Stock Market Basics

 Who is a broker?

 

A broker is a member of a stock exchange, who is permitted to do equity trades there.  Broker is an enrolled member of the exchange and is registered with SEBI. A broker is an intermediate person (or a company) between an investor and a stock exchange. They buy & sell shares and other securities for investors in the stock market. Please note that an investor cannot directly deal with the stock exchange.

 

What is an ISIN Number?

 

ISIN (International Securities Identification Number) is a unique identification number for a security across the universe.

 

How is SENSEX decided?

 

Sensex, generally a stock market index, was launched in 1986 by BSE (Bombay Stock Exchange). It evaluates the fluctuations in stock prices of 30 big companies in terms of market value, turnover, profit etc. The value of the Sensex is calculated on every minute basis. If the Sensex is going up that means the stock price of most companies of BSE is increasing and if the Sensex is going down that means the share price of most BSE companies is decreasing. The base year of the Sensex is 1978-79 and the base index value was set at 100.

 

What is MID CAP?

 

According to the current market, companies are categories in large-cap, mid-cap and small-cap companies. Company's capitalization is calculated on the basis of the total number of its outstanding shares in the market multiplied by the current price per share. The mid-cap companies’ market capitalization lies between Rs 5,000 - 20,000cr. Mid-cap companies are considerably smaller than large-cap companies in comparison to revenue, profitability, employees, client base, etc.

 

What is Future and Option?

 

Future Contracts	Options
Future Contracts are a type of derivatives deriving value from an underlying instrument.	Options are a type of derivatives deriving value from an underlying instrument.
In future contracts, the buyers and sellers must be agreeable on a specific future date for trading before the expiration date.	Gives rights, not the obligation to the investor to buy or sell before the contract expires. Only buyer or seller has an obligation to buy or sell.
Buy and sell at an acceptable future price.	Buy and sell at the strike price.
Helpful for institutional investors to trade in big quantities.	Helpful for retail investors to trade in a certain quantity.
Futures are comparatively riskier than Options	Options are less Risky than Futures.
Can provide unlimited loss and profit to the buyers.	Can provide unlimited profit but limited loss contract to buyers.

 

 

Why do share prices move up and down?

 

The answer in two words is "Demand & Supply". For example, if there is more demand for shares of a company and less people are willing to sell them, the share will move upwards and if there is a huge supply but no one is interested in buying shares at the current price, the share will move downwards.

 

Also there are many factors involved in this including the company's financial result, overall economy situations, sector performance, government rules & regulations, major political & natural events, future of the company, upcoming products & services, company management changes, stock market frauds  etc. Any one of them and many more factors affect demand & supply of a company stock and ultimately move its prices to go up & down. Thus, it is very hard to predict stock movement and require lots of research and expertise.

 

The difference between stockholder and stakeholder?

• A stakeholder can or cannot be the shareholder in a company but a shareholder is always a stakeholder.
• A shareholder has at least one stock in the public company and interest in stock performance, whereas a stakeholder has an interest in the company's performance.
• A shareholder can be an institution, company and individual holding thestocks and a stakeholder can be employees, supplier, owner, vendors, customers,and bondholders.
• A shareholder can buy or sell the stocks frequently based on their needs,but stakeholders are concerned with the long term need and performance of the company
• A shareholder is the owner of the company whereas a stakeholder can or can or cannot be the owner of the company. 

What is Thematic Investing?

 

Thematic Investing is  a way to make investment decisions based upon emerging themes — themes that are identified by looking at the intersection of shifting economics, demographics, psychographics, technologies, mixed with regulatory mandates and other forces. It is based on predictions about trends rather than on past performance of the market or the fundamentals of a specific company.

 

The closest comparison of thematic investment is Exchange Traded Funds (ETF's). Thematic investment offers a lot more flexibility over ETFs as the companies to invest in a theme are identified by the broker, fund-manager or even a group of people in a community.

How different is Thematic Investing from Mutual Funds?

 

In Thematic Investing, an investor investing in a portfolio of company shares instead of individual stocks. Thematic Investing is a recent concept and not very popular yet but if anyone compare between Thematic Investing and Mutual fund, there are some differences which makes thematic investing better than mutual fund investing in many ways:

1. Investor can customize Thematic Investing but mutual funds can't be customized.
2. Mutual funds comes with many other charges and expense which is usually around 2% - 2.5% of the investment. But in case with Thematic Investing it's very low compare to mutual fund.
3. In thematic investing, investor can rebalance/redeem/ invest at any point of time. But in mutual fund, it is the Fund manager who decides the fate of investors
4. Mutual funds have too many stocks in their portfolios, thematic has few.

 

What are the different types of derivatives?

 

There are four different types of derivative contracts-

• Futures contracts: Futures are traded on BSE or NSE exchange and is a standardized contract to buy or sell the underlying at a specified price, at a certain date.
• Forward contracts: Forwards are traded in OTC markets and is a customized agreement between two individuals to buy or sell underlying assets at a specified date, at a certain date in future.
• Options contracts: Options gives the right, but not an obligation, to buy or sell the underlying asset at a certain date and at a specified price. Options are traded in both OTC markets and BSE, NSE exchanges.
• Swaps: It is a contract made between two financial institutions to exchange cash flows in the future. Swaps do not derive their value from any underlying instrument. These contracts are traded in OTC markets only.

Is Demat account required for Options Trading?

 

Options contracts in India are settled in cash and there are no deliveries involved. The profit/loss arising from the transaction is settled in cash. The profit will be credited to investor account and loss would be deducted from the trade value. So, a trader doesn't need a demat account for Options trading. However, investor would need a trading account and a linked savings bank account to buy/sell Call and Put options from the exchanges.