1. Stock Market
1.1 Stock
Plain and simple, a “stock” is a share in the ownership of a company. A stock represents a claim on the company's assets and earnings. As you acquire more stocks, your ownership stake in the company becomes greater.
(Note: Some times different words like shares, equity, stocks etc. are used. All these words mean the same thing.)
1.2 Share Market
A Share market or Stock market, is a private or public market for the trading of companystock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together.
Stock market is known as the cradle of capitalism. It is a place where companies come to raise their share capital and investors go to invest their surplus funds. Stock market essentially discharges the functions of "the invisible hand" that channels investment into the most productive ventures so as to optimize the overall productivity of the economy.
Stock Market is a place where financial instruments like shares, debentures, commercial papers, bonds etc are bought and sold. Stock markets are popularly known as stock exchanges. There are many popular stock markets in the world. NASDQ, Tokyo Stock Exchange, London Stock Exchange are the most popular of the lot. There are many participants in a stock market. Investors, Speculators, Arbitrators, Traders are different type of participants of a Stock
Market. Brokers are intermediaries who bring together various participants in a Stock Market.
Most important function of the stock market is to facilitate trading of financial instruments. Brokers submit a quote at the stock market on behalf of their clients. Quotes are specific to the scrip. The quote of the buyer is matched to the quote of the seller and the transaction takes place. All transactions entered in a stock market are guaranteed by the Stock Exchange. That means if the buyer or seller fails to meet his obligation, the stock exchange steps in and meets the commitment of the participant. This instills a lot of confidence and credibility about the sanctity of the transaction amongst the investing public. That is the reason why a stock exchange is preferred by investing public to a gray market in shares even though the latter has much lower transaction cost.
All the participants in the stock market have the same objective i.e. to make a profit. Investors invest in the stock market with the hope that market value of their investment will go up and they will be able to make higher returns than in bank deposits. Arbitrages buy in one market and sell in another market with an objective of making a profit. For example if the shares of Caltex are quoting at a lesser price at Amsterdam Stock Exchange in comparison to London Stock Exchange, arbitrages will buy at Amsterdam and sell at London. This will result in a rise in share price at Amsterdam and fall in share price at London, thus bringing in price equilibrium among various stock markets in the world.
Speculators operate in the stock market with an objective to make quick money by guessing the direction of the stock market. If they expect the market to rise, they buy shares with a very small investment horizon. Similarly if they expect a correction in stock market, they sell shares, thus imparting an essential element of liquidity in the market. Those who expect a rise in the stock market and buy relentlessly are known as bulls. Bulls keep the buying pressure and attempt to take the stock market to dizzy heights. Bull market is a market scenario where bulls have complete control over the stock markets. When bull market reaches its peak, investors will make huge profit. Many investors start booking their profit by selling the investments. Slowly the bulls find that there are more shares than they could perhaps buy in the stock market. When supply of shares exceeds the demand in the stock market prices start coming down. This is called correction. Correction is a normal phenomenon in any bull market. Some times if the sellers are huge in numbers, a negative sentiment takes over the stock market. Every one attempts to sell their investments with an objective to salvage profit or reduce losses. When this phase set in, bulls loose control. Sellers will control stock market. This phase is popularly known are bear run. Bull and Bear runs follow a cyclical pattern in a stock market.
Normally in a booming economy, companies make huge profits, so markets tend to be bullish. When the trend of the economy reverses Stock Market experience a bear hug. Thus the Stock markets reflect the health if the economy and are often called as "barometers" of the economy
1.3 Shares in the Share Market are either traded through :-
(a) Stock Exchange
(b) Over-the -Counter (OTC)
(a) Stock Exchange
These are organized market places where stocks, bonds are other equivalents are traded between the buyers and sellers where exchange acts as a counter-party to both the participants in case of any default. The contracts are standardized and not customized ones. For example, NYSE, NASDAQ, NSE, NIKKEI, etc.
(b) Over-the -Counter (OTC)
These are not centralized exchanges. Here, the trade takes place through a network of dealers. Generally, the OTC contracts are bilateral customized contracts and not standardized ones.
Important Participants of Share Market Trading are :-
Buyer An investor who buys a script in the belief that the market will rise. If his hinge becomes right then he makes profit otherwise he suffers loss.
Seller Seller of a stock sells in the hope that the stock price will go down.
Stock Broker Brokers are persons or firms who execute buy/sell order on behalf of the investors and charge a commission for rendering the service.
1.4 Share Trading are done in three ways:-
(a) Offline Share Trading
(b) Online Share Trading
(c) Open Outcry Trading
(a) Offline Share Trading
In this form of trading the customer either goes to the share broker's place and sits before the share trading terminal and asks the dealer to place orders in his account. or rings the share broker, asks the share quotes and other relevant informations, and accordingly places orders over the phone.
(b) Online Share Trading
The client could avail the share market and could place his order on his own from any place he wants, provided he has a computer with an Internet connection.
(c) Open Outcry Trading
Here, the investors put their orders through the brokers and these share brokers in turn place and execute orders on behalf of them on the floor of the exchange. These brokers gather in a particular place on the trading floor known as Trading Post. There is a person called as the Specialist present in the trading post who does the matching of the buy and sell orders. This type of auction method is called Open Outcry Method.
2. Online Share Trading
Online Share Trading is becoming the order of the day in share trading. Now-a-days one could hardly see a person going to the stock exchange floor and placing his order. Electronic media has played an important role in flourishing the share market. In case of online share trading an investor could place his order from his own house if he has internet connection.
There are two types of trading that can be done through online share trading
1. Intra-day Trading
2. Delivery Trading
2.1 Intra-day Trading
They enter and exit out of the market like the thief in the night. Traders continuously have a watch on the market during the trading hours and the moment they see any opportunity arising they pounce on it for scalping the profit out. These type of trading generally are risky in nature. They buy and sell stocks during the same day.
Intra day Traders are of two types :-
a. Scalp Traders
b. Momentum Traders
a. Scalp Traders
Investors who perform many trades per day for scalping out small profits out of the bid-ask spread from each trade are known as scalp traders.
b. Momentum Traders
Investors who pounce on those stocks which move significantly in one direction and book desired profit are called momentum traders. They do this within a day.
2.2 Delivery trading
The investor buys the share for holding purposes. The brokerage charges are a bit more than the intraday ones. Delivery Traders are :
a. Technical Traders
b. Fundamental Traders
c. Swing Traders
a. Technical Traders
They believe that buying/selling signals are present within the graphs and charts of the stock.
b. Fundamental Traders
They perform trade on the basis of study of fact-sheets of the company like historical profit graph, balance sheet, anticipated earning reports, stock splits, mergers and acquisitions, etc.
c. Swing Traders
They are basically fundamental traders who take delivery of trades for a span of short period generally more than one day.
In this electronic form of trading, the shares are not in the physical form for their inconvenience to handle. So, they are now converted to dematerialized form . So, one investor does not have to worry about the safety of the physical shares because the bought shares get transferred to the respective D-mat account . Thus, online share trading has helped the investors a lot as it is hassle-free and time efficient.
For the intraday traders the brokerage costing is minuscule in comparison to the delivery trades.
3. Securities and Exchange Board of India
3.1 Introduction
SEBI is the Regulator for the Securities Market in India. Originally set up by the Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 being passed by the Indian Parliament.Chaired by C B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern and Southern regional offices in New Delhi, Kolkata and Chennai. It is in the news that a new Western Regional Office has been proposed at Ahmedabad.
3.2 Function of SEBI
SEBI has to be responsive to the needs of three groups, which constitute the market:
· The issuers of securities
· The investors
· The market intermediaries.
SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the