NCFM - Financial markets a beginners module (NSE) - [PDF Document] (2022)

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    CONTENTS

    1. INVESTMENTBASICS.......................................................................................................7

    What is Investment?...................................................................................................................7Why should one invest?.............................................................................................................7When to startInvesting?...........................................................................................................7What care should one take whileinvesting?......................................................................8What is meant by Interest?......................................................................................................8What factors determine interestrates?...............................................................................8What are various options available for investment?......................................................9 What arevarious Short-term financial options available forinvestment?.............9 What are various Long-term financial options available for investment? ............10 What is meant by aStockExchange?................................................................................11What is anEquity/Share?......................................................................................................11What is a Debt Instrument?.................................................................................................12What is aDerivative?................................................................................................................12What is a MutualFund?............................................................................................................12What is an Index?.......................................................................................................................13What is a Depository?...............................................................................................................13What isDematerialization?.....................................................................................................13

    2. SECURITIES...........................................................................................................................14What is meant by Securities?..............................................................................................14What is the function of SecuritiesMarket?.......................................................................14Which are the securities one can investin?.....................................................................14

    2.1 REGULATOR................................................................................................................................15Why does Securities Market needRegulators?...............................................................15Who regulates the SecuritiesMarket?................................................................................15What is SEBI and what is its role?.......................................................................................15

    2.2 PARTICIPANTS............................................................................................................................16Who are the participants in the Securities Market?......................................................16 Is itnecessary to transact through anintermediary?..................................................16What are the segments of SecuritiesMarket?................................................................16

    3. PRIMARY MARKET............................................................................................................17What is the role of the Primary Market?.........................................................................17What is meant by Face Value of a share/debenture?..................................................17 What do youmean by the term Premium and Discount in a Security Market?.17

    3.1 ISSUE OF SHARES......................................................................................................................18Why do companies need to issue shares to the public?.............................................18 What are thedifferent kinds of issues?.............................................................................18What is meant by Issue price?..............................................................................................19What is meant by MarketCapitalisation?..........................................................................19What is the difference between public issue and privateplacement?...................20 What is an Initial Public Offer(IPO)?..................................................................................20

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    Who decides the price of an issue?.....................................................................................20What does price discovery through Book Building Process mean?......................20 What is the main difference between offerof shares through book building and offer of shares through normalpublicissue?..................................................................21What is Cut-OffPrice?...............................................................................................................21What is the floor price in case of book building?...........................................................21 Whatis a Price Band in a book built IPO?........................................................................21Who decides the Price Band?.................................................................................................22What is minimum number of days for which a bid should remain openduring book building?..............................................................................................................................22Can open outcry system be used for book building?...................................................22 Can theindividual investor use the book building facility to make anapplication?...................................................................................................................................22How does one know if shares are allotted in an IPO/offer for sale ?What is the timeframe for getting refund if shares notallotted?....................................................22 Howlong does it take to get the shares listed afterissue?.......................................22 What is the role ofa Registrar to anissue?...................................................................23Does NSE provide any facility for IPO?..............................................................................23What is aProspectus?...............................................................................................................23What does Draft Offer document mean?........................................................................24What is an AbridgedProspectus?.......................................................................................24Who prepares the Prospectus/Offer Documents?......................................................24 What doesone mean byLock-in?......................................................................................24What is meant by Listing of Securities?..........................................................................25What is a ListingAgreement?..............................................................................................25What does Delisting of securities mean?........................................................................25What is SEBIs Role in an Issue?..........................................................................................25Does it mean that SEBI recommends an issue?............................................................26 DoesSEBI tag make ones moneysafe?...........................................................................26

    3.2 FOREIGN CAPITALISSUANCE..................................................................................................26Can companies in India raise foreign currency resources?.......................................26 What is an AmericanDepository Receipt?........................................................................26What is an ADS?.........................................................................................................................27What is meant by Global Depository Receipts?..............................................................27

    4. SECONDARYMARKET.....................................................................................................284.1INTRODUCTION...........................................................................................................................28

    What is meant by Secondarymarket?...............................................................................28What is the role of the Secondary Market?......................................................................28What is the difference between the Primary Market and the SecondaryMarket?...........................................................................................................................................................28

    4.1.1 Stock Exchange.........................................................................................................29What is the role of a Stock Exchange in buying and selling shares?.....................29 What is Demutualisation of stockexchanges?................................................................29How is a demutualised exchange different from a mutualexchange?..................29 Currently are there any demutualisedstock exchanges in India? ...................Error! Bookmark notdefined.

    4.1.2 Stock Trading..................................................................................................................30What is Screen Based Trading?............................................................................................30What isNEAT?..............................................................................................................................30

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    How to place orders with the broker?................................................................................30How does an investor get access to internet based trading facility?.....................30 What is a ContractNote?.........................................................................................................31What details are required to be mentioned on the contract noteissued by the stockbroker?................................................................................................................................31What is the maximum brokerage that a broker can charge?...................................31 Why should one trade on arecognized stock exchange only for buying/sellingshares?............................................................................................................................................32How to know if the broker or sub broker isregistered?..............................................32 Whatprecautions must one take before investing in the stockmarkets?...........32 What Dos and Donts should an investor bear inmind when investing in the stock markets?............................................................................................................................33

    4.2 PRODUCTS IN THE SECONDARY MARKETS..........................................................................35What are the products dealt in the SecondaryMarkets?............................................35

    4.2.1 EquityInvestment....................................................................................................37Why should one invest in equities in particular?............................................................37 Whathas been the average return on Equities in India?...........................................37 Which are the factorsthat influence the price of astock?.........................................38 What is meant bythe terms Growth Stock / Value Stock?.......................................38 How can one acquireequity shares?..................................................................................39What is Bid and Ask price?.....................................................................................................39What is a Portfolio?....................................................................................................................40What is Diversification?............................................................................................................40What are the advantages of having a diversifiedportfolio?......................................40

    4.2.2. Debt Investment..........................................................................................................41What is a Debt Instrument?.................................................................................................41What are the features of debtinstruments?....................................................................41What is meant by Interest payable by a debenture or abond?............................42 What are the Segments in theDebt Market in India?.................................................42 Who are theParticipants in the DebtMarket?................................................................42Are bonds rated for their credit quality?...........................................................................42How can one acquire securities in the debt market?...................................................42

    5. DERIVATIVES.......................................................................................................................43What are Types ofDerivatives?............................................................................................43What is an Option Premium?...............................................................................................43What is Commodity Exchange?..........................................................................................44What is meant byCommodity?...........................................................................................44What is Commodity derivatives market?..........................................................................44What is the difference between Commodity and Financialderivatives?...............44

    6. DEPOSITORY.........................................................................................................................45How is a depository similar to a bank?..............................................................................45Which are the depositories in India?..................................................................................45What are the benefits of participation in a depository?..............................................45 Who is aDepository Participant (DP)?...............................................................................46Does one need to keep any minimum balance of securities in hisaccount with his DP?............................................................................................................................................46What is anISIN?.........................................................................................................................46What is aCustodian?.................................................................................................................46

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    How can one convert physical holding into electronic holdingi.e. how can one dematerialise securities?.........................................................................................................47Can odd lot shares be dematerialised?..............................................................................47Do dematerialised shares have distinctive numbers?..................................................47 Can electronicholdings be converted into Physicalcertificates?.............................47 Can one dematerialisehis debt instruments, mutual fund units, government securities inhis demat account?..........................................................................................47

    7. MUTUAL FUNDS...................................................................................................................48What is the Regulatory Body for MutualFunds?............................................................48What are the benefits of investing in MutualFunds?...................................................48 What isNAV?................................................................................................................................49Are there any risks involved in investing in Mutual Funds?......................................49 What are the differenttypes of Mutual funds?...............................................................50What are the different investment plans that Mutual Fundsoffer?........................53 What are the rights that areavailable to a Mutual Fund holder in India? ...........53 What is aFund Offer document?..........................................................................................54What is Active Fund Management?.....................................................................................54What is Passive Fund Management?...................................................................................55What is anETF?...........................................................................................................................56

    8. MISCELLANEOUS...............................................................................................................578.1 CORPORATE ACTIONS..............................................................................................................57

    What are CorporateActions?.................................................................................................57What is meant by Dividend declared bycompanies?.................................................57 Whatis meant by Dividend yield?.......................................................................................58What is a StockSplit?...............................................................................................................58Why do companies announce StockSplit?.......................................................................59What is Buyback of Shares?...................................................................................................60

    8.2 INDEX............................................................................................................................................60What is the Niftyindex?...........................................................................................................60

    8.3 CLEARING & SETTLEMENT ANDREDRESSAL.......................................................................61What is a ClearingCorporation?...........................................................................................61What is Rolling Settlement?...................................................................................................61What is Pay-in and Pay-out?..................................................................................................61What is anAuction?...................................................................................................................62What is a Book-closure/Record date?................................................................................62What is a No -delivery period?...............................................................................................62What is an Ex-dividenddate?................................................................................................62What is an Ex-date?..................................................................................................................63What recourses are available to investor/client for redressing hisgrievances?63 What isArbitration?...................................................................................................................63What is an Investor Protection Fund?................................................................................63

    9. CONCEPTS & MODES OF ANALYSIS....................................................................64What is Simple Interest?.........................................................................................................64What is Compound Interest?.................................................................................................65What is meant by the Time Value of Money?..................................................................67How is time value of money computed?...........................................................................70What is Effective Annualreturn?..........................................................................................72

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    How to go about systematically analyzing acompany?..............................................73 What is anAnnual Report?.....................................................................................................74Which features of an Annual Report should one read carefully?.............................74 What is a Balance Sheet and aProfit and Loss Account Statement? What is the difference betweenBalance Sheet and Profit and Loss Account Statements of acompany?.......................................................................................................................................74What do these sources of fundsrepresent?.....................................................................77What is the difference between Equity shareholders and Preferentialshareholders?...............................................................................................................................78What is the difference between secured and unsecured loans underLoan Funds?.............................................................................................................................................79What is meant by application of funds?............................................................................79What do the sub-headings under the Fixed Assets like Gross blockDepreciation, Net Block and Capital-Work in Progress mean?...........................80 What are Current Liabilities andProvisions and Net Current Assets in the balancesheet?.............................................................................................................................81How is balance sheet summarized?....................................................................................81What does a Profit and Loss Account statement consistsof?...................................82 What should one look forin a Profit and Loss account?.............................................83

    10. RATIO ANALYSIS.............................................................................................................85

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    Distribution of weights in the Financial Markets: A BeginnersModule Curriculum

    Chapter

    No. Title Weights (%)

    1 Investment Basics 28 2 Securities 2 3 Primary Market 15 4Secondary Market 24 5 Derivatives 1 6 Depository 3 7 Mutual Funds 68 Miscellaneous 6 9 Concepts & Modes of Analysis 12 10 RatioAnalysis 3

    Note:- Candidates are advised to refer to NSEs website:www.nseindia.com while preparing for NCFM test (s) forannouncements pertaining to revisions/updations in NCFM modules orlaunch of new modules, if any.

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    1. Investment Basics

    What is Investment? The money you earn is partly spent and therest saved for meeting future expenses. Instead of keeping thesavings idle you may like to use savings in order to get return onit in the future. This is called Investment.

    Why should one invest? One needs to invest to: earn return onyour idle resources generate a specified sum of money for aspecific goal in life make a provision for an uncertain future

    One of the important reasons why one needs to invest wisely isto meet the cost of Inflation. Inflation is the rate at which thecost of living increases. The cost of living is simply what itcosts to buy the goods and services you need to live. Inflationcauses money to lose value because it will not buy the same amountof a good or a service in the future as it does now or did in thepast. For example, if there was a 6% inflation rate for the next 20years, a Rs. 100 purchase today would cost Rs. 321 in 20 years.This is why it is important to consider inflation as a factor inany long-term investment strategy. Remember to look at aninvestment's 'real' rate of return, which is the return afterinflation. The aim of investments should be to provide a returnabove the inflation rate to ensure that the investment does notdecrease in value. For example, if the annual inflation rate is 6%,then the investment will need to earn more than 6% to ensure itincreases in value. If the after-tax return on your investment isless than the inflation rate, then your assets have actuallydecreased in value; that is, they won't buy as much today as theydid last year.

    When to start Investing? The sooner one starts investing thebetter. By investing early you allow your investments more time togrow, whereby the concept of compounding (as we shall see later)increases your income, by accumulating the principal and

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    the interest or dividend earned on it, year after year. Thethree golden rules for all investors are:

    Invest early Invest regularly Invest for long term and not shortterm

    What care should one take while investing? Before making anyinvestment, one must ensure to:

    1. obtain written documents explaining the investment 2. readand understand such documents 3. verify the legitimacy of theinvestment 4. find out the costs and benefits associated with theinvestment 5. assess the risk-return profile of the investment 6.know the liquidity and safety aspects of the investment 7.ascertain if it is appropriate for your specific goals 8. comparethese details with other investment opportunities available 9.examine if it fits in with other investments you are considering oryou

    have already made 10. deal only through an authorisedintermediary 11. seek all clarifications about the intermediary andthe investment 12. explore the options available to you ifsomething were to go wrong,

    and then, if satisfied, make the investment. These are calledthe Twelve Important Steps to Investing.

    What is meant by Interest? When we borrow money, we are expectedto pay for using it this is known as Interest. Interest is anamount charged to the borrower for the privilege of using thelenders money. Interest is usually calculated as a percentage ofthe principal balance (the amount of money borrowed). Thepercentage rate may be fixed for the life of the loan, or it may bevariable, depending on the terms of the loan.

    What factors determine interest rates? When we talk of interestrates, there are different types of interest rates - rates thatbanks offer to their depositors, rates that they lend to theirborrowers, the rate at which the Government borrows in the

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    Bond/Government Securities market, rates offered to investors insmall savings schemes like NSC, PPF, rates at which companies issuefixed deposits etc. The factors which govern these interest ratesare mostly economy related and are commonly referred to asmacroeconomic factors. Some of these factors are: Demand for moneyLevel of Government borrowings Supply of money Inflation rate TheReserve Bank of India and the Government policies which

    determine some of the variables mentioned above

    What are various options available for investment? One mayinvest in: Physical assets like real estate, gold/jewellery,commodities etc.

    and/or Financial assets such as fixed deposits with banks, smallsaving

    instruments with post offices, insurance/provident/pension fundetc. or securities market related instruments like shares, bonds,debentures etc.

    What are various Short-term financial options available forinvestment? Broadly speaking, savings bank account, moneymarket/liquid funds and fixed deposits with banks may be consideredas short-term financial investment options:

    Savings Bank Account is often the first banking product peopleuse, which offers low interest (4%-5% p.a.), making them onlymarginally better than fixed deposits.

    Money Market or Liquid Funds are a specialized form of mutualfunds that invest in extremely short-term fixed income instrumentsand thereby provide easy liquidity. Unlike most mutual funds, moneymarket funds are primarily oriented towards protecting your capitaland then, aim to maximise returns. Money market funds usuallyyield

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    better returns than savings accounts, but lower than bank fixeddeposits.

    Fixed Deposits with Banks are also referred to as term depositsand minimum investment period for bank FDs is 30 days. FixedDeposits with banks are for investors with low risk appetite, andmay be considered for 6-12 months investment period as normallyinterest on less than 6 months bank FDs is likely to be lower thanmoney market fund returns.

    What are various Long-term financial options available forinvestment? Post Office Savings Schemes, Public Provident Fund,Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc.

    Post Office Savings: Post Office Monthly Income Scheme is a lowrisk saving instrument, which can be availed through any postoffice. It provides an interest rate of around 8% per annum, whichis paid monthly. Minimum amount, which can be invested, is Rs.1,000/- and additional investment in multiples of 1,000/-. Maximumamount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if heldJointly) during a year. It has a maturity period of 6 years.Premature withdrawal is permitted if deposit is more than one yearold. A deduction of 5% is levied from the principal amount ifwithdrawn prematurely.

    Public Provident Fund: A long term savings instrument with amaturity of 15 years and interest payable at 8% per annumcompounded annually. A PPF account can be opened through anationalized bank at anytime during the year and is open allthrough the year for depositing money. Tax benefits can be availedfor the amount invested and interest accrued is tax-free. Awithdrawal is permissible every year from the seventh financialyear of the date of opening of the account and the amount ofwithdrawal will be limited to 50% of the balance at credit at theend of the 4th year immediately preceding the year in which theamount is withdrawn or at the end of the preceding year whicheveris lower the amount of loan if any.

    Company Fixed Deposits: These are short-term (six months) tomedium-term (three to five years) borrowings by companies at afixed rate of interest which is payable monthly, quarterly,semi-annually or annually. They can also be cumulative fixeddeposits

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    where the entire principal alongwith the interest is paid at theend of the loan period. The rate of interest varies between 6-9%per annum for company FDs. The interest received is after deductionof taxes.

    Bonds: It is a fixed income (debt) instrument issued for aperiod of more than one year with the purpose of raising capital.The central or state government, corporations and similarinstitutions sell bonds. A bond is generally a promise to repay theprincipal along with a fixed rate of interest on a specified date,called the Maturity Date.

    Mutual Funds: These are funds operated by an investment companywhich raises money from the public and invests in a group of assets(shares, debentures etc.), in accordance with a stated set ofobjectives. It is a substitute for those who are unable to investdirectly in equities or debt because of resource, time or knowledgeconstraints. Benefits include professional money management, buyingin small amounts and diversification. Mutual fund units are issuedand redeemed by the Fund Management Company based on the fund's netasset value (NAV), which is determined at the end of each tradingsession. NAV is calculated as the value of all the shares held bythe fund, minus expenses, divided by the number of units issued.Mutual Funds are usually long term investment vehicle though theresome categories of mutual funds, such as money market mutual fundswhich are short term instruments.

    What is meant by a Stock Exchange? The Securities Contract(Regulation) Act, 1956 [SCRA] defines Stock Exchange as any body ofindividuals, whether incorporated or not, constituted for thepurpose of assisting, regulating or controlling the business ofbuying, selling or dealing in securities. Stock exchange could be aregional stock exchange whose area of operation/jurisdiction isspecified at the time of its recognition or national exchanges,which are permitted to have nationwide trading since inception. NSEwas incorporated as a national stock exchange.

    What is an Equity/Share? Total equity capital of a company isdivided into equal units of small denominations, each called ashare. For example, in a company the total equity capital of Rs2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Eachsuch unit of Rs 10 is called a Share. Thus, the company then is

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    said to have 20,00,000 equity shares of Rs 10 each. The holdersof such shares are members of the company and have votingrights.

    What is a Debt Instrument? Debt instrument represents a contractwhereby one party lends money to another on pre-determined termswith regards to rate and periodicity of interest, repayment ofprincipal amount by the borrower to the lender. In the Indiansecurities markets, the term bond is used for debt instrumentsissued by the Central and State governments and public sectororganizations and the term debenture is used for instruments issuedby private corporate sector.

    What is a Derivative? Derivative is a product whose value isderived from the value of one or more basic variables, calledunderlying. The underlying asset can be equity, index, foreignexchange (forex), commodity or any other asset. Derivative productsinitially emerged as hedging devices against fluctuations incommodity prices and commodity-linked derivatives remained the soleform of such products for almost three hundred years. The financialderivatives came into spotlight in post-1970 period due to growinginstability in the financial markets. However, since theiremergence, these products have become very popular and by 1990s,they accounted for about two-thirds of total transactions inderivative products.

    What is a Mutual Fund? A Mutual Fund is a body corporateregistered with SEBI (Securities Exchange Board of India) thatpools money from individuals/corporate investors and invests thesame in a variety of different financial instruments or securitiessuch as equity shares, Government securities, Bonds, debenturesetc. Mutual funds can thus be considered as financialintermediaries in the investment business that collect funds fromthe public and invest on behalf of the investors. Mutual fundsissue units to the investors. The appreciation of the portfolio orsecurities in which the mutual fund has invested the money leads toan appreciation in the value of the units held by investors. Theinvestment objectives outlined by a Mutual Fund in its prospectusare binding on the Mutual Fund scheme. The investment objectivesspecify the class of securities a Mutual Fund can invest in. MutualFunds invest in

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    various asset classes like equity, bonds, debentures, commercialpaper and government securities. The schemes offered by mutualfunds vary from fund to fund. Some are pure equity schemes; othersare a mix of equity and bonds. Investors are also given the optionof getting dividends, which are declared periodically by the mutualfund, or to participate only in the capital appreciation of thescheme.

    What is an Index? An Index shows how a specified portfolio ofshare prices are moving in order to give an indication of markettrends. It is a basket of securities and the average price movementof the basket of securities indicates the index movement, whetherupwards or downwards.

    What is a Depository? A depository is like a bank wherein thedeposits are securities (viz. shares, debentures, bonds, governmentsecurities, units etc.) in electronic form.

    What is Dematerialization? Dematerialization is the process bywhich physical certificates of an investor are converted to anequivalent number of securities in electronic form and credited tothe investors account with his Depository Participant (DP).

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    2. SECURITIES

    What is meant by Securities? The definition of Securities as perthe Securities Contracts Regulation Act (SCRA), 1956, includesinstruments such as shares, bonds, scrips, stocks or othermarketable securities of similar nature in or of any incorporatecompany or body corporate, government securities, derivatives ofsecurities, units of collective investment scheme, interest andrights in securities, security receipt or any other instruments sodeclared by the Central Government.

    What is the function of Securities Market? Securities Markets isa place where buyers and sellers of securities can enter intotransactions to purchase and sell shares, bonds, debentures etc.Further, it performs an important role of enabling corporates,entrepreneurs to raise resources for their companies and businessventures through public issues. Transfer of resources from thosehaving idle resources (investors) to others who have a need forthem (corporates) is most efficiently achieved through thesecurities market. Stated formally, securities markets providechannels for reallocation of savings to investments andentrepreneurship. Savings are linked to investments by a variety ofintermediaries, through a range of financial products, calledSecurities.

    Which are the securities one can invest in? Shares GovernmentSecurities Derivative products Units of Mutual Funds etc., are someof the securities investors in the

    securities market can invest in.

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    2.1 Regulator

    Why does Securities Market need Regulators? The absence ofconditions of perfect competition in the securities market makesthe role of the Regulator extremely important. The regulatorensures that the market participants behave in a desired manner sothat securities market continues to be a major source of financefor corporate and government and the interest of investors areprotected.

    Who regulates the Securities Market? The responsibility forregulating the securities market is shared by Department ofEconomic Affairs (DEA), Department of Company Affairs (DCA),Reserve Bank of India (RBI) and Securities and Exchange Board ofIndia (SEBI).

    What is SEBI and what is its role? The Securities and ExchangeBoard of India (SEBI) is the regulatory authority in Indiaestablished under Section 3 of SEBI Act, 1992. SEBI Act, 1992provides for establishment of Securities and Exchange Board ofIndia (SEBI) with statutory powers for (a) protecting the interestsof investors in securities (b) promoting the development of thesecurities market and (c) regulating the securities market. Itsregulatory jurisdiction extends over corporates in the issuance ofcapital and transfer of securities, in addition to allintermediaries and persons associated with securities market. SEBIhas been obligated to perform the aforesaid functions by suchmeasures as it thinks fit. In particular, it has powers for:Regulating the business in stock exchanges and any othersecurities

    markets Registering and regulating the working of stock brokers,subbrokers

    etc. Promoting and regulating self-regulatory organizationsProhibiting fraudulent and unfair trade practices Calling forinformation from, undertaking inspection, conducting

    inquiries and audits of the stock exchanges, intermediaries,self regulatory organizations, mutual funds and other personsassociated with the securities market.

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    2.2 Participants

    Who are the participants in the Securities Market? Thesecurities market essentially has three categories of participants,namely, the issuers of securities, investors in securities and theintermediaries, such as merchant bankers, brokers etc. While thecorporates and government raise resources from the securitiesmarket to meet their obligations, it is households that investtheir savings in the securities market.

    Is it necessary to transact through an intermediary? It isadvisable to conduct transactions through an intermediary. Forexample you need to transact through a trading member of a stockexchange if you intend to buy or sell any security on stockexchanges. You need to maintain an account with a depository if youintend to hold securities in demat form. You need to deposit moneywith a banker to an issue if you are subscribing to public issues.You get guidance if you are transacting through an intermedia ry.Chose a SEBI registered intermediary, as he is accountable for itsactivities. The list of registered intermediaries is available withexchanges, industry associations etc.

    What are the segments of Securities Market? The securitiesmarket has two interdependent segments: the primary (new issues)market and the secondary market. The primary market provides thechannel for sale of new securities while the secondary market dealsin securities previously issued.

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    3. PRIMARY MARKET

    What is the role of the Primary Market? The primary marketprovides the channel for sale of new securities. Primary marketprovides opportunity to issuers of securities; Government as wellas corporates, to raise resources to meet their requirements ofinvestment and/or discharge some obligation. They may issue thesecurities at face value, or at a discount/premium and thesesecurities may take a variety of forms such as equity, debt etc.They may issue the securities in domestic market and/orinternational market.

    What is meant by Face Value of a share/debenture? The nominal orstated amount (in Rs.) assigned to a security by the issuer. Forshares, it is the original cost of the stock shown on thecertificate; for bonds, it is the amount paid to the holder atmaturity. Also known as par value or simply par. For an equityshare, the face value is usually a very small amount (Rs. 5, Rs.10) and does not have much bearing on the price of the share, whichmay quote higher in the market, at Rs. 100 or Rs. 1000 or any otherprice. For a debt security, face value is the amount repaid to theinvestor when the bond matures (usually, Government securities andcorporate bonds have a face value of Rs. 100). The price at whichthe security trades depends on the fluctuations in the interestrates in the economy.

    What do you mean by the term Premium and Discount in a SecurityMarket? Securities are generally issued in denominations of 5, 10or 100. This is known as the Face Value or Par Value of thesecurity as discussed earlier. When a security is sold above itsface value, it is said to be issued at a Premium and if it is soldat less than its face value, then it is said to be issued at aDiscount.

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    3.1 Issue of Shares

    Why do companies need to issue shares to the public? Mostcompanies are usually started privately by their promoter(s).However, the promoters capital and the borrowings from banks andfinancial institutions may not be sufficient for setting up orrunning the business over a long term. So companies invite thepublic to contribute towards the equity and issue shares toindividual investors. The way to invite share capital from thepublic is through a Public Issue. Simply stated, a public issue isan offer to the public to subscribe to the share capital of acompany. Once this is done, the company allots shares to theapplicants as per the prescribed rules and regulations laid down bySEBI.

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    What are the different kinds of issues? Primarily, issues can beclassified as a Public, Rights or Preferential issues (also knownas private placements). While public and rights issues involve adetailed procedure, private placements or preferential issues arerelatively simpler. The classification of issues is illustratedbelow: Initial Public Offering (IPO) is when an unlisted companymakes either a fresh issue of securities or an offer for sale ofits existing securities or both for the first time to the public.This paves way for listing and trading of the issuers securities. Afollow on public offering (Further Issue) is when an already listedcompany makes either a fresh issue of securities to the public oran offer for sale to the public, through an offer document. RightsIssue is when a listed company which proposes to issue freshsecurities to its existing shareholders as on a record date. Therights are normally offered in a particular ratio to the number ofsecurities held prior to the issue. This route is best suited forcompanies who would like to raise capital without diluting stake ofits existing shareholders. A Preferential issue is an issue ofshares or of convertible securities by listed companies to a selectgroup of persons under Section 81 of the Companies Act, 1956 whichis neither a rights issue nor a public issue. This is a faster wayfor a company to raise equity capital. The issuer company has tocomply with the Companies Act and the requirements contained in

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    the Chapter pertaining to preferential allotment in SEBIguidelines which inter-alia include pricing, disclosures in noticeetc.

    What is meant by Issue price? The price at which a company'sshares are offered initially in the primary market is called as theIssue price. When they begin to be traded, the market price may beabove or below the issue price.

    What is meant by Market Capitalisation? The market value of aquoted company, which is calculated by multiplying its currentshare price (market price) by the number of shares in issue iscalled as market capitalization. E.g. Company A has 120 millionshares in issue. The current market price is Rs. 100. The marketcapitalisation of company A is Rs. 12000 million.

    Classification of Issues

    Issues

    Preferential Rights

    Initial Public Offering

    Public

    Further Public Offering

    Fresh Issue Offer for Sale Fresh Issue Offer for Sale

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    What is the difference between public issue and privateplacement? When an issue is not made to only a select set of peoplebut is open to the general public and any other investor at large,it is a public issue. But if the issue is made to a select set ofpeople, it is called private placement. As per Companies Act, 1956,an issue becomes public if it results in allotment to 50 persons ormore. This means an issue can be privately placed where anallotment is made to less than 50 persons.

    What is an Initial Public Offer (IPO)? An Initial Public Offer(IPO) is the selling of securities to the public in the primarymarket. It is when an unlisted company makes either a fresh issueof securities or an offer for sale of its existing securities orboth for the first time to the public. This paves way for listingand trading of the issuers securities. The sale of securities canbe either through book building or through normal public issue.

    Who decides the price of an issue? Indian primary market usheredin an era of free pricing in 1992. Following this, the guidelineshave provided that the issuer in consultation with Merchant Bankershall decide the price. There is no price formula stipulated bySEBI. SEBI does not play any role in price fixation. The companyand merchant banker are however required to give full disclosuresof the parameters which they had considered while deciding theissue price. There are two types of issues, one where company andLead Merchant Banker fix a price (called fixed price) and other,where the company and the Lead Manager (LM) stipulate a floor priceor a price band and leave it to market forces to determine thefinal price (price discovery through book building process).

    What does price discovery through Book Building Process mean?Book Building is basically a process used in IPOs for efficientprice discovery. It is a mechanism where, during the period forwhich the IPO is open, bids are collected from investors at variousprices, which are above or equal to the floor price. The offerprice is determined after the bid closing date.

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    What is the main difference between offer of shares through bookbuilding and offer of shares through normal public issue? Price atwhich securities will be allotted is not known in case of offer ofshares through Book Building while in case of offer of sharesthrough normal public issue, price is known in advance to investor.Under Book Building, investors bid for shares at the floor price orabove and after the closure of the book building process the priceis determined for allotment of shares. In case of Book Building,the demand can be known everyday as the book is being built. But incase of the public issue the demand is known at the close of theissue.

    What is Cut-Off Price? In a Book building issue, the issuer isrequired to indicate either the price band or a floor price in theprospectus. The actual discovered issue price can be any price inthe price band or any price above the floor price. This issue priceis called Cut-Off Price. The issuer and lead manager decides thisafter considering the book and the investors appetite for thestock.

    What is the floor price in case of book building? Floor price isthe minimum price at which bids can be made.

    What is a Price Band in a book built IPO? The prospectus maycontain either the floor price for the securities or a price bandwithin which the investors can bid. The spread between the floorand the cap of the price band shall not be more than 20%. In otherwords, it means that the cap should not be more than 120% of thefloor price. The price band can have a revision and such a revisionin the price band shall be widely disseminated by informing thestock exchanges, by issuing a press release and also indicating thechange on the relevant website and the terminals of the tradingmembers participating in the book building process. In case theprice band is revised, the bidding period shall be extended for afurther period of three days, subject to the total bidding periodnot exceeding ten days.

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    Who decides the Price Band? It may be understood that theregulatory mechanism does not play a role in setting the price forissues. It is up to the company to decide on the price or the priceband, in consultation with Merchant Bankers.

    What is minimum number of days for which a bid should remainopen during book building? The Book should remain open for aminimum of 3 days.

    Can open outcry system be used for book building? No. As perSEBI, only electronically linked transparent facility is allowed tobe used in case of book building.

    Can the individual investor use the book building facility tomake an application? Yes.

    How does one know if shares are allotted in an IPO/offer forsale? What is the timeframe for getting refund if shares notallotted? As per SEBI (Issue of Capital and DisclosureRequirements) Regulations, 2009 the Basis of Allotment should becompleted with 8 days from the issue close date. As soon as thebasis of allotment is completed, within 2 working days the detailsof credit to demat account / allotment advice and despatch ofrefund order needs to be completed. So an investor should know inabout 11 days time from the closure of issue, whether shares areallotted to him or not.

    How long does it take to get the shares listed after issue? Ittakes 12 working days after the closure of the book builtissue.

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    What is the role of a Registrar to an issue? The Registrarfinalizes the list of eligible allottees after deleting the invalidapplications and ensures that the corporate action for crediting ofshares to the demat accounts of the applicants is done and thedispatch of refund orders to those applicable are sent. The LeadManager coordinates with the Registrar to ensure follow up so thatthat the flow of applications from collecting bank branches,processing of the applications and other matters till the basis ofallotment is finalized, dispatch security certificates and refundorders completed and securities listed.

    Does NSE provide any facility for IPO? Yes. NSEs electronictrading network spans across the country providing access toinvestors in remote areas. NSE decided to offer this infrastructurefor conducting online IPOs through the Book Building process. NSEoperates a fully automated screen based bidding system called NEATIPO that enables trading members to enter bids directly from theiroffices through a sophisticated telecommunication network. BookBuilding through the NSE system offers several advantages: The NSEsystem offers a nation wide bidding facility in securities

    It provide a fair, efficient & transparent method forcollecting bids

    using the latest electronic trading systems Costs involved inthe issue are far less than those in a normal IPO

    The system reduces the time taken for completion of theissue

    process The IPO market timings are from 10.00 a.m. to 5.00p.m.

    What is a Prospectus? A large number of new companies floatpublic issues. While a large number of these companies are genuine,quite a few may want to exploit the investors. Therefore, it isvery important that an investor before applying for any issueidentifies future potential of a company. A part of the guidelinesissued by SEBI (Securities and Exchange Board of India) is thedisclosure of information to the public. This disclosure includesinformation like the reason for raising the money, the way money isproposed to be spent, the return

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    expected on the money etc. This information is in the form ofProspectus which also includes information regarding the size ofthe issue, the current status of the company, its equity capital,its current and past performance, the promoters, the project, costof the project, means of financing, product and capacity etc. Italso contains lot of mandatory information regarding underwritingand statutory compliances. This helps investors to evaluate shortterm and long term prospects of the company.

    What does Draft Offer document mean? Offer document meansProspectus in case of a public issue or offer for sale and Letterof Offer in case of a rights issue which is filed with theRegistrar of Companies (ROC) and Stock Exchanges (SEs). An offerdocument covers all the relevant information to help an investor tomake his/her investment decision. Draft Offer document means theoffer document in draft stage. The draft offer documents are filedwith SEBI, atleast 30 days prior to the registration of red herringprospectus or prospectus with ROC. SEBI may specify changes, ifany, in the draft Offer Document and the issuer or the leadmerchant banker shall carry out such changes in the draft offerdocument before filing the Offer Document with ROC. The Draft OfferDocument is available on the SEBI website for public comments for aperiod of 21 days from the filing of the Draft Offer Document withSEBI.

    What is an Abridged Prospectus? Abridged Prospectus is a shorterversion of the Prospectus and contains all the salient features ofa Prospectus. It accompanies the application form of publicissues.

    Who prepares the Prospectus/Offer Documents? Generally, thepublic issues of companies are handled by Merchant Bankers who areresponsible for getting the project appraised, finalizing the costof the project, profitability estimates and for preparing ofProspectus. The Prospectus is submitted to SEBI for itsapproval.

    What does one mean by Lock-in?

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    Lock-in indicates a freeze on the sale of shares for a certainperiod of time. SEBI guidelines have stipulated lock-inrequirements on shares of promoters mainly to ensure that thepromoters or main persons, who are controlling the company, shallcontinue to hold some minimum percentage in the company after thepublic issue.

    What is meant by Listing of Securities? Listing means admissionof securities of an issuer to trading privileges (dealings) on astock exchange through a formal agreement. The prime objective ofadmission to dealings on the exchange is to provide liquidity andmarketability to securities, as also to provide a mechanism foreffective control and supervision of trading.

    What is a Listing Agreement? At the time of listing securitiesof a company on a stock exchange, the company is required to enterinto a listing agreement with the exchange. The listing agreementspecifies the terms and conditions of listing and the disclosuresthat shall be made by a company on a continuous basis to theexchange.

    What does Delisting of securities mean? The term Delisting ofsecurities means permanent removal of securities of a listedcompany from a stock exchange. As a consequence of delisting, thesecurities of that company would no longer be traded at that stockexchange.

    What is SEBIs Role in an Issue? Any company making a publicissue or a listed company making a rights issue of value of morethan Rs 50 lakh is required to file a draft offer document withSEBI for its observations. The company can proceed further on theissue only after getting observations from SEBI. The validityperiod of SEBIs observation letter is three months only i.e. thecompany has to open its issue within three months period.

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    Does it mean that SEBI recommends an issue? SEBI does notrecommend any issue nor does take any responsibility either for thefinancial soundness of any scheme or the project for which theissue is proposed to be made or for the correctness of thestatements made or opinions expressed in the offer document. SEBImainly scrutinizes the issue for seeing that adequate disclosuresare made by the issuing company in the prospectus or offerdocument.

    Does SEBI tag make ones money safe? The investors should make aninformed decision purely by themselves based on the contentsdisclosed in the offer documents. SEBI does not associate itselfwith any issue/issuer and should in no way be construed as aguarantee for the funds that the investor proposes to investthrough the issue. However, the investors are generally advised tostudy all the material facts pertaining to the issue including therisk factors before considering any investment. They are stronglywarned against relying on any tips or news through unofficialmeans. 3.2 Foreign Capital Issuance

    Can companies in India raise foreign currency resources? Yes.Indian companies are permitted to raise foreign currency resourcesthrough two main sources: a) issue of foreign currency convertiblebonds more commonly known as Euro issues and b) issue of ordinaryshares through depository receipts namely Global DepositoryReceipts (GDRs)/American Depository Receipts (ADRs) to foreigninvestors i.e. to the institutional investors or individualinvestors.

    What is an American Depository Receipt? An American DepositaryReceipt ("ADR") is a physical certificate evidencing ownership ofAmerican Depositary Shares ("ADSs"). The term is often used torefer to the ADSs themselves.

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    What is an ADS? An American Depositary Share ("ADS") is a U.S.dollar denominated form of equity ownership in a non-U.S. company.It represents the foreign shares of the company held on deposit bya custodian bank in the company's home country and carries thecorporate and economic rights of the foreign shares, subject to theterms specified on the ADR certificate. One or several ADSs can berepresented by a physical ADR certificate. The terms ADR and ADSare often used interchangeably. ADSs provide U.S. investors with aconvenient way to invest in overseas securities and to tradenon-U.S. securities in the U.S. ADSs are issued by a depositorybank, such as JPMorgan Chase Bank. They are traded in the samemanner as shares in U.S. companies, on the New York Stock Exchange(NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQand the over-the-counter (OTC) market. Although ADSs are U.S.dollar denominated securities and pay dividends in U.S. dollars,they do not eliminate the currency risk associated with aninvestment in a non-U.S. company.

    What is meant by Global Depository Receipts? Global DepositoryReceipts (GDRs) may be defined as a global finance vehicle thatallows an issuer to raise capital simultaneously in two or marketsthrough a global offering. GDRs may be used in public or privatemarkets inside or outside US. GDR, a negotiable certificate usuallyrepresents companys traded equity/debt. The underlying sharescorrespond to the GDRs in a fixed ratio say 1 GDR=10 shares.

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    4. SECONDARY MARKET

    4.1 Introduction

    What is meant by Secondary market? Secondary market refers to amarket where securities are traded after being initially offered tothe public in the primary market and/or listed on the StockExchange. Majority of the trading is done in the secondary market.Secondary market comprises of equity markets and the debtmarkets.

    What is the role of the Secondary Market? For the generalinvestor, the secondary market provides an efficient platform fortrading of his securities. For the management of the company,Secondary equity markets serve as a monitoring and controlconduitby facilitating value-enhancing control activities, enablingimplementation of incentive-based management contracts, andaggregating information (via price discovery) that guidesmanagement decisions.

    What is the difference between the Primary Market and theSecondary Market? In the primary market, securities are offered topublic for subscription for the purpose of raising capital or fund.Secondary market is an equity trading venue in which alreadyexisting/pre-issued securities are traded among investors.Secondary market could be either auction or dealer market. Whilestock exchange is the part of an auction market, Over-the-Counter(OTC) is a part of the dealer market.

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    4.1.1 Stock Exchange

    What is the role of a Stock Exchange in buying and sellingshares? The stock exchanges in India, under the overall supervisionof the regulatory authority, the Securities and Exchange Board ofIndia (SEBI), provide a trading platform, where buyers and sellerscan meet to transact in securities. The trading platform providedby NSE is an electronic one and there is no need for buyers andsellers to meet at a physical location to trade. They can tradethrough the computerized trading screens available with the NSEtrading members or the internet based trading facility provided bythe trading members of NSE.

    What is Demutualisation of stock exchanges? Demutualisationrefers to the legal structure of an exchange whereby the ownership,the management and the trading rights at the exchange aresegregated from one another.

    How is a demutualised exchange different from a mutual exchange?In a mutual exchange, the three functions of ownership, managementand trading are concentrated into a single Group. Here, the brokermembers of the exchange are both the owners and the traders on theexchange and they further manage the exchange as well. This attimes can lead to conflicts of interest in decision making. Ademutualised exchange, on the other hand, has all these threefunctions clearly segregated, i.e. the ownership, management andtrading are in separate hands.

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    4.1.2 Stock Trading

    What is Screen Based Trading? The trading on stock exchanges inIndia used to take place through open outcry without use ofinformation technology for immediate matching or recording oftrades. This was time consuming and inefficient. This imposedlimits on trading volumes and efficiency. In order to provideefficiency, liquidity and transparency, NSE introduced anationwide, on-line, fully-automated screen based trading system(SBTS) where a member can punch into the computer the quantities ofa security and the price at which he would like to transact, andthe transaction is executed as soon as a matching sale or buy orderfrom a counter party is found.

    What is NEAT? NSE is the first exchange in the world to usesatellite communication technology for trading. Its trading system,called National Exchange for Automated Trading (NEAT), is a stateof-the-art client server based application. At the server end alltrading information is stored in an in-memory database to achieveminimum response time and maximum system availability for users. Ithas uptime record of 99.7%. For all trades entered into NEATsystem, there is uniform response time of less than one second.

    How to place orders with the broker? You may go to the brokersoffice or place an order on the phone/internet or as defined in theModel Agreement, which every client needs to enter into with his orher broker.

    How does an investor get access to internet based tradingfacility? There are many brokers of the NSE who provide internetbased trading facility to their clients. Internet based tradingenables an investor to buy/sell securities through internet whichcan be accessed from a computer at the investors residence oranywhere else where the client can access the internet. Investorsneed to get in touch with an NSE broker providing this service toavail of internet based trading facility.

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    What is a Contract Note? Contract Note is a confirmation oftrades done on a particular day on behalf of the client by atrading member. It imposes a legally enforceable relationshipbetween the client and the trading member with respect topurchase/sale and settlement of trades. It also helps to settledisputes/claims between the investor and the trading member. It isa prerequisite for filing a complaint or arbitration proceedingagainst the trading member in case of a dispute. A valid contractnote should be in the prescribed form, contain the details oftrades, stamped with requisite value and duly signed by theauthorized signatory. Contract notes are kept in duplicate, thetrading member and the client should keep one copy each. Afterverifying the details contained therein, the client keeps one copyand returns the second copy to the trading member duly acknowledgedby him.

    What details are required to be mentioned on the contract noteissued by the stock broker? A broker has to issue a contract noteto clients for all transactions in the form specified by the stockexchange. The contract note inter-alia should have following: Name,address and SEBI Registration number of the Member broker. Name ofpartner/proprietor/Authorised Signatory. Dealing OfficeAddress/Tel. No./Fax no., Code number of the member

    given by the Exchange. Contract number, date of issue ofcontract note, settlement number

    and time period for settlement. Constituent (Client) name/CodeNumber. Order number and order time corresponding to the trades.Trade number and Trade time. Quantity and kind of Securitybought/sold by the client. Brokerage and Purchase/Sale rate.Service tax rates, Securities Transaction Tax and any othercharges

    levied by the broker. Appropriate stamps have to be affixed onthe contract note or it is

    mentioned that the consolidated stamp duty is paid. Signature ofthe Stock broker/Authorized Signatory.

    What is the maximum brokerage that a broker can charge? Themaximum brokerage that can be charged by a broker from his clientsas commission cannot be more than 2.5% of the value mentioned inthe respective purchase or sale note.

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    Why should one trade on a recognized stock exchange only forbuying/selling shares? An investor does not get any protection ifhe trades outside a stock exchange. Trading at the exchange offersinvestors the best prices prevailing at the time in the market,lack of any counter-party risk which is assumed by the clearingcorporation, access to investor grievance and redressal mechanismof stock exchanges, protection upto a prescribed limit, from theInvestor Protection Fund etc.

    How to know if the broker or sub broker is registered? One canconfirm it by verifying the registration certificate issued bySEBI. A broker's registration number begins with the letters INBand that of a sub broker with the letters INS.

    What precautions must one take before investing in the stockmarkets? Here are some useful pointers to bear in mind before youinvest in the markets: Make sure your broker is registered withSEBI and the exchanges and

    do not deal with unregistered intermediaries. Ensure that youreceive contract notes for all your transactions from

    your broker within one working day of execution of the trades.All investments carry risk of some kind. Investors shouldalways

    know the risk that they are taking and invest in a manner thatmatches their risk tolerance.

    Do not be misled by market rumours, luring advertisement orhot

    tips of the day. Take informed decisions by studying thefundamentals of the

    company. Find out the business the company is into, its futureprospects, quality of management, past track record etc Sources ofknowing about a company are through annual reports, economicmagazines, databases available with vendors or your financialadvisor.

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    If your financial advisor or broker advises you to invest in acompany

    you have never heard of, be cautious. Spend some time checkingout about the company before investing.

    Do not be attracted by announcements of fantasticresults/news

    reports, about a company. Do your own research before investingin any stock.

    Do not be attracted to stocks based on what an internet websitepromotes, unless you have done adequate study of the company.

    Investing in very low priced stocks or what are known aspenny

    stocks does not guarantee high returns. Be cautious about stockswhich show a sudden spurt in price or

    trading activity. Any advise or tip that claims that there arehuge returns expected,

    especially for acting quickly, may be risky and may to lead tolosing some, most, or all of your money.

    What Dos and Donts should an investor bear in mind wheninvesting in the stock markets? Ensure that the intermediary(broker/sub-broker) has a valid SEBI

    registration certificate. Enter into an agreement with yourbroker/sub-broker setting out

    terms and conditions clearly. Ensure that you give all yourdetails in the Know Your Client form. Ensure that you readcarefully and understand the contents of the

    Risk Disclosure Document and then acknowledge it. Insist on acontract note issued by your broker only, for trades done

    each day. Ensure that you receive the contract note from yourbroker within 24

    hours of the transaction. Ensure that the contract note containsdetails such as the brokers

    name, trade time and number, transaction price, brokerage,service tax, securities transaction tax etc. and is signed by theAuthorised Signatory of the broker.

    To cross check genuineness of the transactions, log in to theNSE website (www.nseindia.com) and go to the trade verificationfacility extended by NSE. Issue account payee cheques/demand draftsin the name of your broker only, as it appears on the contractnote/SEBI registration certificate of the broker.

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    While delivering shares to your broker to meet your obligations,ensure that the delivery instructions are made only to thedesignated account of your broker only.

    Insist on periodical statement of accounts of funds andsecurities from your broker. Cross check and reconcile youraccounts promptly and in case of any discrepancies bring it to theattention of your broker immediately.

    Please ensure that you receive payments/deliveries from yourbroker, for the transactions entered by you, within one working dayof the payout date.

    Ensure that you do not undertake deals on behalf of others ortrade on your own name and then issue cheques from a familymembers/ friends bank accounts.

    Similarly, the Demat delivery instruction slip should be fromyour own Demat account, not from any other family members/friendsaccounts.

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    Do not sign blank delivery instruction slip(s) while meetingsecurity payin obligation.

    No intermediary in the market can accept deposit assuring fixedreturns. Hence do not give your money as deposit against assurancesof returns.

    Portfolio Management Services could be offered only byintermediaries having specific approval of SEBI for PMS. Hence, donot part your funds to unauthorized persons for PortfolioManagement.

    Delivery Instruction Slip is a very valuable document. Do notleave signed blank delivery instruction slip with anyone. Whilemeeting pay in obligation make sure that correct ID of authorisedintermediary is filled in the Delivery Instruction Form.

    Be cautious while taking funding form authorised intermediariesas these transactions are not covered under Settlement Guaranteemechanisms of the exchange.

    Insist on execution of all orders under unique client codeallotted to you. Do not accept trades executed under some otherclient code to your account.

    When you are authorising someone through Power of Attorney foroperation of your DP account, make sure that:

    your authorization is in favour of registered intermediaryonly.

    authorisation is only for limited purpose of debits and creditsarising out of valid transactions executed through thatintermediary only.

    you verify DP statement periodically say every month/ fortnightto ensure that no unauthorised transactions have taken place inyour account.

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    authorization given by you has been properly used for thepurpose for which authorization has been given.

    in case you find wrong entries please report in writing to theauthorized intermediary.

    Dont accept unsigned/duplicate contract note. Dont acceptcontract note signed by any unauthorised person. Dont delaypayment/deliveries of securities to broker. In the event of anydiscrepancies/disputes, please bring them to the

    notice of the broker immediately in writing (acknowledged by thebroker) and ensure their prompt rectification.

    In case of sub-broker disputes, inform the main broker inwriting about the dispute at the earliest. If yourbroker/sub-broker does not resolve your complaints within areasonable period please bring it to the attention of the InvestorServices Cell of the NSE.

    While lodging a complaint with the Investor Grievances Cell ofthe NSE, it is very important that you submit copies of allrelevant documents like contract notes, proof of payments/deliveryof shares etc. alongwith the complaint. Remember, in the absence ofsufficient documents, resolution of complaints becomesdifficult.

    Familiarise yourself with the rules, regulations and circularsissued by stock exchanges/SEBI before carrying out anytransaction.

    4.2 Products in the Secondary Markets

    What are the products dealt in the Secondary Markets? Followingare the main financial products/instruments dealt in the Secondarymarket which may be divided broadly into Shares and Bonds:Shares:

    Equity Shares: An equity share, commonly referred to as ordinaryshare, represents the form of fractional ownership in a businessventure.

    Rights Issue/ Rights Shares: The issue of new securities toexisting shareholders at a ratio to those already held, at a price.For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholderto receive 2 shares for every 3 shares held at a price of Rs. 125per share.

    Bonus Shares: Shares issued by the companies to theirshareholders free of cost based on the number of shares theshareholder owns.

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    Preference shares: Owners of these kind of shares are entitledto a fixed dividend or dividend calculated at a fixed rate to bepaid regularly before dividend can be paid in respect of equityshare. They also enjoy priority over the equity shareholders inpayment of surplus. But in the event of liquidation, their claimsrank below the claims of the companys creditors,bondholders/debenture holders.

    Cumulative Preference Shares: A type of preference shares onwhich dividend accumulates if remained unpaid. All arrears ofpreference dividend have to be paid out before paying dividend onequity shares.

    Cumulative Convertible Preference Shares: A type of preferenceshares where the dividend payable on the same accumulates, if notpaid. After a specified date, these shares will be converted intoequity capital of the company.

    Bond: is a negotiable certificate evidencing indebtedness. It isnormally unsecured. A debt security is generally issued by acompany, municipality or government agency. A bond investor lendsmoney to the issuer and in exchange, the issuer promises to repaythe loan amount on a specified maturity date. The issuer usuallypays the bond holder periodic interest payments over the life ofthe loan. The various types of Bonds are as follows:

    Zero Coupon Bond: Bond issued at a discount and repaid at a facevalue. No periodic interest is paid. The difference between theissue price and redemption price represents the return to theholder. The buyer of these bonds receives only one payment, at thematurity of the bond.

    Convertible Bond: A bond giving the investor the option toconvert the bond into equity at a fixed conversion price.

    Treasury Bills: Short-term (up to one year) bearer discountsecurity issued by government as a means of financing their cashrequirements.

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    4.2.1 Equity Investment

    Why should one invest in equities in particular? When you buy ashare of a company you become a shareholder in that company. Sharesare also known as Equities. Equities have the potential to increasein value over time. Research studies have proved that the equityreturns have outperformed the returns of most other forms ofinvestments in the long term. Investors buy equity shares or equitybased mutual funds because :- Equities are considered the mostrewarding, when compared to other

    investment options if held over a long duration. Researchstudies have proved that investments in some shares with

    a longer tenure of investment have yielded far superior returnsthan any other investment. The average annual retrun of the stockmarket over the period of last fifteen years, if one takes theNifty index as the benchmark to compute the returns, has beenaround 16%.

    However, this does not mean all equity investments wouldguarantee similar high returns. Equities are high risk investments.Though higher the risk, higher the potential returns, high riskalso indicates that the investor stands to lose some or all hisinvestment amout if prices move unfavourably. One needs to studyequity markets and stocks in which investments are being madecarefully, before investing.

    What has been the average return on Equities in India?

    If we take the Nifty index returns for the past fifteen years,Indian stock market has returned about 16% to investors on anaverage in terms of increase in share prices or capitalappreciation annually. Besides that on average stocks have paid1.5% dividend annually. Dividend is a percentage of the face valueof a share that a company returns to its shareholders from itsannual profits. Compared to most other forms of investments,investing in equity shares offers the highest rate of return, ifinvested over a longer duration.

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    Which are the factors that influence the price of a stock?Broadly there are two factors: (1) stock specific and (2) marketspecific. The stock-specific factor is related to peoplesexpectations about the company, its future earnings capacity,financial health and management, level of technology and marketingskills. The market specific factor is influenced by the investorssentiment towards the stock market as a whole. This factor dependson the environment rather than the performance of any partic ularcompany. Events favourable to an economy, political or regulatoryenvironment like high economic growth, friendly budget, stablegovernment etc. can fuel euphoria in the investors, resulting in aboom in the market. On the other hand, unfavourable events likewar, economic crisis, communal riots, minority government etc.depress the market irrespective of certain companies performingwell. However, the effect of market-specific factor is generallyshort-term. Despite ups and downs, price of a stock in the long rungets stabilized based on the stock-specific factors. Therefore, aprudent advice to all investors is to analyse and invest and notspeculate in shares.

    What is meant by the terms Growth Stock / Value Stock? GrowthStocks: In the investment world we come across terms such as Growthstocks, Value stocks etc. Companies whose potential for growth insales and earnings are excellent, are growing faster than othercompanies in the market or other stocks in the same industry arecalled the Growth Stocks. These companies usually pay little or nodividends and instead prefer to reinvest their profits in theirbusiness for further expansions. Value Stocks: The task here is tolook for stocks that have been overlooked by other investors andwhich may have a hidden value. These companies may have been beatendown in price because of some bad event, or may be in an industrythat's not fancied by most investors. However, even a company thathas seen its stock price decline still has assets to its name -buildings, real estate, inventories, subsidiaries, and so on. Manyof these assets still have value, yet that value may not bereflected in the stock's price. Value investors look to buy stocksthat are undervalued, and then hold those stocks until the rest ofthe market realizes the real value of the company's assets. Thevalue investors tend to purchase a company's stock usually based onrelationships between the current market price of the company

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    and certain business fundamentals. They like P/E ratio beingbelow a certain absolute limit; dividend yields above a certainabsolute limit; Total sales at a certain level relative to thecompany's market capitalization, or market value etc.

    How can one acquire equity shares? You may subscribe to issuesmade by corporates in the primary market. In the primary market,resources are mobilised by the corporates through fresh publicissues (IPOs) or through private placements. Alternately, you maypurchase shares from the secondary market. To buy and sellsecurities you should approach a SEBI registered trading member(broker) of a recognized stock exchange.

    What is Bid and Ask price? The Bid is the buyers price. It isthis price that you need to know when you have to sell a stock. Bidis the rate/price at which there is a ready buyer for the stock,which you intend to sell. The Ask (or offer) is what you need toknow when you're buying i.e. this is the rate/ price at which thereis seller ready to sell his stock. The seller will sell his stockif he gets the quoted Ask price. If an investor looks at a computerscreen for a quote on the stock of say XYZ Ltd, it might looksomething like this: Bid (Buy side) Ask (Sell side)______________________________________________________

    Qty. Price (Rs.) Qty. Price (Rs.)_____________________________________________________________

    1000 50.25 50.35 2000 500 50.10 50.40 1000

    550 50.05 50.50 1500 2500 50.00 50.55 3000 1300 49.85 50.651450

    _____________________________________________________________Total 5850 8950_____________________________________________________________ Here,on the left-hand side after the Bid quantity and price, whereas onthe right hand side we find the Ask quantity and prices. The bestBuy (Bid) order is the order with the highest price and thereforesits on the first line of the Bid side (1000 shares @ Rs. 50.25).The best Sell (Ask) order is the order

  • 40

    with the lowest sell price (2000 shares @ Rs. 50.35). Thedifference in the price of the best bid and ask is called as theBid-Ask spread and often is an indicator of liquidity in a stock.The narrower the difference the more liquid or highly traded is thestock.

    What is a Portfolio? A Portfolio is a combination of differentinvestment assets mixed and matched for the purpose of achieving aninvestor's goal(s). Items that are considered a part of yourportfolio can include any asset you own-from shares, debentures,bonds, mutual fund units to items such as gold, art and even realestate etc. However, for most investors a portfolio has come tosignify an investment in financial instruments like shares,debentures, fixed deposits, mutual fund units.

    What is Diversification? It is a risk management technique thatmixes a wide variety of investments within a portfolio. It isdesigned to minimize the impact of any one security on overallportfolio performance. Diversification is possibly the best way toreduce the risk in a portfolio.

    What are the advantages of having a diversified portfolio? Agood investment portfolio is a mix of a wide range of asset class.Different securities perform differently at any point in time, sowith a mix of asset types, your entire portfolio does not sufferthe impact of a decline of any one security. When your stocks godown, you may still have the stability of the bonds in yourportfolio. There have been all sorts of academic studies andformulas that demonstrate why diversification is important, butit's really just the simple practice of "not putting all your eggsin one basket." If you spread your investments across various typesof assets and markets, you'll reduce the risk of your entireportfolio getting affected by the adverse returns of any singleasset class.

  • 41

    4.2.2. Debt Investment

    What

    (Video) How to get NSE Certificate NCFM Modules : AS Chakravarthy NCFM Academy Hyderabad

FAQs

How do I get study material for Ncfm? ›

Interested candidates who desire to purchase Workbooks for NCFM modules (Except modules of FPSB Ltd., IMS Proschool, I-Sec and SSA Business Solutions) may send a request letter along with demand draft of Rs. 500/- per module per workbook, favouring 'NSE ACADEMY LTD' payable at the nearest NSE office.

Which one is better NISM or Ncfm? ›

What is the difference between the NCFM and NISM? Well, there is only a slight difference as both are conducted by two different institutes. However, both the exams hold the same value. In other words, NCFM is held by the National Stock Exchange (NSE) while SEBI conducts NISM.

How many exams are there in Ncfm? ›

NCFM Exam Details

These certification modules are divided into three broad categories: foundation, intermediate, and advanced, catering to students and professionals with varying expertise in different knowledge areas.

Is Ncfm exam tough? ›

Key Differences. Entry barrier: NCFM has no entry barrier. It is one of the toughest exams to clear as it goes in-depth and students need to learn and study a lot to clear all the modules, but still, this course can be done by anyone who has a keen interest in the capital and financial market.

Can I get job after Ncfm exam? ›

Therefore, there are always tremendous, highly paying jobs to for deserving and thriving individuals who are NCFM certified. There can be four major career positions you can aspire for after taking up NCFM certification: The Market Maker – buys and sells stocks and shares in one's account to make a profit.

Does Ncfm exam have negative marking? ›

There would be negative marking (25% of the marks assigned to the question answered wrongly). The fees for the module would be Rs. 1500/-. For on-line registration, payment of fees and enrollment for this module, candidates can log on to www.nseindia.com, under 'NCFM Online' link.

Is Ncfm exam Mcq? ›

Students need to became a analyst have to clear the nse module of ncfm certification with 60% of marks in 2 hours multiple choice question answers.

Can we give Ncfm exam from home? ›

All Problem's One Solution

NCFM is an online testing and certification program. It tests the practical knowledge and skills required to operate in the financial markets. Tests are conducted in a secure and unbiased manner and certificates awarded based on merit of the candidate to qualify the on-line test.

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