Stock Market and Equity Trading

Equity investment is one of the most attractive investment options available for any investor. However, it shall please be noted by any investor that in short term equities undergo huge volatility and investment in equity either directly or through mutual fund route is best suited for long term horizon only. Equity investment is meant for those who are ready to take high risk for high return.   

Indian Stock Market- An overview. 

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two major stock exchanges in India. There are 22 Regional Stock Exchanges too.  However, with the emergence of screen based trading, the BSE and NSE have established themselves as the undisputed leaders and both together account for more than 80 per cent of the equity volume traded in India. Share market in India function from Monday to Friday, except on national holidays, declared in advance. 

BSE Sensex, is the primary index of BSE and consists of 30 stocks. S&P NSE 50 Index, popularly known af NIFTY is the index of NSE and it is comprised of fifty stocks.  The BSE Sensex is the older and is the most widely followed index. Both indices are calculated on the basis of market capitalization of constituent shares. The shares are representatives key sectors and are heavily traded. The scrips traded in stock exchanges have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares are group of shares in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment while the 'Z' group scrips represent the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations.

Securities and Exchange of Board of India (SEBI) is the regulator of Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market. 

How can shares be purchased from Stock Exchange? 

A person who is desirous of buying  or selling shares in the market has to first open a DP account. Thereafter, he has to place his order with a broker. The broker routes the order through his system to the stock exchange. The order stays in the exchange's queue systems and gets executed when a corresponding and matching order is received. For a buy transaction, the order has to match with a sell transaction and vice versa. For a buy transaction, the shares purchased will be credited to the account of buyer through the account of broker. In the case of a sale transaction, the share will be debited to the DP account of the seller and will be transferred to the buyer. 

Rolling Settlement Cycle: 

Each trading day is considered as a trading period and transactions executed during the day must be  settled based on the net obligations for the day. At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day after transaction.  For arriving at the settlement day, only stock exchange working days are considered and all intervening holidays, which include bank holidays, NSE/BSE holidays, Saturdays and Sundays are excluded. Based on T+2 concept, trades executed on Monday are to be settled on Wednesday and that on  Tuesday on Thursday and so on. 

Buying Limit 

Buying Limit is the limit available for a customer to carry out buy transactions. It is the amount set aside by the customer in the the account with the broker and the amount realized from the sale of any shares he had sold earlier less amount remaining to be paid on purchases made. 

Going Short: 

Going short on a stock means selling shares which are not held by the customer. Generally, traders go short when they expect the price to decline. In a rolling settlement cycle, the position will have to be covered  by  the end of the day of transaction. . 

Margin Trading: 

Normally, to carry out buy, the customer should have sufficient amount in the account. Similarly, for sell transactions in a stock exchange, the customer should have shares in his account. However, if you do not have the full amount to meet the purchases or sufficient number of shares to deliver for the sale, the customer has to cover (square) the purchase/sale transaction by a corresponding sale/purchase transaction before the close of the settlement cycle. During the course of the settlement cycle, if the price moves in favor of customer (risen in case of purchase done earlier and fallen in case of a sale done earlier) it leads to profit and the customer receives the amount from the exchange. In case the price movement is adverse, that leads to loss for the customer and the amount will be recovered from his account. Sufficient margins to take care of price oscillations have to be maintained for taking care of such adverse movements. Margins are normally quoted as a percentage of the value of the transaction.