Basics Of Broking

Basics of Broking M LEARNING S Made Simple

By : Kaushal Mandalia Associate Financial Planner [email protected]

What is Equity Market Equity Market

Share Market

Profit is divided Among shareholders

Profit = Earning Per Share M LEARNING S Made Simple

Share = Share In Business

Business earns PROFIT

Equity Represents Portion of BUSINESS (PROFIT) which is GROWING [email protected]

How to EARN From Equity Market Equity RETURNS = Price GAP (Capital Earnings) + Dividend

Selling Price Less Buying Price Advise Based Broking…. Minimize Loss, Maximize Gains

Share in Profit Pick fundamentally strong Company based on Advise

If you Believe that Corporate Profits will grow Rest is IRRELAVENT….

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Traditional Business V/s Equity Market Traditional Business

Equity Market

• Bottom-line = Profit

• Bottom-Line = Profit

• Time, Energy and Money Needed

• Only Money Required.

No

requirement of Time and Energy

• Large Capital Required • Exit Route is Long and difficult • Control required

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on

daily

operation

• Small Capital Required • Shortest Possible Exit Route • No Control Required. Best of the Best Brains are doing that for you.

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Bottom Line of Investment… Earning

Savings

Fixed Deposit in Bank @ 10%

Bank lends this money to Businessman and earned 15% Interest

Money Finally Invested in Business

Equity Market

Whether you invest in Debt Market or Equity Market, Money flows to Business Sector only.

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Equity Market – Classification

Exit Route

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Entry Route

Who is Broker? • Broker is an intermediary who facilitates Entry or Exit into Equity Market • They levy fees on Transactions (Buy or Sell) which is called Brokerage.

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What is Stock Exchange • A Place where one can trade his/her Shares. It’s a formal or Organized BAZAAR. • Two Main Stock Exchanges • Bombay Stock Exchange (BSE) • National Stock Exchange (NSE)

• National Stock Exchange is the World’s Third Largest Stock Exchange in terms of Number of Trades after NASDAQ and NYSE M LEARNING S Made Simple

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Electronic Trading • Eliminates the need of physical trading floors • Fully Automated. One can trade from anywhere. • Workstations are connected to stock exchange’s central computer via VSAT (Very Small Aperture Terminus) • The orders placed by brokers reach exchange’s central computer and matched electronically. • Completely Hassle FREE. M LEARNING S Made Simple

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What is INDEX? • Weighted Average of Selected Stock Price. • Measure of Market Trends. • Comprises stocks that have large liquidity and market capitalization. • Two Main Index • BSE’s Sensex and NSE’s NIFTY

• Other Examples • BSE Midcap, BSE Small Cap etc, [email protected]

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ORDER Execution • Select a broker and enter into broker client agreement and fill client registration form. • Get a trade confirmation through phone and ask for the contract note on the end of the day. • Contract note describes the rate, date, time at which the trade is transacted and brokerage rate. • Contract Note establishes a legally enforceable relationship between the client and the member. • Client must receive contract note within 24 hours of trade execution. M LEARNING S Made Simple

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IMPORTANT TERMS

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Book Closure / Record Date • When shares of a joint stock company invariably change hands during trading, identifying owner of share becomes difficult. • So when a company declares dividend (Share in Profits) there has to be a cut off date for such benefits to be transferred to the share holders. This date is termed as “Book Closure Date” or “Record Date”. • It is the date after which company will not handle any transfer of shares request until the benefits are transferred. Analogy :For E.g. a company policy says, Candidate joining before 15th Sept of the year are qualified for Performance Appraisal to be conducted at the end of Financial Year. [email protected]

Book Closure Announcement

Source : Moneycontrol as on 31st October 2008

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No Delivery Period, Ex Dividend Date, Ex Date

• No Delivery Period • Once company declares record date, Exchange set up No Delivery Period – A time during which only trading is permitted and all trades are settled after the period gets over.

• Ex Dividend Date • The date on or after which a security begins trading without the dividend included in the contract price.

• Ex Date • The first date of the No Delivery Period. • The buyers of the shares on or after Ex Date will not get any benefits of Dividend or Bonus.

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Buy Back • A process by which a company buys back its shares. • No of ways in which company can buy back • • • • •

From existing Shareholders on proportionate basis Thro’ tender offer from open market Thro’ Book Building Process From Stock exchange or From ODD lot holders.(Odd lot is any transaction less than 100 shares are generally called Odd Lots)

• A Company can not buy back thro’ negotiated deals on or off stock exchange, through spot transaction or thro’ any private arrangement, clearing and settlements. M LEARNING S Made Simple

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Pay in and Pay Out Pay In Date

Pay In Date

Funds made available to Exchange

Securities transferred to Exchange

Buyer

Seller

Securities Transferred to Buyer

Funds transferred to Seller

Pay Out Date

Pay Out Date Stock Exchange

Short Selling • A Legal Trading Strategy. • Normal Process : First Buy and then Sale • Assumption : Price will go up in near future.

• Short Selling : First Sell and then Buy. • Assumption : Price will go down in near future.

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Auction • Auction is conducted for those securities that members fall to deliver / short deliver during pay-in • There are three factors which give rise to auction • Short Deliveries • Un-rectified Bad Deliveries • Un-rectified company obligations

• The buy / sell auction for a capital market is managed thro’ auction market • If the shares are not bought at auction, i.e. if the shares are not offered for sale, exchange squares up the transaction as per SEBI guidelines. Square-up happens at the highest price from the relevant trading period till the auction day or at 20% above the last available closing price whichever is higher. [email protected]

Fundamental Analysis • Analysis of Historical Data. • Analyzing factual information like • Financial Statement • Management and Competitive Advantage • Industry Current Scenario and Future Outlook • Finding out Intrinsic (True) Value of Stock and analyze whether stock is overpriced or underpriced. • Perfect Blend of Macro and Micro Analysis. • Recommended For Long Term Investment.

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Technical Analysis • In stock market, share price is fluctuating and resulting in a TREND. • This TREND is predictable in NEAR FUTURE (If showing any pre-determined pattern) • The analysis of Price Trend is called Technical Analysis.

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Example – Technical Analysis

Source : Angel Technical Analysis research as on 30th October 2008

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Key Ratios • PE ratio • Market Value to Book Value Ratio

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PE Ratio Reliance Industries Ltd

• PE ratio = Price per Share / Earning per Share • In other words, it indicates how much money you need to invest to get one rupee earning per share. • Lower the ratio better the investment proposition. [email protected]

Lowest PE Ratio Scripts Company Name

Last Price (Rs)

EPS (Rs)

PE Ratio

Southern Gas Lt

231.45

1090.22

0.21

Singer India

5.76

16.66

0.35

Bombay Oxygen

5371.55

10759

0.50

IFB Industries

20.05

24.29

0.83

Amtek India

34.90

30.92

1.13

CEAT

39.70

32.41

1.22

Source : Moneycontrol as on 31st October 2008

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Highest PE Ratio Company Name

Last Price (Rs)

EPS (Rs)

PE Ratio

KGN Industries

1573.75

0.74

2126

TCI Industries

1180.30

1.41

837.09

UTV Software

474.90

1.41

336.81

Fortis Health

59.60

0.20

298

IndiaNivesh

631.55

4.82

131.03

Reliance Natural

43.55

0.43

101.28

Source : Moneycontrol as on 31st October 2008

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Price to Book Value • This ratio is used to find whether stock is undervalued or overvalued. • Ratio = Price of Share / Book Value of Share • Book Value = Net Worth. • If ratio <1, Its undervalued, if Ratio is > 1, its overvalued. M LEARNING S Made Simple

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Most Undervalued Stocks Company Name

Last Price (Rs)

Book Value (Rs)

PBV Ratio

MTNL

65.70

189.23

0.35

Allahbad Bank

48.70

117.47

0.41

Parshvnath

40.55

97.81

0.41

Bajaj Hind

45.25

101.43

0.45

Essar Shipping

33.50

72.08

0.46

Videocon Ind

120

243.14

0.49

Source : Moneycontrol as on 31st October 2008

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Most Overvalued Stocks Company Name

Last Price (Rs)

Book Value (Rs)

PBV Ratio

Asian Paints

956.75

96.80

9.88

Divis Lab

1096.65

135.03

8.12

ABB

535.65

76.06

7.04

NMDC

143.83

20.91

6.88

Glenmark

282.15

41.10

6.87

GlexoSmithKline

1070.35

160.67

6.66

Source : Moneycontrol as on 31st October 2008

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Demat - Meaning • Demat is an abbreviation of Dematerialization which is a process whereby securities like shares, debentures are converted from physical form to electronic form. • There are two depository participants • NSDL and CDSL

• The Depository provides its services to investors through its agents called Depository Participants (DP’s). M LEARNING S Made Simple

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Arbitrage • Its an act of buying securities in One Market and Selling in Another Market at Higher Price. • It takes advantage of a price differential existing in the prices of the same commodity or security in two or more different markets. M LEARNING S Made Simple

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IPO and Book Building  An IPO is an abbreviation for initial public offer. Its applicable when any company issues shares for the first time to Retail Investors and Financial Institutions.  Book Building process  A Process of Price Discovery thro Bids from Retail Investors and Financial Institutions  Only Price Range is Provided. Allotment price is decided once book is closed. M LEARNING S Made Simple

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Learning..

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INVESTOR’S PSYCHOLOGY

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A Small Complication • Equities are unique assets that investors feel more comfortable buying at higher price and selling at lower price.

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Investor psyche - wrong emotion dominates at the wrong time

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When everyone is GREEDY you should be FEARFUL and when Everyone is FEARFUL You should be GREEDY WARREN BUFFET

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Sentiments V/s Business Efficiency..

Long Term Earnings..

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Important Parameters for Investing in Equity Market • Set your Objective • Long Term or Short Term, • Dividend Earning or Taking advantage of Short Term Fluctuation

• Diversify • Diversify among sectors and companies. Select 10 Different Stocks

• Always Minimize Risk • Use STOP LOSS as feature to minimize losses

• Avoid TIPS • Check Fundamentals and Technical • Check Key Ratios • Price to Book Value • PE Ratio

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Landmark Study by Hood and Bee bower

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Thank You. M LEARNING S Made Simple

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