Equity

Accounts Requirement

                You need three accounts for trading in equities.

1.       Savings Account

2.       Demat Account

3.       Trading Account

Most of the banks now offer all three accounts as a 3-in-1 account.  The charges differ bank to bank and banks which offer 3-in-1 accounts may charge higher brokerage due to facilities they provide. Now a days, all the financial instruments are in dematerialized form and there are no more physical form of investment.

So to trade online using the dematerialized form you need the demat account to be opened and the savings account for transferring funds required for buy/sell of shares at the stock exchanges. Trading account is the broker account used to transact in the demat account and settlement of accounts to the savings account.

Equity Basics

1.       Why Equity Market?

Equity market offers high returns on investments but it’s a risky investment. Proper analysis is required to choose the companies to be invested on.

2.       What are exchanges in India?

In India, there are many stock exchanges. But the major stock exchanges most of the stocks are traded are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). BSE has the SENSEX index and the NSE has the NIFTY index. SENSEX has the top 250 companies listed in BSE based on the market capitalization and the NIFTY index has the top 50 companies in NSE (NSE+FIFTY = NIFTY).

3.       Who governs the stock exchanges in India?

The Security Exchange Board of India (SEBI) governs the stock exchanges in India.

4.       How to choose the companies to invest?

The fundamentals of the companies are more important while choosing the company to be invested. Some of the terminologies are the share capital, sales, EPS, PE ratio, etc.

5.       What is an equity share capital?

The equity share capital is the capital raised by the company. The company issues shares with a face value to expand the business with a definite purpose.

6.       What is an IPO?

IPO is the Initial Public Offering made by the companies to raise the equity share capital. The company will offer the shares to the public at a fixed price or a price range for a certain period of time.  The public can apply for IPO and allocation is based on the number of times it’s over subscribed.

7.       What is a face value?

Face value is the value without the premium and it will be mentioned in the share certificate. IPO can have the share price with a premium to face value.

8.       What is issue price?

Issue price is the price fixed by the company in IPO. It may be a fixed price or price range. It will be issued at premium to the face value.

9.       What is Sales?

Sales are the actual business by the company. Companies declare the sales every quarter. While checking the fundamentals of a company, Sales is one of the important components. Check the orders and sales improvement of the company every quarter.

10.   What is a Net profit?

Profit is based on sales. Profit is usually described as Profit Before Tax (PBT) and Profit After Tax (PAT). PAT is the Net profit of the company.  This is declared every quarter by the company.

11.   What is the EPS?

Earnings Per Share (EPS) as the name indicates it is the earnings or the profit per share. It is calculated as below.

EPS = (Net Profit/Share Capital) * Face Value

EPS of a company determines the shares’ market price and EPS is derived from the Net Profit which is achieved based on the sales.

12.   What is the PE Ratio?

Price Earnings (PE) Ratio is how much the price is earned compared to the Earnings Per Share (EPS). It is calculated as

PE Ratio = Current Market Price/Earnings Per Share

Each Industry has its own average PE ratio. One can compare the PE ratio with Industry PE ratio to determine how much more the market price can increase or decrease from current market price.

13.   What are the reserves?

Reserves are the previous accumulated profits which may be used for further development of the company or may be distributed to the share holders as dividends or bonuses.

14.   What is Market capitalization and volume?

Volume is the number of shares traded in the market.  Market capitalization is the value of the shares traded in the market.

15.   What is a Dividend?

Dividend is declared as a percentage of face value and paid to the share holders. It may be a Interim or Final Dividend.

16.   What is a bonus?

Bonus is the shares issued by the company for free for the shares held by the share holders. There will be ratio declared by the company stating how many bonus shares for the every share held by the share holder.

17.   What is a book value?

Book value is value of the share after taking into account all the reserves, assets and the liabilities of the company.

18.   What is deliverables?

Trading on share may be intra-day trade or a delivery trade. Intraday trade is nothing but buying and selling shares on the same day. Delivery is opting delivery into the demat account. Deliverables is nothing but the percentage of delivery in the total volume traded on a day.

19.   What is 52 week high and low?

52 week high and low is the maximum and minimum price traded by the share in the last 12 months.

20.   What is bid and offer?

Bid is the price asked for by the buyer and Offer is the price at which the seller is ready to sell his holdings.

21.   What is a record date?

Record Date is the date declared for the purpose of dividend or bonus. If you are holding the shares on the record date then you will be eligible for the bonus or dividend declared by the company.

22.   What is public share holding?

Public share holding is the shares held by the public at any point of time.