VSM ResourcesWhat is an ‘Equity’/Share?Let’s explain this by a simple example:Total ownership of a company is divided into equal units of small denominations, each called ashare. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is said to have20,00,000 equity shares of Rs 10 each. The holders of such shares are part owners of that company.What is meant by a Stock Exchange?The Book Definition of a stock exchange is : ‘Stock Exchange’ is a body of individuals, whetherincorporated or not, constituted for the purpose of assisting, regulating or controlling the businessof buying, selling or dealing in securities. Example of stock exchanges: BSE/NSE.Stock Exchange helps to match the buyer’s and seller’s requirement in an automated andanonymous fashion.What is the role of a Stock Exchange in buying and selling shares?The stock exchanges provide a trading platform, where buyers and sellers can meet to transactin securities (stocks in this case!). The trading platforms provided by modern stock exchanges areelectronic ones and there is no need for buyers and sellers to meet at a physical location to trade.They can trade through the computerized trading screens.How can one acquire equity shares(shares of a company) ?You can bid for a company’s shares when it goes public i.e. when companies sell their shares into themarket for the first time.Alternately, you may purchase shares from the secondary market (the trading that you see on thestock exchange constitutes a part of secondary market). To buy and sell securities(stocks) you shouldapproach a SEBI registered trading member (broker) of a recognized stock exchange. For example,websites like ‘sharekhan’ and ‘moneycontrol.com` .What is Bid and Ask price?It gets a bit important over here!!The ‘Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bidis the rate/price at which there is a ready buyer for the stock, which you intend to sell.
The ‘Ask’ (or offer) is what you need to know when youre buying i.e. this is the rate/ price at whichthere is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.Types of OrdersYou can buy/sell shares over internet and can place following conditions on them as well. These aremeant to minimise the losses and/or ensure a minimum level of profits. Here we explain a few ofthem:Limit Price/Order: In these orders, the price for the order has to be specified while entering theorder into the system. The order gets executed only at the quoted price or at a better price (a pricelower than the limit price in case of a purchase order and a price higher than the limit price in caseof a sale order).For example:If you enter limit price as Rs. 200 for buying a stock, then system will purchase a stock which has avalue either Rs. 200 or less.Similarly, If you enter limit price as Rs. 200 for selling a stock, then system will sell that stock only fora price which is either Rs.200 or greater.Market Price/Order: It gets executed at the best price obtainable at the time of entering the order .The system immediately executes the order, if there is a pending order of the opposite type againstwhich the order can match. If it is a sale order, the order is matched against the best bid (buy) price and if it is a purchase order,the order is matched against the best ask (sell) price. The best bid price is the order with the highestbuy price and the best ask price is the order with the lowest sell price.Day Order (Day): A Day order is valid for the day on which it is entered. The order, if not matched,gets cancelled automatically at the end of the trading day.Immediate or Cancel order (IOC): An IOC order allows the investor to buy or sell a security as soonas the order is released into the market, failing which the order is removed from the system. Partialmatch is possible for the order and the unmatched portion of the order is cancelled immediately.Matching of orders1.When the orders are received, they are time-stamped and then immediately processed forpotential match.2.The best buy order is then matched with the best sell order. The best buy order is the one withhighest price offered, also called the highest bid, and the best sell order is the one with lowest price
also called the lowest ask.3.If a match is found then the order is executed and a trade happens. If an order cannot be matched with pending orders, the order is stored in the pending orders booktill a match is found or till the end of the day whichever is earlier . The matching of orders is doneon a price-time priority i.e., in the following sequence:• Best Price• Within Price, by time priorityWhat is a Portfolio?A Portfolio is a combination of different investment assets mixed and matched for the purpose ofachieving an investors goal(s). Items that are considered a part of your portfolio can include anyasset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art andeven real estate etc. However, for most investors a portfolio has come to signify an investment infinancial instruments like shares, debentures, fixed deposits, mutual fund units.What is Diversification? It is a risk management technique that mixes a wide variety of investments within a portfolio.It is designed to minimize the impact of any one security on overall portfolio performance.Diversification is possibly the best way to reduce the risk in a portfolio.What are the advantages of having a diversified portfolio?A popular saying that ‘Don’t put all your eggs in one basket’ holds true in Stock Markets as well.A good investment portfolio is a mix of a wide range of asset class. Different securities performdifferently at any point in time, so with a mix of asset types, your entire portfolio does not suffer theimpact of a decline of any one security.If you spread your investments across various types of assets and markets, youll reduce the risk ofyour entire portfolio getting affected by the adverse returns of any single asset class.DerivativesWhat are Types of Derivatives?Forwards: A forward contract is a customized contract between two entities, where settlement takesplace on a specific date in the future at today’s pre-agreed price.Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certaintime in the future at a certain price. Futures contracts are special types of forward contracts inthe sense that the former are standardized exchange-traded contracts, such as futures of the Niftyindex.
Options: An Option is a contract which gives the right, but not an obligation, to buy or sell theunderlying at a stated date and at a stated price. While a buyer of an option pays the premium andbuys the right to exercise his option, the writer of an option is the one who receives the optionpremium and therefore obliged to sell/buy the asset if the buyer exercises it on him.Options are of two types - Calls and Puts options:‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset,at a given price on or before a given future date.‘Puts’ give the buyer the right, but not the obligation to sell a given quantity of underlying asset at agiven price on or before a given future date.Warrants: Options generally have lives of up to one year. The majority of options traded onexchanges have maximum maturity of nine months. Longer dated options are called Warrants andare generally traded over -the-counter.What is an ‘Option Premium’? At the time of buying an option contract, the buyer has to pay premium. The premium is the pricefor acquiring the right to buy or sell. It is price paid by the option buyer to the option seller foracquiring the right to buy or sell. Option premiums are always paid upfront.