FAQ

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What is equity trading?

It is simply buying and selling of equities. However, unlike other commodities, equities are not traded everywhere, and are traded only in special market places called exchanges.
What is an exchange?

An exchange is a mechanism through which buyers and sellers of equities are brought together. These days, this is largely electronic and done with computers.
Investors cannot, however, participate directly in the exchange and can participate only through members of the exchange, popularly referred to as brokers.
How does the exchange works?
An exchange has pre-specified timings. During that time, all the members of the exchange link up to a central computer through their remote terminals. The members then place bids to buy equities, or make offers to sell equities. Other members who can match the bid or the offer confirm their acceptance, and the transaction is completed.
Members of stock exchanges place bids and offers on behalf of their clients, who are the investors.
Why are brokers required?
Investing in equities is quite risky. The broker is a professional, who knows the risk and can advise the investor accordingly. Secondly, an exchange will become an unwieldy mechanism if the entire universe of investors were to go and start making bids and offers. Reducing the number of individuals is a way of keeping control.
Third, equity trading can also be abused. To prevent these abuses, exchanges as well as the Government has a number of regulations in place. Restricting activity to the members of the exchange will enable the regulations to be followed, preventing abuse of the system.
How are shares traded?
Like in any other buying or selling, once the broker confirms the trade, if you are buying the share, you pay the broker the value of the shares and take delivery of the shares. If you are selling the shares, you hand over the equities to the broker and the broker will pay you for your shares.

When settlement does happen?
Each exchange has its own settlement period within which the entire process of delivery and purchase should be completed. Typically, the process is completed in a week to ten days time.
Which shares to Buy and sell?
An index is an indicator of how the stock market is doing on the whole. An index comprises a basket of stocks. The collective value of these stocks on a given date is taken and given a score of 100. From that day onwards, the value of these stocks is tracked and its score relative to 100 is computed.
The stocks selected are based upon a number of parameters that the creators of the index decide. Equally, the valuation is also done using complex mathematical principles. Periodically, the list of shares used for computing the index also undergoes a change. These changes are decided by the index creators based on the parameters they have set for the stocks for inclusion.
An index shows whether the stock market, on the whole, is appreciating in value or declining in value.
The movement of the index itself is no indicator for individual shares. You may find that a particular share may be increasing in its price even when the index is down and vice versa. The index is only an indicator of the general trend
The common indexes in Indian stock markets are the SENSEX, the index for stocks listed on the Bombay Stock Exchange and Nifty, the index for stocks listed on the National Stock Exchange.
What is an index?
Buying and selling shares involve a fair amount of research. These involve assessing how well the company is managed, how the company is performing compared to others in the industry, how the industry itself is doing, the financial performance of the company, the interest of the lay public in the company, etc.
It is best that you consult an expert in such analysis, before you decided to buy or sell a particular share. Such investment advice is also provided by your share brokers.
How Long to hold on the shares?
Historically, it has been demonstrated that investments in equities offer the best long term returns and hence the highest opportunity to enhance your capital. Thus, the longer you stay invested in the equity markets, the better will be your returns.
However, this holds true for the equity market as a whole, and not necessarily for shares of individual companies. The value of shares of specific companies are subject to various pulls and pressures which could cause a share that is highly valued one day, to drop its value overnight, as a result of unpredictable factors ranging from Government policy to acts of omission and commission by the management of the company.
It is advisable that you periodically, at least once in a year, evaluate your holdings and decide whether to continue with them or change them.
However, one very important thumb rule which the professionals offer is, never to get emotional about a share. In other words, do not hold on to the share of a company whose value is declining, just because its history has been very good!
Are investment in shares safe?
Any investment is prone to a certain degree of risk. Shares, as a class of investment have the highest element of risk. The only services riskier than shares are lotteries and other games of chance. These risks arise as a result of factors described earlier. However, today there is strong legislation, procedures and a regulatory authority - Securities Exchange Board of India (SEBI), which to a large extent prevents risk as a result of misleading the investing public
What is SENSEX?
The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. The index is widely used to measure the performance of the Indian stock markets. SENSEX is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks at The Stock Exchange, Mumbai. Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time (since 1978-79).

What are derivatives?
Derivatives, such as futures or options, are financial contracts which
derive their value from a spot price, which is called the “underlying”. For
example, wheat farmers may wish to enter into a contract to sell their
harvest at a future date to eliminate the risk of a change in prices by that
date. Such a transaction would take place through a forward or futures
market. This market is the “derivatives market", and the prices of this
market would be driven by the spot market price of wheat which is the
“underlying”. The term “contracts" is often applied to denote the specific
traded instrument, whether it is a derivative contract in wheat, gold or
equity shares. The world over, derivatives are a key part of the financial
system. The most important contract types are futures and options, and
the most important underlying markets are equity, treasury bills,
commodities, foreign exchange, real estate etc.
What is a forward contract?
In a forward contract, two parties agree to do a trade at some future date,
at a stated price and quantity. No money changes hands at the time
the deal is signed.
Why is forward contracting useful?
Forward contracting is very valuable in hedging and speculation. The
classic hedging application would be that of a wheat farmer forward -
selling his harvest at a known price in order to eliminate price risk.
Conversely, a bread factory may want to buy bread forward in order to
assist production planning without the risk of price fluctuations. If a
speculator has information or analysis which forecasts an upturn in a
price, then he can go long on the forward market instead of the cash
market. The speculator would go long on the forward, wait for the price
to rise, and then take a reversing transaction making a profit.
What are the problems of forward markets?
Forward markets worldwide are afflicted by several problems:
(a) lack of centralisation of trading,
(b) illiquidity, and
(c) counterparty risk.
In the first two of these, the basic problem is that of too much flexibility
and generality. The forward market is like the real estate market in that
any two persons can form contracts against each other. This often makes
them design terms of the deal which are very convenient in that specific
situation for the specific parties, but makes the contracts non-tradeable if
more participants are involved. Also the “phone market" here is unlike
the centralisation of price discovery that is obtained on an exchange,
resulting in an illiquid market place for forward markets. Counterparty
risk in forward markets is a simple idea: when one of the two sides of the
transaction chooses to declare bankruptcy, the other suffers. Forward
markets have one basic issue: the larger the time period over which the
forward contract is open, the larger are the potential price movements,
and hence the larger is the counter- party risk.
Even when forward markets trade standardized contracts, and hence
avoid the problem of illiquidity, the counterparty risk remains a very real
problem.
What is a futures contract?
Futures markets were designed to solve all the three problems (listed in
Question 4) of forward markets. Futures markets are exactly like forward
markets in terms of basic economics. However, contracts are
standardised and trading is centralized (on a stock exchange). There is
no counterparty risk (thanks to the institution of a clearing corporation
which becomes counterparty to both sides of each transaction and
guarantees the trade). In futures markets, unlike in forward markets,
increasing the time to expiration does not increase the counter party risk.
Futures markets are highly liquid as compared to the forward markets.