Stock Market “Learning Ouicomes | k 5.1 Introduction 5.2. Securities Market 5.3. Meaning of Security 5.4 Segments of Securities Market 5.5 Useful Terms to Know before Investing in the Stock Market 5.6 Return on Investment in Securities 5.7 Risk in the Investment in Securities 5.8 Management of Risk 5.9 Taxon Capital Gains 5.10 Mutual Funds — Review Questions — References134 || Finance for Everyone 5.1 INTRODUCTION Weall know that money doesn’t grow on trees. It ean grow only when itis saved and invested prudently ‘While saving means setting aside money for future, investing means putting your money in assets whist are likely to earn return. One may invest in physical assets like real estate, gold, and commodities etc, o¢ buy financial assets such as deposits with banks, saving instruments of post office, insurance schemes, pension funds, provident fund, or securities market instruments such as shares, debentures, and bond, etc, Investment in securities in the securities market is fast becoming popular mode of investment dye to promising return and liquidity. Buying and selling of securities is no longer a complex mechanism, With evolving technology, it has become much easier and fast. Today, it is important to know the important terms pertaining to securities market before one start investing, It will help investor to understand markets and their functioning. Further, it will help them to make informal choices. So let us study and understand the important terms pertaining to securities market in this chapter. 5.2 SECURITIES MARKET The market in which securities are issued, purchased, and transferred among buyers and sellers is called as the securities market. It has two segments i.e. the primary market and secondary (Stock) market. New securities are sold in the primary market, However, sale and purchase of already existing securities is done in the secondary market. The primary market creates new securities which are traded in secondary markets, The securities bought and sold include shares, debentures, bonds, derivatives, and mutual fund units. On the one hand, the securities market provides medium to corporate organisations to raise capital by issue of securities, on the other they provide investment, opportunities, and liquidity to investor. 5.3 MEANING OF SECURITY Security is a financial instrument with monetary value which can be bought and sold or traded. Securities are issued by a corporate organization or a government entity to raise funds, They allow widespread ownership, easy transfer, dispersion of wealth and simplified investment for investors Itis an opportunity for investors to earn on their money. It allows separation of ownership and management and provides broader source of capital to the issuing company. Securities are one of the key elements in the financial structure of an economy. Issue of securities creates the need for security markets which allows more efficient allocation of resources, provides liquidity and opportunity to get return, This gives a boost to the economic growth of a nation, 5.3.1 Types of Securities As per section 2 of the Securities Contracts (Regulation) Act, 1956, Securities includes @) Shares, scrips, stocks, bonds, debentures, debentures stock or other marketable securities of @ like nature in or of any incorporated company ot other body corporate (b) DerivativesStock Market || 135 (©) Units @ Security receipt (©) Government securities (&) Rights or interests in securities (g) And such other instruments as may be declared by the Central Government to be securities. From investor’s point of view, we can divide securities in four heads () Ownership securities ie. shares (ii) Debt securities i.e., debentures and bonds (iii) Derivatives, and (jv) Mutual Fund units. 5.3.1.1 Ownership Securities Ownership securities are represented by shares. Shares are most universal from of raising long term funds by a corporate organization. To raise funds a company can issue a unit of ownership called as share. Share represents an equal proportion of a Company's shares capital. The investors who buy these shares are known as shareholders. A company issues a certificate to every shareholder under the common seal of the company certifying that he is the owner of the company shares and how many shares are held by him. Accompany can issue two types of shares ie. (@ Equity shares, and (i) Preference shares. 5.3.1.1.1 Equity Shares Equity shares constitute the major portion of the share capital of the company. They get no special rights or restrictions, They have the potential to get the highest income but also take the highest risk. Equity shareholders are the legal owners of the business. They provide the permanent capital to the corporate organization and bear the risk of ownership. When a company is formed it issued equity shares to the promoters. The first issue of equity shares tothe public is made for additional capital. This is called as Initial public Offering (IPO). Subsequent issues are called as further issues. Features of Equity Shares + Maturity: Equity shares are not redeemed during the life ofthe organization. Equity shareholders are paid back only in the event of winding up ofthe company. + Chai ets: Equity shareholders have residual claim on the assets of the business, that i, fai case of ae their claim is settled after meeting all the debt liabilities and payment toprefeence shareholders. Hence, only the remaining balance of asses belongs to them. i i im oni id dividend « Richt to income: Equity shareholders have residual claim on income too. They are pai pee aie Sable to them after meeting all operating charges and financial charges and also after paying dividend to preference shareholders. The rate of dividend is not fixed on these136 || Finance for Everyone shares and depends upon the discretion of board of directors. Therefore, equity shares are ag, called ‘variable income securities’. ; ; + Right to control: Equity shareholders have the right to control the affairs of the business through voting rights. The company’s management, that is, aaa of directors, at apo it ‘ders in their annual general meeting. Each equity share gets one vote, Be ne serar exe ty shareholder possess, higher will be his Voting So higher the number of equity shares, an equit e i Fane rights are accessed by the equity shareholders in the annual general meeting onal important issues pertaining to the business. + Pre-emptive right: The pre-emptive right is the right available to equity shareholder to purchase further shares in proportion to their existing shareholding in case the company is making further issue of fresh equity shares. The pre-emptive right protects the controlling power of the existing shareholders. However, a shareholder has the right to decline the ‘right offer’ or renounce it in favour of some other person. + Limited liability: The liability of the equity shareholder is limited to the value of equity share they have purchased. If the company makes losses, they are not required to pay for it, so the liability of an equity sharcholder is different from a sole proprietor or a partner who has unlimited liability. Once a shareholder has paid the issue price of the equity share he is not required to pay anything even at the time of liquidation of the company. To sum up, Equity shares are a high-risk reward sources of finance. The equity share-holders share the risk, retum and control of the ownership of the company. 5.3.1.1.2 Preference Shares Preference shares are those ownership securities which have two preferences over the equity shares. These two preferences are: 1. In the case the company declares dividend, they have preference over equity sharcholders to receive dividend first at a pre decided rate, 2. In the case of liquidation of the company, the capital of preference shareholders is repaid before anything is paid to the equity shareholders, Features of Preference Shares ae ow types. However, there are many features which are common among all These significant features are as follows: . Maturity pee pea a 1997, a company can issue only redeemable preference issued irredeemable preference shaves a #20 year, even though previously companies have * Claims on assets: At the time of winding up, preference shares have prior claim on assets than equity shares, i i z thane nity ares. After paying all the creditors, the preference shareholders are returned their * Right to income: Unlike equity shares, preference shares are entitled to a fixed rate ofStock Market || 137 dividend decided at the time of issue of such shares. Dividend is not a com; eet 2 ipulsory payment like interest on loan. In case the company decides to declare dividend, only then is it paid to preference shareholders. However, in case of cumulative preference shares, the dividend keeps on accumulating if not declared in any year. Further, participative preference shares may participate in the surplus profits after payment of dividend to equity shareholders. + Right to control: Preference shareholders do not get any voting right and thus do not have any right to control the company. However, preference shareholders can vote on a resolution which directly affects their rights. + Limited liability: The liability of the preference shareholders is also limited to the value of the preference share they have purchased. Once they have paid the full issue price to the company, they have no further liability. + Hybrid form of security: Preference shares have qualities of both equity and debts. It resembles equity shares because dividend is paid out of distributable profits, if declared and is, not a compulsory payment. However, the rate of dividend is fixed like interest on a debt security. These shares also do not carry any voting right and are mostly redeemable like debt. Thus, preference shares are treated as a hybrid security. In brief, preference shares do not dilute owner’s control of the company and put no restrain on freedom of the management. However, these shares are costlier than debt sources. 5.3.1.2 Debt Securities Borrowed capital of an organisation is raised by issue of debt securities. These securities are issued for a specific period against payment of interest at regular interval and the principal is repaid as per the agreed schedule. For a corporate organisation borrowed sources/debt securities are riskier than ownership securities as the former securities create legal obligations to pay interest and principal. However, they are cheaper. source of funds when compared to ownership securities. For an investor, debt securities are fixed income source with less risk as a company has legal obligation to pay interest on them. Debentures and bonds are two popular types of debt securities for raising debt capital by a company. Bonds and debentures have common features Features of Debentures and Bonds + Maturity: Debentures and bonds are used with a fixed maturity schedule. Debentures may be redeemable at fixed date or in instalments by drawing lots. However, a company may #ssue irredeemable debentures or perpetual bonds too. + Right to Income: Debenture holders/bond holders get aright to receive regular interest payment. Interest is paid at a fixed percentage of the par value of the debt instrument payable annually or semi-annually or quarterly, etc. + Legal Liability: It is the legal liability of the company to pay int principal on maturity date. + Indenture: An indenture or debenture trust deed is a legal d terest on due dates and to repay ocument containing details of the138 || Finance for Everyone agreement between the company and the debenture trustee who represent the debenture holders, ‘The debenture trustee is generally a bank, financial institution or an insurance company, The debenture trust deed is a detailed document which includes description of debentures, terms of issue, rights of debenture holders rights of the issuing company and the responsibilities of trustee. Security : Debentures may be issued as secured or unsecured debentures. In India, debentures are usually secured by a charge on the present and future immovable assets of the company, Debentures may be issued as unsecured debentures wherein no security is provided to debenture holders. * Claim on assets: In case of liquidation, debenture holders/bond holders have a claim on assets prior to that of shareholder. The realized assets of the company are first utilized to pay the debenture/bond holders before any payment to preference and equity shareholders. However, secured debentures will have priority over the unsecured debentures. Control: Debenture holders are creditors of the company and they do not carry any voting rights and do not have any control over the management of the company. + Call feature: ‘Debentures/bonds may carry call feature in which case the issuing company may redeem the debentures on a certain price before the maturity date. 5.3.1.3 Derivatives A derivative is a financial instrument whose value is derived from the value of one or more underlying assets. The most common types of derivatives are futures, options, forwards, and swaps. Derivatives are discussed in detail in the chapter later 5.3.1.4 Mutual Fund Units Mutual Fund units are issued by mutual fund companies to investors of mutual fund schemes as. per the amount of money invested by them. Mutual fund schemes are discussed later in the chapter under a separate heading. 5.4 SEGMENTS OF SECURITIES MARKET ‘The securities market has two inseparable and interdep endent segments i.e., the primary market and the stock market. Primary Market or New Issue Market Secondary Market or Stock MarketStock Market || 139 5.4.1 Primary Market mary market is a market where new securities are issue i i primary matt i a market where new secur -d. It provides medium for the organisations Liao pportunities on the o1 rr to aoe acne Etats; onesie eon croanty fr ae i a eens a large number of investors and sives the Way quid secondary market. Long term capital is raised for the businesses by issue of Few securities, therefore, it is also called as new issue market too, 5.4.1.1 Types of Issues of Securities in Primary Market Acompany can issue fresh securities in the primary market in various ways as captained below: @ Public Issues: In this type of the issuc a company invites applications for buying the securities from investors by issuing a prospectus. Once the applications are received, the company allots securities to the applicant as per the prescribed rules of companies Act 2013 and the rules and regulations of SEBI (Securities and Exchange Board of India). Public Issue can of three types i. @ Initial Public Offer (IPO) () Further Public Offer (FPO) (© Offer For Sale (OFS) a (types of Public Issue i ich is not listed on an stock @ Initial Public Offer: When an unlisted company (A company which is not listed on an stock exchange) decides to raise funds through sale of securities for the first time to the public. is called as initial public offer. The company either makes a fresh issue of seountes ot Gat its existing securities for sale to the public for the first time. An IFO may funders,140 || Finance for Everyone angel investors and venture capitalists as an exit strategy, when a private company secks to go to public. IPO not only allow company to reach new investors but also helps in enhancing the image of the company among suppliers, customers, bankers, and public at large. It also gives investor a chance to own a piece of a corporate organisation. Some of the popular IPOs in the world are by companies like Sandi Aramco, a Saudi Arbian multinational petroleum and natural gas company, Alibaba Group Holding Limited of China, Soft Bank Group corporation of Japan, parent company of facebook Meta Platforms. In India, some of the mega IPOS are of Life Insurance Corporation of India (LIC), Paytm Ltd., Coal India Ltd., Reliance Power Ltd. etc. Further Public Offer (FPO): When a listed company (i.¢., which has already issued securities, to the public) decides to come out with a fresh issue of securities and makes an offer for sale to the public, it is called as Further Public offer or Follow-on-Public Offer. In other words, FPO is any issue which comes after IPO. Similar to an IPO, an FPO allows the companies to raise additional funds. For the investors the main advantage is that the issue price for an FPO is mostly lower than the prevailing stock market price. This is done usually to get more and more subscribers to the issue. Another advantage is that they can refer to the past performance of the company on the stock market. Much more data about the management and business practices of the company, financial reports etc, are available to the investor to form an idea about the performance of the company. Google, Facebook, Tesla have used follow-on public offers to raise money. Yes bank Itd, Indian Telecom Industries Ltd, Ruchi Soya Ltd. Engineers India Ltd, Tata steel Itd are some companies in India which have used this method for obtaining funds. Table 5. @) jfference between IPO and FPO. Parameters FPO) FPO is made after IPO to raise funds by 1. Meaning IPO is the first issue of securities made by a company. issue of new additional securities by 2 company. 2. Company Status ‘An unlisted company makes an IPO and becomes listed. ‘An already listed company makes and FPO. 3. Nature of Securities offered ‘New Securities are issued to the public for the first time. Under FPO new securities may be issued or old shares of existing shareholders (mostly of company’s promoters, directors) may be offered for sale to the public. 4. Price of the Security In an IPO Price is fixed in a price band with slight variations The price of security in FPO is market driven. 5. Risk IPOS are risky, FPOs are comparatively less risky.Stock Market || 141 (©) Offer for sale (OFS): Offer for Sale is a mechanism to sell securities through the stock exchanges for listed companies. Securities Exchange Board of India (SEBI) introduced this mechanism in 2012 to make it easier for promoters of listed companies to cut their holdings and comply with the minimum public shareholders norms by June 2013. Only promoters or shareholders holding more than 10% of the share capital of a company can come up with such an issue. Both retail and institutional investors can buy shares offered for sale. It is important to note that it is available for only the top 200 companies in terms of market capitalization. Further, 2.5% of the shares offered must be reserved for mutual funds and insurance companies. Aminimum of 10% of the offer is reserved for retail investors, It is mandatory for the company to inform the stock exchanges two banking days prior to OFS. The offer is opened only for a single day. In an OFS, the buyer investor has to provide a bid in order to buy the shares. The company sets a minimum floor price, Buyer cannot bid below this price.In some cases, the seller offers discount to retail investors. ‘The process of OFS is also simple and requires minimal paperwork from the investor. In India, many government companies have used this mechanism to sell their shares. Oil and Natural Gas Corporation (ONGL) Steel Authority of India Ltd, Coal India Ltd, Hindustan Aeronautics Ltd , Indian Railway Catering and Tourism corporation (IRCTC) are some examples which used the offer for sale mechanism to meet their disinvestment goals. Table 5.2: Difference between Offer for Sale and Initial Public Offering Parameters! Initial Public Offering | Offer for Sale’ |. Meaning In an IPO a company raises money by | In offer for sales the shares are sold by selling its securities to the public for the | existing shareholders to the public. first time. . Seller In IPO, the company sells its shares to | In OFS promotors or large shareholders the public. sell their share'to the public. . Type of Company _| IPO is used by an unlisted company to | Itis made by an already listed company. become listed. . Applicability “Any unlisted company can go for IPO. | Only top 200 companies based upon ‘market capitalization are allowed to go for OFS. . Time Period ‘An IPO is usually open for 3 to 10 days. | An OFS in open for only one trading day. . Increase in Share | IPO increases the share capital of a|OFS only results in transfer of Capital company duc to issue of new shares. | ownership from existing shareholders to new shareholders. . Regulatory ‘A lengthy procedure is required to be|In OFS the process is small and the Compliance. followed for an IPO Issue. regulatory compliance is much less than IPO. . Reservation for | 35% of the shares under an IPO are held | Only 10% of the shares are required to Retail Investor__| for retail investors, be held for retail investors in an OFS.4 142 || Finance for Everyone (i) Right Issue of Shares: Right Issue of shares provides a right to the existing shareholders to buy additional shares in proportion to their existing shareholding in the company. Both Equity shares and preference shares can be issued under this mode of issue of shares. The main features of right issue are as follows. (@) It gives the existing sharcholders a pre-emptive right to buy new shares of a company ata price less than market price, (b) The existing shareholders are also given the right to renounce the offer in favour of any other person. (©) The cost of the issue of right shares is less than the public issue. (@ Itincrease the share capital of the company. (&) The offer is provided through notice to the shareholders who are required to answer within 15 to 30 days. (® Incase a shareholder does not respond it is presumed that he declined the offer. (g) Ithelps the existing shareholder to maintain their proportion in the shareholding of the company Right issue of share is a fast source of raising funds at low cost. For the shareholders it is an opportunity to invest in a company they are already conversant with. One of large right issue has been made by Reliance industries Ltd in May 2020. It offered 42 crore equity shares of £10 each at a price of €1257 each in the ratio of 1:15. It means that shareholders were allowed to subscribe to one equity share for energy fifteen share held. The price of the share of the reliance industries Ltd. in the security market was over %1400 in the year 2020 . The total amount of right issue made by the company was %53,125 crore. ii) Bonus Issue of Shares: Bonus shares are additional shares issued to the existing shareholders without charging anything. New shares are allotted to shareholder in proportion to their existing holding out of the accumulated profits of the company. In this way, undistributed profits are capitalized without affecting the cash position of ‘the company. Following are the main features of bonus issue of shares. (@) Bonus shares are issued free to the existing shareholders on Pprorata basis, (b) They are always fully paid up. (©) Right to renunciation is not available in respect of these shares. (@) Bonus shares do not provide any new funds to the issuing company. (©) Issue of bonus shares is an inexpensive mode of issue of new shares. (® Bonus issue of shares increases the total number of shares issued by a company and thus reduces the market price of the shares, (g) Shareholders receive dividend on their increased shareholding after bonus issue. Bonus issue helps the company to maintain its liquidity. Shareholders are kept happy without affecting the financial position of the company. Increased number of shares in the hands of the shareholders means increased dividend income. They can encash the additional shares received in the stock market. Over the years many companies have issued bonus shares in India. Some of the blue-chipStock Market || 143 companies like Infosys, Reliance Ind : ustries, Wipro, faued bonus shares 0 their shareholdes Pro, ONGC, L & 7, ITC, HDEC bank and TCS have Table 5.3: Difference between Right Issue and Bonus Issue Parameter: Right Issue ee Re 1. Meaning aoe issue of shares provides a Tight|In bonus shares the eS any’s Whe existing Shareholders to purchase | accumulated Profits and reserves ae mnalnew shares ofthe company | converted int share capital and the shares are provide to existing share holders 2 Price Right shares are issued for a pr i t Price to | Bonus share: existing sharcholdes exisingsharcholien, 3. Purpose Right shares are issued to raise | Bonus chars do not create additional additional funds for the company funds. They are issued out of accumulated profits and reserves of the company. 4 Paidupamount | Right issue can be issued as fully paid| Bonus shares are always issued fully up or partly paid up paid up, 5 Right to renounce | Right issue of shares provide a right to Bonus shares do not carry any right to Tenounce shares in favour of any other | renounce them to others person (iv) Private Placement: {nprivate placement securities are not sold to the public but to the pre-selected investors and. institutions, In India, the persons to whom the company can make a private placement should not exceed more than 200 persons in the aggregate. Investors invited to participate include banks, other financial institutions, ‘mutual funds, insurance companies and other rich investors. The participants apply through the private placement application form of the company. Then the company should allot the securities within Sixty days from the receipt of the application money. No public advertisement or utilization of media, marketing channels or agents can be used to inform about the private placement offer. In India, this way of raising funds have gained importance over the years, As compared to IPO ithas few regulatory requirements. Most popular example of private placement is Goldman Sachs ‘approaching Mr, Warren Buffet to offer 5% stake in 2008 in the back drop of sub-prime mortgage crisis. 54.2. Secondary Market Secondary market or the stock market is a platform where buyers and sellers meet to trade in sents otlised companies. The shares, which are already issued in the primary market, are bought and sought inthe stock market, Stock market consists of stock exchanges which functions as organised mat ee the sale and purchase of securities, The stock market makes available the information regarding pric Of securities to the buyers and sellers.144 || Finance for Everyone 5.4.2.1 Characteristics of Stock Market | Stock market deals in the shares, debentures, bonds and other securities already issued by liste companies and government organisation. ; - (@) It does not buy or sell securities on its own account, Rather, it provides the infrastructure to facilitate trade. (b) Security Exchange Board of India regulates the Indian stock market. It protects the interests of the investors by making rules and regulations for the operation of the market. (©) Ithelps to value the securities on the basis of demand and supply. (@) It offers attractive opportunities of saving and investment to investors. (©) Stock market is considered important barometer to gauge the growth of the organisation and economic condition of a nation. (© It provides complete information about the prices and volumes of the securities traded every day. (®) It provides a ready and continuous market for the securities, thus, providing high degree of liquidity to the investor. (b) Transactions are conducted only among the members in stock exchanges for listed securities in a transparent manner. This ensures safety in dealings. @ Stock market imparts buoyancy to the primary market. 5.4.2.2 Stock Exchanges in India Currently there are seven stock exchanges in India. Table 5.4: List of Indian Stock Exchanges S.No. | Name He i igi » Location! ?'|// Year of Establishment 1_| Bombay Stock Exchange(BSE) Mumbai 1875 2__| Calcutta Stock Exchange (CSE) Kolkata 1908 3__| India International Exchange(India INX) Gandhinagar 2017 4 | Indian Commodity Exchange(ICEX) Navi Mumbai 2017 5__| Multi Commodity Exchange of India (MCX) Mumbai 2003 6 | National Commodity & Derivatives Exchange Mumbai 2003 (NCDEX) 7__| National Stock Exchange of India (NSE) Mumbai 1992 Bombay Stock Exchange and National Stock Ext t ‘change are two popular stock exchanges in India. In financial year 2021, a total of over 7462 companie: z 8 were listed on these two exchanges. 5.4.2.3 Stock Market Indices We have seen in the previous section that more than seven thousand companies are listed in just twoStock Market || 145 stock exchanges in India, This makes it impossib parket indices have been developed as indicator ppased upon the prices of certain group of securit ofthe company, type of industry, Securities impacts the value of jnvestment decisions. SENSEX of Bombay Stock Exchange and NIFTY of National Stock Exchange are two popular indices in India which are considered to Tepresent the overall market performance. Some ‘important world indices are Dow Jones (New York Stock Exchange), NASDAQ (Global electronic exchange), and ‘&P 500 (Standard & Poor’s Composite Index) le to monitor the stock market. That is why stock ‘of major changes in stock market. These indices are ties which are selected on particular criteria like size and market capitalization ete. Any change in the prices of underlying the index. Tracking the indices enables investors to make rational Let us learn more about the two Indian Indices: () SENSEX SENSEX is a bench market index of Bombay Stock Exchange of India. The word SENSEX is a made up of two words i.e. Sensitive and Index. A stock market analyst Mr. Deepak Mohan introduced this term. Itwas introduced in 1986 and is the oldest index in India. It is made up from the value of top 30 largest and most frequently traded stocks listed in Bombay Stock. Exchange. It is operated by a joint venture between BSE and standard & Poor's Dow Jones Indices and thus, is also known as S & P BSE Sensex. The Sensex is calculated in Indian rupees and U.S dollars. It reflects the movement in the Indian stock market, If the Sensex increases, it means the prices of the underlying 30 stocks have increased and vice versa. It gives a reflection of the Indian economy and is used to understand the overall trends in stock market, ‘Some of the popular companies included in Sensex are Infosys Ltd., Reliance Industries Ltd, ICICI Bank Ltd, HDFC Bank Ltd., Bharti Airtel Ltd., State Bank of India, ITC Ltd, Tata Steel Ltd. and so on, The base year of Sensex Index is 1978-79. The index have grown steadily and have already crossed 58000 points mark in August 2022. There are two ways to invest in Sensex. Firstly, at investor can directly buy the stocks of constituent ‘companies of the Sensex in the weightage these companies have in Sensex. However, an easy way is to invest in Sensex through Index Mutual Funds, These mutual funds invest in the same companies as in the index. So a Sensex based index mutual fund will have the 30 stocks in the same proportion as the Sensex. HDFC Index fund- S & P BSE Sensex, LIC MF S & P BSE Sensex Indian Fund, and ICICI Pru S & P BSE Sensex Index fund are some of the known mutual Index funds an investor can invest in. (i) NIFTY NIFTY is a bench mark index of National Stock Exchange. The word is a blend of two words i.e. National stock exchange and fifty. It was first established in 1996 with the name CNX Nifty. In 2015, it was renamed as Nifty 50. Nifty is an index based on 50 largest and most liquid companies listed on national stock exchange of India. These companies belong to different industrial sectors. Nifty is managed by India Index services & products Ltd. (ISL). This company is am rent of national stock Exchange and CRISIL. It started its operations on April 22, 1996. Fe oe Teconstituted every six months based upon the performance of the company’s stock over the Period.146 || Finance for Everyone this basis companies are added or removed from the list of NIFTY fifty. The Index shows market trends, When NIFTY goes up, it implies that stock of large companies across industries are moving up and vice-versa. Investors use it to understand market conditions so as to make rational decisions. Further, it indicates positive economic trends in the country. Some of the companies who have existed in Nifty for a long term are Reliance Industries Ltd, ICICI Bank Ltd., State Bank of India Ltd, ITC Ltd., HDFC Bank Ltd, Tata Steel Ltd, Infosys Ltd. ,Bharti Airtel Ltd., Mahindra and Mahindra Ltd., Tata Motors Ltd and so on. The base year of Nifty is 1995 and the base value of is 1000. It has already crossed 17000 marks in August 2022. The base capital for Nifty is ¥2.06 trillion. Like Sensex an investor can directly invest in the index. In that case he/she will have to buy all the 50 shares in the same proportion as they exist in the index. However, easy route is to buy Nifty index mutual funds. HDFC Index fund Nifty 50, SBI Nifty Index Fund, ICICI Prudential Nifty 50 index fund, Tata Nifty 50 Index fund are some of the well-known mutual funds to invest in Nifty. Besides Nifty 50, Nifty also have sub-indices based upon industry, market capitalization or asset closes. They are NIFTY Next 50, Nifty SMALL CAP 50, NIFTY FMCG, Nifty Bank, NIFTY IT, NIFTY Commodities etc, Table 5.5: Difference between SENSEX and NIFTY Parameter)” (2) SENSEX sc | NIFTY 1. Operational Year twas fist started on Ist January 1986] It started operations on April 22, 1996. 2. Full Form Sensex stands for Stock Exchange | Nifty stands for National Stock Sensitive Index Exchange Fifty 3, Stock Exchange Itis a stock market Index for Bombay | It is a stock market index for National stock exchange stock exchange, 4, Constituent Companies | It is based upon the stock value of 30 | It is calculated based upon the stock companies value of 50 companies 5. Base Period The base year for the calculation of | The base year for Nifty is 1995. Sensex is 1978-79 6. Base Value Sensex has base value 100 Nifty has base value 1000. 7, Base Capital Sensex has no base capital defined. | Nifty has a base capital of 2.06 trillion 8. Number of Sectors | Sensex covers companies across 13| Nifty covers companies across 24 sectors sectors and thus is a broader market index 9. Operated by It is operated by a joint venture| It is operated by a joint venture of between Bombay stock exchange and S&P Dow Jones Indices National stock exchange and CRISIL called as IISL.Stock Market || 147 5.5. USEFUL TERMS TO KNOW BEFORE INVESTING IN THE STOCK MARKET ‘There are some basic terms each investor should unde: zi stand before starting i in st eas tes seen Galo re starting investment in stock market. 5.5.1 Business Days In India normal trading is done in the stock market between 9.15 am to 3.30 pm from Monday to Friday without any lunch or tea break, An investor can bu y lunch or t yy and sell securities on BSE and NSE at any time between this trading time -period through a brokerage agency. 5.5.1.1 Segments of Stock Market Timings in India India stock market timings is divided into three segments. (@ Pre-opening session (i) Trading session (ii) Post-closing session () Pre-Opening Session The pre-opening session starts at 9.00 am and goes till 9.15 am. During this time orders for purchase and sale for securities are placed. This session is further divided into three sub sessions. (@) 9.00 am to 9.08 am Order Period: During this period orders for the transaction can be placed when the trading begins. These order entries are given preference and cleared off in the beginning. Order can be cancelled or changed during this time. However, no order can be placed after these eight minutes in pre-opening timings. (b) 9.08 am to 9.12 am Opening Price Determination Period: Prices of securities are determined during this time period baséd upon demand and supply. (©) 9.12. am to 9.15 am Transition Period: This is a transition period between pre-opening session and the normal trading session. No new work is done. In other words, no additional order for transactions can be placed during this time. Also, existing bets already placed between 9.08 am to 9.12 am cannot be revoked as well. It only works as connection window between pre- opening session and trading session. (i) Trading Session/ Normal Session Normal trading in the Indian stock market occurs between 9.30 am to 3.30 pm. Any transactions made during this time follows a bilateral order matching system, wherein price determination is done through demand and supply forces. Bilateral order matching means each sell order is matched with a buy order that has been placed at the same stock price and vice-versa, During this session orders to buy or sell and modify or cancel can be placed without any limitation. Gil) Post Closing Session Post-closing session runs from 3.30 pm to 4 pm. No trading transaction is done during this period.148 || Finance for Everyone However, the determination of closing price is done during this time-period. This session can be divided into two segments : (®) 3.30 pm to 3.40 pm — Determination of Closing Price: During these 10 minutes closing prices of securities are determined by calculating the weighted average of the stock prices in which it is traded between 3.00 pm to 3.30 pm. The closing prices for the indices like Nifty, Sensex are calculated by taking the weighted average of the prices of all the underlying securities of the index. (®) 3.40 pm to 4.00 pm — Bids for the following day: Bids for the following day’s trade can be placed between 3.40 pm to 4.00 pm. Bids placed during this time period are confirmed only when there are adequate number of buyers and sellers present in the market. In case the closing price is less than opening price next day, investors will eam capital gain. In case closing price exceeds opening price, bids can be cancelled during the pre-opening session period of 9.00 am to 9.08 am. 5.5.2 Opening and Closing Prices in Stock Market As discussed in the previous section, there is a mechanism for calculating the opening and closing price in the stock markets in India. (a) Opening price: The opening price is the price at which first trading is done in a security in the trading session which starts at 9.15 am. ‘The opening price is determined in the pre-opening session window of 9.08 am to 9.12 am. The orders are collected first in the window of pre-opening session i.e, 9.00 am to 9.08 am, The ‘opening price is than determined based on the principle of demand and supply. Its the equilibrium price where the maximum trade volume of a security can be executed. Suppose following is the information availabl ah le regarding a security price,] ts demand and supply , and the maximum tradable quantity at each price. [Security Price (@7 [oo Demand Uae] Supply Unies) ‘Maximum Tradable Units 107 500 400 400 108 450 500 450 109 500 600 500 110 400 750 400 11 350 800 350 112 300 600 300 In the above case, maximum units of a se curity can be traded at 109. Hence the ing price of the security is determined as €109. ” . —— eaeStock Market || 149 (b) Closing price: The closing price is the price calculated for a stock after the trading session (9.15 am to 3.30 pm) is over. It is calculated as the weighted average of all prices of the securi ae ; ast 30 minutes of the trading session i.e. between 3.00 pm to ae at which it is traded during the _ Suppose following information is given regarding a security: ‘Time No. of Units Traded |" Price 3.05 pm 2 110 3.10 pm 5 125 3.12pm 3 115 3.20pm 4 120 3.28 pm 6 130 ‘The weighted average of the price a security can be calculated as: WA+W,B +, ‘Where weights are the number of shares traded. 2x110 +5%125 +3x115 +4%120+6x130 245434446 220+ 625 +345 + 480+ 780 20 450 » = 122.5 2 So, the closing price is determined as %122.5. It is the generally used as a benchmark price by the market followers to understand the market performance and to compare with the previous closing price. It is to be noted that closing price is different from the Last ‘Trading Price. Last Trading Price is the:price at which a security is traded for the last time before the closure of trading session. In our illustration it is 7130 at which 6 units of the security were traded at 3.28 pm. In case the security is not traded between 3.00 pm to 3.30 pm. Then, whenever, the security was traded for the last time becomes the closing price. Suppose last time, the security was traded at 7115 at 2.48 pm. In that case last trading price and the closing price are the same as 115. Opening price of a security may be different from the closing price. Opening price is calculated based upon demand and supply of security inthe pre-opening session window of 9.00-9.08 am. Closing Price is the weighted average of prices of a security between 3.00 pm to 3.30 pm on the previous day. The developments after trading hours may induce differences in the opening and the closing price.150 || Finance for Everyone 5.5.3. Blue Chip Stocks and Defensive Stocks Ina security market there are multiple types of stocks (shares) that can be traded. The classification ccan be based upon various factors. Based upon market capitalization, they can be classified as large cap stocks, mid cap stocks, small cap stocks. On the basis of ownership, they are termed as equity and preferred stocks. Depending upon the dividend payment they can be growth stocks and income stocks, Based upon risk they can be blue chip and beta stocks. Depending upon price trends stocks can be defensive and cyclical stock etc. Blue chip stocks and defensive stocks are popular due to their unique characteristics. Let us know about them. (@ Blue Chip Stocks Blue chip stocks are the shares of blue -chip companies. These companies have a long history of stable earnings, dividend payment and sound financial performance. These companies enjoy good reputation in the market and their shares are highly priced in the security market. The term ‘Blue chip’ was first coined by Oliver Gingold ,who use to work in Dow Jones, in 1923 when he noticed that several stocks traded at $200 or more per share. Today, the term is used for high quality stocks/shares. The features of these shares are: (a) Assured Returns: The blue chip companies earn consistent revenue and provide regular dividend to shareholders. (b) Credit Worthiness: These companies have stable debt equity ratio and a high interest coverage ratio. They meet their financial obligations on time. (©) Risk Factor: Due to stable financial performance and retum on equity of blue-chip companies, these are rated high and risk to investor is comparatively less. (@ Growth: Blue chip companies show steady growth and proven track record. Thus, their shares are considered safe and stable. Some of the intemational blue-chip stocks are of Apple, Mastercard, Coca-Cola, Walmart, Microsoft, Johnson and Johnson, American Express, Procter & Gamble and so on.In India the share of Reliance Ltd, Hindustan Unilever Ltd, Infosys Ltd, HDFC Bank Ltd. Bharti Airtel Ltd, ITC Ltd, etc. are considered blue chip stocks. Gi) Defensive Stocks Defensive stocks are those shares which provide consistent dividend and have stable eamings even during an economic or market downturn, Defensive stock companies are those companies which offer goods or services that people continue to buy even when the economy is not doing well such as utilities, consumer durable, pharmaceutical, real estate and so on. The features of these shares are: 1, Success History: Defensive stock comy history of regular eamings. 2. Consistent Dividends: The sharcholders of, companies. panies are usually large companies with a success defensive stocks get regular dividend from theitStock Market || 151 3. Low Volatility: The basic characteristic of defensive stock is that its price is not affected much by the stock market ups and downs. 4, Non-Cyelical: These stock perform relatively the same regardless of the overall economic conditions in a country. So they don’t mirror the overall cycles of the economy such as growth and recession and therefore they are also known as non-cyclical stocks, Defensive stocks perform better than the market during recession and during bull they don’t grow as much as the market grows. They are the good choice for investors who wish to play safe in the market. ‘Top intemational defensive stocks are Lockheed Martin, Costco, Walmart FedEx, Mckesson, Procter and Gamble, General Motors, Coca-Cola and so on. In India, the shares of Hindustan Unilever, Dabur Ltd, TCS Ltd,, Infosys Ltd., Wipro Ltd., Sun Pharma Ltd and Cipla Ltd are popular defensive stocks. 5.5.4 Demat Account and Trading Account ‘To start trading online, the investor is required to operi a Demat account and a trading account with a stockbroker. The buying and selling of securities in India can only be done through SEBI registered brokers who are members of the stock exchange. These brokers provide the facility of opening a demat and trading account. Demat account stores the securities bought in the electronic form. A trading account facilitate buying and selling of securities in the stock market. Let us learn more about them. 1, Demat Account Demat account is essential to get started with online trading as securities are traded in the digital made today, Demat account is known as Dematerialized Account. Dematerialization is the process of converting the physical share certificates into electronic form. Prior to 1996, trading in stocks used to be done physically in stock exchanges. However, introduction of the demat account by SEBI has created ease in doing transactions from anywhere. In India, Depositories such as National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) provide the services of opening free Demat Account. Opening a demat account is a pre-requisite for stock market trading in India, It is also required for applying for shares in an Initial Public offering (IPO). The use of demat account is quite simple, Demat account gets linked with the trading account. ‘Trading account gets linked with the bank account of investor. To start trading first money is transferred from bank account to trading account. Then, the investor can place order for the purchase of securities. Once the order is execurted the shares are transferred to demat account by the end of T + Two days where T is the transaction day. Similarly, the securities can be sold too. Benefits of Demat Account @) Safety of Securities: In the demat account securities are kept safe electronically. There is no risk of share getting lost, damaged or stolen as in case of physical share certificate. (®) Convenience in Trading: Demat account can be accessed anytime, anywhere through an electronic devise like laptop and smart phone.152 || Finance for Everyone (©) Convenience in Storage and Transfer: Any large number of securities can be stored in a Demat account. This makes the trading & transfer of securities easily possible. (@) Storage for Various Investments: It provides storage and helps in keeping track of all the investments of an investor such as in shares, bonds, mutual funds, exchange traded funds in one place. (©) Reduced Costs: Demat account has taken away the costs of handling physical certificates, (© Loan Facilities: Securities maintained in a demat account can be used as collateral to obtain a loan facility from bank. (g) Global Investors: Indian stock markets are attracting global investors as easy access is provided to Indian stock markets through a demat account. (h) Increased Liquidity: The demat account has simplified sale of securities. It has become convenient and faster to get money in a sale transaction. Thus, it has provided increased liquidity to the securities. @ Easy Receipt of Benefits: Dividends, interests, refunds etc are auto-credited in the demat account. The investors account is easily updated with stock splits, bonus shares, right issues ete, 2. Trading Account Trading account allows a buyer to buy and sell securities through a stockbroker. Trading account is linked to the investor’s bank account, Shares purchased through this account are deposited in demat account and the similarly in a sales transaction the number of shares sold are debited to demat account and the money is credited to the bank account. Trading Account is an essential tool today for trading in stock market. However, itis important to note that only one trading account can be opened with different brokers. Proof of income, proof of identify and proof of address is required to open this account, Benefits of a Trading Account @) Seamless Transactions: Trading account has made the process of online purchase and sale of securities simple, quick, convenient and seamless, (©) One Point Access: Online trading account providing instant access to all the major exchanges ic, Bombay stock exchange, national stock exchange, national commodity and Derivatives exchange, multi commodity exchange ete. via a common plat form. Trading becomes easy. (©) Reliable Information: Experts and professional reports are casily available on the online trading platforms. This helps the investor to make informed decisions, (@) Flexible a Access: Trading accounts can be easily accessed through smart devices like laptop and smart phones. (©) Track of Investments: Investors can easily keep track of their investments via records of trading account. They can monitor the performance of the stocks throughout the day and then buy and sell at one single platform, (O Reduced Costs: Online trading account helps in reducing costs of physical trading. Investors can trade in large volume and cam profits quickly, They can also negotiate the brokerage fees.(g) Customized Support: ‘Trai support to their online tr trading accounts, Additio account holders, ined executiv Stock Market || 153 es of online tradin, i a s € platforms provide customized ang the mt client. They can resolve « technical issue with the PSY can send personalized alerts and notifications to trading | Trading Account 2 | Nature Demat Account is used to keep the Securities bought in the electronic form, ‘Trading Account is used to buy and sell securities in the stock market. 3. | Need in IPO Demat account is like a store house for the securities bought. ‘Trading Account shows the record of the transactions of buying and selling securities, 4. | Annual Maintenance An. investor needs an Demat account if he/she wants to apply for securities in an Indian public offering (IPO). Investor who do not wish to sell the shares need not open a trading account for applying in an IPO , Charges Demat account require annual maintenance charges to be paid besides the brokerage charges. Only brokerage charges are to be Paid for operations in a trading account. No annual maintenance 5.5.5 Delivery Instruction Slip (DIS) Delivery Instruction slip one account to another. DI; charges are required to be paid.. is an important document required in a trading transaction, It is like a cheque for demat account transaction. It is used to facilitate and authorize the sale or transfer of shares from S is required to instruct the depository participant (Demat account provider) to debit the demat account. This signed document ‘0 do the transfer on sell Power of att itis losing its importance. 's especially important for offine trading. It permits the depository participant ler’s behalf. However, in an online transaction, the investor can simply ve lomey to his/her broker to conduct the transaction. In such case no DIS is required, therefore, Some of the important elements of a DIS are: (i) Date (ii) DP. ID Gii) Client 1D Ge) Name (9) IN (Intemational Securities Identification Number) vi) Security name vii) Quantity ane ees 'x) Payment details x) counter party name (person to ‘whom the securities are DPID xii) Counter client ID xiii) Execution date (xiv) Signatures. fee ee DIS is required to be filled very cautiously as it can get rejected by ie beet ses. Some stockbrokers have started issuing E-DIS for online transactions154 || Finance for Everyone transfer requests online, However, these days depositories NSDL and CDSL have started providing online services for transfer of securities directly from the demat account .So no DIS is required for transfer. 5.5.6 Block Deal and Bulk Deal Block deal and bulk deal are big deals in the securities done in a stock market. These deals are keenly watched by big investors. (i) Block Deal: It is a transaction on a stock exchange of a minimum value of €10 crores between two parties, The minimum value have been raised from 5 crores to 10 crores by SEBI in 2017. Features of a Block Deal (®) Separate Window: Stock exchanges are required to provide a separate trading window. ‘Morning Block Deal window is operated between 8.45 am to 9.00 am. The reference price for execution of block deals in this window is the previous day closing price of the stock. Afternoon block deal window operates between 2.05 pm to 2.20 pm, The reference price in this window is the volume weighted average market price (VWAP) of the trades executed in the stock in the cash segment between 1.45 pm to 2.00 pm. (0) Segment: Block deal is allowed only in cash segment. (©) Price Range: The order placed can be within + 1% of the applicable reference price in the respective windows as stated in point (a). (@) Disclosure: The stock exchanges are required to disseminate the information on block deals such as the name of the scrip, name of the client, quantity of shares bought/sold, traded price, etc. to the general public on the same day after the market hours. It implies that during the deal, no information is available to outside retail investor about the deal except the parties involved. (©) Matching of Orders: For a block deal to be executed, the quantity and the rate should be exactly the same as the opposite side block deal order. (f) Validity: Block deal order remains valid in the system for 90 seconds only, after which it gets killed if remains unexecuted. [Illustration 533 (@ Client ABC enters Block Deal order for buying of 6 lakh shares of Beta Ltd @ 85 Gi) Client DEF enters Block Deal order for selling of 6 lakh shares of Beta Ltd @ 85 The quantity and rate are matching block deal will be executed . [Illustration 5. (i Client ABC enters block deal for buying of 10 lakh shares of Alpha Ltd @ 110 Gi) Client DEF enters block deal for selling of 5 lakh shares of Alpha Ltd @ 110 (iii) Client PQR enters block deal for sclling of 5 lakh shares of Alpha Ltd @ 110.Stock Market || 155 Ta tis a is matching but the quantity does not match, So, block deal of buying 10 lakh Shares ccs not match with any ofthe seller. Thus, block deal can't be executed. It is to be noted that a block deal cannot be executed partially. Ifit is not executed fully, the order will get cancelled. (g) Delivery: Every block deal trade has to result in delivery. (h) Participants: Since volume and value of shares are very high normally retail investors do not participate in block deals. Major participants in these deals are institutional investors including foreign institutional investors, mutual funds, financial institutions, banks, insurance companies, venture capitalists and high net worth individuals (HNIS). The introduction of block deal by SEBI has provided transparency to stock market transactions. The details about them are available in both BSE and NSE exchanges of India. Investors now can know who is getting interested in which company It gives a clear idea how these deals are influencing the stock prices. (ii) Bulk Deal ‘A bulk deal constitutes all transactions in a scrip on an exchange where the total quantity of shares ‘bought/sold is more than 0.5% of the number of equity shares of the company listed on the exchange. ‘The quantitative limit of 0.5% can be reached through one or more transaction executed during the day in the normal market segment. Features of Bulk Deal (a) Trading Window: Unlike block deal bulk deals happen during normal trading window. No separate window is required. (b) Trading Hours: Bulk deal can be executed during normal trading hours i.e. 9.00 am to 3.30 pm. (©) Visibility: Unlike block deals, Bulk deals are visible to everyone on the trading window. (@ Disclosure: The broker is required to disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/ sold and the trade price immediately upon execution of the trade. ‘The stock exchanges are required to disseminate the aforesaid information on the same day after market hours to the general public. (©) Delivery: Delivery is mandatory in bulk deals. 5.5.7 Face Value and Market Value As an investor it is important to understand the concepts of face value and market value of a security. (i) Face Value P e Face value isthe price at which a security is issued by a company through Initial Public Offering. Its fixed by the company atthe time of issue of security. It is also called as par value. A security is shown4 156 || Finance for Everyone at its face value in the books of the company and the security certificate issued to the security holder, For example the face value of the share of Reliance Industries Ltd is €1, of Infosys Ltd it is &5, Face value of the bond of NIPC is €12.5 of Britannia Ltd it is €30, of NHAI (National Highway Authority of India) it is 71000. ‘There are no fixed criteria for fixing the face value of shares or bonds by a company. However, face value helps in calculation of dividend payment on shares, interest payments on bonds and debentures, Calculation of premium is also made on face value if the security is issued at premium. Further, earnings per share is also calculated on this (ii) Market Value Market value is the price at which a particular security is traded on a stock exchange. The value is highly dependent upon the demand and supply situations in the stock market and keeps on changing. It is the price at which an investor can buy and sell a security on a stock exchange. The market value of a security can be easily seen on the stock exchange on which it is listed. The market value on 14th August2022 of Reliance Industries Ltd. share was %2632, of Tata Steel Ltd share was 7112.80, of Infosys Ltd share was €1593.75. Similarly the market value on 12th August 2022 of NTPC bond was 713.26, of Britannia Ltd was %3662.05 and NHAI bond was 71188.20. High market value of security of a company depicts that investors are optimistic about the company and its future performance. Market value is used to calculate the market capitalization of a company Table 5.7: Difference between Face Value and Market Value "Market Value’ It is the current price of a security at which it is quoted on a stock exchange. ‘S.No. | Parameter. Itis the price at which a company issues its security for the first time. 1. [Meaning Market forces of demand and supply determines the market value of a security. Market value keeps on fluctuation depending upon the _ factors influences the demand and supply of security in the stock exchange. Market value is the real value of 8 2. [Price Determination | Face valueis decided by a company before issuing the security. * Stability Face value is fixed ,it never changes. 4. [Utility A security is represented in the balance-sheet of a company and in the security certificate of investor at its face value. Payment of| interest/dividend, bonus issues, security premium, stock splits are based on it. EPS is calculated using this value. security at which it can be bought or sold in the market, Market capitalization of a company i based upon the market value.Stock Market || 157 5.5.8 Market Capitalization Market capitalization is the market value of all its outstanding shares. Itis calculated by multiplying the market value of a share with the total outstanding number of shares issued by a company. [Mlustration 5.5:, Suppose Market price of the share of Reliance Industries Ltd 2650.6. Its outstanding number of shares are 6765.99 million. Then the market capitalization of reliance industries is Market Capitalization = 6765.99 x %2650.6 = 21,79,29,873.5 million. 5.5.9 Classification of Stocks based on Market Capitalization Based on market capitalization stocks in the stock market are classed into three categories (@ Large cap stocks: As per SEBI the first 100 companies ranked according to their market capitalization by the stock exchanges are knowm as large cap companies. Market capitalization of the stocks of these companies tend to be more than %20,000 crores. All popular names such as Reliance industries, TCS, HDFC Bank, Infosys etc. fall under this category. Gil) Mid cap stocks: The companies with rankings 101 to 250 are known as mid cap companies. The market capitalization of the stocks of these companies tend to fall between 5000 crores 10 220,000 crores. Bajaj Electrical Ltd, Godrej Industries Ltd, Raymond Ltd, Apollo Tyres Ltd, VIP industries Ltd are some of the known names in this category. (ii) Small cap stocks: The companies which are ranked 251 and below in the stock exchanges are known as small cap companies. Their stocks market capitalization tend to fall below %500 crores. Just Dial Ltd. Hindustan Foods Ltd, NIIT Ltd, Rallis India Ltd, and Relegate Enterprise Ltd. are some well-known small cap companies. Normally large cap stocks dominate the stock market and are considered stable and less risky. These stocks are considered good choice for long term investors. Mid cap stocks are more volatile and riskier than the large cap stocks. However, they have a growth potential and therefore investors get attracted to these stocks. Small cap stocks are smaller in size. Success of small cap companies can sky rocket their stock prizes and failure can lead to huge losses. Thus, these stocks are considered risky. Aggressive investors are found to be more interested in these stocks. Itis important for investors to know about the market capitalization of companies. It helps them to devise long term investment strategy. They can make diversified investment in stocks. It also helps in comparison of the companies in the same market cap group. The market capitalization is an easy and. quick method to assess a company’s size and value for potential investment. 5.5.10 Bear and Bull Investors in a stock market are often categorized as bulls and bears. A bull isa type of investor who believes that a specific security or an asset or a market is poised to rise in value. Such a speculator is buying or holding a security to earn quick gains in short term as the market is expected to rise.158 || Finance for Everyone A bear on the other hand is an investor who is pessimistic about the stock markets. He expects the Prices to fall in the near future and tries to make profit from a decline in price. 5.5.11 Bull Market and the Bear Market Depending upon the trend in stock market, the market may be classified into a bull market and bear market. A bull market is a state in stock market where prices of stocks and indices show an uptrend. Investors belief that the up trend will continue. Bull market as a rise of 20% or more in stock prices from a recent low or 52 weak low. The bull market is said to be confirmed when 50- day moving average of stock or index crosses the 200-day moving average. This is called as golden cross. Bear market is the opposite phase of bull market. In this market state the prices in the stock market continue to decline over a period of time. In other words when a stock prices or index falls 20% or more from a recent peak or 52- week high, it is said to have entered a bear market phase. The phase is confirmed when the 50-day moving average of the stock or index falls below the 200-day moving average. This is also called as death cross. The key indicators of a bull market are rise in stock prices, GDP, and employment rate .In bear market reverse conditions appear. ‘The words bull and bear are metaphors of a stock market taken from how a bull and bear attack their opponents. A bull pulls its homs up in the air when it attacks. On the other hand, a bear puts its paws downwards while attacking its opponent. The great depression of 1929-30 and stock market crash is a wonderful example of bear market. The stock market crashes of 1992, 1994, 2000 and 2008 are examples of bear markets in India, On the other hand, between April 2003 to January 2008, the Bombay stock exchange was a bull market when during the period it raised from 2900 points to 21000 points. Table 5.8: Bull Market vs. Bear Market [SiNo [Parameter ‘Bear Market 1 [Price Trend Stock prices show up trend, ‘Stock prices show down trend. 2 | Trading Type In this large volume of stocks are | In bear market large volume of bought. stocks are sold, 3 | Investors Mood | Investor is optimistic with high| Investor is pessimistic with low confidence, confidence in the market. 4 | Economic Situation |In bull market state economy is | In bear market situation economy is generally strengthening. generally weakening. 5 |GDP ‘A tise in GDP occurs in a bull| A fall in GDP is seen in a bear market marketStock Market || 159 S.No ‘Parameter Bull Market | Bear Market |) // IPOs In bull market there is a general increase in IPOs offers. In bear market IPOs offers tend to decrease, Employment The economy and industries are flourishing so increase in employment opportunity occurs. ‘The economy is sluggish due to which production gets affected. This may cause layoffs and unemployment. Demand and Supply of Securities In bull market demand for securities is high but supply is low as a result security prices rise. In bear market the supply is higher than the demand leading to fall in prices of securities . Investor’s Position In bull market, investor takes long position and make profit when the Prices rise up beyond the contracted price. In bear market, investor fakes short position and make profit if prices fall beyond the contracted price. 10 Investments Sought Equity isa good investment in a bull market as high risk in them brings high returns. Securities which are less risky i.e. bonds and government securities are preferred in a bear market as investor want to keep their money safe. 5,6 RETURN ON INVESTMENT IN SECURITIES We already know that there are two types of securities most prevalent in the stock market ie. equity or ownership securities and debt securities. On both the types of securities there is a possibility to earn two types of gains i.e., (i) Regular income Gi) Capital gains () Regular Income: Dividend and interest are earned regularly by an investor on equity and debt securities respectively (@) Dividend: Dividend is a reward paid to the share- holders ofthe company. The profits of the company can be Kept in the business as retained eamings and can also be used to pay aa retum in the form of dividends to the shareholders. Dividend can be paid in cash or by 's shares, The rate of dividend is fixed on preference shares, However, on issue of bonu I omit rectors and approved by the shareholders in the annual equity it is decided by board of di general meeting of the company. It is to be noted that it is not obligatory for a company to pay dividends. The companies like to pay dividend as it indicates to the investors that the company is doing well and have, good prospects. The investors’ confidence gets increased in the company.160 || Finance for Everyone The payment of dividend is just an appropriation of profits for the company, and it is not an expense. Dividend income is taxable in the hands of the shareholders. Dividend yield is the rate of dividend paid by a company on its current market price. It ig calculated as: Dividend amount per share ‘Current market price of share In India, the shares of Indian Oil Corporation, Coal India Ltd. RIC Ltd, Hindustan Zine Ltd, Tata Steel Ltd, NDMC Ltd., ONGC Ltd, GAIL India Ltd are considered high dividend yield stocks. (b) Interest on debt securities: Interest is the charge paid by the borrower to the lender on the amount borrowed. It is normally expressed as annual percentage. When an investor is depositing money in a savings bank account, he/she is lending money to the bank. And, therefore, bank pays interest on the amount received. Banks also provide loans for various Purposes. In that case bank charges interest on the amount lent, Thus, the interest is the cost paid for borrowing. Similarly, when organizations issue debt securities like bonds and debentures they are borrowing money and for this they pay interest on the securities issued by them. The rate of interest depends upon the risk. Higher the risk for the lender, high will be the rate of interest. The key factors affecting interest rates besides the risk of default are inflation rate, liquidity, market conditions and the length of the time for which money is borrowed. i) Capital Gains: Besides the regular income received in the form of dividend and interest, there can be gain in the value of the security/asset which can be realised when it is sold. This benefit is called as capital gain. However, there may also occur a capital loss when the value of the security/ capital assets decreases below its cost or purchase at the time of sale. Capital gain/loss is realized only when a security is sold. For example, suppose Ajay purchased 100 shares of Reliance Industries Ltd at £2500 per share one year ago. Today, he sold these shares at 3100 per share. In that case there is a capital gain of 7600 per share, However, if today the price of the Reliance Industries share is only £2100, then there is a capital loss of €400 per share. Dividend Yield = Capital gain is an income and, therefore, investor is required to pay capital gain tax on this income. ‘The capital gain can be short term and long term based upon the holding period of asset/security and accordingly income tax act has provisions for short term and long-term capital gain tax provisions explained later in the chapter. Besides the above two types of E gains a shareholder can get benefits in many other ways besides receiving dividend in cash as explain e J * ied above, Let us know about them too. (a) Issue of Bonus Shares ‘The issue of bonus shares implies payment of dividend inthe form of shares instead of cash, New shares are allotted to equity shareholders in proportion to thei existing holdings out of the accumulated profits of the company. In this way, undistributed profits are capitalized withont affecting the cash position.Stock Market || 161 ‘The Companies Act provides that a company may, ifits articles of association so provide, capitalize its profits by issuing fully paid bonus shares to the members thereby transferring the sums capitalized from the profit and loss account or reserve account to the share capital, Characteristics of Bonus Issue ‘The basis characteristics of bonus shares are as follows: ‘Bonus shares are shares issued free. Bonus shares are issued to the existing sharcholders on prorate basis. They are always fully paid up. Right to renunciation is not available in respect of these shares. Bonus shares do not provide any new funds to the issuing company. Bonus shares are not income for income tax purpose. ‘The issue of bonus shares does not change the shareholder's wealth (net worth) in the company. Bonus shares are not gifts, as they are the capitalization of accumulated profits and reserves which already belong to the shareholders. Purpose of Bonus Issue ‘The purpose of the bonus issue is not just to give dividend but it may be made to achieve the following: ‘To signal future profitability and growth prospects. To expand equity base. To achieve a desired level of debt-equity ratio. ‘To make shares more attractive. To restore the share prices to an acceptable range of trading. To increase yield of shareholders. To bring down the abnormally high rate of cash dividend on existing equity share. ‘To bring the issued and paid-up capital in line with the capital employed so as to depict more realistic earning capacity of the company. To pay bonus to the sharcholders without affecting its liquidity. To capitalize profits so as to use them permanently in the business. ‘To make the nominal value and the market value of the shares of the company comparable. To correct the balance-shect so as to give a realistic view of the capital structure of the company. ‘As compared to cash dividend bonus issue conserve cash. For shareholders it increases the number of available equity shares in hand without diluting the proportionate ownership. It is seen currently that a lot of companies are making bonus issues in India after a good-post pandemic performance in financial year 21-22. Infosys, Bharat Petroleum Corporation Ltd. Wipro Ltd, ITC Ltd, and Motherson Sumi Systems Ltd. are 5 Indian companies which have consistently issued bonus shares to their shareholders.