Investing is how you can make your money grow, or appreciate for long term financial goals. It is based on your budget, long term goals and risk appetite. Its main objectives are safety, income and growth.
Depending upon the investment objective and risk, you can invest in different asset classes. Asset class can be defined as a group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.
The most popular investment options are:
- Mutual Funds
A security is a financial instrument representing financial value. Securities are broadly categorized into:
- Debt securities (such as banknotes, bonds and debentures)
- Equity securities e.g. common stocks
- Derivative contracts, such as forwards, futures, options and swaps.
Introduction to stock market and how to invest in Equities
Equity is a stock or any other security representing an ownership interest.
E.g. If you own 10 shares of a company which has 1000 outstanding shares, you own 1% (10*100/1000) stake in the company.
Stock Exchange/ Stock market
A stock exchange/market is a platform for the trading of securities like stock/ shares, and derivatives. A stock may betbought or sold only if it is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. The major stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) which are regulated by Security and Exchange Board of India (SEBI).
Primary market is the market which deals with the issuance of new securities. Companies raise fund through this market by issuing shares or bonds. Primary market issues include:
- Initial Public Offerings (IPO): Initial Public Offer (IPO) is privately held company's first sale of stock to the general public via a stock exchange. An IPO can generate funds for working capital, debt repayment, acquisitions, and a host of other uses.
- Rights Issue: A rights issue is when a company offers existing shareholders a right to purchase additional shares of the company at a given price, which is normally at a discount to the prevailing market price of the stock.
- Preferential Issue: A Preferential issue is an issue of stocks or of convertible securities through listed firms to a select number of person’s under Section 81 of the Companies Act, 1956 that is neither a public issue nor a rights issue. This is a speedier path for a firm to increase equity funds.
Secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. In the secondary market you purchase shares from other seller and not from the issuer of the share i.e. the company directly.
E.g. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)
Stock Market Index
A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.
Stock market indices are important because of following reasons:
- They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt.
- They can be used as a standard/benchmark to compare the performance of an equity fund.
- It is a lead indicator of the performance of the overall economy or a sector of the economy.
There are two leading and nation-wide stock exchanges in India:
- Bombay stock Exchange (BSE)
- National Stock Exchange (NSE)
Apart from these there are 20 regional Exchanges connected via the Inter-Connected Stock Exchange (ICSE).
- SENSEX: Main index of BSE, consisting of 30 stocks, representing large, well-established and financially sound companies across key sectors
- MIDCAP: This includes scripts which gives market capitalization coverage between 80% & 95% (i.e. when companies are arranged in descending order of their market capitalization, this group contributing 15% (80-95%) of Market capitalization).
- SMLCAP: This includes scripts which gives market capitalization coverage between 95% & 100% (i.e. when companies are arranged in descending order of their market capitalization, this group contributing 5% (95% & 100%) of Market capitalization).
- BSE-500: It represents more than 93% of the listed universe.
Apart from these, BSE also have sectoral indices, volatility index, thematic and investment strategy indices.
- S&P CNX NIFTY: The main index of NSE, consisting of well diversified 50 stock index accounting for 24 sectors of the economy.
- CNX NIFTY JUNIOR: This also consists of 50 stocks. S&P CNX Nifty and the CNX Nifty Junior make up the 100 most liquid stocks in India.
- INDIA VIX: India VIX is a volatility index based on the NIFTY Index Option prices.
- CNX 100: CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy, owned and managed by India Index Services & Products Ltd. (IISL), a joint venture between CRISIL & NSE.
- S&P CNX DEFTY: S&P CNX Nifty is S&P CNX Nifty, measured in dollars for performance indication to foreign institutional investors, off-shore funds etc
- S&P CNX 500: The S&P CNX 500 companies are disaggregated into 71 industry indices viz. S&P CNX Industry Indices. Industry weightages in the index reflect the industry weightages in the market.
- CNX MIDCAP: CNX Midcap Index captures the movement and act as a benchmark of the midcap companies with minimum 3 years of operation and a positive net worth.
- NIFTY MIDCAP 50: This consists of stocks with average market capitalization ranging from Rs.1000cr to Rs.5000cr, excluding those in S&P CNX NIFTY and which are not part of the derivatives segment.
Apart from these NSE also have different sectoral indices.
Market Capitalization, often shortened as "Market Cap", is the total market value of a company's outstanding shares. Market capitalization is calculated by multiplying the number of shares outstanding (this includes the value of all listed categories of a corporation's stocks - preferred stock, common shares, etc) by the market price per share which is the current value of a company.
For example, if a company has 10cr shares, and the current price per share is Rs.10, then the company's market capitalization is (10cr shares x Rs.10), or Rs.100cr.
In general, the larger the market cap the greater the stability and the lower the risk. In general, large caps are mature companies and small caps are younger, growing companies. Small caps carry greater risk, but also more upside potential than large caps.
Free float market capitalization
Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. Shareholdings of investors that would not, in the normal course, come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float.
Difference between trading and investing
|Intraday Trading||Delivery Based Investment|
|1.||In Intraday trading you buy and sell the same day without actually getting the shares in your account.||In this one can sell or buy stocks as and when he wants, as the investor takes the delivery of the stock which is done on T+2 basis i.e. if the trade was done on date T, it gets delivered on second business day after to the trade day T.|
|2.||Even if you do not sell the stocks by yourself, they will automatically square off before the closing of the exchange.||This gives advantage to the investor to hold the stock till it reaches the expected price.|
|3.||Investment period is only few hours.||In this investor may enjoy the benefit of dividend paid by the company based on his investment period.|
|4.||The brokerage charge is less in this type of trading.||The brokerage charge is more than that in intraday trading.|
In India, demat account is a dematerialized account for an investor to trade in listed stocks or debentures in the stock market.
Dematerialization is the process of converting securities from physical form to electronic form or directly allotting securities in electronic form to the investor’s Demat A/C with the DP.
A depository holds securities like shares, debentures, bonds, government securities, and units in electronic form at the request of the investors through a registered Depository Participant. A depository also provides services related to transactions in securities. And, to avail the services of depository, you need to open an account with its agents known as Depository Participants (DPs).
When an Index or a stock moves in any direction more than the specified percentage, then it enter a circuit. This can happen because of the speculation about the particular stock or, the industry or economy as a whole. If it moves up, it is Upper circuit and if it moves down, it is referred as lower circuit.
To control this circuit movement, SEBI has rules known as circuit breakers. Circuit breaker varies for stocks and Index as a whole.
The index-based market-wide circuit breaker applies at three stages:
- When the index moves up or down by 10 percent
- When the index moves up or down by 15 percent
- When the index moves up or down by 20 percent
When triggered, these circuit breakers bring all buying and selling of shares on the index to a halt.
|If index moves up/down by 10%||If index moves up/down by 20%||If index moves up/down by more than 20%|
|Before 1 PM .||1 hr||2 hr||Trading is stopped for the rest of day, irrespective of time|
|Between 1 pm to 2.30 pm||30 min||1 hr|
|2.30 pm onwards||Trading continues||Trading is stopped|
When these breakers are applied on individual stocks, they are known as price bands/ price filters.
- These are not applied to the 30 stocks listed in BSE SENSEX and 50 stocks listed in Nifty. They are only applied to non-index stocks.
- Circuit filter changes every day and stock keeps moving between one circuit filter categories to other based on previous day’s closing price.
- If circuit set for a stock is 10%, then the stock price cannot move up or down more than 10%.
- The NSE has price bands of 2%, 5%, 10% and 20%.
- The BSE has a price band of 20% for all non-index stocks, but it often reduces it 10%, 5% or 2% depending on the movement in the price of the stock based on criteria decided by the surveillance department.
- Mainly, the price bands are decreased for illiquid stocks because there are high chances of manipulating the stocks due to their low volumes.