An corrected market is an opportunity call to invest into tumbled stocks. The history of stock exchanges and the stock trading has witnessed numerous incidents of people becoming rich overnight as well as impecunious at the same time. People therefore have advanced in saying the stock market is a gamble, an authorized legal gamble. Not surprised, but the remark is a confirmed stamp especially from those who have squandered their coffers & bank balances by burning their fingers in stock trades.
However the stock markets are beyond anyone’s derogatory speculation and imaginations. And it is therefore important to understand this stock market and its perspectives, its functioning, trading, investments, risks, profits, etc. This motive leads to the formation of our blog “An Insight Into Indian Stock Markets”.
The history of the stock exchange dates back to the 18th century, when the BSE-Bombay Stock Exchange was formed in 1875. Formerly known as “The Native Share and Stock brokers Association” – it was formed by an informal group of stock brokers. The leading stock broker of that time Mr. Premchand Roychand assisted in setting out its traditions, conventions, and procedures for trading of stocks at Bombay Stock Exchange which are still being followed. In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act. Later in 1992 the National Stock Exchange- NSE was introduced as the first dematerialized electronic exchange in the country. Its electronic trading system removed the paper-based settlement system from trading and provided a modern, fully automated screen-based electronic trading system which offered an easy trading facility to the investors.
Understanding the terms
Stock Exchange:Stock Exchanges are an organized marketplace that provides a trading platform for the buyers and sellers to meet to transact in company stocks or other securities. The main function of the stock exchanges is to:
- Provide trading platform to investors and provide liquidity
- Register the members- Stock Brokers & sub brokers
- Provide Indices
- Manage the risk in securities transactions
- Facilitate the listing of securities
There are many exchanges in India; the prominent two which are popular and are trading in high volumes are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Sensex: Sensex is the first benchmark equity index of BSE which was introduced in the year 1986. It provides a base for identifying the top 30 trading companies of the exchange from more than 10 sectors. The other indices of BSE other than Sensex includes BSE 100, BSE Midcaps, BSE Small caps, BSE Auto, BSE Pharma, BSE Infra, BSE Metal, BSE PSU, etc.
Nifty: Nifty is the benchmark equity index of NSE which was introduced in the year 1996. It consists of top 50 companies actively traded stocks. Nifty is also known as Nifty50 or CNX Nifty.
NSDL & CDSL: NSDL and CDSL are the two largest securities depositories in India. In the depository system, securities are held in depository accounts, which is similar to holding funds in bank accounts.
NSDL: Is the National Securities Depository Limited founded in the year 1996 and is promoted by NSE. It is the first depository in India to handle the most of the held securities and their settlements in dematerialized form in the Indian capital markets. The older systems of paper-based settlement of trades caused substantial problems of bad delivery and delayed transfer of title and therefore the NSDL was introduced to allow the investors and traders to securely hold and transfer their stocks electronically. Their safekeeping is not limited only to the stocks but also to their other services such as stocks, bonds, debentures, commercial papers, mutual funds, etc.
CDSL: Central Depository Services (India) Ltd. i.e CDSL founded in 1999 is the second Indian central securities depository based in Mumbai, being promoted by BSE. It also facilitates the holding, transferring and transacting in securities in the electronic form and settlement of trades on stock exchanges. These securities include equities, debentures, bonds, units of mutual funds, certificate of deposits (CDs), commercial paper (CP), Government securities and Treasury Bills.
SEBI: SEBI – The Securities and Exchange Board Of India is a regulatory authority established in 1992 to regulate the securities markets of India and to protect the interests of the traders, investors, brokers & sub-brokers and prohibiting the fraudulent & unfair trade practices in the securities markets.
Though the history of the stock markets remains indifferent for the investor, it remains important for them to know these basic terminologies and understand its functions before investing / trading into the stock markets.
Trading in Stock Markets
The main motto of any investor or trader to enter the stock markets is earnings i.e. to earn on their invested amounts invested in securities and stocks.There are no definite formulas or equations that can ascertain the volatile stock indexes and ascertain the future prices of the listed stocks. However predictions can be made on the expected returns and the appreciations on the stock prices on the basis of its (company’s stocks) past performances, announcements from the company, sectoral specific news, chart reading and interpretations, etc. For doing this research there are R&D teams (Research & Development) with stock-broker companies that carry out the research and studies on the stocks-history, volatility, past movements, range, 52 weeks high & low, circuit levels, internal and external factors/ announcements affecting the stock prices, etc. This study is of vital importance in PMS services offered by the stock broking houses. PMS – Portfolio Management Services is an investment portfolio in stocks managed by a professional portfolio manager that can potentially be tailored to meet specific investment objectives. The SEBI guidelines on PMS states that one needs to invest a minimum of Rs. 5 lacs for PMS. However the minimum amount requirement criteria for the PMS may vary between broking house to houses.
The high volatility and the unpredictable nature of the stock markets states one must acquire patience over the invested amount if good profits are to be earned. Ideally the stock investments should be made from a long term perspective. The greed for the short term earning by conducting short term trades or intraday churns can extinguish the entire invested amount or may limit the profits and may also post loss in the books of accounts. It is therefore important that one must study the stock markets and its trading etiquettes before jumping into the volatile ocean of stocks trading. Below mentioned are few of the important trading etiquettes & protocols:
1. Understanding the function of demat account and trading account. In simple language a demat account is an account where the shares are stored while the trading account is a fund/margin account that stores the money through which the shares are bought.
2. The capital gains earned through the stock trades are classified as either long-term gains or short-term gains and are therefore taxed accordingly. The dividend income earned on the shareholdings is also subject to income tax.
3. There is a capping on the percentage increase in the prices of the stocks per day. This is referred to as circuit levels of the stocks. There can either be a buying circuit or a selling circuit in a stock. Buyer circuit implies there are only buyers in the script and no sellers while the seller circuit means there are only sellers and no buyer in the script.
4. The 52 weeks high and the 52 weeks low of the stocks are considered as the benchmark prices for facilitating the trades.
5. The indexes are driven by the heavy weighted stocks also known as large caps whose prices are the driving force for the direction of the indexes.
6. There are basically three types of trades
- Delivery/cash carry forward trades- buying a stock which can be sold at a later date.
- Intraday trades- buying and selling in a stock only for a day.
- Derivative trades in Future and options –
For Delivery/carry forward trades
(a.) Utilize own funds and buy stocks in delivery/cash trade over intraday preferences. This reduces the risk of loss.
(b.) In delivery trades brokerage is charged on both legs i.e. for buy as well as sell plus the applicable taxes.
(c.) Same dated cash delivery trade punched for buy and consequently sold for the same quantity is treated as intraday transaction and intraday brokerage is applicable.
(d.) Shares- dividend, split, bonus, etc. are applicable only on the long term share holdings.
For intraday trading always remember:
(a.) Always trade with the market trend.
(b.) Avoid trading in high volatile markets.
(c.) Intraday trades also facilitate selling first and then buying in the underlying stocks.
(d.) Always buy and sell if the market is bullish OR first sell and then buy if the markets are bearish.
(Bull Market – market is positive and the stocks are trading in green
Bear Market – market is negative and the stocks are trading in red)
(e.) Avoid trading on extra margins especially in volatile and unpredictable markets.
(f.) Do not rely on “TIPS”. They may be misleading at times. Rely on your own instincts.
(g.) Book profits on regular intervals. Do not greed for more. Be satisfied with the profits already booked.
(h.) Entry and exit is important in intraday trades.
(i.) Always trade with a stop loss.
(j.) Do not utilize your full margins on a single trade. Keep funds for averaging.
(k.) Remember intraday trades are subject to square off at 3.pm. Close all intraday open positions before 3 pm or else the positions will be auto-squared off after 3 pm at whatever prevailing stock price. If you wish to carry forward the open intraday position convert the intraday trade to delivery/cash.
(l.) Brokerage on intraday is charged on a single leg plus applicable taxes.
(m.) Learn to reverse the positions. Eg. if got stuck in a long position (i.e. the buy position) and the market is short (i.e. negative) book loss and over sell to create a short position and vice-a-versa.
For derivative trading
(a.) In derivatives trade there is no scope for buying a single quantity of shares. Unlike in cash delivery and intraday trades the futures and options contracts have a pre-decided lot size consisting of the number of shares and the trade has to be placed in the multiple of lot sizes.
(b.) Brokerage charged is similar to intraday trades – on single leg plus applicable taxes for future trades & flat fee per lot on both legs for buy as well as sell trade in options.
(c.) Futures are contracts where the buyer and seller enter into a contract to buy or sell at a predetermined future date and price.
(d.) Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. In options the holder is not required to buy or sell the asset if they choose not to.
(e.) There are two types of options: a Call option and a Put option. To define a call option – it gives the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time, to define put option – it gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.
(f.) In simple terms, the call is the long (buying) position in the option and the put is the short (selling) position in the option of the underlying stock.
To summarize: Share market is one of the apt choices of investments over a horizon period of long term share holding pattern. It gives dual benefits to the investors. First, the appreciation in the prices of the stocks is the long term capital gain and second the dividend earned on the shareholdings is also an income to the investors. Investors eye on the opportunities to invest into tumbled stocks and add to their net worth with the increased profits on the share prices. Indian stock markets are one such market that has provided promising returns to its investors. History evidence has shown that our markets have reacted impulsively in comparison to other worldwide markets but have recorded promising recoveries by providing good returns on the investments. The past impact of viruses such as SARS, Avian Influenza i.e. bird flu, EBOLA & Zika took a severe hit on the stock markets and the Indian markets crashed heavily along with the worldwide stock markets reacting negatively to these viruses. However sharp recovery was noticed in the markets especially the Indian stock markets which recovered to provide more than 50% returns over a year. In light of the past performances of the Indian stock markets, the current market correction in the Indian stock markets owing to the pandemic Covid19, can also be assumed as an investment opportunity for buying the stocks at cheaper prices by the investors.
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