The document provides an overview of key concepts related to investing in stocks and equity markets. It defines what shares/equities are, explains the role of stock exchanges in facilitating buying and selling of shares, and how investors can acquire shares through initial public offerings or secondary markets. It also describes common order types like limit orders and market orders, the matching process for orders on an exchange, concepts like portfolios and diversification, and basic derivative instruments like futures, options, and warrants.

1. VSM Resources
What 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 a
share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000
units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is said to have
20,00,000 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, whether
incorporated or not, constituted for the purpose of assisting, regulating or controlling the business
of 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 and
anonymous 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 transact
in securities (stocks in this case!). The trading platforms provided by modern stock exchanges are
electronic 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 the
market for the first time.
Alternately, you may purchase shares from the secondary market (the trading that you see on the
stock exchange constitutes a part of secondary market). To buy and sell securities(stocks) you should
approach 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. Bid
is the rate/price at which there is a ready buyer for the stock, which you intend to sell.

2. 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.
Types of Orders
You can buy/sell shares over internet and can place following conditions on them as well. These are
meant to minimise the losses and/or ensure a minimum level of profits. Here we explain a few of
them:
Limit Price/Order: In these orders, the price for the order has to be specified while entering the
order into the system. The order gets executed only at the quoted price or at a better price (a price
lower than the limit price in case of a purchase order and a price higher than the limit price in case
of 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 a
value 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 for
a 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 against
which 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 highest
buy 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 soon
as the order is released into the market, failing which the order is removed from the system. Partial
match is possible for the order and the unmatched portion of the order is cancelled immediately.
Matching of orders
1.When the orders are received, they are time-stamped and then immediately processed for
potential match.
2.The best buy order is then matched with the best sell order. The best buy order is the one with
highest price offered, also called the highest bid, and the best sell order is the one with lowest price

3. 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 book
till a match is found or till the end of the day whichever is earlier . The matching of orders is done
on a price-time priority i.e., in the following sequence:
• Best Price
• Within Price, by time priority
What is a Portfolio?
A Portfolio is a combination of different investment assets mixed and matched for the purpose of
achieving an investor's goal(s). Items that are considered a part of your portfolio can include any
asset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and
even real estate etc. However, for most investors a portfolio has come to signify an investment in
financial 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 perform
differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the
impact of a decline of any one security.
If you spread your investments across various types of assets and markets, you'll reduce the risk of
your entire portfolio getting affected by the adverse returns of any single asset class.
Derivatives
What are Types of Derivatives?
Forwards: A forward contract is a customized contract between two entities, where settlement takes
place 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 certain
time in the future at a certain price. Futures contracts are special types of forward contracts in
the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty
index.

4. Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the
underlying at a stated date and at a stated price. While a buyer of an option pays the premium and
buys the right to exercise his option, the writer of an option is the one who receives the option
premium 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 a
given price on or before a given future date.
Warrants: Options generally have lives of up to one year. The majority of options traded on
exchanges have maximum maturity of nine months. Longer dated options are called Warrants and
are 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 price
for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for
acquiring the right to buy or sell. Option premiums are always paid upfront.