How to buy and sell shares for beginners in India
‘Shares’, also known by the terms ‘Stocks’ or ‘Equity’, are issued by Companies when they need money to build their factories, buy machinery, etc. (Capital Expenditure: Capex) and Working Capital to buy raw materials, to pay workers, etc. Holding a company’s shares means that you are one of the many owners (shareholders) of a company. Shares, Stocks and Equity all mean the same thing. The difference between Shares and Stocks are, we commonly say ‘Shares’ of a particular company and ‘Stock’ as a collective term for Shares. For example, we use the term ‘Stock’ like in ‘Stock Exchange’. Stock may refer to the shares of many companies. Equity is the more technically correct term for Shares, but is rarely used.
How to start buy and sell Shares in India
To invest in the share market in India you must have the following
- A PAN and Adhaar Card
- A Bank Account – savings or current Account
- A Demat Account – What is a Demat Account is explained below
Shares have to be bought from one of the Stock Exchanges in India, like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). You cannot buy shares directly from the stock exchanges, but have to go through Stock Brokers. There are several large Share Brokrage houses like ICICI Direct, Kotak Securities, Stock Holding corporation of India Ltd. (SHCIL), Geojit, IndiaBulls, etc. With all the large share brokers you can buy and sell shares online. Instructions can be given online to buy or sell shares. The shares will be either credited or debited to your Demat Account.
What is a Demat Account?
A Demat Account is just like a bank account. In a demat account, instead of money, your shares get credited or debited.
Like Bank notes, Company shares are in the form of certificates. Each share certificate has a unique number ID and a face value. For example, if you hold 1000 numbers of shares of Rs.10- face value, each of those shares will have a unique Number and a value (Rs.10- face value). It is the share numbers and its value that gets recorded electronically. The Shares held electronically are said to be Dematerialized or ‘Demat’, the short form. The account in which Demat shares are held is known as a Demat Account.
The Dematted shares are held in either of two central depositories in India, The NSDL (National Securities Depository Limited) or the CDSL (Central Depository Services Limited). The share brokers who buy and sell shares for you, are agents of these Central Depositories. When you buy or sell shares, your share broker has online access to transact in your Demat shares held in the depository. When opening a Demat Account, you will have to fill up a form and tie one of your bank account with the Demat Account. All money to buy and sell shares has to be routed through this account.
What is meaning of IPO in share market
IPO stands for ‘Initial Public Offering’. When a new Company in India issues shares to the Public for the first time, it is called an ‘Initial Public Offering’ or IPO. The shares issued by an Indian Company in the Initial Public Offering or IPO are called ‘prime issues’ and are therefore referred to as the ‘primary market’.
IPOs are normally issued at their ‘face value’, that is the value written on each share certificate. In India most of the primary issue IPO face value is Rs.10-. Some times existing Companies can issue IPOs at a premium to their face value. An example of this is when an existing fully Government owned public enterprise offers their shares to the public.
Companies register themselves into a ‘Stock Exchanges’, like the ‘Bombay Stock Exchange – BSE’ or the ‘National Stock Exchange of India – NSE’. They do this in order for their shares to be publicly traded – or in other words to be bought and sold in the open market. Such dealings are usually carried out by registered stock brokers of these exchanges. The price of the shares of all the Companies registered in these exchanges are published online instantaneously during trading hours – usually from 9AM to 3.30PM on all working days. Anyone can visit the BSE or NSE websites and view these prices online instantaneously.
What is BSE SENSEX and NSE NIFTY
Stock market indexes like BSE SENSEX and NSE NIFTY are an indicator of the total stock valuations of selected stocks in that particular stock exchange. These indices are a numerical value arrived at by using formulas which takes into account the instantaneous stock value of the top companies included in the particular index. Some companies in the Index are given more weightage due to their importance in influencing the market sentiment.
The BSE SENSEX index is a daily value obtained by adding the daily share price of 30 BSE SENSEX listed companies in India. The selected companies in BSE SENSEX are companies who are judged to be well managed and stable. The NSE Nifty is index is a daily value obtained by adding the daily share price of 50 NSE listed companies from various industries sectors of India. In both the NIFTY and SENSEX , weightage is given to companies according to their total market worth.
Major Stock Market Indices of the world
Various Stock Market Indices, published in real time, gives us an indication of the Stock Market health of the various Nations and thus of the world. The most popular Market Indices of the world are the National Indices of Industrialized Countries like the American Standard and Poor’s ‘S&P 500’; The Dow Jones Industrial Average (Dow Jones Indices) ‘DJIA’, the NASDAQ (National Association of Securities Dealers Automated Quotations); the Japanese ‘Nikkei 225’, the Russian ‘RTSI’, the Indian ‘SENSEX’ and ‘NIFTY’ and the British ‘FTSE 100’, etc.
The Share Market Live Chart India of NSE and BSE are online all the time during trading hours.
Meaning of words used in share market
Here are the meanings of some commonly used technical words in the share market in India. Words like P/E Ratio, EPS, EBITDA, Book Value, etc. Understanding the meanings of these technical terms used in Indian share market is an important first step in learning the share market in India.
What does EPS stand for in stock market
EPS is the short form of ‘Earnings Per Share’. The definition of EPS is the value obtained by dividing the net profit of a Company by the number of its Shares in the market. When comparing the EPS values of different companies, the face value of the shares being compared should be considered. The face values of shares of Indian Companies can vary from the usual Rs.10-, to Rs.5-, Rs.2-, Rs.1- or sometimes it is even Rs.100- or more. For example, an EPS of Rs.14- per share of a Rs.10- face value share will be equivalent to Rs.1.40 of a Rs.1- face value share.
What is P/E Ratio in share market
P/E Ratio stands for Price to Earnings Ratio. It can also be called the PE multiple. P/E Ratio is one of the most important parameters for comparison of the performance of different Companies. It is the value obtained by dividing the current market price of the share by its EPS or the Earnings per Share. The lower this value, the cheaper the share value is and this is how to compare P/E ratio of two companies.
How important is book value per share
The book value of the share of a company is the net asset value of the company divided by the number of shares in the market of that company. The book value per shore is an important signal of how good the share value of a company is. The market price for the Share you plan to buy should not be more than say about 1.4 times its book value. The lower this value the better. There are some exceptions to this rule, like in the case of some low capital companies with a high profitability.
How to analyse quarterly results of companies
The official financial year in India is from 1st April of every year to 31st March the following year. The financial year is divided into 4 quarters, each of 3 months. The first quarter of a financial year called Q1, is from 1st April till 30th June of the same year, Q2 is from 1st July till 30th September and similarly Q3 and Q4 follows.
To analyse the quarterly results of companies, you should look at the total sales figures and profit after tax each Quarter. Special attention to be given to compare the figures to the previous years same quarter results. This is because the performance of many companies are seasonal, so it is important to compare performance of the previous years same quarter. A positive growth in sales, with at least constant profitability margins, indicates a growing company and you can consider buying its shares.
What is moving average of stock
The moving average is the average price of a share during the last so many days. You will hear this term very often when listening to the business TV channels like ET Now, Bloomberg, CNBC TV18, NDTV Profit, etc. They usually talk about 20 day moving average or 200 day moving average. In case of, say the 20 day moving average, it is a Simple Moving Average, and is the value obtained by dividing the sum of the closing prices of the last 20 trading days by 20. In the case of a 200 day moving average, more weightage will be given to the more recent prices and this method is called the Exponential Moving Average (EMA). The moving averages are quoted only to give an idea of the past average prices to compare it with the present price, or to forecast trends in the market.
Topline and Bottom line of a company
Top Line refers to the total sales revenue income shown on the top of a Company’s income statement. Bottom Line refers to the net profit after deducting all expenses and shown at the bottom of the income statement.
What does CAPEX of a Company mean
CAPEX stands for Capital expenditures, that is money spent on items like Factory buildings, machinery, etc.
Meaning of OPEX of a Company
OPEX is the short form for operating expenses.
What does EBITDA stands for
EBITDA Stand for ‘Earnings before interest, taxes, depreciation and amortization’. EBITDA of a Company is a useful figure when you want to compare companies with each other. Different companies have different figures for taxes, repayment of loans, depreciation, etc. When the EBITDA of two companies are compared side by side, it gives us a feel of how profitable one company is compared to the other.
EBITDA Margin of a Company
EBITDA Margin is defined as the EBITDA of a company divided by its total revenue. The EBITDA margin gives us an idea of how much of the total income of the company is used up in expenses.