knowledge of share market

knowledge of share market

                                                                                           
What are the basics of Investment?                                        
The money you earn is partly spent and the rest saved, for meeting the future expenses. If you keep your savings idle its nominal value remains the same but real value decreases by prevailing inflation. This can be defined by the following formula: Instead of keeping the savings idle, you park it somewhere to get a return on this capital in the future. This is called an investment. There are various avenues for investment.
You may invest in the bank deposits, postal deposits,
real estate, jewelry, paintings, life insurance, tax savings schemes likes PPF/NSC or stock market related instruments called securities like shares, debentures, bonds, etc. However, the return from each investment option depends on the associated risk. The riskier the investment, the higher will be the return. For instance, stock market related investments are risky, but makes you earn more returns than other modes of investment.

What are the benefits of investing in the stock market?
Stock Market investments offer you benefits like easy liquidity, flexibility of amounts invested/disinvested, reasonable returns and a regulatory framework to safeguard your rights. Shares are the most popular form of stock market investments due to their higher potential for capital growth.

Real rate of return = Nominal rate of return - Inflation
In the long run it is empirically found that investment in equities gives maximum return.

What is a share?
A Share or stock is a document issued by a company,
which entitles its holder to be one of the owners of the company. A share is directly issued by a company through IPO or can be purchased from the stock market. By owning a share you can earn a portion of the company's profit called dividend. Also, by buying and selling the shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.

What is a company?
A company basically means a group of persons associated together for achieving some objectives. The term company means a company formed and registered under the Indian Companies Act 1956.
As company is a voluntary association of persons its capital is divisible into parts which are known as shares with limited liabilities. A company exists only in contemplation of law and it has no physical existence.
“A stock broker is
One who invests other people’s money until its all gone”
Woody Allen,
American Film
Maker
PRESENT VALUE OF RS 1 LAKH (INVESTED IN 1992)
Mode of Investment Value of Rs1 Lakh Remarks
Bank Fixed Deposit Rs. 3,79,535 Calculated on the basis of prevailing average different bank rates in 1992-97 (11 per cent), in 1997-2002 (11.5 per cent) and in 2002- 08 (5.5 per cent) SBI-MF Magnum Rs. 4,89,300 Mutual Fund Scheme started in 1993 Tax Gain (1993)
Gold Rs. 2,61,000 In January 1992, the price of gold was Rs.4,200 per 10 gram and in January 2008 the price of gold is
Rs.11,000 per 10 gram Property Rs. 5,00,000 In 1992, the rate of real to Rs.7,14,000 estate in Nariman Point Mumbai was Rs.7,000 per sqft and in January 2008 the rate of same property was Rs.35,000 to 50,000 per sqft
Sensex Rs.10,30,346 In January 15, 1992 Sensex was at 2020 and on January 07, 2008 Sensex was at 20813
(Values are calculated on the basis of prevalent average rate in case of property and gold while value for the mutual funds is calculated on the basis of returns/dividend given by the bank)

What is a company's legal identity?
A company is considered as a juristic person with a perpetual succession and a common seal. Its life does not depend upon the life of its members, who can change from time to time. On registration, a company acquires a personality distinct from its members.
A company can sue and be sued in its own name. It can institute and defend suits and other legal proceedings in its own name.
A company has limited liability. The privilege of limited liability for business debts is one of the principal advantages of doing business in the corporate form. In a company limited by shares, liability of the members is limited to the unpaid value of the shares, whereas in a company limited by guarantee, liability of members is limited to such amount as the member may undertake to contribute to the assets of company in the event of it being wound up.

Can you tell me about the financial cycle of the business?
Earlier when the companies did not have the access to the primary market they had to borrow funds to raise the necessary money. But, after the popularization of the securities market (specially after 1980’s) the Initial Public Offering of equity shares or IPO has become the favourite method for financing. However, before a company approaches the securities market in order to raise money, it has to go through various stages of financing.
When an entrepreneur wishes to start a business, he raises money in the form of ‘seed capital’. For this he may offer certain shares in the business to the people who have contributed for this initial capital. Since at this stage the capital required is limited the entrepreneurs prefer the seed capital to be raised in the personal capacity. In general, at this stage the business entity is known as sole proprietorship or a partnership as the business is closely held and by a single person or a small group of persons.
When the business expands, the need for finance increases.
When the business is reasonably established the Venture Capitalists start to take interest in the entity and they look for the investment opportunities. In the return of money invested the venture capitalists usually are given shares or warrants. The company could remain a Private Limited Company at this stage as it is still closely held and owned by a few people. There should be at least two shareholders in a private limited company. The venture capitalists are those people who look for higher profit and are prepared to take higher risk for it.
Now if the business expands further the need for finance rises to the level where the company has to go to public in order to realise their expansion or diversification plans. At this juncture they take the IPO route.

How do shares come into being?
Any business is owned either by a single promoter or joint promoters with an unlimited liability, or a group of people (both promoters and non-promoters) with a limited liability. Limited liability means, in case of bankruptcy of the company, the owner's liability will be limited to the extent of their individual contribution towards capital. These three forms of the business organizations are called proprietorship, partnership firm and limited company respectively. Since each owner has his own share of contribution towards the owner's capital (also called equity), each of them is given his legal entitlement to share the ownership of the company in the form of document. These documents are rightly called shares and the owners are shareholders. A limited company is either called a public limited or a private limited company depending on its turnover and number of members in its board. Among public limited companies, the companies with their shares widely held are listed in the stock exchanges, and the shares of only these limited com panies are traded.
“T rifles make perfection and perfection is no trifle”
Michaelangelo,
1475 - 1564
Italian Artist

All public limited companies are started privately by a promoter or a group of the promoters. But, the promoters' capital and the borrowings from banks and financial institutions are not sufficient for financing the project or setting up a business. So, these companies invite the public also, to contribute towards the equity and issue shares to these individual investors through initial public offering (IPO). A company is run by a Board of Directors - who are shareholders' nominees - but are generally controlled by the promoters.

What is a General Body Meeting (GBM)?
It is a meeting of the shareholders, and being the most powerful body of any company, the GBM takes all the decisions regarding the working of the company. Held annually, this meeting is also called the Annual General Meeting (AGM), and discusses among other issues, the performance of the company in the previous accounting period and even finalizes the accounts. The AGM also appoints Auditors and Directors for the company, approves of the dividend declared by the company (it also has a right to lower the dividend).
Statutorily, the period between two AGMs should
not exceed 18 months.
The AGM has the authority to pass resolutions empowering the Board of Directors to take important decisions regarding the day-to-day working of the company.
Companies often convene the GBM in between two AGMs to take important decisions. This meeting is termed as Extraordinary General Meeting (EGM). The proposal to declare a bonus or rights issue and the ratio thereof are put forward to the AGM/EGM and approved by the shareholders.
In case of a rights issue, the premium of conversion,
the instrument and other terms are also approved
from this meeting.
Are there any instruments other than shares (IPO) available for the company to raise the funds?
Yes, the fresh issue includes equity shares, debentures or some kind of hybrid instruments. These securities may be issued in the domestic market or in the international market.
In case of international market the funds are raised through ADR/GDR/FCCB/QIP route.
Apart from raising fund through IPO/FPO the companies can raise fund by issue of debt in the form of Debentures. Companies also can offer Warrants as a part of their new offing. Warrant is an instrument which can be converted into equity shares at the choice of investor at a certain predetermined price and quantity at a specified time in the future. There is no obligation involved on the buyer in case of warrant.
The companies also can raise funds in the foreign markets.
Foreign currency loans can be availed from the foreign banks or foreign financial institutions. The other means of raising funds in the international market is the approaching public and NRIs abroad. This helps companies to diversify their investor base and build its profile in the international market. This also offers flexibility in terms of shifting between fixed/floating rates and switching between currencies.
Indian companies are permitted to raise foreign currency through following two main resources:
?? Issue of Foreign Currency Convertible Bonds (FCCBs)
?? Issue of ordinary equity shares through depository receipts, i.e., Global Depository Receipts (GDRs) and
American Depository Receipts (ADRs)
Both the FCCBs and Depository Receipts
(ADR/GDR) are convertible to equity shares at the option of investor. Because of this these carry lower interest rates in comparison to similar non-convertible debt instruments. FCCBs/ADRs/GDRs issued by the companies to the NRIs have free convertibility outside India. In order to improve liquidity in the ADR/GDR market RBI has issued the guidelines in 2002 to allow two-way fungibility in ADRs/GDRs. This implies that the investors can convert their holdings from ADRs/GDRs into shares and vice versa. In order to issue shares in the overseas market the companies are required to register themselves in the concerned market and would be subjected to the laws prevailing in that market.
“Average investors who try to do a lot of trading will only make their brokers rich”
Michael Jenson,
Finance Professor
-Harvard

What is the difference between debt and equity?
Following are the differences between debt and equity:

Tell me more about the stock market?
This is an organized set-up with a regulatory body and the members who trade in shares are registered with the stock market and regulatory body SEBI. Stock markets exist in different cities all over the world with each market having a different set of "listed" shares. Thus, the shares listed in the Bombay Stock Exchange (BSE) will be different from those in the Delhi Stock Exchange (DSE), because a company may not want to be listed in a particular stock exchange or may not fit the eligibility requirements of the particular exchange.
The stock market is also called the secondary market as it involves trading between two investors.

Give me a brief history of Indian Stock Market.
The history of Indian stock market is about 200 years old. Prior to this the hundis and bills of exchange were in use, specially in the medieval period, which can be considered as a form of virtual stock trading but it was certainly not an organized stock trading. The recorded stock trading can be traced only after the arrival of East India Company.
The first organized stock market that was governed by the rules and regulations came into the existence in the form of The Native Share and Stock Brokers' Association in 1875.
After gone through numerous changes this association is