Equity FAQ
Money is a need in today’s environment and everybody has a varied income level. Whatever is earned is partly spent and partly saved for meeting future expenses. Instead of keeping the savings idle an individual uses the savings in order to get return on it in the future and mitigate inflation to some extent. This is called Investment.
The rate at which the cost of living increases is termed as inflation. It is simply the costs to buy the goods and services you need to live. Inflation causes money to lose value as the same amount of money will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if the average inflation rate is 7% for the next 20 years, goods or serviced that are priced at Rs. 1000 today would cost Rs. 3617 in 20 years. This makes it all the more important to consider inflation as a factor in any long-term investment strategy. One should look at an investment's 'actual' rate of return, which is the return after inflation. One should aim to invest to get a return above the inflation rate ensuring that the investment does not decrease in value.
Equity investments are basically investments in shares of companies which are listed/being listed on trading exchanges. Stocks can be bought/sold from the exchanges (secondary market) or via IPOs – Initial Public Offerings (primary market). Stocks can be termed as one of the best long-term investment options as the market volatility and the resultant risk of losses are mitigated by the general upward momentum of the economy in the long run.
Shares define the portion of investment an investor has made in a particular company at a given price. The total equity capital of a company is divided into equal units of small denominations, each called a share. The holders of such shares are members of the company and have voting rights.
It is a product whose value is derived from the value of one or more basic variables, which is called underlying. The underlying asset can be equity, commodity or any other asset. These products had initially emerged as hedging devices to safe guard an individual/ organization from the volatility of commodity prices over a period of time. Financial derivatives gained momentum post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular.
An Index is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards The leading Indices in the Indian markets are based on BSE( e.g. BSE SENSEX) and NSE Exchanges(e.g. NSE NIFTY) . These indices are a reflection of the overall price movement in the market.
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. In India currently there are two depositories namely National Securities Depository Limited(NSDL) & Central Depository services Limited(CDSL) whose services are availed of by many members who are called ‘Depository Participants’.
Prior to the concept of electronic exchanges shares were issued to investors in physical form. Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
Securities Markets, in India they are majorly Stock Exchanges namely NSE – National Stock Exchange and BSE – Bombay Stock Exchange, is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. These exchanges also perform an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. It efficiently facilitates transfer of resources from investors to others who have a need for those (corporates). It links savings to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.
Due to the changing economy and ratio between supply and demand resulting in the absence of conditions of perfect competition in the securities market, the role of the Regulator is extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of liquidity for corporate and government and the interest of investors are protected.
It is a shared responsibility jointly taken by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. It provides SEBI with statutory powers for protecting the interests of investors in securities, promoting the development of the securities market and regulating the securities market.
Its regulatory jurisdiction extends over organisations in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. It has been obligated to perform the aforesaid functions by such measures as it thinks fit. To be specific, it has powers as below :
- To regulate the business in stock exchanges and any other securities markets.
- To Register and regulate the working of stock brokers, sub–brokers etc.
- Promoting and regulating self-regulatory organizations.
- Prohibiting fraudulent and unfair trade practices.
- Taking information by undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self– regulatory organizations, mutual funds and other persons associated with the securities market.
The Stock Exchanges essentially has three categories of participants, which are, the issuers of securities, investors in securities and the intermediaries which bring in the issuers and the investors together, such as merchant bankers, brokers etc.
It is advisable to conduct transactions through an intermediary as you need a trading member of a stock exchange if you intend to buy or sell any security on stock exchanges, maintain an account with a depository if you intend to hold securities in demat form, need to deposit money with a banker to an issue if you are subscribing to public issues. One also gets guidance while transacting through an intermediary. We should choose a SEBI registered intermediary, as he is accountable for its activities.
The Stock Exchanges has two interdependent segments: the primary (new issues) market and the secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and is a small contributor on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price.
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities is generally through book building or through normal public issue.
It refers to a market where securities are traded after they have initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market.
Under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), the stock exchanges in India provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by BSE & NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. The trade is done through the computerized trading screens or internet based trading facilities available and provided by the trading members.
Periodic payments to shareholders made out of the company's profits are termed as dividends. The company decides the amount in a board meeting based on the company's performance and surplus.
By trading in demat segment the risk of bad deliveries is completely eliminated. One can also save on 0.5% in stamp duty in case of transfer of electronic shares. It also avoids the cost of courier; follow up with broker and loss of share certificates in transit. One can also take a loan against shares held in demat form by pledging the same with various lending institutions if required.
Opening a demat account is as simple as opening a bank account. One can open a depository account with any DP by filling up the account opening form, which is available with the DP. Sign the DP-client agreement that defines the rights and duties of the DP and the person wishing to open the account. Receive your client account number (client ID). This client id along with your DP id gives you a unique identification in the depository system.
One needs to fill up a dematerialization request form, which is available with your DP. The holder has to submit the share certificates along with the form; (write "surrendered for demat" on the face of the certificate before submitting it for demat). The credit of such shares is received in general in about 21 days from the registrar.
Saving is a stage on the way to investing. You cannot be an investor without being a saver but you can be a saver without being an investor. Savings are effectively cash or cash instruments, such as deposit account, term bonds etc. Investing is what you do with the savings you have created if you are looking to generate a return on your money that is greater than what is already available to you through your savings instruments.
There is really no such thing as 100% safe saving scheme or investment scheme. If anybody tells you different, don't believe them! Not even government-backed bonds are 100% safe. For that matter, ask anybody who had money invested in various Latin America debt instruments in the 1970s and 1980s. Even governments can go out of business!
The answer to this question is a definite yes. It has been seen that over the years there has been no financial instrument which has given returns as high as the stock markets. The only important factor to be kept in mind is that investment should always be made with an objective in mind and we should not be too greedy while investing. On the other hand, as inflation has fallen over the last couple of decades so have the returns available from basic savings accounts. In fact, many instant access accounts no longer keep pace with inflation at all. Leaving your money in such an account now actually means it is falling in value!
