FAQs on Stock Market

Q. What is an Equity Share?

A. An equity share represents ownership in a company. The holder of such a share is a member of the company eligible to
share many benefits from the company.

Q. What Returns can I expect from my investments in equity shares?

A. Investment in good equity shares brings different types of returns such as capital appreciation, dividend, bonus and right
shares etc.

Q What is Capital Appreciation (capital gain)?

A. It is the difference between buying price and selling price of a share. People buy shares with the view of selling at a
better price and this difference is one of the most important gains from equity investment.

Q. What is Dividend?
A. Dividend is the part of profit distributed by the company among its investors. It is declared as a percentage of the paid-up
value or face value of the share.
E.g. 20% dividend on a Rs.10 face value share is Rs.2 whereas it is 20 Ps. on a Re.1 share.

Q. What is a Bonus Share?

A. A share issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits
earned in the earlier years.

Q. What is a Rights Issue?

A. In a rights issue, a company issues new shares by giving existing shareholders the right to purchase new shares in
proportion to their existing holding. E.g. one right share for each existing share (1:1), one right share each for two existing
shares (1:2) etc. Right Shares are usually offered at a discount, and most investors take up the offer of a rights issue.

Q. What are the risks?

A. Equity shares are “High-Risk High-Return Investments”. The major distinction of Equity investment from all other
investments is that while the return from many avenues such as Bank Deposits, Small Saving Schemes, Debentures, Bonds
etc are fixed and certain, the earnings from equity investments are highly uncertain and varied. A good scrip picked up at the
right time could fetch fairly good returns else the return may be meagre or it may even turn negative, i.e. the invested fund
itself may be eroded. In short, if the investment in fixed income category instruments is secured and risk-free to a large
extent, investment in equities and related fields could be termed as risky. E.g. Rs.9500 invested in Infosys Technologies in
1993 has grown to Rs.2.50 crore plus at current valuations* – a case of high returns. If HFCL was bought in 2000 at
Rs.1800, your investment would have come down to Rs.12 at current valuations* – a case of high risk.
*July 2009

Q. What is Preferential Allotment of shares?

A. A fresh allotment of shares to promoters, their friends and relatives on a preferential basis is called preferential allotment.

Q. What is the Face Value of a share?

A. Face Value, also called Par Value, is the nominal value of the share. The company arrives at this figure on the basis of the
total capital issued by it and the number of shares issued in order to raise that capital. While earlier, companies were
required to fix the face value of their shares at Rs.10 or multiples of Rs.10 as per the prevailing regulations of the time, now
they are free to fix the face value at any amount they desire.

Q. What is Issue at Par?

A. It is when a share is issued at the same price as the face value of the share.

Q. What is Issue at Premium?

A. It is when a share is issued at a price above the face value of the share. Face value of Sobha Developers equity is Rs.10
but the share was issued at a price of Rs.640, i.e., at a premium of Rs.630.

Q. What is a Bond?
A. A Bond is a promissory note issued by a company or government to its lenders. A bond is evidence of debt on which the
issuing company usually promises to pay the bond holder a specified amount of interest at intervals over a specified length
of time, and to repay the original loan on the expiration date. A bond investor lends money to the issuer and in exchange, the
issuer promises to repay the loan amount on a specified maturity date.

Q. Where can I buy shares from?

A. You can buy shares from the IPO market or from stock exchanges.

Q. What is an IPO?
A. When a company offers its shares to the general public for the first time ever, it is known as an Initial Public Offer or
IPO. After the IPO, shares are listed in stock exchanges for trading.

Q. What is a Stock Exchange ?

A. A Stock Exchange is a place where the buyer and seller meet to trade in shares in an organized manner. There are at
present 23 recognized stock exchanges in the country that are governed by the Securities Contract (Regulation) Act, 1956.

Q. What is the function of the Stock Market?

A. Stock market enhances capital formation in the economy and
comprises of
a) Primary Market is a place where new offerings by companies are made either as an Initial Public Offering (IPO) or
Rights Issue.
b) Secondary Market is a market where securities are traded after being initially offered to the public in the Primary Market
and/or listed on the Stock Exchange. Majority of trading is done in this market.

Q. Whom should I contact for my Stock Market related transactions?

A. To be able to buy or sell shares in the stock markets a client would need to be registered with a stock broker like who
holds membership in stock exchanges and is registered with SEBI.

Q. What Accounts have I to open?

A To start trading in shares, you have to open a trading account with a stock broker and a DP account with a Depository
Participant.

Q. Am I required to sign any Agreement with the broker or sub- broker?

A. Yes, you have to sign the “Member-Client agreement” for the purpose of engaging a broker to execute trades on your
behalf from time to time, and furnish details relating to yourself(KYC-Know Your Client), to enable the member to maintain
the Client Registration Form.

Q. What is a Member-Client Agreement form?

A. This form is an agreement entered into between client and broker in the presence of witnesses wherein the client agrees
(is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker, after being satisfied of
broker’s capabilities to deal in the same.

Q. How do I place my Orders?

A. Trading (buying or selling of shares) can be done via the phone or by coming in person to the office of broker or through
any other facility provided the broker like Internet trading. The dealer (employee of the broker who is supposed to input the
investor’s order into the stock exchange order system) after checking the authenticity of the person calling and after
checking the margin available in the account would put/enter the order into the stock exchange system

Q. What are the different types of orders?

A. There are several types of orders that you can place through a broker. The most common type, which is a regular buy or
sell order, is called a market order. Another type of order is a limit order wherein you ask the broker to trade only if the price
reaches a specific level. In a stop order, you tell the broker to sell your shares if the price drops to a certain level. This helps
you to check your losses if the price of that share drops further.

Q. What is the Methodology of trades?

A. The market watch, i.e. the screen kept open normally on the trade screen would show the following as columns -
1. Best bid price or best buy price
2. Best bid quantity or quantity of stocks in demand at the best bid price
3. Best offer price or best sell price
4. Best offer quantity or quantity of stocks available at the best offer price
5. Last traded price

Q. How does the transaction take place?

A. Orders put into the trading system are executed automatically when the price for a buy order on a security is matched
with a sell price.

Q. What is taking a position?

A. When you act upon a stock and buy or sell into it, you are taking a position. A position is an amount of money committed
to an investment in anticipation of favorable price movements.
There are two kinds of positions: -
a) Long positions or going long is nothing but buying a share. When you buy, that means you are anticipating an upward
movement in the price, and that is how you profit. People usually buy stocks at prices expecting to sell them later at higher
prices, and hence make profits.
b) Short positions or going short represent sell positions. When you sell, you are anticipating a fall in the price and the fall is
the source of your profits. The shares will be sold and when the price falls they will be repurchased and given back, and the
price difference is the investor’s profits. Of course, the investor who borrowed the shares carries the risk of not having the
price move as anticipated, in which case he may lose money in repurchasing the stocks.

Q. What is a Rolling Settlement?

A. Rolling Settlement is one in which there is no fixed settlement period. Each trading day will be a settlement day under
this system. Trades executed on a particular day are settled based on the net obligations for the day. In NSE and BSE, the
trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence, trades
executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day).
The funds and securities pay-in and pay-out are carried out on T+2 day.

Q. What is a Clearing House?

A. It’s an agency of the Stock Exchange that is responsible for the effective delivery and settlement of contracts between the
members (brokers) of that exchange.

Q. What is Pay-in day and Pay-out day?

Pay-in day is the day when the broker shall make payment or delivery of securities to the exchange. Pay-out day is the day
when the exchange makes payment or delivery of securities to the broker.

Q. What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf of the client. It establishes a legally enforceable
relationship between the client and Broker with respect to the settlement of the trades. The Contract Note would show
settlement number, order number, trade number, time of trade, quantity and price of the trades, brokerage charged etc and it
would be signed by an authorized person from the Broker.

Q. What are the additional charges other than brokerage that can be levied on the investor?
A. The trading member can charge:
1. Securities Transaction Tax.
2. Service tax as applicable.
3. Transaction charges levied by NSE, stamp duty and other charges directly attributable to the transaction.
Note: The brokerage and service tax is indicated separately in the contract note.

Q. How do I make or receive payments to or from the broker?

A. Payments to the broker have to be made via an Account Payee cheque/Demand Draft in favor of the broker. The payment
should necessarily come from the bank account of the investor and not from any other person. Similarly broker would pay
an Account Payee cheque in the name of the investor, which will also contain the bank name and account number of the
client.

Q. How long does it take to receive my money for a sale transaction and my shares for a buy transaction?
A. The pay-out of funds and securities to the clients by broker will be within 24 hours of the pay-out.

Q. What is a depository?
A. A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government
Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related
to transactions in securities.
There are two main depositories in India, namely,
a) National Securities Depository Ltd. (NSDL) and
b) Central Depository Services Ltd.
(CDSL), both of which are regulated by SEBI.

Q. What should I do when I want to open an account with a DP?

A. You can approach any share broker. or any DP of your choice and fill up an account opening form. At the time of opening
an account, you have to sign an agreement with the DP in a NSDL prescribed standard agreement, which details your and
your DP’s rights and duties. You will need to furnish photocopies of an address-proof (this could be a ration card or a voter
ID card),
a passport-size photograph and PAN card for verification.

Q. Do I need to possess shares or other securities to open a DP account?

A. No. You are not required to possess shares or other securities while opening a DP account.

Q. Should the client keep a minimum balance of securities in his account?

A. No. NSDL has not prescribed any minimum balance of securities. The client can have a zero balance in his account.
However, the DP may fix some minimum limit.

Q. Is there any restriction on the number of DP accounts an individual can open?

A. No. There is no such restriction.

Q. How do I deliver or receive shares to or from the broker ?

A. In case of sales, the investor would need to transfer the shares to the pool account of the broker for the specified
settlement number. The delivery should necessarily come from the demat account of the investor and not from any other
person. Similarly, broker would directly transfer shares bought to the account of the investor.

Q. What do you mean by ‘Market Trades’ and ‘Off Market Trades’?

A. Any trade settled through a clearing corporation is termed as a ‘Market Trade’. These trades are done through stock
brokers on a stock exchange. ‘Off Market Trade’ is one which is settled directly between two parties without the
involvement of a clearing corporation. The same delivery instruction slip can be used either for market trade or off-market
trade by ticking one of the two options.

Q. How are Margins paid?

A. To buy or sell shares, the client has to maintain a minimum amount in his trading account as prescribed by the Stock
Exchange margin rules from time to time. Currently, the margins are calculated on the Value at Risk model. Margins are to
be paid by the investor before placing the order.

Q. What happens if I could not make the payment of money or deliver shares on the pay-in day?
A. In case of purchase on your behalf, the member broker has the liberty to close out transactions by selling securities in
case you fail to make full payment to the broker for the execution of contract before pay-in day as fixed by Stock Exchange
for the concerned settlement period, unless you already have an equivalent credit with the broker. The shortages in case of
sales are met through auction process and the difference in price indicated in Contract Note and price received through
auction is paid by member to the Exchange which is then liable to be recovered from the client. In both the cases any loss in
transactions will be deductible from the margin money paid by you.

Q. What is an Auction?
A. The securities are put up for auction by the Exchange on account of non-delivery of securities by the selling trading
member to ensure that the buying trading member receives the securities due to him. The non-delivery by the trading
member could arise on account of short delivery. The Exchange purchases the requisite quantity in the Auction Market and
gives them to the buying trading member.

Q. What happens if the shares are not bought in the auction?

A. If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction, the transactions are
closed out as per SEBI guidelines. The guidelines stipulate that “the close out price will be the highest price recorded in that
scrip on the exchange in the settlement in which the concerned contract was entered into and up to the date of auction/close
out OR 20% above the official closing price on the exchange on the day on which auction offers are called for, whichever is
higher.” Since in the rolling settlement the auction and the close out takes place during trading hours, the reference price in
the rolling settlement for close out procedures would be taken as the previous day’s closing price.

Q. What happens if I do not get my money or share on the due date?

A. In case a broker fails to deliver to you in time and make the proper payment of money/shares or you have a complaint
against the conduct of the broker, you can file a complaint with the respective stock exchange. The Exchange is required to
resolve all complaints. To resolve the dispute the complainant can also resort to arbitration as provided on the reverse of
Contract Note /Purchase or Sale Note. However, if the complaint is not addressed by the Stock Exchanges or is unduly
delayed then the complaints along with supporting documents may be forwarded to Secondary Market Department of SEBI.
Your complaint would be followed up with the exchanges for expeditious redressal. In case of a complaint against a sub-
broker, for redressal the complaint may be forwarded to the concerned broker with whom the sub-broker is affiliated.

Q. What are the rights of the investor?

A. The right to get - Proof of price/brokerage charged, Money/shares on time, Statement of Accounts and Contract Note
from trading member.

Q. What are the obligations of the investor?

A. The obligation to -
• Sign a proper Member-Constituent Agreement
• Possess a valid contract or purchase/sale note
• Deliver securities and make payment on time
• Provide Margin before trade

Q. What is internet trading?

A. Instead of visiting/calling your stock broker’s office you can trade from your home or office. This is called internet
trading. For this, you require a computer with an internet connection. The advantage is that you can place your own orders.

Q. What are the various kinds of accounts that I need to trade via Internet with a broker?
A. Three kinds of accounts are required to be able to trade online.
They are:
a) E-Broking account with the broker
b) Depository Participant (DP) account with the broker
c) Bank account, which has developed an interface with the broker

Q. What are the tax implications of investing in Indian equities?

A. Tax rates on investment gains are categorized as long term and short term capital gains.
(a) Long term capital gains
Long Term investments that are held for more than 12 months are termed as long term capital assets. Profit on sale of such
assets is termed as long term capital gain (LTCG) which as per the latest Budget notification will attract nil tax. Dividend is
also tax free in the hands of investors.

(b) Short term capital gains

Shares that are held for less than 12 months are classified as short term capital assets which as per the latest Budget
notification will attract 15% tax.

Q. Who is a Portfolio Manager?

A. Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the
client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of
securities or the funds of the client, as the case maybe, is a Portfolio Manager.

Q. What is meant by bullish and bearish trends in the market?

A. When the market goes up it is called a bullish trend and when the market goes down it is called a bearish trend.

Q. Why are some shares called Blue Chips?

A. The term ‘Blue Chips’ refers to the stock of renowned companies with established and stable businesses. Such companies
offer a steady stream of earnings and are preferred by investors because of the stability of their earnings. People desiring
solid investments with minimal risks should invest in shares of ‘Blue Chip’ companies.
Q. What is an index?
A. An index is a stock-market indicator created as a statistical measure of the performance of an entire market or segment of
a market based on a sample of securities from the market. An index is thus a means to evaluate the overall performance of a
market or of a segment of the market at any point of time. As a measure of the performance of the market at a particular
time, the index at that point of time is compared to the index number at another point of time in the past and the strength or
weakness of the market is measured on the basis of the difference in the index figures.
For example, one Monday’s market could be termed as strong if the index value on that day is better than last Friday’s index
figures. Similar comparisons are possible intra day, daily, weekly, monthly or annual basis to measure the market
performance. Apart from being a general market indicator, indices are used as a benchmark to evaluate individual portfolio
performance. Professional money managers will always try to outperform the market, i.e. they will always try to do better
than the indices. For example, if the value of a portfolio moves up by 10% while the index moved up by only 5% then the
portfolio is doing better than the market.
We have 2 renowned indices viz. (a) BSE Sensitive (BSE Sensex) and (b) S&P Nifty 50 (Nifty). BSE Sensex comprises of
30 large-cap companies. As the name suggests, it is the premier index of the Bombay Stock Exchange (BSE). Nifty is the
prominent index of the National Stock Exchange (NSE) and it comprises 50 large-cap stocks traded in the National Stock
Exchange.