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Basics of Stock Market - 6

Now let us go into the market!

The market can be classified into 2 categories - Primary & Secondary.

Primary market is the market where the new securities are issued. IPO, Rights, FPO, Private Placements are primary market

Secondary market is the market where the shares are traded on a daily basis, after they are issued in the Primary market. When we talk about buying and selling of scrips, it is in the secondary market.

Depository
A depository is like a bank, wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. The Depository provides its services to investors through its agents called the Depository Participant (DP). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others,three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs.

In India, we have The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). Following are the benefits of Electronic format:
  • quick transfer of ownership and help in deciding who will get Dividend, Rights or Bonus.
  • saves Stamp Duty
  • no need to maintain the physical form (avoiding worn out, losing them etc.,)
  • Odd lot shares (which are not market lot) can easily be maintained.
Dematerialised shares do not have any distinctive numbers. These shares are fungible, which means that all the holdings of a particular security will be identical and interchangeable

Book-closure/Record date

Book closure refers to the closing of the register of the names of investors in the records of a company. Companies announce book closure dates from time to time. The benefits of dividends, bonus issues, rights issue accrue to investors whose name appears on the company's records as on a given date which is known
as the record date and is declared in advance by the company so that buyers have enough time to buy the shares, get them registered in the books of the company and become entitled for the benefits such as bonus,
rights, dividends etc.

With the depositories now in place, the buyers need not send shares physically to the companies for registration. This is taken care by the depository since they have the records of investor holdings as on a particular date electronically with them.

No-delivery period (NDP)?
Whenever a company announces a book closure or record date, the exchange sets up a no-delivery period for that security. During this period only trading is permitted in the security and the trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for the benefit is clearly determined. So, before buying a scrip for Bonus or Dividend look out for the NDP. Recently, with the dematerialization in place, SEBI was discussing to do away with the NDP.

Ex-dividend date

The date on or after which a security begins trading without the dividend included in the price, i.e. buyers of the shares will no longer be entitled for the dividend which has been declared by the company, in case they buy on or after the ex-dividend date. For example, if the Ex-dividend date is 21st Sep 2009, you need to get the delivery before 21st Sep. Else, you will not be eligible for the Dividend.

The concept is the same for Ex-Bonus date, except for the fact that it applies for Bonus issue.

Ex-date
The first day of the no-delivery period is the ex-date. If there is any corporate benefits (like rights, bonus, dividend) announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits.

Okay...now let us get to know how to place order to buy or sell a scrip.

You need to have a trading account with an intermediary (Broker) and through him you have to transact (i.e place an order for buying or selling).

Rate at which to buy or sell

At what price you will place the order to buy or sell? To answer this question, you need to know what is a Bid and Ask price.

The ‘Ask’ (or offer) is what you need to know when you're buying i.e. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.

The ‘Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell.

The Ask and Bid rate is available online, as the trading in India is online. Your broking account, if it is online, you can see the Bid and Ask rate.

The total number of quantity that is available for BID or ASK will decide whether there is a selling pressure or buying pressure for the scrip. If the ASK quantity is more, there is a selling pressure and vice-versa.

How do you know at what rate you need to buy or sell?

It depends on various factors. Normally, the market trend and the fundamental of the scrip. Every morning, before the Indian markets open we can see how the US market (NASDAQ, DOW JONES) and Asian markets (NIKKEI, HANG SENG, STRAITS etc.,) was moving. This will give an indication on how the Indian market will be behaving.

Check with your broker or financial consultant, which scrip to buy and how the market will behave. Before that you need to make sure whether you are buying for Investment (Long term holding) or Trading (Short term holding).

You can see the following terms used in the rates. Let us take the example of NTPC. It was quoting around Rs.213:
  • CMP - Current Market Price (the price at which the scrip is quoting at a moment and in case the market is closed, the last traded price). In this case, it was Rs.213
  • Target price - The financial consultants will give recommendation as the target price of a scrip. It may be more or less than the CMP, depending on the situation. and if the market feels that it will go upto Rs.225, then Rs.225 becomes the target price.
  • Stop Loss - If a consultant says that the rate of NTPC will go up to Rs.225, he will also give a Stop Loss, say Rs.200. It means that though he said the scrip will go upto Rs.225, he will say that if the scrip goes down below Rs.200 and if you have bought the scrip, it is better to sell and avoid further loss. This is what is called Stop Loss
  • 52week High & Low - This is the rate the scrip has made a High and Low during the last 52 weeks (i.e a year). This indicates the maximum the scrip has gone and the low it has reached and where the CMP is quoting will decide how much it can go up or down (provided the market conditions is constant). NTPC made a high of Rs.233 and a low of Rs.113 during the last 52 weeks.
  • Open rate - It is the rate at which the scrip opened on a particular day
  • Day's high - It is the highest rate the scrip has achieved during the day.
  • Day's low - It is the lowest rate the scrip touched during the day.
  • Close rate - It is the rate at which the scrip was last traded when the market closed.
Based on the above, you can get to know the basics of the scrip's rate. But again what rate for a scrip depends on the fundamental of the scrip (EPS, PE, PBV, etc.,) which we will see in the next post.

Cheers,
Gopal

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