

Its basic objectives are:

• Protecting the interests of investors in stocks
• Promoting the development of the stock market
• Regulating the stock market

Chapter 1.2: Getting familiar with market-related concepts

Now that we are done with the basics, let’s move on to some terms and concepts you would frequently hear with respect to the stock markets.

WHAT ARE DIVIDENDS?

As we learned earlier, a share is a portion of the company. When the company makes profits, you often receive a part of it. This is the idea behind dividends. Every year, companies distribute a small amount of profits to investors as dividends. This is the primary source of income for long-term shareholders – those who don’t sell the stock for years together.

WHAT IS MARKET CAPITALIZATION?

Different companies issue varied amounts of shares when they get listed. The value of one share also differs from that of another company’s stock. Market capitalization smoothens out these differences. It is the market stock price multiplied by the total number of shares held by the public. It, thus, reflects the total market value of a stock taking into consideration both the size and the price of the stock. For example, if a stock is priced at Rs. 50 per share, and there are 1,00,000 shares in the hands of public investors, then its market capitalization stands at Rs. 50,00,000.

Market capitalization matters when stacking stocks into different indices. It also decides the weightage of a stock in the index. This means, bigger the company’s market value, the more its price fluctuations affect the value of the index.

WHAT ARE ROLLING SETTLEMENTS?

Supposing your friend agrees to buy a book for you from a bookshop, you will have to pay him for it eventually. Similarly, after you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is the process whereby payment is made by the buyers, and shares are delivered by the sellers.

A rolling settlement implies that all trades have to be settled by the end of the day. Hence, the entire transaction – where the buyer pays for securities purchased and seller delivers the shares sold – have to be completed in a day.

In India, we have adopted the T+2 settlements cycle. This means that a transaction conducted on Day 1 has to be settled on the Day 1 + 2 working days. This is when funds are paid and securities are transferred. Thus, 'T+2' here, refers to Today + 2 working days. Saturdays and Sundays are not considered as working days. So, if you enter into a transaction on Friday, the trade will be settled not on Sunday, but on Tuesday. Even bank and exchange holidays are excluded.

WHAT IS SHORT-SELLING?

An investor sells short when he anticipates that the price of a stock may fall from the existing price. So, the investor borrows a share and sells it. Once the share price dips, he will buy the same share at a lower price, and return it back, while pocketing a profit in the bargain. Simply put, you first sell at a high and then buy at a low. Short-selling helps traders profit from declining stock and index prices. Since this is usually conducted in anticipation of a stock movement, short-selling is considered a risky proposition.

Let us take an example. Suppose you expect shares of Infosys to fall tomorrow for whatever reason, you enter an order to sell shares of Infosys at the current market price. Once the share price falls adequately tomorrow, you buy at the lower rate. The difference in the sale and buying prices is your profit. However, if the share prices increase after you sold at a reduced price, then you end up with a loss.

WHAT ARE CIRCUIT FILTERS AND TRADING BANDS?

Some stocks are more volatile than others. Too much volatility is not good for investors. To curb this volatility, SEBI has come up with the concept of circuit filters. The market regulator has specified the maximum limit the price of a stock can move on a given day. This is called a price trading band. If a stock breaches this limit, trading is halted in that stock for a while. There are three levels of limits. Each limit leads to trading halt for a progressively longer duration. If all three circuit filters are breached, then trading is halted for the rest of the day. NSE define circuit filters in 5 categories including 2%, 5%, 10%, 20% and no circuit filter.

Also, prices may not be same on the two exchanges – NSE and BSE. So, circuit filters can be different for shares on the two exchanges.

WHAT ARE BULL AND BEAR MARKETS?

Markets are often described as ‘bull’ or ‘bear’ markets. These names have been derived from the manner in which the animals attack their opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if stock prices trend upwards, it is considered a bull market; if the trend is downwards, it is considered a bear market.

The supply and demand for securities largely determine whether the market is in the bull or bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.

WHAT IS MARGIN TRADING?

Many traders trade on the stock market using borrowed funds or securities. This is called margin trading. It is almost like buying securities on credit. Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities, it also subjects you to a number of unique risks such as interest payments charged for the borrowed money. Kotaksecurities.com offers its customers the facility of margin trading.

WHAT IS MAHURAT TRADING?

Every year, the stock market is open for a few hours on the first day of Diwali. A special trading session conducted for an hour on the auspicious occasion of Diwali. Usually this takes place in evening. Mahurat trading has been going on for over 100 years on the Bombay Stock Exchange. It marks the beginning of a new financial year called 'Samvat'.

WHAT ARE TOP-DOWN, BOTTOM-UP APPROACHES?

These are ways to select stocks from amongst the thousands listed on the exchange.

• The top-down approach first takes into consideration the macro-economy. You understand the trends and outlook for the overall economy. Using this, you choose a one or more industries that are expected to do well in the near future. This is because every industry reacts to overall economic conditions like inflation, interest rates, consumer demand and so on, in a different way. Select one amongst the industries after in-depth analysis. Next, you understand the workings of the industry, the players and competitors and other factors that affect the sector. Based on this, you select one of the companies in the industry.
• The bottom-up approach is just the opposite. You do not look at the economy or select an industry first, but concentrate on company fundamentals. You first understand what your priorities are – high growth or steady income through high dividends. Using appropriate ratios like the Price-to-Earnings ratio or the Dividend-yield, you select a bunch of stocks. Next, analyze each of these companies; find answers for questions like what factors drive profits? Is the company management efficient? Is the company heavily indebted? What is the future outlook? And so on. Based on the results, select the company that best fits your requirements.
• The bottom-up approach is most suited for weak market conditions. This is because, the underlying belief is that these companies will perform well even if the economy is poor. They are thus anomalies – companies that don’t follow the normal market trend.

WHAT DOES COST AVERAGING MEAN?

Rupee-cost averaging is a concept when you buy a stock in small bunches, instead of buying in lump-sum. This helps reduce the average cost of your investment.

Let us use an example. Suppose you bought 100 shares of a company costing Rs. 10 each, your total investment cost is Rs. 1000. Instead of that, if you buy 50 shares for Rs. 100 and 50 for Rs. 95, your total cost of investment would be lower. Not just that, even your average cost per share would be lower. This is called rupee-cost averaging.

This concept comes handy when a stock falls after you have bought it. The fall in share price gives you an opportunity to buy more and reduce your average cost of investment. This way, when you finally sell the shares at some time in the future, you end up making more profits.

WHAT IS STOCK VOLATILITY?

Stock prices constantly fluctuate. This is because the demand for the stock changes. As more stocks change hands, greater is the change in its share price. This is called stock volatility. Even the amount of volatility in the market changes on a daily basis. To measure this volatility, the National Stock Exchange introduced the VIX India index, also called the fear gauge. VIX is often used as an indicator of stock price trends. This is because, VIX rises when there is more fear and uncertainty in the market.

This means, investors perceive an increase in risk. This usually follows a fall in the market.

WHAT ARE PRICE-TARGETS AND STOP-LOSS TARGETS?

As an investor, to maximize your profits, you need to get your pricing right – both when it comes to buying and selling. However, sometimes, prices fluctuate more than expected. So, it can become a little difficult to gauge whether to trade now or wait a little more. This is where stock recommendations help.

Analysts put out price targets and stop-loss measures, which let you know how long you should hold a stock. A price target indicates that the price of share is unlikely to climb above the level. So, once the share price touches the target, you may look to sell it and pocket your profits. A stop loss, meanwhile, acts as a target on the lower end. It lets you know when to sell before the stock falls further and worsens your loss.

WHAT IS INSIDER TRADING?

In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading is 'the trading of shares based on knowledge not available to the rest of the world’. It is illegal to trade after receiving 'tips' of confidential securities information.

This applies to corporate personnel as well as traders and brokers. This is why company management have to report their trades to the exchange. For example, when corporate officers, directors, or employees trade the company’s stocks after learning of significant, confidential corporate developments, it is considered an illegal form of insider trading. This applies to employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. Even government employees, who trade after learning of such information, are considered to have broken the law on insider trading. It is a punitive offence.

Chapter 1.3: HOW DOES SHARE MARKET WORK?

Ask any layman about the share market investing, and they will tell you that they don’t know about stock trading. Yet, the stock market is one of the largest avenues for investment. As many as Rs. 6 lakh crore-worth stocks have been traded in the two stock exchanges in India on some occasions. Stock market investing is often called a gamble. It would cease to be a gamble if you understood the basics of the share market.

HOW SHARE MARKET WORKS:

In the previous section, you were introduced to the different market participants and other share market basics. Let’s try to stitch these narratives together and understand how the stock market works.

• A stock exchange in the platform where financial instruments like stocks and derivatives are traded. Market participants have to be registered with the stock exchange and SEBI to conduct trades. This includes companies issuing shares, brokers conducting the trades, as well as traders and investors. All of this is regulated by the Securities and Exchange Board of India (SEBI), which makes the rules of conduct.

• First, a company gets listed in the primary market through an Initial Public Offering (IPO). In its offer document, it lists details about the company, the stocks being issued, and so on. During the listing, the stocks issued in the primary market are allotted to investors who have bid for the same.

• Once listed, the stocks issued can be traded by the investors in the secondary market. This is where most of the trading happens. In this market, buyers and sellers gather to conduct transactions to make profits or cut losses.
• Stock brokers and brokerage firms are entities registered with the stock exchange. They act as an intermediary between you, as an investor, and the stock exchange.
• Your broker passes on your buy order to the exchange, which searches for a sell order for the same share. Once a seller and a buyer are fixed, a price is agreed finalized, upon which the exchange communicates to your broker that your order has been confirmed.
  This message is then passed on to you. Even at the broker and exchange levels, there are multiple parties involved in the communication chain like brokerage order department, exchange floor traders, and so on. However, the trading process has become electronic today. This process of matching buyers and sellers is done through computers.
  As a result, the process can be finished within minutes.

  HOW YOUR ORDER IS PROCESSED

  

• However, there are tens and thousands of investors. It is impossible for all to converge in one location and conduct their trades. This is where stock brokers and brokerage firms play role.
• Once you place an order to buy a particular share at a said price, it is processed through your broker at the exchange. There are multiple parties involved in the process behind the scenes.
• Meanwhile, the exchange also confirms the details of the buyers and the sellers to ensure the parties don’t default. It then facilitates the actual transfer of ownership of shares. This process is called settlement. Earlier, it used to take weeks to settle trades.
  Now, this has been brought down to T+2 days. For example, if you conducted a trade today, you will get your shares deposited in your demat account by the day after tomorrow ( i.e. two working day).
• The exchange ensures that the trade is honoured during the settlement#. Whether the seller has the required stock to sell or not, the buyer will receive his shares. If a settlement is not upheld, the sanctity of the stock market is lost, because it means trades may not be upheld.
• As and when trades are conducted, share prices change. This is because prices of shares – like any other goods – are dependent on the perceived value. This is reflected in the rise or fall of demand for the stock. As demand for the stock increases, there are more buy orders. This leads to an increase in the price of the stock. So when you see the price of a stock rise, even if it is marginal, it means that someone or many placed buy order(s) for the stock. Larger the volume of trade, greater the fluctuation in the stock’s price.

HOW TO INVEST IN SHARES:

Now that you have understood exactly how the stock market works, you may be wondering how to invest in the market.

Step 1

First, understand your investment requirements and limitations. Your requirements should take into account the present as well as the future.

The same applies to your limitations. For example, you just got a job and earn Rs. 20,000 a month. Your limitation could be that you need to set aside at least Rs. 10,000 for instalment payments for your car, and another Rs. 5,000 for your monthly expenses.

This leaves aside only Rs. 5,000 for investment purposes. Now, if you are a risk-averse investor, you may prefer to invest a larger portion of this amount in low-risk options like bonds and fixed deposits. This means, you have only a small portion left for stock market investing – Rs. 1,000. Further, take into consideration your tax liabilities.

Remember, making profits on short-term buying and selling of shares incurs capital gains tax. This is not applicable if you sell your shares after a year.

So, ensure that your cash needs don’t force you to sell your shares on short-term unnecessarily. Better to take a wise well-thought decision, than attract unnecessary costs in the future.

Step 2

Once you understand your investment profile, analyse the stock market and decide your investment strategy. Find out which stocks suit your profile. If we continue the above example, with a budget of Rs 1,000, you can either choose to buy one large-cap stock or multiple small-cap stocks. If you need an additional source of income, opt for high-dividend stocks.

If not, opt for growth stocks which are likely to appreciate the most in the future. Deciding the kind of stocks you wish to collect is part of your investment strategy.

Step 3

Wait for the right time. Have you ever seen a cheetah or tiger hunt? They lie low for a while waiting for their prey, and then they pounce. Exactly the same way, time is of utmost importance in the stock market. Merely getting the stock right is not enough. Your profits will be maximised only if you buy at the lowest level possible. The same applies if you are selling your shares. This needs time. Do not be impulsive.

Step 4

Conduct your trade either online or on the phone through your broker. Ensure that your broker confirms the trade and gets all the details right. Recheck the trade confirmation to avoid errors.

Step 5

Monitor your portfolio regularly. The stock market is dynamic. Companies may seem profitable one moment, and not-so profitable the next due to some unforeseen factor. Ensure you regularly read about the companies you have invested in. In the case of some unfortunate situation, this will help you minimize your losses before it is too late.

However, this does not mean you panic every time the stock falls. A stock’s price will fall at some point in time, because there will be some investor in the market with a shorter investment horizon than you. So, he will sell his stock and pocket whatever profits possible in that shorter time. Patience is a key virtue in the markets.

Chapter 1.4: WHAT ARE DIFFERENT TYPES OF STOCKS?

When share prices rise, everyone wants to know what share to buy. Investors are keen to be a part of the wealth creation process. Stock markets are engines of economic growth for a country. A vibrant stock market is essnetial for a country like India. There are multiple ways an investor could participate.

HOW ARE STOCKS CLASSIFIED?

Stocks can be classified into multiple categories on various parameters – size of the company, dividend payment, industry, risk, volatility, as well as fundamentals.

• Stocks on the basis of ownership rules:
  This is the most basic parameter for classifying stocks. In this case, the issuing company decides whether it will issue common, preferred or hybrid stocks.

• Preferred & common stocks:
  The key difference between common and preferred stocks is in the promised dividend payments. Preferred stocks promise investors that a fixed amount will be paid as dividends every year. A common stock does not come with this promise. For this reason, the price of a preferred stock is not as volatile as that of a common stock. Another key difference between a common stock and a preferred stock is that the latter enjoy greater priority when the company is distributing surplus money.
  However, if the company is getting liquidated – its assets are being sold off to pay off investors, then the claims of preferred shareholders rank below that of the company’s creditors, and bond- or debenture-holders. Another distinction is that preferred shareholders may not have voting rights unlike holders of common stocks.

• Hybrid stocks:
  Some companies also issue hybrid stocks. These are often preferred shares that come with an option to be converted into a fixed number of common stocks at a specified time. These kinds of stocks are called ‘convertible preferred shares’. Since these are hybrid stocks, they may or may not have voting rights like common stocks.
• Stocks with embedded-derivative options: 
  Some stocks come with an embedded derivative option. This means it could be ‘callable’ or ‘putable’. A ‘callable’ stock is one which has the option to be bought back by the company at a certain price or time. A ‘putable’ share gives the stockholder the option to sell it to the company at a prescribed time or price. These kinds of stocks are not commonly available.

• Stocks on the basis of market capitalization:
  Stocks are also classified on the basis of the market value of the total shareholding of a company. This is calculated using market capitalization, where you multiply the share price by the total number of issued shares. There are three kinds of stocks on the basis of market capitalization:

• Small-cap stocks:
  - ‘Cap’ is the short form of ‘Capitalization’. As the name suggests, these are stocks with the smallest values in the market. They often represent small-size companies. Generally companies that have a market capitalization in the range of up to Rs. 250 crore are small cap stocks.
  - These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. This is because small companies have the potential to grow rapidly in the future. So, an investor may profit by buying the stock when it is cheaply available in the company’s initial stage. However, many of these companies are relatively new. So, it is difficult to predict how they will perform in the market.
  - Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring. On the other hand, the stocks of these companies tend to be volatile and may decline dramatically.

• Mid-cap stocks:
  - Mid-cap stocks are typically stocks of medium-sized companies. Generally, companies that have a market capitalization in the range of Rs. 250 crore and Rs. 4,000 crore are mid-cap stocks.
  - These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company.
  - Mid-cap stocks also include baby blue chips – companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks), but lack their size. These stocks tend to grow well over the long term.
• Large-cap stocks:
  - Stocks of the largest companies in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. They are often blue-chip firms.
  - Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities. However, the sheer size of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time.
  - Investors, however, gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks, while also ensuring the long-term preservation of their capital.

• Stocks on the basis of dividend payments: 
  Dividends are the primary source of income until the shares are sold for a profit. Stocks can be classified on the basis of how much dividend the company pays.

• Income stocks:
  - These are stocks that distribute a higher dividend in relation to their share price. They are also called dividend-yield or dog stocks. So, a higher dividend means larger income. This is why these stocks are also called income stocks.
  - Income stocks usually represent stable companies that distribute consistent dividends. However, these companies often are not high-growth companies. As a result, the stock’s price may not rise much. Preferred stocks are also income stocks, since they promise regular dividend payments.
  - Income stocks are thus preferred by investors who are looking for a secondary source of income. They are relatively low-risk stocks.
  - Investors are not taxed for their dividend income. This is another reason that long-term, relatively low-risk investors prefer income stocks.
  - So how to find such stocks? Use the dividend-yield measure to identify stocks that pay high dividends. The dividend yield gives a measure of how much an investor is earning (per share) from the investment by way of total dividends. It is calculated by dividing the dividend announced by the share price, and then written in percentage format. For example, a stock with a price of Rs. 1000 offers a dividend of Rs. 5 per share has a dividend yield is 0.5%.

• Growth stocks:
  - Not all stocks pay high dividends. This is because, companies prefer to reinvest their earnings for company operations. This usually helps the company grow at a faster rate. As a result, such stocks are often called growth stocks.
  - Since the company grows at a faster rate, the value of the shares also rises. This helps the investor earn a higher return when the stock is sold, although this comes at the expense of lower income through dividends.
  - For this reason, investors choose such stocks for their long-term growth potential, and not for a secondary source of income.
  - However, if the company ceases to grow, it cannot be called a growth stock. This makes such stocks more risky than income stocks.

• Stocks on the basis of fundamentals:
  Followers of value investing believe that a share price should equal the intrinsic value of the company’s share. They, thus, compare share prices with per-share earnings, profits and other financials to arrive at the intrinsic value per share.

• If a share price exceeds this intrinsic value, the stock is believed to be overvalued. In contrast, if the price is lower than the intrinsic value, the stock is considered to be undervalued.

• Undervalued stocks are also called ‘value stocks’. They are preferred by value investors, as they believe the share price will eventually rise in the future.

• Stocks on the basis of risk:
  Some stocks are riskier than others. This is because their share prices fluctuate more. However, just because a stock is risky does not mean investors should avoid it. Risky stocks have the potential to make you greater profits. Low-risk stocks, in contrast, give you lower returns.

• Blue-chip stocks:
  These are stocks of well-established companies with stable earnings. These companies have lower liabilities like debt. This helps the companies pay regular dividends.
  Blue-chip stocks are thus considered safe and stabile. They are named after blue-colored chips in the game of poker, as the chips are considered the most valuable.

• Beta stocks:
  Analysts measure risk – called beta – by calculating the volatility in its price. Beta values can have positive or negative values. The sign merely denotes if the stock is likely to move in sync with the market or against the market.
  What really matters is the absolute value of beta. Higher the beta, greater the volatility and thus more the risk. A beta value over 1 means the stock is more volatile than the market. Thus, high beta stocks are riskier. However, a smart investor can use this to make greater profits.

• Stocks on the basis of price trends:
  Prices of stocks often move in tandem with company earnings. Stocks are thus classified into two groups:

• Cyclical stocks:
  Some companies are more affected by economic trends. Their growth moderates in a slow economy, or fastens in a booming economy. As a result, prices of such stocks tend to fluctuate more as economic conditions change.
  They rise during economic booms, and fall as the economy slows down. Stocks of automobile companies are the best example of cyclical stocks.

• Defensive stocks:
  Unlike cyclical stocks, defensive stocks are issued by companies relatively unmoved by economic conditions. Best examples are stocks of companies in the food, beverages, drugs and insurance sectors.
  Such stocks are typically preferred when economic conditions are poor, while cyclical stocks are preferred when the economy is booming.

HOW TO BUY STOCKS?

Stocks can be classified into multiple categories on various parameters – size of the company, dividend payment, industry, risk, volatility, as well as fundamentals.

Step 1

Open demat and trading accounts. Without these two accounts, you cannot trade in the stock markets. Read how to open a demat account here, and a trading account here.

Step 2

First, analysis stocks and select ones that fit your investment profile. Read how to conduct stock market analysis.

Step 3

Once you have selected your stock, monitor it for a while. This is to ensure you buy at the lowest price possible in the near-term. Understand how the stock price moves.

First, analysis stocks and select ones that fit your investment profile. Read how to conduct stock market analysis.

Step 4

Decide when you want to place your order – during market times or after markets. This depends on the share price you are targeting. If you want to buy a stock at a fixed price, and the stock closed at that price, place the order after markets. If you feel you are likely to get a lower price during market hours, place it when the market is open for trading.

Step 5

Decide the kind of order you want to place. There are three kinds of orders – a limit order, a market order and a stop loss order, IOC (Immediate or cancel). A market order is the simplest of the lot – you simply place an order without any other specifications. In a limit order, you set an upper price limit. Suppose you have placed a limit order for 10 shares with a limit price of Rs. 100 when the share price is Rs. 99. You trade will be processed as long as shares are available at Rs. 100 or below. So, if only 8 shares are available, only 8 out of the 10 requested will be purchased. This ensures you don’t pay more than a specified amount.

Step 6

Once you have decided the specifics of your order, you either go online to your trading account to place the order, or call your broker. Give your bank account details so that the purchase money can be deducted from your account.

Step 7

Once you have decided the specifics of your order, you either go online to your trading account to place the order, or call your broker. Give your bank account details so that the purchase money can be deducted from your account.

Chapter 1.5: All you need to know about stock quotes

The stock market is an important avenue for investment. As an investor, you pay money and buy a few stocks, which then reap dividends over your investment horizon. There are over 5,000 stocks listed on the exchange. Each needs to be identified in a way that sets it apart from the other stocks listed. This is where stock quotes play an important role.

HERE’S A LOOK:

WHAT ARE STOCK QUOTES?

You must have often seen a ticker on a business news channel on the TV or on the huge billboard outside the Bombay Stock Exchange, constantly showing a bunch of letters and numbers in green or red lettering. These are stock quotes. The bunch of letters you see is a stock symbol, while the numbers that follow signify the stock price.

• What are stock symbols?
  A stock symbol is a unique code given to all companies listed on the exchange. Once you know the stock code or symbol of the company, you can easily obtain information about the company. This is important for investors who wish to conduct a financial analysis before purchasing a company’s shares. For example, TCS stands for Tata Consultancy Services, while INFY stands for Infosys. Often, it is not possible to write the full name of a company. It would take up a lot of space on the ticker board or stock table. In such a case, the stock symbol comes handy and it is just 3-4 letters. For this reason, stock symbols are also referred to as ticker symbols. So, when you are searching for a stock on Kotaksecurities.com or on the exchange’s site, typing the stock symbol will directly lead you to the company’s page, which will give you all possible details.

Note: On Kotaksecurities.com, you can also type just the first three alphabets of the company. Our site will display all possible combinations from which you may select the stock that you wish to invest in.

WHERE ARE THEY AVAILABLE?

Stock quotes are available very easily. Some of most accessible avenues to get stock information are the internet and business news channels. Pink papers or business newspapers also regularly publish a list of stock quotes, called the stock table. You could alternatively access the Kotak Securities website and get all the information that you wanted within a matter of seconds.

WHY SHOULD I READ A STOCK QUOTE?

When you invest in a stock, you need to know the stock price as well as its historical trends. This is imperative if you wish to invest in a valuable company at the right time. This will ensure that you not only get the stock right, but also the share price. Remember, if you wish to maximize your profits in the stock market, you need to buy at lows and sell at highs. So timing is of utmost importance. A stock quote gives you the information required to make this buying/selling decision.

So, you need to track stocks continuously for a period of time before making a buying or selling decision. Tracking stocks lets you gain from the best stock opportunities available in the market. It also helps you know monitor how the stocks in your portfolio are performing. No, it is not as complicated as it sounds. The Kotak Securities website can help you. It is designed to empower you with all the tools you might require to invest wisely.

You have the Portfolio Tracker Section, which lets you regularly monitor your portfolio. You can also track other stocks you wish to purchase, while keeping pace with all market activities with our Research Section that empowers you with intensive market-related research reports.

HOW TO READ STOCK QUOTES?

The stock table – available in financial papers and online – contains the information of all stocks. It can be a little confusing to understand. It has the following elements:

Company name and symbol:

The stock table needs space to fit in details of as many shares as possible. There is thus a space crunch. For this reason, company symbols, and not names, are used. On the internet, though, company’s names too are given. This helps you identify the stock.

High/low:

During market hours, share prices keep changing as more trades are conducted. This is because buying makes the stock more valuable, while selling makes it less valuable. This in turn affects the share price. To give an investor a basis for comparison, the stock quote mentions the highest and lowest prices the stock hit in that day. If the share price is constantly rising, the ‘high’ would keep climbing. In the same way, the ‘low’ would keep falling in a down market. Once the market closes, the difference between the highest and the lowest prices gives an idea about the volatility in the stock’s price.

Net change:

The closing price also helps calculate how much the stock’s price has changed. This change is written in both percentage as well as absolute value format. It is calculated by subtracting today’s price from the previous closing price, and then dividing with the closing price to get the percentage change. A positive change indicates the stock price has increased from the previous day. When the net change is positive, the stock is written in green colour, while red colour is used to denote share price has fallen.

Dividend details:

Companies distribute a portion of their profits to shareholders as dividends. While an investor holds the share, dividends are the primary source of income. For long-term investors, this is of great importance. This is because higher dividends mean greater returns for the investor. For this reason, many stock quotes mention the dividend yield, which helps compare the dividend with the share price. The dividend yield is calculated by dividing the dividend per share with the stock price. Higher the dividend yield, greater is the investor’s income through dividends.

Stock price:

This is the price an investor or trader pays to buy a single share of the company. This fluctuates constantly during market hours, and remains constant when markets are closed for trading. It reflects the value the market has allotted to the company.

Close:

Stock prices stop fluctuating once the market is shut for trading. The ‘close’ or the ‘closing price’ thus reflects the last price at which the stock traded. During the market hours, it represents the previous day’s closing price, again giving investor a benchmark to compare against. Since the newspaper is delivered in the morning, it reflects the price at which the stock closed the previous day.

52-week high/low:

This shows the highest and lowest stock price in one year or 52-weeks. This too helps the investor understand the stock’s trading range over a broader period of time.

PE Ratio:

Some stock tables and quotes also mention the PE ratio. This is the amount an investor pays for each rupee the company earns. It is calculated by dividing the stock price with the company’s earnings per share. This is important because stock price is a market-assigned value. It largely depends on market sentiment about the stock, and hence may not be in synchronization with the share’s internal value. The PE ratio, thus, helps give perspective about the share’s value in comparison to the company’s financial performance. A high PE ratio means the stock is costly, while a low PE ratio means the stock is cheaply available.

Volume:

If a company has a stipulated number of shares floated on the exchange, not all of them may be traded in a single day. It depends on demand for the stock. This is understood in the ‘volume’ section of the stock quote, which shows how many stocks changed hands. A higher trading volume is usually followed by a significant change in the stock price.

Chapter 1.6: What are stock market indices?

You may often hear people speaking that the ‘market’ fell one day, or that the ‘market’ jumped. However, if you read the stock table, you will realize that not all stocks rose or fell. There were some which moved in the opposite direction. Then, what does the ‘market’ mean?

It means an index.

Read more to understand stock indices.

WHAT ARE STOCK INDICES?

From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index. This classification may be on the basis of the industry the companies belong to, the size of the company, market capitalization or some other basis. For example, the BSE Sensex is an index consisting of 30 stocks. Similarly, the BSE 500 is an index consisting of 500 stocks.

The values of the grouped stocks are used to calculate the value of the index. Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market.

Some of the important indices in India are:

• Benchmark indices – BSE Sensex and NSE Nifty
• Sectoral indices like BSE Bankex and CNX IT
• Market capitalization-based indices like the BSE Smallcap and BSE Midcap
• Broad-market indices like BSE 100 and BSE 500

WHY DO WE NEED INDICES?

Indices are an important part of the stock market. Here’s why we need stock indices:

Sorting:

In a share market, there are thousands of companies listed. How do you differentiate between all of those and pick one or two to buy? How do you sort them out? It is a classic case of a pin in a stack of hay. This is where indices come into the picture. Companies and their shares are classified into indices based on key characteristics like size of company, sector or industry they belong to, and so on.

Representation

Indices act as a representative of the entire market or a certain segment of the market. In India, the BSE Sensex and the NSE Nifty are considered the benchmark indices. They are considered to represent the overall market performance. Similarly, an index formed of IT stocks is supposed to represent all stocks of companies from the industry.

Comparison

An index makes it easy for an investor to compare performance. An index can be used as a benchmark to compare against. For example, in India the Sensex is often used as a benchmark. So, to find if a stock has outperformed the market, you simply compare the price trends of the index and the stock. On the other hand, an index can also be used to compare a set of stocks against a benchmark or another index. For example, on a given day, the benchmark index like Sensex may jump 200 points, but this rally may not extend to a certain segment of stocks like IT. Then, the fall in the value of index representing IT stocks could be used for comparison rather than each individual stocks. This also helps investors identify market trends easily.

Reflection

Investor sentiment is a very important aspect of stock market movements. This is because, if sentiment is positive, there will be demand for a stock. This will subsequently lead to a rise in prices. It is very difficult to gauge investor sentiment correctly. Indices help reflect investor’s mood – not just for the overall market, but even sector-wise and across company sizes. You can simply compare an index with a benchmark to see if has underperformed or outperformed. This will, in turn, reflect investor sentiment.

Passive investment

Many investors prefer to invest in a portfolio of securities that closely resembles an index. This is called passive investment. An index portfolio helps investors cut down cost of research and stock selection. They rely on the index for stock selection. As a result, portfolio returns will match that of the index. For example, if Sensex gave 8% returns in one month, an investor’s portfolio that resembles the Sensex is also likely to give the same amount of returns. Indices are also used to construct mutual funds and exchange-traded funds (ETFs).

HOW ARE STOCK INDICES FORMED?

An index consists of similar stocks. This could be on the basis of industry, company size, market capitalization or another parameter. Once the stocks are selected, the index value is calculated. This could be a simple average of the prices of the components. In India, the free-float market capitalization is commonly used instead of prices to calculate the value of an index.

The two most common kinds of indices are – Price-weighted and market capitalization-weighted index.

What is stock weightage?

Every stock has a different price. So, a 1% change in one stock may not equal a similar change in another stock’s price. So, the index value cannot be a simple total of the prices of all the stocks. Here is where the concept of stock weightage comes into play. Each stock in an index has a particular weightage depending on its price or market capitalization. This is the amount of impact a change in the stock’s price has on index value.

• Market-cap weightage
  Market capitalization is the total market value of a company’s stock. This is calculated by multiplying the share price of a stock with the total number of stocks floated by the company. It thus takes into consideration both the size and the price of the stock. In an index using market-cap weightage, stocks are given weightage on the basis of their market capitalization in comparison with the total market-capitalization of the index. For example, if stock A has a market capitalization of Rs. 10,000 while the index it is part of has a total m-cap of Rs. 1,00,000, then its weightage will be 10%. Similarly, another stock with a market-cap of Rs. 50,000, will have a weightage of 50%.
  The point to remember is that market capitalization changes every day as the stock price fluctuates. For this reason, a stock’s weightage too changes every day. However, it is usually a marginal change. Also, the market capitalization-weightage method gives more importance to companies with higher m-caps.
  In India, most indices use free-float market capitalization. In this method, instead of using the total shares listed by a company to calculate market capitalization, only the amount of shares publicly available for trading are used. As a result, free-float market capitalization is a smaller figure than market capitalization.
• Price weightage
  In this method, an index value is calculated on the basis of the company’s stock price, and not market capitalization. Stocks with higher prices have greater weightages in the index than stocks with lower prices. The Dow Jones Industrial Average in the US and the Nikkei 225 in Japan are examples of price-weighted indices.
  There are also other kinds of weightages like equal-value weightage or fundamental weightage. However, they are rarely used by public indices.

HOW IS INDEX VALUE CALCULATED?

An index’s value depends on whether it is a price-weighted index or market cap-weighted. Let us take the example of the BSE Sensex to understand how an index is calculated.

Chapter 1.7: All you need to know about the annual report

Corporate earnings announcements and annual reports are a must as per law. This is to keep investors informed about the company’s operations and financial performance. In this section, we will learn about these reports, how to understand them and why they are important to the investor.

WHAT ARE COMPANY EARNINGS?

Companies undertake activities that produce a good or service. This is sold to customers who pay a certain amount of money for it. The total amount the company receives is called 'revenue'. A company also incurs expenses on employees, utility bills, costs of production and other operating expenses.

Once you deduct these expenses, the surplus left is the company’s earnings, or net profit. Usually, income earned from operations is the key source of profits. Many companies also earn additional income from different kinds of investments.
Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of investment property.

Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations.

WHAT ARE QUARTERLY AND OTHER FINANCIAL REPORTS?

Every three months, every company has to submit details about its financial performance. These are called quarterly reports. In addition, companies may also provide with special reports called statistical supplements. These provide investors with additional financial information. These, however, are not as comprehensive as the annual report.

Thus, quarterly reports are very similar to the annual reports, except they are issued every three months and are less comprehensive. These are filed with the stock exchange, which then makes it available to investors.

WHY ARE EARNINGS IMPORTANT TO YOU AS AN INVESTOR?

As an investor who holds shares of the company, you have part ownership of the company. You are thus entitled to get a portion of the company's profit as dividends. Until you sell the stock, this is your primary source of income as an investor from the stock holding. As a result, if the company does well and earns more profit, you receive more as dividend. Not just that, it will also drive up the inherent value of your shareholding. This means you earn more returns.

Sometimes, when a company is in the initial stages of growth, it may choose to reinvest its earnings for operations and expansion. While you are temporarily at a loss as an investor, this increases the likelihood that you will get higher dividends in the future.
Company earnings are important to you, even if you hold its bonds. This is because, when you lend money to the company by investing in its bonds, the company uses part of its earnings to repay you through interest payments. The greater the company’s earnings, the more secure you can be that you will receive your interest payments. So, company earnings are important to you because you make money when the business you invest in makes money.

INSIDE THE ANNUAL REPORT:

Here is what comprises an annual report:

• A letter from the chairman on the high points of business in the past year with predictions for the next year.
• The company philosophy – a section that describes the principles and ethics that govern a company's business.
• An extensive report on each section of operations within the company, describing the company's services or the products.
• Financial information that includes the profit and loss (P&L) statements, cash flow statement and a balance sheet. Depending on its income and expenses, the company will either make profits or show losses for the year. The cash flow statement, as the name suggests, reflects where the money came from and how it was utilized. It is an important financial statement as it helps one understand if the company is generating enough money from its operations to fund the costs, or if the company is constantly reliant on external funding like debt or equity. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations.
• An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by independent accountants.
• The annual report also includes a section called management’s commentary. In this section, the management explains how the balance sheet and income statements have been prepared, where the funds have come from, and how they have been utilized. This is also an important section as it reflects the management’s mindset and outlook

UNDERSTANDING THE BALANCE SHEET

The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that all of the company’s funds are accounted for, and that financial accounts are always in balance. It is reported to investors at least once a year. You may also receive quarterly, semi-annually or monthly balance sheets. The contents of a balance sheet include what the company owns, what it owes, and the value of the business to its stockholders.

Let’s look at these three components in detail:

WHAT ARE ASSETS?

This is the component that details all that the company owns. Assets, then, are any items of economic value owned by a corporation that can be converted into cash. There are two main kinds of assets – current and long-term assets.

CURRENT ASSETS:

Are assets that can be easily converted to cash in the short term within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. It is also important because assets can be easily liquidated into cash, which could help prevent loss of your investments incase of bankruptcy.

Also, current assets are important to most companies, as they are a source of funds for day-to-day operations. It is, thus, evident that the more current assets a company owns, the better it is performing.

- Cash and cash equivalents are also a kind of current assets. Cash equivalents are non-cash items, but which can be converted into cash quite easily. For this reason, they are considered equal to cash. Cash equivalents are generally highly liquid, can be sold easily, short-term and safe investments like bank deposits.

- Accounts Receivable is another kind of a current asset. It is the money customers – either individuals or corporations – owe the firm in exchange for goods or services that have been delivered or used. For example, suppose your shopkeeper is willing to supply goods on an account-basis, and you pay for all the goods at the end of the month, whatever money you owe him will be counted as accounts receivable until you actually pay for it.

Simply put, this is business being done on credit instead of cash. For this reason, it is a significant component of the balance sheet. Although accounts receivable is money owed to you, it is recorded as an asset on the balance sheet as it represents a legal obligation for the customer to pay the cash.

- A firm’s inventory is the stock of goods produced that have not been sold yet. It sometimes also includes the materials already bought for manufacturing a particular good.

For this reason, a manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory, generally, will consist only of products purchased that are still to be sold. Since inventory is likely to earn the company money in the future, it is recorded as an asset on the balance sheet.

LONG-TERM ASSETS :

Are those assets that cannot be converted into cash in the current or upcoming fiscal year.

They are grouped into several categories like:

- A long-term tangible asset is one that is held for business use and is not expected to be converted to cash in the current or upcoming fiscal year. Examples include manufacturing equipment, real estate, and furniture. Fixed assets like equipment, buildings, production plants and property are a kind of long-term tangible asset. They are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the company’s earnings.

On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all such assets, except land. Depreciation gives you an estimate of the decrease in the value of an asset that is caused by 'wear and tear'. Sometimes, it also occurs because the asset has become obsolete. Depreciation appears in the balance sheet as a deduction from the original value of the fixed assets. This is because the value of the fixed asset decreases due to ‘wear and tear’.

- Intangible assets are non-physical assets such as copyrights, franchises and patents. Since they are intangible and not concrete like tangible assets, it becomes difficult to estimate their value. Often there is no ready market for them. However, there are times when an intangible asset can be the most valuable asset that a company possesses.

WHAT ARE LIABILITIES?

This is the component of the balance that deals with a company's debt to outside parties. They represent the rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt. Examples of liabilities include bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into current liabilities and long-term liabilities.

CURRENT LIABILITIES :

Are debts that are due within one year. They include the money owed for taxes, salaries, interest, accounts payable and notes payable. A company is considered to have good financial strength when current assets exceed current liabilities.

- Accounts payable is the amount the company owes to suppliers that it has bought raw materials and other goods from. You will often see accounts payable on most balance sheets. Let us take the example used earlier for accounts receivable. When you purchase goods from the shopkeeper on a monthly-account basis, whatever money you owe him before the end of the month is counted as ‘accounts payable’ in your balance sheet. Since the money is paid over a short-term, accounts payable is counted as a current liability.

LONG-TERM LIABILITIES :

Are long-term loans that are to be paid back over a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

WHAT IS SHAREHOLDER'S EQUITY?

This is the value of a business to its owners after all of its obligations have been met. Shareholder’s equity is calculated as the value of a company's assets subtracted from the value of its total liabilities. Shareholders' equity is also calculated by the sum of the amount of capital the owners invested, and the portion of the profits that the company reinvests rather than distributing as dividend.

Recollect that companies distribute a portion of their income as dividends to shareholders. Whatever left is called retained earnings. This is reinvested in the company for its operations. Thus, shareholder’s equity reflects how much the business is funded through the two key common sources – owners’ capital invested initially and the money accumulated over time from profitable operations.

WHY SHOULD THE BALANCE SHEET BE IMPORTANT TO YOU?

As an investor, you need to ensure that the company you have invested in has good potential for future growth, and will yield good returns. The balance sheet helps you get answers to questions like:

• Will the firm meet its financial obligations?
• How much funds have already been invested in this company?
• Is the company overly indebted?
• What are the different assets that the company has purchased with its financing?
• Is the company using its funds efficiently?

These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance.

HOW DO I OBTAIN AN ANNUAL REPORT?

Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company website, or search the internet; there are several sources on the internet providing such information on public companies.

All listed companies are required to submit the financial reports available in the public domain as per SEBI regulations. These may, hence, also be available with the two exchanges – Bombay Stock Exchange and National Stock Exchange.

HOW DO YOU USE EARNINGS INFORMATION TO MAKE AN INVESTMENT DECISION?

Your investment goals, determine how you use information about company earnings. If you are an income investor – one interested in earning immediate income from your investments – you probably want to invest in a company that is paying high dividends.

If you have a long-term investment strategy, dividends may not be as important to you. In this case, you may choose to compare company financial, which indicates whether a company is oriented for income, growth, or a bit of both. By comparing the financials for different companies in the same industry, you can find characteristics best suited to your investment goals.

A convenient way to compare companies is through Earnings per Share (EPS). It represents the net profit divided by the number of outstanding shares of stock.

When you compare the EPS of different companies, be sure to consider the following:

• Companies with higher earnings are financially stronger than companies with lower earnings.
• Companies that reinvest their earnings may pay low or no dividends, but may be poised for growth.
• Companies with lower earnings and higher research and development costs may be on the brink of either a breakthrough or a disaster, making them a risky proposition.
• Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger.

Chapter 1.8: Stock Market Analysis and More

You cannot invest without analyzing the stocks and the underlying companies. That would be akin to running on the highway blindfolded. There are many kinds of share market analyses. Read further to know about fundamental and technical analyses

WHAT IS FUNDAMENTAL ANALYSIS?

This method aims to evaluate the value of the underlying company. It takes into account the intrinsic value of the share keeping in mind the economic conditions and the industry along with the company’s financial condition and management performance. A fundamental analyst would most definitely look at the balance sheet, the profit and loss statement, financial ratios and other data that could be used to predict the future of a company. In other words, fundamental share market analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.

The basic belief is that as the company grows so will the value of the share increase. This in turn will benefit the investor in the long run.

WHAT IS AN OVERVALUED STOCK OR AN UNDERVALUED STOCK?

Once you look at the balance sheet and other financial details, you use ratios to compare the financials with the price of the stock. This helps understand how much an investor is really paying in comparison with the company’s growth. The most common ratio used is the Price-to-Earnings or PE ratio. This is computed by dividing the share price with the company’s earnings per share.

If the share price in comparison with its earnings per share is less than industry average, then the stock is said to be undervalued. This means the stock is selling at a much lower price than what it is actually worth.

In contrast, an overvalued stock is where the investor is paying more for each rupee the company earns. This means, the stock’s price exceeds its intrinsic value. This often happens when investors expect the company to do well in the future. A high PE in relation to the past PE ratio of the same stock may indicate an overvalued condition, or a high PE in relation to peer stocks may also indicate an overvalued stock.

However, as an investor you have to be very careful. Compare the fundamental value of the stock with its historic values. If there is a sudden increase in valuation, there are high chances that the price may fall to correct the mispricing. In case of a sudden fall in valuation, check for any latest news about the company. It is quite likely that some new factor may have emerged that may be detrimental to the company’s profits.

Since the PE is computed using the earnings per share for the year gone by, it is called a trailing PE. This is not a perfect way to understand the stock’s value. For this reason, analysts often use the forward PE, where the estimated earnings per share for the current or another year is used.

Let us understand using an example.

Suppose a company ABC earns Rs 50 per share. Its current share price is Rs 100. Its PE ratio is thus 2. Suppose, the average PE ratio for the industry is 5, then the company is undervalued. If there is another company in the same industry with a PE ratio of 10, then its stock will be considered to be overvalued.

However, an analyst expects the company to earn Rs 100 per share in the next financial year. Then the forward PE would be 1.
This shows that the price is even more undervalued when you consider the company’s growth.

WHAT IS TECHNICAL ANALYSIS?

Unlike fundamental analysis, technical analysis has nothing to do with the financial performance of the underlying company. In this method, the analyst simply studies the trend in the share prices. The underlying assumption is that market prices are a function of the supply and demand for the stock, which, in turn, reflects the value of the company. This method also believes that historical price trends are an indication of the future performance.

Thus, instead of assessing the health of the company by relying on its financial statements, it relies upon market trends to predict how a security will perform. Analysts try to cash in on the momentum that builds up over time in the market or a stock.

Technical analysis is often used by short-term investors and traders, and rarely by long-term investors, who prefer fundamental analysis.
Technical analysts read and make charts of prices. Some common technical share market analysis measures are the day-moving averages (DMAs), Bollinger bands, Relative Strength Indices (RSI) and so on.

INVESTING PHILOSOPHIES:

So now you know about stock market analysis techniques. How does that really help you invest? These investing philosophies will help you understand.

What does value investing mean?

Value investing is an investment style, which favors good stocks at great prices over great stocks at good prices. Hence, it is often referred to as ‘price-driven investing’. A value investor will buy stocks that may be undervalued by the market, and avoid stocks that he believes the market is overvaluing. Warren Buffet, one of the world's best-known investment experts, believes in value investing.

For example, if a stock of a company growing at 10% is selling at Rs 100 with a PE ratio of 10 and another stock of company that also grows at 10% is selling at Rs 150 with a PE ratio of 15, the value investor would select the first stock over the second. This is because the first stock is undervalued in comparison with the second.

Value investors see the potential in the stocks of companies with sound financial statements that they believe the market has undervalued. They believe the market always overreacts to good and bad news, causing stock price movements to not move in tandem with long-term fundamentals. For this reason, they are always on the hunt for undervalued companies.

Value investors profit by taking a position on an undervalued stock (at a deflated price) and then profit by selling the stock when the market corrects its price later. Value investors don't try to predict which way interest rates are heading or the direction of the market and the economy in the short term. They only look at a stock's current valuations and compare them to their historical range.

In other words, they pick up the stocks as fledglings and cash in on them when they are valued right in the markets.

For example, say a particular stock's PE ratio has ranged between a low of 20 and a high of 60 over the past five years, value investors would consider buying the stock if its current PE is around 30 or less. Once purchased, they would hold the stock until its PE rose to the 50-60 ranges, before they consider selling it. In case they expect further growth in the future, they may continue to hold.

What is contrarian philosophy?

As the name suggests, the contrarian philosophy suggests trading against the market sentiment. This means you buy stocks when they are out of favor in the market place, and avoiding stocks that everyone is buying. They then sell these stocks when they gain back the favor.

Contrarians believe in taking advantages that arise out of temporary setbacks or negative news that have caused a stock’s price to decline.

A simple example of the contrarian philosophy would be buying umbrellas in the winter at a cheap rate and selling them during rainy days. Value investing is a kind of contrarian philosophy.

HOW TO PLACE CONTRARIAN TRADES?

If you are a contrarian trader:

• Conduct stock market analysis. Find out stocks with low PE ratios.
• Once you do that, compare with historical PE ratios and share prices.
• Read up about the company, its financial performance and future outlook. If you are satisfied that the company is inherently worthy, select the stock.
• Wait for the prices to decline. Buy at lows.
• You could also look at market indicators like mutual fund cash positions, and put/call ratios, and investment advisory opinions. Mutual funds hold a portion of their assets as cash. A greater cash holding suggests that mutual funds are bearish, while a low cash holding means mutual funds are investing money in the markets. This means they are bullish. Once you understand this, take an exactly opposite position. Sell when MFs are buying and buy when they are selling.
• A put option is an agreement to sell in the future in the derivatives market, while a call option is when you agree to buy in the future. The put/call ratio helps you understand the proportion of put options and call options. The higher this ratio, the greater the put options, and vice versa.
• An increase in put options suggests that the market is bearish, while demand for call options means the market is bullish. As a contrarian trader, you should prepare accordingly.
• Investment advisories are issued by many brokerage firms and investment banks, which regularly conduct analysis of individual stocks, industries and the overall economy. A positive recommendation often leads to an increase in share price as investors buy the stock. Contrarian traders could buy when negative investment advisories are issued, and sell after positive recommendations.

Chapter 1.9: All about Dematerialization and Demat Accounts

WHAT IS DEMATERIALIZATION?

Technology has brought about a drastic change in our everyday lives. The stock markets too have not been left untouched by the change. In 1875, the Bombay Stock Exchange was founded with an open outcry floor trading exchange. Traders would stand on the floor and shout prices of stocks for buying or selling. Then, money would be exchanged for physical receipts of the shares called the certificate. This led to a great amount of paperwork. Even the settlements of trade agreements took time because of the need to deliver the share certificates.

Much has changed since.
In 1996, dematerialization was embraced. Dematerialization is the process by which physical share certificates held by an investor are converted into an equivalent number of securities in electronic form and credited into the investor’s demat account.

BENEFITS OF DEMATERIALIZATION

COMMON BANK:

Dematerialization is not just for shares, but also for debt instruments like bonds. Now, you can hold all your investments in a single account.

AUTOMATIC UPDATE:

Since this is a common account, you don’t have to keep giving all your details like addresses every time you transact or every time you change the details. These details are automatically made available to companies you transact with.

ODD-LOT PROBLEM:

Earlier, shares were transacted in lots. A single or odd number of securities could not be transacted. This problem is now eliminated.

DELIVERY RISKS:

Dematerialization has also eliminated the risks of fake shares, thefts, deliveries gone wrong, and so on, and reduced the paperwork involved. Time of delivery has also reduced drastically. Once your trade is approved, the securities are automatically credited to your account. This applies to other company-related activities like stock splits, stock bonuses, and so on.

COST REDUCTION:

Earlier, when you transferred the securities, you incurred extra costs due to the stamp duty. This is not a problem with the demat form.

EASY TO HOLD:

Paper certificates are vulnerable to tears and damage. In contrast, the dematerialized or demat format is a safe and convenient way to hold securities. You also have a nomination facility, whereby you can facilitate a transfer of shares in the event of your demise.

WHAT IS DEMAT ACCOUNT?

A demat is to your shares what a bank account is to your money. Simply put, it is the account that holds all your shares in electronic or dematerialized form. Like the bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs). You cannot trade in the stock market without a demat account.

UNDERSTAND HOW THE DEMAT ACCOUNT WORKS:

CENTRAL DEPOSITORY:

There are two depositories in India – the CDSL and NSDL. They hold all the demat accounts. The central depository holds details of your shareholding on your behalf like banks.

UNIQUE ID:

Each demat account has a unique number for identification purposes. This is the number you need to provide for transactions. The number will help the exchange and companies identify you and credit the shares in your account.

DEPOSITORY PARTICIPANTS:

Access to the central depository is provided by the Depository Participants or DPs. They act as the intermediary between the central depository and the investor. DPs could be banks, brokers or financial institutions that are empowered to offer demat services. Kotak Securities is one such Depository Participant (DP). You open a demat account or a Beneficial Owner (BO) accounts with a DP, who will provide you a unique access to the central depository.

PORTFOLIO HOLDING:

The demat account holds all your securities. So, whenever you check your account, you can see your portfolio holding and its details. These are updated automatically every time you conduct a transaction – be is buying or selling a security.

HOW DO YOU OPEN A DEMAT ACCOUNT?

• Then fill up an account opening form and submit along with copies of the required documents and a passport-sized photograph. You also need to have a PAN card. Also carry the original documents for verification.
• You will be provided with a copy of the rules and regulations, the terms of the agreement and the charges that you will incur.
• During the process, an In-Person Verification would be carried out. A member of the DP’s staff would contact you to check the details provided in the account opening form.
• Once the application is processed, the DP will provide you with an account number or client ID. You can use the details to access your demat account online.
• As a demat account holder, you would need to pay some fees like the annual maintenance fee levied for maintenance of account and the transaction fee -- levied for debiting securities to and from the account on a monthly basis. These fees differ from every service provider (called a Depository Participant or DP). While some DPs charge a flat fee per transaction, others peg the fee to the transaction value, and are subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). In addition to the other fees, the DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa.
• Minimum shares: A demat account can be opened with no balance of shares. It also does not require that a minimum balance be maintained.

WHAT ARE THE DOCUMENTS REQUIRED FOR A DEMAT ACCOUNT?

You need to submit proof of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification.

Here is a broad list of documents that can be used as proofs:

You need to submit proof of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification.

Proof of identity: PAN card, voter's ID, passport, driver's license, bank attestation, IT returns, electricity bill, telephone bill, ID cards with applicant's photo issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities, or professional bodies such as ICAI, ICWAI, ICSI, bar council etc.

Proof of address: Ration card, passport, voter ID card, driving license, bank passbook or bank statement, verified copies of electricity bills, residence telephone bills, leave and license agreement or agreement for sale, self-declaration by High Court or Supreme Court judges, identity card or a document with address issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities and professional bodies such as ICAI, ICWAI, Bar Council etc.

This is easy. All you need to do is fill in the Demat Request Form (DRM), fill in the appropriate details of the share certificates you hold, and submit it with the physical share receipt. Every share certificate needs a separate DRM form. Once the form is approved, your demat account will automatically be updated to reflect your newly dematerialized shares.

Chapter 1.10: How to open a Demat Account

HOW DO YOU OPEN A DEMAT ACCOUNT?

• First select the Depository Participant you want to open your demat account with. Most brokerages and financial institutions offer the service.
• Then fill up an account opening form and submit along with copies of the required documents and a passport-sized photograph. You also need to have a PAN card. Also carry the original documents for verification.
• You will be provided with a copy of the rules and regulations, the terms of the agreement and the charges that you will incur.
• During the process, an In-Person Verification would be carried out. A member of the DP’s staff would contact you to check the details provided in the account opening form.
• Once the application is processed, the DP will provide you with an account number or client ID. You can use the details to access your demat account online.
• As a demat account holder, you would need to pay some fees like the annual maintenance fee levied for maintenance of account and the transaction fee -- levied for debiting securities to and from the account on a monthly basis. These fees differ from every service provider (called a Depository Participant or DP). While some DPs charge a flat fee per transaction, others peg the fee to the transaction value, and are subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). In addition to the other fees, the DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa.
• Minimum shares: A demat account can be opened with no balance of shares. It also does not require that a minimum balance be maintained.

WHAT ARE THE DOCUMENTS REQUIRED FOR A DEMAT ACCOUNT?

You need to submit proofs of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification.

Here is a broad list of documents that can be used as proofs:

PROOF OF IDENTITY 

PAN card, voter's ID, passport, driver's license, bank attestation, IT returns, electricity bill, telephone bill, ID cards with applicant's photo issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities, or professional bodies such as ICAI, ICWAI, ICSI, bar council etc.

PROOF OF ADDRESS 

Ration card, passport, voter ID card, driving license, bank passbook or bank statement, verified copies of electricity bills, residence telephone bills, leave and license agreement or agreement for sale, self-declaration by High Court or Supreme Court judges, identity card or a document with address issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities and professional bodies such as ICAI, ICWAI, Bar Council etc.

WHAT NEXT?

Now that you know all about dematerialization and demat accounts, read about trading accounts – a must have for investing in the share market – and how they differ from a demat account. Click here.

If you are looking to open a demat account with Kotak Securities, click here.

Chapter 1.11: All about Demat and Trading Account: All you need to know

WHAT IS A TRADING ACCOUNT?

When a company lists on the stock market, its shares become available for trading on the stock exchange. Earlier, the exchange had an open-outcry system. In the mid-90s, the stock exchanges adopted the electronic system. This means, all trades were conducted electronically. Simply put, you didn’t have to go to the counter and place an order physically. You could do it through a computer, which would verify the details, the market price, and process the trade.

For this reason, you need a special account through which you can conduct transactions. This is called the trading account. Without one, you cannot trade in the stock markets. You register for an online trading account with a stock broker or a firm. Each account comes with a unique trading ID, which is used for conducting transactions.

WHAT IS THE DIFFERENCE BETWEEN DEMAT AND TRADING ACCOUNTS?

Yes. A trading account is used to place buy or sell orders in the stock market. The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from. Trading account with Kotak Securities helps you trade seamlessly in the stock market.

Let’s use an example.

You have Rs.100 in your wallet. You go to a shop and tell the seller that you want a packet of chips, you check the price, and finalize the transaction. Then, you take the money out of your wallet and give it to the seller. In this case, the wallet acts as the demat account, while you act as the trading account.

HOW TO OPEN AN ONLINE TRADING ACCOUNT?

Just like the demat account, a trading account is a must for investing in the stock market. This is because to trade in the stock markets, you need to be registered with the stock exchange. Stock brokers are registered members of the exchanges. They traditionally conduct trades on your behalf.

Most often, stock broking firms have thousands of clients. It is not feasible to take physical orders from every client on time. So, to make this process seamless, it is advisable to open an online trading account. Using this trading account, you can place buy or sell orders either online or phone, which will automatically be directed to the exchange through the stock broker.

HERE’S HOW YOU OPEN A TRADING ACCOUNT:

• First, select the stock broker or firm. Ensure that the broker is good and will take your orders in a timely manner. Remember, time is of utmost importance in the stock market. Even a few minutes can change the market price of the stock. For this reason, ensure that you select a good broker.
• Compare brokerage rates. Every broker charges you a certain fee for processing your orders. Some may charge more, some less.
• Some give discounts on the basis of the amount of trades conducted. Take all this into account before opening an account. However, remember that it is not necessary to choose a broker who charges the lowest fees. Good quality brokerage services provided often may need higher-than-average charges.
• Next, get in touch with the brokerage firm or broker and enquire about the account opening procedure. Often, the firm would send a representative to your house with the account opening form and the Know Your Client (KYC) form
• Fill these two forms up. Submit along with two documents that serve as proof of your identity and address.
• Your application will be verified either through an in-person check or on the phone, where you will be asked to divulge your personal details.
• Once processed, you will be given your trading accounts details. Congrats, you will now be able to conduct trades in the stock market

HOW TO TRADE USING DEMAT ACCOUNT?

STEP 1:

Link your trading and demat accounts. This way you won’t have to keep supplying your demat account details for every transaction.

STEP 3:

The exchange will process your order. It will verify the details of the transaction, the market price, the availability of the shares in the market, and so on. It will also check the details of your demat account that is linked to your trading account. This is especially so in case of a sell order.

STEP 2:

Place an order through your online trading account. This could be a market order, a limit or buy order, or an after-market order. If your brokerage allows you to place orders through the phone, then you will need to supply your trading account details.

STEP 4:

Once the order is processed, the shares will be either deposited in or debited from your demat account.

CAN YOU TRANSFER SHARES USING DEMAT ACCOUNT?

• Nomination: Yes, nomination is possible. You can have a nominee of your choice by filling up the details in the account opening form. This enables the nominee to receive the securities after the death of the holder of the demat account.
• Between DPs: Transfer of shares is possible between demat accounts held with different DPs. You need to fill the Delivery Instruction Slip Book (DIS) and submit the same to your DP for transferring your shares from another demat account. However, you need to check whether the central depositories are same or not (CDSL or NSDL). If both of them are different, then you need an INTER-Depository Instruction Slip (Inter DIS). If they are same, then you need an INTRA Depository Instruction Slip (Intra DIS).
  Do try to submit that DIS when the market is on. Then, the date of submission of DIS and date of execution of DIS would be the same. Otherwise, there may be a delay. You may also need to pay the broker some charges for the transfer.
  
  

  Chapter 1.12: How to open a Trading Account

  Since 2000, the stock markets have become electronic. This means, trading is conducted online. Today, you need a demat and a trading account to invest in the stock market. A trading account is opened with a stock broker.

  Most often, stock broking firms have thousands of clients. It is not feasible to take physical orders from every client on time. So, to make this process seamless, you open a trading account. Using this account, you can place buy or sell orders either online or phone, which will automatically be directed to the exchange through the stock broker.

  

  HERE'S HOW YOU OPEN A TRADING ACCOUNT

  • First, select the stock broker or firm. Ensure that the broker is good and will take your orders in a timely manner. Remember, time is of utmost importance in the stock market. Even a few minutes can change the market price of the stock. For this reason, ensure that you select a good broker.
  • Compare brokerage rates. Every broker charges you a certain fee for processing your orders. Some may charge more, some less.
  • Some give discounts on the basis of the amount of trades conducted. Take all this into account before opening an account. However, remember that it is not necessary to choose a broker who charges the lowest fees. Good quality brokerage services provided often may need higher-than-average charges.
  • Next, get in touch with the brokerage firm or broker and enquire about the account opening procedure. Often, the firm would send a representative to your house with the account opening form and the Know Your Client (KYC) form
  • Fill these two forms up. Submit along with two documents that serve as proof of your identity and address.
  • Your application will be verified either through an in-person check or on the phone, where you will be asked to divulge your personal details.
  • Once processed, you will be given your trading accounts details. Congrats, you will now be able to conduct trades in the stock market

  WHAT ARE THE DOCUMENTS REQUIRED?

  Just like the procedure for opening a demat account, you need to submit proofs of identity and address along with a passport size photograph and the account opening form for opening a trading account.

  Here is a broad list of documents that can be used as proofs:

  PROOF OF IDENTITY 

  PAN card, voter's ID, passport, driver's license, bank attestation, IT returns, electricity bill, telephone bill, ID cards with applicant's photo issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities, or professional bodies such as ICAI, ICWAI, ICSI, bar council etc.

  PROOF OF ADDRESS 

  Ration card, passport, voter ID card, driving license, bank passbook or bank statement, verified copies of electricity bills, residence telephone bills, leave and license agreement or agreement for sale, self-declaration by High Court or Supreme Court judges, identity card or a document with address issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities and professional bodies such as ICAI, ICWAI, Bar Council etc.

  Chapter 1.13: Stock Market FAQs?

  Have some more questions about the stock market? Here are answers to some common questions:

  WHY WOULD I CHOOSE STOCKS?

  Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.

  WHAT INSTRUMENTS ARE TRADED IN THE STOCK MARKETS?

  There are various types of instruments traded in the stock market. They include shares, mutual funds, IPOs, futures and options.

  WHERE DO I BUY STOCKS?

  Stock trading happens on stock exchanges. However, you cannot buy directly at the exchange. To buy stocks, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission. You can easily buy stocks through Kotaksecurities.com, one of India's leading stock brokers, with a variety of services and products to cater to all your investment needs at very reasonable brokerage rates. Once you are registered with us, you can trade using the Kotak Securities website, our mobile trading app, our desktop trading application, or through the phone using our Call & Trade facility.

  

  WHERE DO I FIND STOCK RELATED INFORMATION?

  Some of the most accessible avenues to get stock information are the internet, business news channels and print media. You could alternatively access the Kotak Securities website and get all the information that you wanted within a matter of seconds.

  WHAT ARE SOME OF THE ORDERS I CAN PLACE?

  You can place different kinds of orders such as market orders, limit orders, stop loss orders, good-till-cancelled orders, after-market orders (AMOs), etc.

  

  Market order

  A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

  Limit order

  To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the current market price. However, although a limit order guarantees a price, it cannot guarantee execution of the trade. This is because the stock might not reach the desired price on that particular trading day owing to market-related factors.

  Stop loss order

  A stop loss order is a normal order placed with a broker to sell a security when it reaches a certain predetermined price called the trigger price. Sometimes the market movements defy your expectations. Such market reversals often result in loss-bearing transactions. The stop loss trigger price is your defense mechanism – an amount at which you will be able to sustain yourself against such unanticipated market movements. For example, if you bought a stock at Rs. 10, you place a stop loss order with your broker to sell it, if it reaches Rs. 8. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.

  Good-till-canceled

  GTC or Day Orders are orders given to your broker that hold true only during the trading day when the order was placed. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus, they are orders that are only 'good until it is canceled' or 'good for the day'. For example, suppose that you have placed a stop loss order with your broker to sell a stock once the price reaches level X. If it does not reach limit X, your broker will not sell the stock. However, the stop loss order given to your broker will not hold true for the next day. So, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again.

  IOC

  An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security as soon as the order is released into the market, in case order failed to full fill the total quantity it will be removed from the market. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

  WHAT HAPPENS IN CASE MY SHARES ARE SHORT SOLD?

  At any point of time when the shares are short sold and the same are not delivered to the exchange, the shares go in for auction. Here, the shares are purchased on behalf of the client in the auction market and delivered to the actual buyer. To carry on the auction procedure, 150% of the amount shall be blocked in your account. This amount will be reversed once the actual auction charges are debited from your account.
  
  You also have the option to transfer shares from some other demat account to your demat account with Kotak Securities in order to adjust for the shares short-sold. However, the shares should be transferred one day prior to the pay-in date before 3.30 p.m.

  WHAT ARE ADVANCES AND DECLINES?

  • Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest 'advances' inform you how the market has progressed. In contrast, 'declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical analysis tool that indicates market movement. The ratio is calculated using the formula:
    
  • Generally, it is seen that in bullish markets, the number of stocks that advance is more than the ones that declined; the converse holds true in a bearish market. The indicator – market breadth – is used to gauge the number of stocks advancing and declining for the day.
  • 'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day.
  • Advances and declines are calculated from the previous day’s closing results. However, a market with an advance-decline ratio that is significantly down or up may have a hard time reversing out of that direction the next day.

  CAN I TRADE WHEN MARKETS ARE SHUT?

  No, you cannot trade when the markets are shut but you can place orders . Such orders are called After-Market Orders. AMO is for those customers who are busy during market hours but wish to participate. When you place an AMO, you have to keep in mind the closing price of the stock. You can choose a price which is 5% higher or lower than the closing price. That said, your order will be processed as soon as the market opens the next day at the opening price if it falls within this 5% band.
  
  AMOs come handy when you need time to plan your orders after conducting research. During market hours, you need to actively track the price as it is constantly fluctuating. This is not the case for AMOs.

  WHAT ARE STOCK RECOMMENDATIONS?

  You cannot invest without conducting research. Often, many analysts and brokerage firms undertake their own stock market research keeping in mind the economy, industries, currency valuation, and so on. They often use public data from institutions like the Reserve Bank of India and speak to experts as part of their research. This is not easily possible for retail investors. As a result, findings of such research are extensively followed by investors, which also give a buy or sell recommendation for specific stocks.

  CAN I OWN MORE THAN ONE DEMAT OR TRADING ACCOUNT?

  Yes, you can own more than one demat and trading account. However, these may be with multiple brokers and firms. While you have the freedom to open many accounts, it is not a viable option. This is because you would have to pay maintenance charges for each of these accounts, which may turn out to be costly affair in the long run.

  HOW CAN YOU QUALIFY THE MARKET AS BULL OR BEAR?

  Bull and bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements that last for a few days, as they may only indicate corrections or short-lived movements.

  WHAT IS BOTTOMING OUT?

  Stock prices move in trends – an upward and a lower trend. During periods of bear markets, prices keep falling. However, there will come a time when the market starts to look cheap. This is when it starts to rise again as people start buying slowly. This phenomenon when the market free-fall ends and the rise begins is called bottoming out.
  
  Similarly, on the higher end, there will come a point when too much buying has made the stock costly. Traders then start selling in droves to book profits. So, the price does not rise beyond this level. This is called 'peaking'.

  

  WHAT ARE THE VARIOUS TYPES OF THE RISKS ONCE I START TRADING?

  

  This is the risk of investing in the stock market in general. It refers to a chance that a security’s value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors like inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affected by market risk.

  INDUSTRY RISK

  This is a risk that affects all companies in a particular industry. This is because the companies in an industry may work in a similar fashion. This exposes them to certain kinds of risk unique to the industry.

  REGULATORY RISK

  Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations that will dramatically affect a business.

  BUSINESS RISK

  These are the risks unique to an individual company. It refers to the uncertainty regarding the organization’s ability to conduct its business. Products, strategies, management, labor force, market share, etc. are among the key factors investors consider in evaluating the value of a specific company.

  WHAT IS BANKRUPTCY?

  Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer meet its financial obligations. Both stocks and bondholders fear bankruptcy. This is because you are unlikely to get all your money back. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible. However, in case the liabilities exceed the value of the company’s assets, even creditors may be at a loss.