stock market basics

Before investing, it is always wise to learn the Basics of Stock Market. We have compiled articles and tutorials on the Share Market Basics. Also included here explanation of Stock Market Terms and jargon used by people involved in trading stocks and shares. Whether it is Bombay Stock Exchange (BSE), National Stock Exchange (NSE), London Stock Exchange (LSE) or New York Stock Exchange (NYSE), trading terms or more or less similar

INVESTING IN STOCKS

Many of us would like to try our luck in the Stock markets. Yes, Why Not ? Trading stocks is one of the most lucrative methods of making money.

Here's Why :

1. You do not need a lot of money to start making money, unlike buying property and paying a monthly mortgage.

2. It requires very minimal time to trade - unlike building a conventional business. 

3. It’s ‘fast’ cash and allows for quick liquidation (You can convert it to cash easily, unlike selling a property or a business).

4. It’s easy to learn how to profit from the stock market.

But You need to have your basics clear. Unless you do….you will be wasting your time and loosing money. You need to be crystal clear of each and every aspect of Investments, stock options, Stock Trading, Company, Shares, Dividend & Types of Shares, Debentures, Securities, Mutual Funds, IPO, Futures & Options, What does the Share Market consist of? Exchanges, Indices, SEBI , Analysis of Stocks – How to check on what to buy?, Trading Terms (Limit Order, Stop Loss, Put, Call, Booking Profit & Loss, Short & Long), Trading Options – Brokerage Houses  etc.

Systematic Investment Plan(SIP)

The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor.

Systematic Investment Plan :-

• A specific amount should be invested for a continuous period at regular intervals under this plan.
  
• SIP is similar to a regular saving scheme like a recurring deposit. It is a method of investing a fixed sum regularly in a mutual fund.
  
• SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the mutual fund scheme.
  
• While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in a rising market.
  
• The investor automatically participates in the market swings once the option for SIP is made.
  

SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit fits in the lower range of average market price. An investor can either give post dated cheques or ECS instruction and the investment will be made regularly in the mutual fund desired for the required amount. SIP generally starts at minimum amounts of Rs.1000/- per month and upper limit for using an ECS is Rs.25000/- per instruction. For instance, if one wishes to invest Rs.1, 00,000/- per month, then they need to do it on four different dates.

SIP investor
It is easy to become a systematic investor. One needs to plan the saving effectively and set aside some amount of money every month for investment purposes in a fund that is ideally a diversified equity fund or balanced fund. Post dated cheques can be given to the fund house. The investor is at liberty to exit from the scheme depending on the market conditions.

Benefits of Systematic Investment Plan

Power of compounding: The power of compounding underlines the essence of making money work if only invested at an early age. The longer one delays in investing, the greater the financial burden to meet desired goals. Saving a small sum of money regularly at an early age makes money work with greater power of compounding with significant impact on wealth accumulation.

Rupee cost averaging: Timing the market consistency is a difficult task. Rupee cost averaging is an automatic market timing mechanism that eliminates the need to time one's investments. Here one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets.

Convenience: SIP can be operated by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be banked on the specified dates and the units credited into the investor's account. The SIP facility is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund.

SIP features:-
Disciplined investing is vital to earning good returns over a longer time frame. Investors are saved the bother of identifying the ideal entry and exit points from volatile markets. SIP options such as equity, debt and balanced schemes offer a range of investment plans. While there is no entry load on SIP, investors face an exit load if the units are redeemed within a stipulated time frame. The success of your SIP hinges on the performance of your selected scheme.

Insurance

Insurance :-
  In law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Principles of insurance :-

Commercially insurable risks typically share seven common characteristics.

1. A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, proportionally the actual results are increasingly likely to become close to expected proportions. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to the insured, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. 
6. Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market. 

Types of Insurance :-

1.Motor insurance
This includes automobile, truck, motorcycle, aircraft, boat, or any other form of motorized transportation. It is perhaps the most common type of insurance, and is required by law in many countries.

Motor insurance covers the insured party against financial loss that he may incur to repair his vehicle or a third party’s in the event of an accident. In return for annual or semi-annual premiums, the insurance company is bound to pay any losses as described in the policy. Such a policy may include property, liability or third party, and medical coverage.

Property coverage insures damage to or theft of a vehicle; liability covers bodily injury or property damage that may occur as a result of the insured’s actions, and medical coverage pays any fees necessary for bodily injuries, rehabilitation and in some cases foregone wages and funeral costs.

In many countries, all of these types of automovile insurance are required of vehicle owners. In some countries, or states, only third party is required. However, in the case of new vehicles, any banks which may be financing the vehicle may require full insurance as a condition of financing.

2.Health insurance
Most developed nations have government-funded health care which means that most or all citizens have access to medical facilities and treatment, as well as health insurance.
For example, the National health Service (NHS) in the United Kingdom pays for citizens’ medical needs. However, in the US, there is no government-funded health policy - whether for insurance or treatment. As a result, US citizens and residents must be insured or risk facing astronomical medical bills, garnishing of wages, and bankruptcy. Often, medical insurance (both health and dental) is included in employee benefit packages in the US and other countries. Nevertheless, the issue of affordable health insurance and treatment in the US is one of the most controversial and heated topics, as many cannot afford either. If you live in a country without comprehensive national health care, then low cost health insurance is a vital requirement.


3.Disability insurance
This form of insurance protects workers from injuries and illnesses which prevent them from doing their jobs. It can pay for existing commitments the policyholders may have such as outstanding bills, mortgages, utilities, and more.
Workers’ compensation is common in the US, and pays a worker his wages and medical expenses in the event of an injury on the job.
Permanent disability which prevents a worker from ever working again is covered by total permanent disability insurance. This provides the disabled employee with benefits for the rest of his or her life, or according to the terms specified in the policy. Companies can purchase a similar type of insurance, called, disability overhead insurance. This pays for ongoing overhead costs of a business while the owners are not able to work.

4.Property insurance
This type of insurance typically covers things like homes, machinery, crops, valuable goods, shipped cargo, rented property (homes or apartments), and more.


It can cover damages as a result of various activities including acts of God (earthquakes, floods, storms, hurricanes, etc), vandalism, terrorism, fraud, and more.
5.Liability insurance
This covers negligent acts of an insured party with reference to a vehicle or a home. It protects the insured against legal claims and indemnification.

There are various types of liability insurance such as professional indemnity insurance Environmental liability insurance and Prize indemnity insurance .
Professional indemnity insurance protects employees from malpractice suits (as in the medical profession), errors and omissions (by appraisers, home inspectors, realtors, insurance agents, notaries, and others), and other acts of unintentional workplace negligence.
6.Credit insurance
This is taken by lenders who need coverage against the people that have credit with them (borrow money). In the event of their inability to pay it back (usually due to unemployment, disability, or death), this insurance protects the lender.


There are many other kinds of insuance, and even each of the major categories mentioned above has dozens of variations and types. They differ depending on the markets, the understanding of risk and availability of historical data, government regulation and law, cultural perceptions and expectations, and more.
 

Money Market Instruments

Money Market Instruments:-

By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned instruments are normally termed as money market instruments:

1. 
   
   Certificate of Deposit (CD)
   
   
   
2. 
   
   Commercial Paper (C.P)
   
   
   
3. 
   
   Inter Bank Participation Certificates
   
   
   
4. 
   
   Inter Bank term Money
   
   
   
5. 
   
   Treasury Bills
   
   
   
6. 
   
   Bill Rediscounting
   
   
   
7. 
   
   Call/ Notice/ Term Money
   
   
   

Bonds & Debentures

 Bonds:-

A bond is a debt security, by which you are lending money to a government, municipality, corporation, or other entity known as the issuer.

In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures or becomes due.

Why Invest in Bonds?

Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital or to receive dependable interest income.

What should be the key Bond Investment Considerations?

There are a number of key variables to look at when investing in bonds: the bond’s maturity, redemption features, credit quality, interest rate, price and yield. Together, these factors help determine the value of your bond investment and the degree to which it matches your financial objectives.

  Face Value:-

Securities are generally issued in denominations of 10, 100 or 1000. This is known as the Face Value or Par Value of the security.

What is the Coupon rate of the Security?

The Coupon rate is simply the interest rate that every debenture/Bond carries on its face value and is fixed at the time of issuance. For example, a 10% p.a coupon rate on a bond/debenture of Rs 100 implies that the investor will receive Rs 10 p.a. The coupon can be payable monthly, quarterly, half-yearly, or annually or cumulative on redemption

 Interest Rate:-

Bonds pay interest that can be fixed, floating or payable at maturity. Most debt securities carry an interest rate that stays fixed until maturity and is a percentage of the face (principal) amount. Typically, investors receive interest payments semiannually. For example, a Rs.1000 bond with an 8% interest rate will pay investors Rs.80 a year, in payments of Rs.40 every six months. When the bond matures, investors receive the full face amount of the bond—Rs.1, 000. 
Floating Interest rate:-

Some sellers and buyers of debt securities prefer having an interest rate that is adjustable, and more closely tracks prevailing market rates. The interest rate on a floating—rate bond is reset periodically in line with changes in a base interest—rate index, such as the rate on Treasury bills.

Zero Coupon Bond:-

Some bonds have no periodic interest payments. Instead, the investor receives one payment at maturity that is equal to the purchase price (principal) plus the total interest earned, compounded semiannually at the (original) interest rate. Known as zero coupon bonds, they are sold at a substantial discount from their face amount. For example, a bond with a face amount of Rs.10, 000 maturing in 5 years might be purchased for about Rs.7130. At the end of the 5 years, the investor will receive Rs.10, 000. The difference between Rs.10, 000 and Rs.7, 130 represents the interest, based on an interest rate of 7%, which compounds automatically until the bond matures.

What do you mean by the Maturity of the bond?

Securities are issued for a fixed period of time at the end of which the principal amount borrowed is repaid to the investors. The date on which the term ends and proceeds are paid out is known as the Maturity date. It is specified on the face of the instrument. Maturity ranges are often categorized as follows:

• Short—term notes: maturities of up to five years
  
  
  
• Intermediate notes/bonds: maturities of five to 12 years
  
  
  
• Long—term bonds: maturities of 12 or more years
  
  
  

What is redemption and what are the various Redemption Features?

On reaching the date of maturity, the issuer repays the money borrowed from the investors. This is known as Redemption or Repayment of the bond/debenture.

• Call Provisions: Some bonds have redemption, or “call” provisions that allow or require the issuer to repay the investors’ principal at a specified date before maturity. Bonds are commonly “called” when prevailing interest rates have dropped significantly since the time the bonds were issued.
  
  
  
• Puts: Conversely, some bonds have “puts,” which allow the investor the option of requiring the issuer to repurchase the bonds at specified times prior to maturity. Investors typically exercise this option when they need cash for some purpose or when interest rates have risen since the bonds were issued. They can then reinvest the proceeds at a higher interest rate.
  
  
  

How is the Price of the bond calculated?

The price paid for a bond is based on a whole host of variables, including interest rates, supply and demand, credit quality, maturity and tax status. Newly issued bonds normally sell at or close to their face value. Bonds traded in the secondary market, however, fluctuate in price in response to changing interest rates. When the price of a bond increases above its face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount. When prevailing interest rates rise, prices of outstanding bonds fall to bring the yield of older bonds into line with higher—interest new issues.When prevailing interest rates fall, prices of outstanding bonds rise, until the yield of older bonds is low enough to match the lower interest rate on new issues.

What is the Yield on a Bond?

Yield is the return you actually earn on the bond—based on the price you paid and the interest payment you receive. There are basically two types of bond yields you should be aware of: current yield and yield to maturity or yield to call.

  Current Yield:-

Current yield is the annual return on the amount paid for the bond and is derived by dividing the bond’s interest payment by its purchase price. If you bought at Rs.1, 000 and the interest rate is 8% (Rs.80), the current yield is 8% (Rs.80 ÷ Rs.1, 000). If you bought at Rs.800 and the interest rate is 8% (Rs.80), the current yield is 10% (Rs.80 ÷ Rs.800).

What is Yield to Maturity/Yield to Call?

Yield to maturity and yield to call, tell you the total return you will receive by holding the bond until it matures or is called. It also enables you to compare bonds with different maturities and coupons. Yield to maturity equals all the interest you receive from the time you purchase the bond until maturity (including interest on interest at the original purchasing yield), plus any gain (if you purchased the bond below its par, or face, value) or loss (if you purchased it above its par value). Yield to call is calculated the same way as yield to maturity, but assumes that a bond will be called and that the investor will receive face value back at the call date.

  Yield Curve:-

The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This result, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. This occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long term yield is lower than the short term yield.

How are the Interest Rates and Maturity related?

Changes in interest rates don’t affect all bonds equally. The longer it takes for a bond to mature, the greater the risk that prices will fluctuate along the way and that the fluctuations will be greater—and the more the investors will expect to be compensated for taking the extra risk. There is a direct link between maturity and yield.

Who are institutional investors in the Indian Debt Market?

Institutional investors operating in the Indian Debt Market are: Banks, Insurance companies, Provident funds, Mutual funds, Trusts, Corporate, treasuries, Foreign investors (FIIs)

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec, market, rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.

The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are:

• Demand for money
  
  
  
• Government borrowings
  
  
  
• Supply of money
  
  
  
• Inflation rate
  
  
  
• The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.
  
  
  

What is record date/shut period?

G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest to the holders registered in its register on a certain date. Such date is known as record date. Securities are not transferred in the books of issuer during the period in which such records are updated for payment of interest etc. Such period is called as shut period.

What do you mean by "Cum-Interest" and "Ex-Interest"?

Cum-interest means the price of security is inclusive of the interest accrued for the interim period between last interest payment date and purchase date. Security with ex-interest means the accrued interest has to be paid separately

What are G-Secs?

G-Secs or Government of India dated Securities are Rupees One hundred face-value units / debt paper issued by Government of India in lieu of their borrowing from the market. These can be referred to as certificates issued by Government of India through the Reserve Bank acknowledging receipt of money in the form of debt, bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption

What are ‘Gilt edged’ securities?

The term government securities encompass all Bonds & T-bills issued by the Central Government, state government. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

'Gilt Securities' are issued by the RBI, the central bank, on behalf of the Government of India. Being sovereign paper, gilt securities carry absolutely no risk of default.

What is Inflation linked bond?

These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that time - the base coupon rate is fixed with the inflation rate (consumer price index-CPI) being added to it to arrive at the total coupon rate. The idea behind these bonds is to make them attractive to investors by removing the uncertainty of future inflation rates, thereby maintaining the real value of their invested capital.

What is SDL?

State government securities (State Loans): These are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in consultation with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time.

What is a PSU Bond?

Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under the administrative control of the Government of India). Most of the PSU Bonds are sold on Private Placement Basis to the targeted investors at Market Determined Interest Rates.

What is a Debenture?

A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu of the money borrowed for a certain period. In essence it represents a loan taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays the principal normally, unless otherwise agreed, on maturity. These are long-term debt instruments issued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years.

What is the difference between a bond and a debenture?

Long-term debt securities issued by the Government of India or any of the State Government’s or undertakings owned by them or by development financial institutions are called as bonds. Instruments issued by other entities are called debentures. The difference between the two is actually a function of where they are registered and pay stamp duty and how they trade.

What are the different types of debentures?

Debentures are divided into different categories on the basis of Convertibility of the instrument and security

On the basis of convertibility, debentures are classified into:

• Non Convertible Debentures (NCD): These instruments retain the debt character and can not be converted in to equity shares
  
  
  
• Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.
  
  
  
• Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.
  
  
  
• Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.
  
  On the basis of Security, debentures are classified into:
  
  
  
• Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of the principal or interest amount, his assets can be sold to repay the liability to the investors
  
  
  
• Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company.
  
  
  

Who Regulates Indian G-Secs and Debt Market?

RBI: The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Another major area under the control of the RBI is the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has moved slowly towards a regime of market determined controls.

SEBI: Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market in cases where entities raise money from public through public issues.

Apart from the two main regulators, the RBI and SEBI, there are several other regulators specific for different classes of investors, e.g. the Central Provision Fund Commissioner and the Ministry of Labour regulate the Provident Funds.