Basics of Stock Markets

Basics of Stock Markets


  1. Understanding share markets
  2. What are shares
  3. Broking, demat, and transaction costs
  4. How share market works
  5. Opening a trading account
  6. How to buy/sell – online and offline
  7. Market concepts

Learning objectives

  • Learn about stock markets in India
  • Learn how to trade online
  • Understand risks involved

Chapter One – Understanding Stock Markets

a. Stock Markets

A stock market or share market is where the stocks or shares of companies are traded so people can either buy or sell them. Today all trading on the stock exchanges happens electronically. There are two major stock exchanges for equities (shares) in India – National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). All major businesses in the country are listed on both of these exchanges. While there are many other regional exchanges in different states, most of you will invest through one of these two exchanges. Both of these exchanges follow similar trading mechanisms, hours and operating principles.

b. Regulation of markets

Considering the fact that the stock market investing can be a risky proposition, there is a need for investors to be protected through proper regulations. The Securities and Exchanges Board of India (SEBI), an independent market body, has been created to impose and enforce market regulations, with a view to safeguard the interests of the investors and develop the market.
SEBI has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.

Its basic objectives are:

• Protecting the interests of investors in stocks
• Promoting the development of the stock market
• Regulating the stock market

The market is divided into two types – primary and secondary.

Primary Market:

When a company or a governmental firm lists its shares for the first time, it’s called a primary market. Companies get registered on exchanges to issue a certain amount of shares so that they can raise money against these shares. This is also called getting listed in a stock exchange.
In a primary market the company being newly listed creates shares and offers them to investors who buy them directly from the company.
A company enters primary markets to raise capital. If the company is selling shares for the first time, it is called an Initial Public Offering (IPO). The company thus becomes a public limited company.

Secondary Market:

Once the shares are listed and available on the stock market for everyone to buy, it’s called a secondary market. Thus although customers buy shares of the same company in both these markets, they buy them from different sellers in each.
Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price.
Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process.

c. Stock market indices

Each exchange has indices that indicate the market sentiment of a selected section of the market (or of the broad market in case of a broad market index). An index tells you which way the market is headed, and changes in market sentiment is reflected by changes in the values of these indices.
So if the market is generally going up, the indices will increase in value, and vice versa. For inclusion in a given index the stocks have to fulfill certain criteria which could be related to market cap, liquidity, industry etc. BSE’s broad market index is called SENSEX and the same for NSE is NIFTY 50.

Chapter Two – Basics about shares (or stocks/equity)

The share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the share market.
Shares are a certificate of ownership of a corporation. Thus, as a stockholder, you share a portion of the profit the company may make as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value.

Chapter Three – Trading Charges

There are two types of transaction costs in trading – brokerage and other charges. Brokerage goes to the broker and other charges go to government and exchange.
Broking charges – in case of cash market, it varies from 10 paise per 100 Rs transaction to 50 paisa (0.1% to 0.5%). In case of intraday cash and futures, it varies from 1 paisa per 100 Rs transaction to 5 paisa. There are now many good discount brokers who charge only Rs 10/20 per transactions.

Demat account charges – Zero to 500 Rs per year (ICICI charges Rs 500)
Buy/sell charges – Brokerage plus other charges vary from 0.5% to 1% (ICICI is on upper side)
Minimum funds – You can normally open an account with Rs 10000 - 50000

Chapter Four - How Share Market Works:

A stock exchange is a platform where financial instruments like stocks and derivatives are traded. Market participants have to be registered with the stock exchange and SEBI to conduct trades. This includes companies issuing shares, brokers conducting the trades, as well as traders and investors. All of this is regulated by the Securities and Exchange Board of India (SEBI), which makes the rules of conduct.

How stock market works

You need a demat account and a trading account to place your orders for buying or selling shares. If you are a trader only, you don’t need a demat account. Since all the orders are electronic, there is more transparency in the system, reducing the probability of fraudulent orders.
When you place an order to buy some shares of a certain company, your broker/trading company sends the orders which in turn gets executed as someone else out there sells those shares. However, since the entire process is digitized, as far as you are concerned, you just place the order and wait for it to reflect in your demat account, if cleared.

How can I trade on NSE and BSE online?

You cannot trade directly on NSE and BSE. You can trade through brokerage firm only.
While brokerage firm provide you platform or in simple words a website or a software through which you can trade online on NSE or BSE. They also handle payment process.

What services brokerage firm provide?

Brokerage firm provide a website or a software through which you can place order to buy and sell share and derivatives. Site keeps all the detail like how many shares you have, and how much money do you have. You can transfer money online from bank account to this site and vice versa.

What is brokerage fee?

Brokerage fee you need to pay based on per transaction.

For Example You bought 10 Share of TCS company at price of 2000 rupee and you want to keep it for more than one day it means you are taking delivery of share. and charges as per decided by your brokerage firm is 0.5% on both buy and sell side so in this case you have to pay (20,000+100) total 20100 from your trading account.

What is Demat account?

Demat account is account where you keep your share. It is associated with brokerage firm website. So let us suppose you bought 10 TCS Share through brokerage firm website then these 10 share will be there in your demat account and these demat account details (10 TCS share) you can see on brokerage firm website.

What is online trading in securities?

Online trading in securities refers to the facility of investor being able to place his own orders using the internet trading platform offered by the trading member viz., the broker. The orders so placed by the investor using internet would be routed through the trading member.

What is online trading account?

Online trading account provides you a website through which you can place order to buy and sell share. It is required to keep information related to buying and selling share. Like how many share you bought, what was purchase price, what is current market price (CMP) etc. 

Also you need money to buy share so where you will keep money? In trading account

From where you will get money in trading account? From bank account

So does it mean you have to transfer money from bank account to trading account? YES

From where I can transfer money from bank account to trading account? You can do it through brokerage firm website.

Does it mean you have to link manually trading account to bank account?

No.When you will open trading account, your brokerage firm will do this.

What is meaning of Nifty is closed with RED color

Green and red colors are two indicators. When someone says Nifty closed in RED color means Nifty closed lower than previous day. If someone says Sensex is moving in green color it means Sensex is going in upward direction.

What is trading and what is investing?

Trading means you are buying share for very short time. Investing means you are buying share and keeping it in demat account for long time.

What is time duration for trading?

Trading can be from 1 day to few weeks.

What is investing time duration?

A Investment is when you are buying share and keeping it for more than 6 month to many years

How can one start trading online?

To start with, investor needs to identify a trading member (broker) who offers internet trading facility and register with the trading member for availing the internet trading facility.

How to choose an online stock broker?

Many of the big and medium sized trading members offer internet trading facility. Investor can get the details of trading members of the Exchange on the website www.nseindia.com. Identify brokers offering internet trading facility; check their references from persons having knowledge about financial markets and select a broker who has good reputation and capability.

Particular attention should be paid by the investor to the availability of support in case of technical problems while choosing the broker.

Who could use online trading?

Usually, a person familiar in using computer, conversant with the use of internet and who is able to tackle routine problems associated with use of personal computers may opt for online trading.

Chapter Five – Opening a Trading Account

Since 2000, the stock markets have become electronic. This means, trading is conducted online. Today, you need a demat and a trading account to invest in the stock market. A trading account is opened with a stock broker. Demat account is not required for trading in derivatives.

How to Open a Trading Account

1. First, select the stock broker or firm. Ensure that the broker has good reputation.
2. Compare brokerage rates. Every broker charges you a certain fee for processing your orders. Some give discounts on the basis of the amount of trades conducted.
3. Next, get in touch with the brokerage firm or broker and enquire about the account opening procedure. Often, the firm would send a representative to your house with the account opening form and the Know Your Client (KYC) form. In many cases it is done online.
4. Fill these two forms up. Submit along with two documents that serve as proof of your identity and address.
5. Your application will be verified either through an in-person check or on the phone, where you will be asked to divulge your personal details.
6. Once processed, you will be given your trading accounts details. You will now be able to conduct trades in the stock market

What are the documents required?

Just like the procedure for opening a demat account, you need to submit proofs of identity and address along with a passport size photograph and the account opening form for opening a trading account.

Here is a broad list of documents that can be used as proofs:

Proof of Identity

PAN card, voter's ID, passport, driver's license, bank attestation, electricity bill, telephone bill, ID cards with applicant's photo issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities, or professional bodies such as ICAI, ICWAI, ICSI, bar council etc.

Proof of Address

Ration card, passport, voter ID card, driving license, bank passbook or bank statement, verified copies of electricity bills, residence telephone bills, leave and license agreement or agreement for sale, self-declaration by High Court or Supreme Court judges, identity card or a document with address issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities and professional bodies such as ICAI, ICWAI, Bar Council etc.

Are there additional documents to be executed for registering as internet customer?

As per SEBI and Exchange stipulations, in addition to execution of regular KYC documents, the investor would have to execute a specific Member- client agreement for internet trading which broadly spells out the rights and obligations of trading member and Investor besides alerting on system related risk, confidentiality of user id and password.

What documents are received usually after registration as an online trading client?

On registering as online trading client with the trading member, normally investor receives a welcome kit containing the user-id and password allotted to the client.

Where to open the account:

Open a Demat and trading account with a stock broker. Most banks also offer this facility like ICICI, HDFC, Kotak, Axis, SBI etc. ICICI is considered one of the best brokers for investors.

Chapter Six – How to Trade Online

Online trading is the process of buying and selling financial instruments over the Internet. With the introduction of the World Wide Web, almost all transactions can be carried out using a computer, including stocks, currencies, options and futures.

a. Types of orders

There are different types of orders that a trader can make. For example, the simplest type of order is a market order, which purchases or sells a set number of shares of a security at the prevailing market price. In contrast, a limit order buys or sells a security when its price reaches a certain point.

For example, placing a buy limit order on a security would instruct the broker to only purchase the security if the price fell to a certain level. This allows a trader to specify the maximum amount he or she would be willing to pay for the security.

In this way, a limit order guarantees the price the trader will pay or be paid, but not that the trade will occur.
Similarly, a stop loss order instructs the broker to buy or sell a security if the price rises above or falls below a certain point. However, the price that the stop order will be filled at is not guaranteed (it is the current market price).

There is also a combination of stop and limit orders called a stop-limit order. When the price of the security passes a certain threshold, this order specifies that the order become a limit order rather than a market order (as it does in a regular stop order).

Using the software/website

There are two ways of trading online – either through a website, or through a software. Almost all professional traders use software as it is fast and convenient. Both are provided by the brokers.
There are various features of the software which are mostly same for all brokers. We are explaining here the basic features, you must practice first on the software/website before starting to trade.

b. Buy & Sell Order Entry Screen

Steps to place an order: some fields may differ on different trading systems.
• Trading Account Number: This field is auto populated at form.
• Select Product: Select Cash, Margin, Intraday, Cover, E-Margin, Encash or Collateral Sell as product on the order entry panel.
• Select Side: Buy or Sell on the Order Entry panel.
• Select Exchange: Select the exchange from the list in the drop down in the exchange text box to place the order. The exchanges available for trading are NSE & BSE.
• Select Book: Select either NL or SL in book type field. NL represents Normal Lot Book & SL represents Stop Loss book.
• Select Instrument: Select one of the instruments from drop down. The instruments available into the drop down are Equity, FUTIDX, FUTSTK, OPTIDX and OPTSTK.
• Symbol: Enter the security symbol (numeric code or Alphabets). If you do not remember the Symbol of the instrument, enter at least three character of the company name or symbol and Click the magnifying glass beside the textbox. This will display a separate window containing the list of instruments beginning with the character input by you. Select the desired symbol from the Security Search. Alternately, click the "Magnifying Glass" beside the textbox to populate the security code. This displays a separate window.

c. Order Entry

• Order Type: Choose the order type from the drop down. The various order types available are:
• Limit Order: Place a Limit order when willing to buy or sell a stock at the specified price or better price than the available current price.
• Market Order: Place a market order when willing to buy or sell a stock immediately at the best available current price in market.
• Quantity: Enter the quantity for buy or sell order into the Qty field.
• Price: Enter the price at which client needs to place buy or sell order. Price field is enabled when the Order Type is Limit. For Market type order Price field will have Mkt which will be grayed out
• Disclosed Quantity (DQ): Enter the Disclosed Quantity. In the Disclosed Quantity field, enter the quantity of shares you would like to disclose when placing your order. The minimum is 10% of your order quantity.
Note: This step is optional. If SL (Stop Loss) is selected for the Book Type, the Disclosed Quantity field cannot be used. Disclosed Quantity is not applicable for Derivatives.
• Trigger Price: Enter the Trigger Price. Trigger Price field is enabled only for Stop Loss order. In case of Buy order, trigger price will be lesser than Limit Price and in case of Sell order trigger price will be greater than Limit price.

d. Market Watch

Market watch is used to view live broadcast of specified securities. The purpose of market watch functionality is to display the market information, segment and market type. Market watch is configurable.
The particulars which are displayed on the market watch screen for a specified security are:
• Exchange
• Instrument
• Symbol
• Company Name (For Derivative Contracts it includes Instrument, Expiry Date, Option Type and Strike Price for Options)
• Buy Quantity
• Buy Price
• Sell Price
• Sell Quantity
• LTP (Last Traded Price)
• % Change
• Last Traded Quantity
• Total Traded Quantity
• Open Price
• Previous Close

In the Market watch, you can change the column width also.
Click on "Add" to add new security or contract into Market Watch.
Click on "Delete" to delete a security or contract from Market Watch.
Click on "Save" to save the securities added in Market Watch so that they will be visible in further login sessions.
Click on "Buy" to place buy order for selected security or contract.
Click on "Sell" to place sell order for selected security or contract.

e. Order Book

Order Book gives the details of all the orders placed, Exchange-Segment (Instrument) wise.
The Order Book Query screen has following fields:
• Trading Account No: It will be auto populated to view a particular Order.
• Product: Select Product (Cash, Margin, E-Margin , Encash, Cover, Collateral Sell, All).
• Exchange: Select the exchange (NSE, BSE, All)
• Segment/Instruments: Select between Equity & Derivatives instrument segment. (Equity, FUTIDX, FUTSTK, OPTIDX, OPTSTK Note:

o If segment selected is Equity, Cash, Margin, Intraday, Collateral Sell, Cover, Encash, E-Margin products will be available. Collateral Sell and Encash will be available only on Sell Order Entry Form.
o If segment selected is Derivative, Margin and Intraday products will be available.
o If segment selected is Derivative and FUTSTK and FUTIDX instrument is selected, then both Margin and intraday products will be available.
o If segment selected is Derivative and OPTSTK and OPTIDX instrument is selected, then intraday products will be available.
• Symbol: When the security code is known, enter the security code. Or Symbol. Alternately follow the same process as mentioned above.
• Mode: Both Online & Offline modes are provided.
• Order Status: This gives the status of all the orders placed -pending, Transit, Cancel, Frozen, Executed, Partially Executed, modified & Rejected.
• The orders can be sub divided under following sub categories:
o Orders Confirmed by the exchange (Pending Orders): Orders, which have received confirmation from the respective exchanges.
o Orders Returned by the exchange (Rejected Orders): Orders, which have been returned/rejected by the Stock Exchange.
o Orders Modified: Orders, which have been modified by the dealers. It will show both confirmed orders and the pending orders.
o Orders in Transit: Orders, that have been entered and also an internal confirmation is received, but the Exchange confirmation has not been so far received.
o Orders Cancelled: Orders, which have been cancelled by you. It will show both confirmed orders and the pending orders.
o Orders Frozen: Orders, which have been frozen by the Exchange & may be confirmed or returned.
o Executed Orders: Orders which have fully got traded at exchange.
o Partially Executed Orders: Orders which have not got traded fully.
• View: Once the Symbol gets displayed in the text box above, Click View to view all the details pertaining to the order placed.
• Alternately, clicking on Submit displays the Order Book, for all orders placed; otherwise "No data Found" message will get displayed. Based on your selection, the appropriate list of orders placed during the day is displayed. Once you have viewed your order book, you can also cancel or modify a pending order.
• Close: Click "Close" will exit Order Book query screen without viewing the orders.
• Close: Click "Close" on records screen will exit the Order Book screen.
• Export Report: This allows you to save order book into your machine.
• Print Report: Print a copy of your viewed order by Click Print Report.
• Buy & Sell Order color: Different colors (Red & Blue) are used to display the buy & sell orders in order book. It make easier to you to identify buy & sell order in order book.

f. Order Cancellation

Order Cancellation is possible only for orders with status as "Pending".
For cancelling an order, follow the below mentioned steps:

• Select the order(s) you want to cancel.
• Click the Cancel Orders button.
• A warning message is displayed stating that the selected order(s) will be cancelled.
• Click the Confirm button to send the cancellation request to exchange. The exchange sends a cancellation confirmation message back once the order gets cancelled.
• Upon successfully cancelling the selected orders, a confirmation message is displayed and the order book updates itself to display the cancelled orders.
• Select Refresh to update the order status in the Order Book.
• Select Close to exit the Order Book.

To Cancel All Orders:
The order book also allows you to perform bulk cancellation i.e. cancel all orders. Follow the below mentioned steps for bulk cancellation:
• Click on Cancel All button.
• A confirmation screen will be displayed.
• Click Ok will send the cancellation request of all selected orders to exchange one by one.
• You will receive the cancellation confirmation in system message screen.

g. Modify Order

Order modification is possible only for orders with status as "Pending". For modifying an order, follow the below mentioned steps:
• Select the order you would like to modify.
• Click "Modify Order" button. This displays the order in the order entry form.
• Update the order details as required. You can modify the following fields as per your requirement viz. Order Type, Order Quantity, Price and Validity Condition.
• Click "Place Order" button.
• An order preview screen appears showing the information you just entered.
• If the order preview details are acceptable and as per the order you just entered, Click "Confirm" button.
• Upon successfully modifying the order, a confirmation screen is displayed along with the same Broker Reference Number assigned to your original order and the order book updates itself to display the modified order.
• The exchange sends back a modification confirmation message after order gets modified.
• Click "Refresh" to update the order status in the Order Book.
• Click "Close" to exit from the Order Book.

h. Trade Book

Trade Book provides details of all Traded or Partly Traded Orders exchange-segment-Instrument wise, during the current trading day. Once you have viewed your Trade Book, you can also:
• Add a trade to your portfolio
• Save your viewed Trade Book to your computer
• Print a copy of your viewed Trade Book for your future records.
• Convert to Delivery, E-Margin, Margin or intraday position

i. Trading Precautions

What precautions an online investor must take on starting online trading?
Investor has to take care that:
1. The Default password provided by the broker is changed before placing of order. Ensure that password is not shared with others. Change password at periodic interval.
2. He has understood the manner in which the online trading software has to be operated.
3. He has received adequate training on usage of software
4. The system has facility for order and trade confirmation after placing the orders

What should investor know about failure of system that is being used for placing orders?

Every online trading client should understand that there could be a possibility of failure of system which could include failure at various points including net work failure, connectivity failure etc. Generally, the trading members have alternate ways of servicing the investors in the eventuality of such failures. In order to mitigate risks arising from such failures, investor before starting trading should understand from the trading member about ways and means of dealing with such failures, steps that investor needs to take for knowing his position, closing the position etc.

What are the other safety measures online client must observe?

1. Avoid placing order from the shared PC’s / through cyber cafés.
2. Log out after having finished trading to avoid misuse.
3. Ensure that one does not click on “remember me” option while signing on from non-regular location.
4. Do not leave the terminal unattended while one is “signed-on” to the trading system.
5. Protect your personal computer against viruses by placing firewall and an anti-virus solution.
6. You should not open email attachments from people you do not know.

Chapter Seven – Market Concepts

What are bull and bear markets?

Markets are often described as ‘bull’ or ‘bear’ markets. These names have been derived from the manner in which the animals attack their opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if stock prices trend upwards, it is considered a bull market; if the trend is downwards, it is considered a bear market.
The supply and demand for securities largely determine whether the market is in the bull or bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.

What is stock volatility?

Stock prices constantly fluctuate. This is because the demand for the stock changes. As more stocks change hands, greater is the change in its share price. This is called stock volatility. Even the amount of volatility in the market changes on a daily basis. To measure this volatility, the National Stock Exchange introduced the VIX India index, also called the fear gauge. VIX is often used as an indicator of stock price trends. This is because, VIX rises when there is more fear and uncertainty in the market.
This means, investors perceive an increase in risk. This usually follows a fall in the market.

What are price-targets and stop-loss targets?

As an investor, to maximize your profits, you need to get your pricing right – both when it comes to buying and selling. However, sometimes, prices fluctuate more than expected. So, it can become a little difficult to gauge whether to trade now or wait a little more. This is where stock recommendations help.

Analysts put out price targets and stop-loss measures, which let you know how long you should hold a stock. A price target indicates that the price of share is unlikely to climb above the level. So, once the share price touches the target, you may look to sell it and pocket your profits. A stop loss, meanwhile, acts as a target on the lower end. It lets you know when to sell before the stock falls further and worsens your loss.

Thin Market: A market in which there are comparatively low number of bids to buy and offers to sell. Since the number of transactions is low the prices are very volatile.

Trading session: The period of time from 9:15 AM to 3:30 PM is open for trading for both sellers and buyers, within this time frame all the orders of the day must be placed. Here all the orders placed in pre-opening sessions are matched and executed.

Securities: A transferable certificate of ownership of investment in products such as stocks, bonds, future contracts and options which an individual holds.

Pre-opening Session: The pre-open session is for duration of 15 minutes i.e. from 9:00 AM to 9:15 AM. In pre-open session order entry, modification and cancelation takes place.


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