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EQUITY

1) What is equity market?
Equity means ownership interest of shareholders in a corporation and equity market is a market in which shares are issued and traded. It is also known as the stock market. Buying a share of the company provides capital to company and a part of ownership of the company to the investors, who are also known as shareholders.

Equity markets have two segments:

  1. Primary Market: where new issues are first offered, deals with IPOs (initial public offering) and FPOs(final public offering).
  2. Secondary Market: any subsequent trading takes place in the secondary market.


2) What is an asset?
An asset is any resource controlled as a result of past transactions that are expected to provide future economic benefits. Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, while fixed assets include such items as buildings and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs, and financial assets, including such items as accounts receivable, bonds and stocks.

3) What are risk ratios?
Every investment, be it in any securities like stocks, bonds or mutual funds, is associated with some risk. There are 5 main indicators of investment risks ie. alpha, beta, r-squared, standard deviation and sharpe ratio. They are all a part of the Modern Portfolio Theory (MPT). The MPT is a standard method used for assessing the performance of various investments by comparing them to market benchmarks.

4) What is alpha?
Alpha is the risk adjusted returns on an investment. It is the excess return over a given benchmark. So an investor should normally buy securities with a positive alpha thus having the possibility of gains in future. If an investment outperforms the benchmark, that means more reward for a given amount of risk. In that case ? > 0.

If an investment underperforms the benchmark; that means the investment has earned too little for its risk. In that case ? < 0. For efficient markets, the expected value of the alpha is zero. i.e ? = 0 and the investment has earned a return adequate for the risk taken.



5) What is beta?
Beta is the measure of the volatitlity of the security in comparison to the movement of the market as a whole.

If beta is positive, it means the stocks are highly volatile and the changes in stocks are greater than the changes in the market movement.

If beta is negative, it means the stocks are less volatile and the changes in the stocks are lesser than the changes in the market movement.

If beta is 1, then the security?s price will move in sync with the market.



6) What is Risk free return?
The risk-free rate is the minimum return an investor should expect for any investment, as any amount of risk would not be tolerated unless the expected rate of return was greater than the risk-free rate.

7) What is CAPM Model?
The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate.

8) What is Price to Earning?
P/E ratio is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.

9) What is EPS?
Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.

10) What is an Index?
An index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

11) What is Nifty?
Nifty, is National Stock Exchange of India's benchmark index for Indian equity market. Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. . IISL is India's first specialized company focused upon the index as a core product. IISL has marketing and licensing agreement with Standard & Poor's for co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE Index'.

12) What is Sensex?
The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The 30 component companies which are some of the largest and most actively traded stocks are representative of various industrial sectors of the Indian economy.

13) What is an IPO and a FPO?
IPO stands for Initial Public offering. It occurs when a privately held company lists a proportion of its shares on a stock exchange making the company public. IPO is raising funds from the public for the very FIRST TIME by issuing shares and in return sharing the ownership of the company with them.

Issuing more shares to the public for want of more funds is called FPO. FPO is Follow-on Public Offer.



14) What is syndication?
Syndication represents a joint effort formed temporarily for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Investing together allows professional financial services group to pool resources and share the risk of an investment. For example, an underwriting syndicate is a group of investment banks that works together to issue new stock to the public. The bank that takes the lead in this endeavor is called the syndicate manager.

15) What is delivery based trading?
This is the type of trading wherein full amount of shares /funds are blocked at the time placing an order ie. if you want to buy shares, you must make the full payment in cash and while selling shares, all shares should be available in your dmat account.

16) What is intraday trading?
In intraday trading, if you place a buy order on a particular trading day, you must also place a sell order of same size, or vice versa, on that very day. Eg: If you buy 20 shares of a company today, then you will have to necessarily sell those 20 shares today itself. All the intraday positions have to be closed prior to 20 minutes of market closure. This is also known as margin trading.

17) What is business valuation?
Business valuation is a process or a set of procedures used to estimate the economic value of a business. Valuation is used in many cases like when one is planning to sell a business, one is planning to acquire another business, to seek funding etc.

There are 4 ways to value a business:

  1. Discounted Cash Flow (DCF) Analysis
  2. Multiples Method
  3. Market Valuation
  4. Comparable Transactions Method


18) Why invest in equities?
Some benefits of investing in equities are:
  1. They have a higher level of liquidity, hence give ready access to money.
  2. They can give higher returns through price appreciation; some companies also distribute bonus shares which increase net value; stocks pay dividend.
  3. Once you buy a share of a company, you become the shareholder of the company i.e. you gain a partnership of the ownership of the company.
  4. The dividend income generated on shares is tax ? free. Hence tax benefits.


19) What is an offer document?
Offer document is a legal document that contains all the relevant details regarding the issue of stock. Investors go through this document to make their decision.

20) Who is a broker?
A broker is a person who is permitted to do trades on different stock exchanges and is registered with SEBI. An investor can contact a broker to carry out transactions pertaining to the capital market. However before contacting a broker, the investor should ensure that the broker is registered with the SEBI by verifying his registration certificate issued by SEBI.

21) What are the major rights and obligations of an investor?
a) Before entering into a contract with the broker, ensure that he is registered with SEBI.

b) Satisfy yourself about the credentials of the broker by asking for information/documents supporting his claims.

c) Keep a documentary proof of having made deposit of money or securities with the broker.

d) Before activating your trading account, obtain clear idea from your broker about all brokerage, commissions, fees and other charges which will be levied on your trades.

e) Furnish details in full as are required by the broker as required in ?know your client? (KYC) norms.

f) Ensure that a contract note is issued by the broker which contains complete records of every transaction within 24hrs of the execution of the contract.

g) In case pay-out of money and / or securities is not received on the next working day after date of pay-out, follow up with the concerned broker for its release. If it is not released within five working days, ensure to lodge a complaint immediately with the Investors? Grievance Cell of the exchange.

h) Ensure to receive a complete ?Statement of Accounts? for both funds and securities settlement every quarter.



22) How trading takes place and what is the process of trading?
The normal course of online trading in the Indian market context is placed below:

Step 1. Investor / trader decides to trade

Step 2. Places order with a broker to buy / sell the required quantity of respective securities

Step 3. Best priced order matches based on price-time priority

Step 4. Order execution is electronically communicated to the broker?s terminal

Step 5. Trade confirmation slip issued to the investor / trader by the broker

Step 6. Within 24 hours of trade execution, contract note is issued to the investor / trader by the broker

Step 7 Pay-in of funds and securities before T+2 day

Step 8. Pay-out of funds and securities on T+2 day