hy should I put my hard earned money into shares when I am not sure of a return?

If theres a science to investing then why do we call investing a risk? And if its not a risk, then why do people end up losing money from their investments in shares? In this booklet we have tried to answer the questions you might have about investing in shares. When is invest ing in shares a risk and when does it become a science? !ow can you be assured that your investment in shares is safe? And more" #ore importantly, weve tried to e$plain some basic concepts that most investors take for granted but that are crucial knowledge for a person %ust entering into the financial %ungle. &o concepts like risk premium, dividend, stock split etc have been e$plained in a simple manner for the benefit of the first timers. 'ot only that this handy booklet also seeks to educate the would be investors in the various aspects of share trading, both offline and online. We hope the booklet shall succeed in satisfying your desire for knowledge of the share market as well as in lending you a helping hand as you take your (I)&* &*+, into the world of investing.

share

market
*arun &hah
-+. / &harekhan

first step to investing in the

-.' *+'*&
02 Why must I invest in shares?
O Invest to create wealth O &hares/the best investment option O 3enefits of share investing are many

4
52 !ow do I buy and sell shares?
O Invest through primary and secondary markets O A beginner6s guide to the stock market O ,lacing an order to buy and sell shares

50

72 !ow do I select the right shares?

O &cience of investing in shares O -omponents of fundamental research O 8earning to %udge an I,.

54
92 !ow can I minimise risks and ma$imise returns?
O *ypes of risk involved in investing in shares O )educing risk O 3ecome a successful investor

7:
12 !ow can I benefit from online trading?
O ;sing your computer to trade O *rading online is convenient O 3enefits of trading on sharekhan.com ,8;& < pages of trading %argon

(irst &tep to Investing in the

&hare #arket

Why must I invest

*his booklet is distributed as part of the &harekhan (irst &tep to Investing ,rogram. It is meant for private circulation .'8= and is not for sale. (irst &tep to Investing in the &hare #arket is meant to introduce new investors to the stock market. It is not intended to be taken as the basis for an investment decision>

in shares?
0. Wh y mu st I in v est i n sh ares?

I' *!I& -!A,*+)2

O Invest to create wealth O &hares/the best investment option O 3enefits of share investing are many

(irst &tep to Investing in the

&hare #arket

Why need I invest?

*he basic question BWhy need I invest?D merits attention before we move on to the bigger question of why one should invest in shares. &imply put, you want to invest in order to create wealth. While investing is relatively painless, its rewards are plentiful. *o under stand why you need to invest, you need to realise that you lose when you %ust save and do not invest. *hat is because the value of the rupee decreases every year due to inflation. (or e$ample, if you ran a household within a budget of )s0CC,CCC in 5CCC, to run the same household today Fassuming the same set of e$pensesG you would probably need )s051,CCC that6s )s51,CCC added to your budget because of inflation> *hus you need to generate an additional )s51,CCC and that can be possible only by
I'(8A*I.'2gen eral rise in prices and wages caused by an increase in the money supply and demand for goods, and resulting in a fall in the value of money. Inflation occurs when most prices rise by some degree across the economy.

I'@+&*I'A your hard earned money.

shares are attractive as much for the appreciation in the share prices as for the dividends their companies pay out. *a$ advantages2 shares appear as the best investment option if you also consider the unbeatable ta$ benefits that they offer. (irst, the dividend income is ta$ free in the hands of investors. &econd, you are required to pay only a 0CE short term capital gains ta$ on the profits made from investments in shares, if you book your profits within a year of making the purchase. *hird, you don6t need to pay any long term capital gains ta$ on the profits if you sell the shares after holding them for a period of one year. *he capital gains ta$ rate is much high er for other investment instruments2 a 7CE short term capital gains ta$ Fassuming that you fall in the 7CE ta$ bracketG and a 0CE long term capital gains ta$. +asy liquidity2 shares can also be made liquid anytime from anywhere Fon sharekhan.com you can sell a share at the click of a mouse from anywhere in the worldG and the gains can be realised in %ust two working days. -onsidering the high returns, the ta$ advantages and the highly liquid nature, shares are the best invest ment option to create wealth.

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&o what are the various invest ment options?

.ne can invest in various financial instruments like equities Fpopularly referred to as sharesG, bank fi$ed deposits, 'ational &avings -ertificates etc as well as in gold, real estate et al. .ut of these shares are the best option for individual investors.

&tock #arket

0:E p.a 4E p.a

Aold

3ank (i$ed ?eposits

Why shares?
!istorically shares have outper formed all the other investment instruments and given the ma$i mum returns in the long run Fsee the table on page :G. In the twenty five year period of 04<C 5CC1 while the other instruments have barely man aged to generate returns at a rate higher than the inflation rate F:.0CEG, on an average shares have given returns of about 0:E in a year and that does not even take into account the dividend income from them. Were we to factor in the divi dend income as well, the shares would have given even higher returns during the same period.

1.:E p.a
?uring this time Inflation grew at
H

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H (r om 04<5 t o 5 CC1

& o ur ce2 ? ata co mp i l ed fr o m th e ) 3I h an d b o ok o f & ta ti st i cs, ' - ?+ I ? is c la im e r2 Inv es tme n ts i n eq ui ty r e l ate d s ec u ri tie s in vo lv e s a h ig h d eg re e of r i sk . , l ea se re ad th e ) i sk ? is c lo su re ? o c ume n t as p re s c ri be d by & eb i b e for e i n ve sti n g.

Are there any other benefits of investing in shares?

?ividend income2 investments in

0 . Wh y must I in ve st in sha res?

0. Wh y mu st I in v est i n sh ares?

(irst &tep to Investing in the

&hare #arket

.,+'I'A A' A--.;'* WI*! &!A)+K!A'

&hares are the best investment option for individual investors due to the following benefits2 0G ,ossibility of high returns 5G +asy liquidity 7G ;nbeatable ta$ benefits 9G Income from dividends

!ow do I buy and sell

I' *!I& -!A,*+)2
O Invest through primary and secondary markets O A beginner6s guide to the stock market O ,lacing an order to buyLsell shares

shares?
5. ! ow d o I buy an d sel l sh ares?

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0 . Wh y must I in ve st in sha res?

(irst &tep to Investing in the

&hare #arket

?I((+)+'-+ 3+*W++' ,)I#A)= A'? &+-.'?A)= #A)K+*& What are the different ways in which I can invest in shares?
*here are basically two ways in which you can invest in shares2 0G ,urchase shares from the primary market Fie I,.sG *he first time that a companys shares are issued to the public, it is by a process called the initial public offering FI,.G. In an I,. the com pany offloads a certain percentage of its total shares to the public at a certain price. #ost I,.s these days do not have a fi$ed offer price. Instead they follow a method called the book building process, where the offer price is placed in a band or a range with the highest and the low est value Frefer to the newspa per clipping on this pageG. *he public can bid for the shares at any price in the band specified. .nce the bids come in, the company evalu ates all the bids and decides on an offer price in that range. After the offer price is fi$ed, the company either allots its shares to the people who had applied for its shares or returns them their money. 5G *rade in the secondary market, ie stock e$changes .nce the offer price is fi$ed and the shares are issued to the people, stock e$changes facilitate the trad ing of shares for the general public. .nce a stock is listed on an e$change, people can start trading in its shares. In a stock e$change the e$isting shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock e$change directly, they have to e$ecute their transactions through authorised members of the stock e$change who are also called stock brokers. In the primary marketsecurities are issued to the public and the proceeds go to the issuing company . &econdary market is a term used for stock e$changes, where stocks are bought and sold after they are issued to the public.

+very I,. highlights the price band as part of the book building process

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!ow does the stock market function?

In order to understand how the stock market operates, you should have knowledge about the role of following institutions L organistions2 a. &tock e$changes, b. 3rokers, c. )egistrars, d. ?epository e$changes and their participants, and e. &ecurities and +$change 3oard of India F&ebiG a. &tock e$changes A stock e$change is the marketplace where companies are listed and where the trading happens. *here are different stock e$changes in the country, the pre dominant being the 'ational &tock +$change F'&+G and the 3ombay &tock +$change F3&+G. b. 3rokers A stock e$change functions through its members called brokers. If you want to buy or sell a share, you con tact a broker. +ach stock e$change has a limited set of brokers and these brokers contact each other using trading terminals to find out who is interested in the share you want to buy or sell. 3rokers have

terminals linked to the 3&+ or the '&+ and they directly purchase or sell shares using these terminals. *he entire transaction happens elec tronically or through websites like www.sharekhan.com. &ome brokers also authorise a sub broker to conduct the transac tions on behalf of them. &ince brokers are providing a service they charge you for the same. *his payment is not a flat rate, but a commission of the trans action value. 3rokerages normally range from C.1E to 0E for deliv ery based transactions and from C.0CE to C.51E for intra day

transactions. c. )egistrars *he registrar for each company maintains records of all the share owners of the company and the number of shares that they own. Whenever a transaction takes place, the registrar updates the sharehold ers database. d. ?epository e$changes and their participants ?epository e$changes are organisa tions that hold shares of investors, on request, in electronic form through a registered depository par ticipant F?,G. It can be compared with a bank as it holds securities in an account, transfers securities between accounts on the instruction of the account holder, facilitates the transfer of ownership without the account holder needing to handle securities and makes the safekeep ing of shares easy. *he agent through which a depository e$change interfaces with the investor is known as a deposito ry participant. =ou can create a demat account with a ?,, who will keep an account of all the shares you own. *his is much like the banking sys tem, where you %ust create an account and have a passbook which

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'&?8L-?&82 the 'ational &ecurities ?epository 8td F'&?8G and the -entral ?epository &ecurities 8td F-?&8G are like the )eserve 3ank of India in the sense that they are the clearing and holding house for all the demat transactions. ?,2 depository participants are like banks in that they are agents of '&?8 or -?&8 in providing depository services.

updates you on the money you own and the transactions you have made. In your demat account you own shares in an electronic format and your account gets updated as you buy and sell shares. e. &ebi *he regulatory body that governs all stock market transactions is the &ecurities and +$change 3oard of India. &ebi ensures the legality of all transactions and that the stock e$change players follow all the rules and regulations set by it andLor the government. &ebi also looks into investor complaints against companies. It is quasi %udicial and can try cases and pass %udgments against companies. It also looks into mergers and acquisitions of companies. &ebi has enacted the ,rohibition of Insider *rading )egulations, 5CC5 which is applicable to all mar

3).K+)AA+ )A*+& .' &!A)+K!A' .-.#

C.1 E C.0 E

for delivery based transactions

for intra day transactions

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5 . !o w do I buy and sell sha res?

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ket intermediaries. &&KI Investor &ervices Fthe parent company of &harekhanG complies and follows the prescribed procedures in order to prevent the misuse of price sensi tive information, which an employ eeLdirectorLofficer of the company may have access to.

What all do I need before I can start investing in shares?

*o start investing in shares you need to open a stock broking account with a regis tered broker and a demat account with a ?,. When you open a &harekhan (irst&tep account, you get every thing you need to start investing in shares. &harekhan is a regis tered broker with both the 3&+ and the '&+, and being a ?, it also pro vides you a free demat account along with your trading account.

.nly buy something that youd be perfectly happy to hold if the market shut down for 0C years.

!ow do I actually place an order to buy or sell shares?

*o facilitate the buying and selling of shares, &harekhan offers multiple trading channels.

=ou can, for e$ample, walk into any of our 51C share shops across 05C cities in India and get your orders e$ecuted. =ou can, on the other hand, even trade online through our site sharekhan.com. (or advanced traders we also have a special online trading software called &peed*rade. =ou can also call on our ?ial n *rade number, which is serviced by a dedicat ed call centre, and place an order with a ?ial n *rade e$ecu tive. When you buy a share, you specify the company whose shares you want to Warren 3uffet, buy, the quantity of Investment Auru shares you want to buy and the price at which you want to buy them. If you don6t specify the price, the shares will be bought at the market rate prevalent at that time. *he process of selling a share is similar to the process of buying a share. Again here you have to spec ify the company, the number of shares to sell and the price at which

you want to sell them. If you don6t specify the price, the shares will be sold at the prevailing market price.

?o I know whom I am buying from?

When you buy a share, you are basi cally placing an order through your broker. *he stock e$change keeps a note of these transactions and at the end of the day starts a process of settle

ment which ensures that the shares you bought come into your account and the person who sold them to you Fthrough his broker of courseG has that number of shares removed from his demat account. *his process of settlement is called a set tlement cycle and the time taken for this is currently *M5 days. *hat is, the settlement will occur two days after you make the trade. If you have an online trading

?='A#I-& .( *!+ &!A)+ #A)K+*

Investors buy and sell shares through a stock e$change.

A fi$ed process is followed for easy transfer of money and shares. It is termed as a settlement cycle of B*M5D or B*rade M 5 daysD, which means that if you buy shares on #onday then you get delivery of the shares after two work ing days, ie on Wednesday. &imilarly if you sell shares on #onday then you will receive your money on Wednesday.

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5 . !o w do I buy and sell sha res?

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account and a demat account with &harekhan then this settlement process happens as a paperless transaction.

,)I#+)
&+'&+I2 this is the common name for the 3ombay &tock +$change &ensitive Inde$. It consists of the 7C largest and most actively traded stocks, representative of various sectors, on the 3ombay &tock +$change. 'I(*=2 'I(*= is the common name for the inde$ consisting of 1C large capitalisation stocks on the Indian 'ational &tock +$change F'&+G.

!ow can I know the current price of any stock?

Whenever you are buying or selling a share, you will encounter certain terms related to share prices. *hese terms deal with the individual price movements of a single share as well as the price movements of all the shares. (or every share, typically there are four price parameters. 0. .pen2 this is the price at which the share opened on a particular day, that is the price at which the first purchase of the share was made during that day. 5. !igh2 this is the highest price that a share went up to on a given day, or the highest price the investors paid for that share. 7. 8ow2 this refers to the lowest price that a share fell to during a day, or the lowest price an investor paid for that share. 9. -lose2 this is the price at which the share closed on that day or the price for the last trade of that day.

of your stock, and the stock6s open ing and closing prices of the previ ous days. =ou can also trade in shares without specifying the price/this is known as a market order. In this case the trade happens at the mar ket price at that point of time.

!ow can I track the stock mar ket?

*he 3&+ &ense$ F3ombay &tock +$change &ensitive Inde$G measures the movement of 7C most actively traded shares on the 3&+. *hese 7C companies represent a cross section of sectors of the economy. &imilar to the 3&+ &ense$ is the

'ifty or the &N, -'I 'ifty, which measures the movement of the '&+. *his inde$ tracks 1C stocks, which represent about JCE of the market capitalisation of the '&+. *he upward or downward movement of the &ense$ or 'ifty is a typical indication of whether the share prices are going up or down in general. If the &ense$ goes up on a partic ular day, it doesn6t mean that the share prices of all companies would have gone up on that day. *racking the movement of stock indices over a longer period is an important part of intelligent investing.

,)I#+)
(ace value2 this is the nominal value that is assigned to a share at the time of issue. It is used in determining the dividend to be given to the shareholders. Apart from its use in determining dividend, face value has lost its relevance in the modern day and has no link with the market price. .ffer price2 the price at which a company sells its shares to the people. #arket price2 the price at which a share is traded on stock e$changes daily and which gov erns our investment value. ?ividend2 the face value of a share determines the dividend or the sharing of the companys annual profits with its shareholders. +IA#,8+ .( ?I((+)+'* *=,+& .( &!A)+ ,)I-+& &tock (ace value ,rice band .ffer price 8isting market price
;*@ &oftware -omm 8td )s0C )s001 to )s07C )s07C )s01C Oet Airways FIndiaG 8td )s0C )s41C to )s0,051 )s0,0CC )s0,011 *ata -onsultancy &ervices 8td. )s0 )s::1 to )s4CC )s<1C )s0,044 3iocon 8td. )s1 )s5:C to )s701 )s701 )s951

At any given point of time, the share price will fluctuate between the highs and the lows, sometimes reaching new highs, sometimes falling to new lows. When trading in shares, you need to mention the price point at which you want to buy or sell. *o specify the price point, it helps if you know the statistics or the trends

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(irst &tep to Investing in the

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!ow do I earn from my invest ment in shares?

&hares can give you returns in two forms. a. Appreciation in share prices =ou buy shares with the belief that their price will increase and that when this happens you will be able to sell off your shares and earn profit. (or e$ample, if you bought a share for )s0CC three years ago and it is )s1CC today, then you have earned )s9CC in three years.

shares, you could earn quite a bit from the dividend itself. *he best thing about dividends is that they are ta$ free in the hands of investors. ?ividend yield stocks are known to give returns higher than fi$ed deposits Pdividend yield Q Fdiv idend per share L market price of the shareG $ 0CCR. &harekhan informs its customers of good dividend yield stocks from time to time.

b. ?ividend When a company makes profits, it +very share transaction attracts can choose to share part of its prof some ta$ or the other. &ome of the its with its shareholders by paying main e$penses are as follows. out dividend. *his dividend is paid a. -apital gains ta$ as a percentage of the face value of If you purchase a share and sell it at the share. (or e$am ple, a company may *)A?+*A8K2 splitting the stocks declare a dividend ? W != ?. &. #+ & *. - K& ! A@ + ?I( ( +) +'* ( A - + @A 8; +& of 51E. *hen if the *he face value of a share is typically )s0C, but many times the face value face value of its can even be )s0CC or )s1 or )s5. *he selection of the face value depends share is )s0C you on the offer price or the price band and sometimes the face value is will get )s5.1C for changed when the stock is split at a later date. If the company announces an issue of )s1C crore and the face value of every share you own each share is )s0C, the company will have to issue 1 crore shares. If the of that company, face value if )s0CC, the company will have to issue 1C lakh shares. irrespective of the .ften it happens that a company6s price rises so rapidly market price. that many people end up buying only one or two shares. In such cases the In itself this company splits the face value of the stock. &o if a )s0C share is being trad might not be much, ed at )s1,CCC, splitting the stock into two will double the number of shares but over a longer that are available in the market. 3ecause of reduced face value, the market prices will fall Fnot necessarily in the same ratioG and people would be able period of time or if to buy more shares of the company. you have a lot of

What are the e$penses during a transaction?

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5 . !o w do I buy and sell sha res?

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a price higher than the purchase price and if this sale is within a year of the purchase, then a 0CE capital gains ta$ is levied on the profit that you make. (or e$ample, if you bought a share for )s0CC on Oanuary 0, 5CC1 and sold it for )s01C on Ouly 0, 5CC1, then you have to pay a ta$ of 0CE on the )s1C profit that you make. If you sell after a year of purchase, there is no ta$ on the long term gains. b. &ecurities transaction ta$ &ecurities transaction ta$ F&**G is levied by the government on every transaction you do on a stock e$change. =ou dont have to pay this separatelyS its collected by your broker. As per the ;nion 3udget 5CC1 the &** will be C.0CE on delivery based transactions and C.C5E on intra day transactions. c. 3rokerage 3rokers get a commission on every

trade that they do for you. *his commission varies from broker to brokerS at sharekhan.com the bro kerage is C.1E for delivery based transactions and C.0CE for intra day transactions. .n the brokerage amount you are required to pay a service ta$ to the government Fto be collected by the brokerG. *he bro kerage varies depending on the serv ice that the broker provides you. &ome brokers, such as &harekhan, offer its clients regular updates on companies, multiple means to trans act and customer service support. d. ?epository fees &ince most of the shares e$ist in a dematerialised form, every time you buy or sell shares the transactions are being noted by your ?,. *he ?,s normally levy a charge which is an annual charge or a charge on each transaction.

=ou can either apply for shares through an I,. or trade in shares in the stock market. *o buyLsell shares in the stock e$change, investors have to go through brokers. &ebi is the regulatory body for the stock market. It protects investors and also handles their complaints against companies. Investing in stocks can provide you with two types of gains2 appreciation in stock price and dividends. *o calculate returns, you must also be aware of transaction ta$es and other charges like bro kerages etc. &ense$ and 'ifty are some of the key indices you can use to track the overall stock market movement.
5C
5 . !o w do I buy and sell sha res?

right shares?
I' *!I& -!A,*+)2
O &cience of investing in shares O -omponents of fundamental research O 8earning to %udge an I,.
7. ! ow d o I sel ec t th e ri ght sh ares?

!ow do

Iselect the

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(irst &tep to Investing in the

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!ow do I know which stocks to buy or sell?

=our investment decisions should not be based on rumours, gut feel or emotionsS but should be taken after a careful study of facts. #ost investors who have made their money in the stock market are those who have been patient, have backed their investments with logic and have never lost sight of common sense. *ypically there are two ways of selecting the right stock2 F0G funda mental research and F5G technical analysis.

0. (undamental research *his requires you to rate a stock based on its historical performance and growth parameters. *his type of research involves a careful scrutiny of the financials of a company. 5. *echnical analysis *his requires you to predict the trend in the market or the price of a company based on historical price movements, using certain statistical parameters. &harekhan offers a selection of stocks based on both fundamental and technical research techniques with different time frames for both types of calls.

What are the components of fundamental research?

A fundamental researcher looks at the performance of a company over a period of time as well as its future growth prospects. !e might com pare this data with that of the other companies in the same sector and measure the same against a stock market inde$. #ost of the data nec essary for doing fundamental research comes from the quarterly and annual reports of companies as well as from the analysis of their stock prices. A fundamental researcher studies the following2 F0G annual reports and F5G ratios like +,&, ,+) etc.

What is there in an annual report?

*he annual report of a company provides a wealth of information about the company. In an annual report investors must look for the ,rofit N 8oss F,N8G statement and the 3alance &heet.

i. *he ,N8 statement

*he ,N8 statement gives you the figures relating to the company6s income, e$penditure, earnings before interest, depreciation, ta$ and amortisation F+3I?*AG, and net profit. Income, +$penditure and 'et profit are the main heads of the ,N8 statement.

)+&+A)-! 3A&+? A?@I-+ ().# &!A)+K!A'

&harekhan provides newsletters and analytical reports to help you decide which shares to select and when to buy or sell them. Account holders get research based investment advice with recommendations to buy shares of com panies whose prospects are good. *hese recommendations are termed as &tock Ideas. &harekhans customers also get a host of services including timely research reports F&harekhan &tock IdeasG, which read like the one shown on the right. A &harekhan &tock Ideas report has the following details2 0G -luster that the company belongs to Fsee page 51G 5G )ecommendation2 whether to 3uy, &ell or !old 7G ,rice target2 price the stock is e$pected to go up to 9G -urrent market price of the stock

0 5 7 9

&harekhan account holders can also e$pect regular updates on each of our recommendations.

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7 . !o w do I selec t the righ t share s?

7. ! ow d o I sel ec t th e ri ght sh ares?

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AG Income2 the total earn ings of the company from varied sources. *his can include sales, income from dividends, interest received, profit from asset sales, stock variation Fwhich refers to the closing stock in inventoryG and so on. !owever attention should be paid to the &ales figure, which pertains to the core busi ness of the company. 3G +$penditure2 the actual money spent on operational e$penses Flike raw material consumed, labour costs etcG. *he .ther e$penses are interest on serv icing a debt, depreciation etc.

?
A typical ,rofit and 8oss &tatement is divided into three sections2 Income, e$penditure and profitability

ii. *he 3alance &heet

*he 3alance &heet gives you an insight into the assets of the com pany, its e$isting liabilities and how its funds are utilised. It can also con tain the details of the sources of the funds Fequity capital, reserves, debt etcG.

-G .perating profit Fpopularly referred to as +3I?*AG2 deducting .perational e$penses from &ales gives you the .perating profit. ?G 'et profit2 after deducting inter est cost, depreciation cost and ta$es from .perating profit you get the profit after ta$ or the 'et profit. &ometimes one off or non recurring items such as the sale of land or investments may boost a companys net profit. Investors need to assess whether the profit is driven by core operation and is sustainable.

!ow do ratios help in funda mental analysis?

;sing the data from the annual report and ratios like +,& and ,+), it is possible for you to %udge the financial health of a company. i. +,&2 earnings per share/this ratio reflects how much the company is earning per share that it has distrib uted. *he +,& is calculated as the total net profit divided by the total

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7 . !o w do I selec t the righ t share s?

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,A)A#+*+)& *. O;?A+ A'

05
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Is the company a family run business or is it professionally owned? +ven with a family run business, what are the credibility and pro fessional qualifications of those managing the company? ?o the top level managers have enough e$perience Fof at least five yearsG in the specific type of business?

I,.

I'@+&*I'A @& *)A?I'A

=ou are I'@+&*I'A in shares when you buy them with the ob%ective of holding them for a long period Ftypically two to five yearsG. .n the other hand, you are *)A?I'A in shares if you buy them with the intention of selling them in a short period Fa day to few weeksG. As an investor when you buy shares, you pay the money equivalent to the amount and the price of the shares you have bought and you take delivery of the shares in your demat account. Whereas a trader typically buys and sells shares on the same day and hence does not take delivery of his shares in his demat account. *he process of buying and selling on the same day is also termed as intra day trading.

Aood investing principles demand that you study the minutest of details prior to investing in an I,.. !ere are some parameters you should evaluate.

I'?;&*)= .;*8..K
*he products or services of the com pany should have a good demand and scope for profit.

7
3;&I'+&& ,8A'&
-heck the progress made in terms of land acqui sition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organisation.

number of shares that have been issued. (or e$ample, if a company has profits of )s0CC million and has issued 0C million shares, its +,& is 0C. *he +,& is used to gauge a com pany6s profitability per unit of shareholder ownership. =ou can use the ratio to compare two companies in the same sector. (or e$ample, companies A and 3 both earn )s0CC, but company A has ten shares outstanding, while company 3 has 1C shares outstand ing. It means that company A has an +,& of 0C and company 3 has an +,& of 5. As a general rule, a higher +,& drives up the stock price of a company.

average as well as the +,& of the other companies in the same sector. ii. ,+)2 while the +,& looks at the profitability of a company, the ,+) Fie the priceLearnings ratioG is the market price equivalent. *he ,+) refers to the market price divided by the +,&. *hus in the above e$ample if the +,& is 0C and the market price is 1C, then the ,+) is 1CL0C Q 1. #eaning, the share of the company is trading at a multiple of 1. *his ratio is typically compared with that of the other companies in the same sector and you get to know whether the company is on the fast track or is a slow runner. While comparing the ,+)s it is better to stick to the companies in a particu lar industry and not compare across industries.

9
(I'A'-IA8&
Why does the company require the money? Is the company floating more equity than required? What is the debt com ponent? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. -heck the assumptions the pro moters are making and whether these assumptions or e$pecta tions sound feasible.

1
)I&K (A-*.)&
*he offer document will list out specific risk factors such as the companys liabilities, court cases or other litigations. +$amine how these factors will affect the operations of the company.

J
K+= 'A#+&
+very I,. will have lead managers and merchant

!owever the +,& should not be viewed in isolation and should also be analysed along with the industry

:
,)I-I'A
-ompare the companys ,+) with that of similar companies. With this you can find out the ,L+ Arowth ratio and e$amine whether its earn ing pro%ections seem viable.

bankers. =ou can figure out the track record of the merchant banker through the &ebi website.

<
8I&*I'A
=ou should have access to the bro kers of the stock e$changes where the company will be listing itself.

&ound research can keep your investments safe. #ake use of the research reports and newsletters F&tock Ideas, &harekhan @alue8ine, Investors +ye etcG that you begin to receive from the &harekhan )esearch team after opening a &harekhan (irst&tep account. Also study the Annual )eport and the other documents of the company you want to invest in.
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7 . !o w do I selec t the righ t share s?

7. ! ow d o I sel ec t th e ri ght sh ares?

minimise risks and ma$imise returns?

I' *!I& -!A,*+)2
O *ypes of risk involved in investing in shares O )educing risk O 3ecome a successful investor
9 . ! ow c an I min imise risks and ma$ imi se retu rns?

!ow can I

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What are the risks involved in investing in shares?

specific risks?

*here are two types of risk associat With careful scrutiny and proper ed with this kind of investment2 homework, it might be easy to iden company specific risk and market tify and be forewarned of the risks a risk. company may be carrying. *he set of risks that deals with a &pecifically check out for the company and its sector is referred to mergers and acquisitions that do as company specific risk. not have a real synergy or are a +$amples of company specific nightmare after reconciliation risk2 bad manage FA.8 *ime ment, bad marketing W!A* (..8I&! I'@+&*.)&Warner, ?. !ewlett ,A)* I strategies, sector dis ,ackard -ompaqG. turbances that have Also be suspi I'@+&* A88 *!+I) &A@I'A& an impact on indus cious of diversifica -anceling try etc. tions that do not your sub +$ternal factors really add value to scription to maga Feconomic, global a company6s core Tines, eat factorsG that affect offering. ing out the market as a whole A third kind of only once a week and then using are referred to as risk would be with the money saved to invest in market risk. the companies that stocks is a bad idea. +$amples of mar have bet their stakes ,ersonal finances need to be ket risk2 political on a single product totally in order before you invest. +nsure that you do not have any instability, high infla offering and are debt and all your loans have been tion, rupee high on repaid. +ven your credit card deprecia debt. should not have any outstanding. tion, rising 8ikewise *hen save every month. And think of interest rates, companies investments in terms of requirements global incidents that depend on Feducation of children, marriage etcG. *he money left over is like wars and disas research could be the only money you ters that throttle the prone to higher risk, have for the stock nation6s economy etc. if the research doesn6t market. come to fruition. !ow do I identify company While you can do your homework, &harekhan is there

to help you with its own set of &tock Ideas, which are our best picks in today6s market, chosen after a careful analysis of their fundamentals and a close scrutiny of the risks associat ed with them.

W!A* (..8I&! I'@+&*.)& ?. letins and track com ,A)* II

?. '.* K++, *)A-K .( *!+I) I'@+&*#+'*& (oolish investors are clueless about the stock market movements. *he market may seem intimidating, but you need to spend a few min utes everyday to constantly be in touch with the market. Keep a notebook and %ot down important points. *here are many other software tools that will help you keep track of your portfolio.

hand. )ead &ebi6s bul panies whose shares prices are very volatile.

Why invest in shares if its risky?

!ow do I identi fy sector driven risks?

If steel prices rise, auto companies get affected. If low cost -hinese products invade the country6s market, then local fast moving consumer goods companies might find no takers for their prod ucts. *he changing nature of the industry itself may lead to dipping stock pricesS a print publication may see revenue loss if everyone moves to reading on the Internet.

=es, there are risks involved in investing in shares and the returns are also not certain, but under standing the risks and learning how to manage them hold the key to achieving higher returns from shares. &o at what point is the risk safe enough to take and at what

!ow do I predict market risk?

It is difficult to predict market risks. *he only thing we can say here is that start noticing all the small signs early. If the election results are feared to lead to a fall in the stock market, notice the signals before

,revailing wisdom is that markets are always right, I assume thay are always wrong
Aeorge &oros, -hairman, &oros (und #anagement

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point does it become W!A* (..8I&! I'@+&*.)&worth ?. the e$tra risky? )isk is the return that the share ,A)* III chance that an may generate. , +@A8;A*+ &*.-K ,)I-+& investment6s actual If, on the other '.* 3;&I'+&&+& return will be differ hand, the investment We frequently ent than e$pected. in shares has the mistake the *his includes the potential to give cart for the possibility of losing returns of 5CE horseS that is we look at a some or all of the F05E more than the companys stock price but don6t original investment. risk free invest consider if the company itself is !igher risk means a mentG, you might go doing good fundamentally> Instead greater opportunity for it. *his 05E of looking at its share prices, start for high e$tra taking notice of the company6s returns and denotes growth prospects, financial parameters, lead a higher poten the risk pre ership status, debt position and other tial for loss. mium. *he risk such factors. *hese will automati cally determine the rise or *he risk premium premium you select fall in the company6s is the e$tra return that will depend on your stock price. the stock market provides risk appetite, ie the degree over the risk free rate to com of risk that you can tolerate. pensate for market risk. Ideally before investing in a &o if you are getting a risk free company you would want to make return of <E from an investment in a note of all the possible scenarios government bonds or provident Fdecrease in price by 0CE, increase funds and an investment in shares by 0CE, increase by 1CE and so might give you 0CE, then you onG and assign a probability to each might decide against investing in scenario. shares as the risk Fassociated with 'e$t compare the probabilities the particular shareG may not be with that of getting risk free returns

W!A* &#A)* I'@+&*.)& ?.?

Investing the same amount at regular inter vals Feg every monthG is known as systematic investing. With this approach you buy more shares when prices are low and fewer shares when prices are high. As a result you may lower your average cost per share over time. (or e$ample, making a one time investment puts much more weight on the specific mar ket conditions at that one point/such as a share price of an equity. &preading out your investments over regular intervals puts time on your side. &ystematic investing in action 8et6s say you invest )s0C,CCC each month in the company ,U) 8td. In #ay ,U) 8tds share price is )s0C a share, so your systematic investment that month buys you 0,CCC shares. )s0C,CCCL)s0C a share Q 0,CCC shares In Oune the share price drops to )s1 a

share, so your investment that month gets you 5,CCC shares. )s0C,CCCL)s1 per share Q 5,CCC shares &ystematic investing balances the dif ferent costs for the shares you purchased. If you had invested all )s5C,CCC in #ay, you would only have 5,CCC shares now, instead of 7,CCC. .f course if you had invested all )s5C,CCC in Oune, you would have 9,CCC shares. Although cost averaging does not assure a profit or protection against risk, it is a logical, smart approach that can help you even out the fluctuations in the market.

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and ma$imise returns?

A**+#,* *I#I'A *!+ #A)K+* 0. ?.'* 3uy when stocks are falling, sell when these are rising. *his works well when
you are a long term investor and there is an e$tended bear or bull run. ?on6t try to second guess or predict that the mar ket will fall today and rise tomorrow. +ven seasoned investors cannot do that> 9. A@.I? !.* *I,& =ou may have overheard some news about a stock or your friend may advise that a particular stock is all geared to move up. Avoid such tips like the plague and your investments will remain safe.

!ow can i minimise risk

any problem in one sector would affect all stocks in the sector. As a thumb rule, if you have investments of up to )s1C,CCC invest in two to three stocks. (or about )s01C,CCC invest in three to five stocks, for around )s1CC,CCC have five to seven stocks, and around ten stocks for higher amounts.

I'@+&* A88 =.;) &A@I'A& <. ?.'* Always maintain a core set of reserves. =ou should never touch these reserves for
investing, so that even in the worst case you still have some money. *ypically these reserves should be your salary of about si$ months.

> 4. 3+ )+A8I&*IAnalyse the reason why you are

investing in shares, ie why you require the money. (or a better lifestyle? (or your child6s future education? (or retire ment planning? .nce you have answered that, ask yourself how much appreciation do you need to get that amount? Work towards this amount and you won6t be disappointed. 0C. 3+ 8+@+8 !+A?+? Invest wisely, don6t get swayed by rumours and allow &harekhan to be your guide at all times. Investment suc cess won6t hap pen overnight, so avoid overre acting to short term market swings.

1. 38;+-!I,& A)+ &A(+ 3+*& 3lue chip companies are there because 6 *)= *. A;+&& *!+ #A)K+* 6& (A@.;)I*+&they have done well in the past and have 5. ?.'* =our instincts might tell you that a high market capitalisation. It is a likely pharma or technology stocks are hot due to certain policies or events, but remember millions of investors have already guessed that and bought these stocks. *he prices of these stocks would therefore be at a higher level when you buy them. Instead focus on the long term and don6t get swayed by short term events. 7 . AI# (.) *!+ 8.'A !A;8 &hort term investing is prone to higher risks. When investing in stocks, aim to get good returns after a period of three to five years at the minimum. Also churn your portfolio periodically and based on the progress that a company makes in a quarter or in si$ months, decide whether to hold the stock or get out of it. guess that they will maintain their track record and give you higher returns even in future. *herefore invest in companies that have a good track record. J. &8.W A'? &*+A?= &*)+A# .( I'@+&*#+'*& &et aside a certain portion of your earn ings every month and invest that sum in shares irrespective of the market condi tions. *his way, over a period of time you can amass a substantial number of shares of the stocks in your portfolio. :. *!I'K ,.)*(.8I. ?on6t put all your earnings in a single stock. *ry to have a diverse portfolio of stocks. *his way even if one stock doesn6t do well, you are still well pro tected. Also invest across sectors, since

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and then do the evaluation. *hus if an investment in a company is e$pected to provide 1CE returns with almost a :1E probability, this would be much better than a safe investment with returns of %ust 0CE. Again even within stocks if one stock provides higher returns with a higher risk and another provides lower returns with a lower risk, then you could go for the stock with lower returns, since at the end of the day you want to be with an investment that has the highest return per unit of risk.

W!A* (..8I&! I'@+&*.)& ?. ,A)* I@

&KI#, .' )+&+A)-! .ne of the main reasons why people lose money in the stock mar ket is because they invest on the basis of rumours or a hot tip passed by a friend. 3efore invest ing in a company always do research on it. *he 3&+ and '&+ websites have a wealth of information on each companyS you can even check out the com pany6s website and download its annual reports. Analyse the financial details and only after all this decide on making an investment in the company.

!ow can I benefitfrom

I' *!I& -!A,*+)2
O ;sing your computer to trade O *rading online is convenient O 3enefits of trading on sharekhan.com

)isk associated with investing in shares can be classified into company specific risk and market risk. =ou can reduce the risk by investing systematically in fundamentally strong com panies.

online trading?
1 . ! ow c an I b enef i t f rom o nli ne tradi ng?

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!ow does one trade online?

Oust like offline trading, online trad ing also involves three main inter mediaries and one ancillary institu tion. A broker, I An e$change, I =your bankers, and I =our depository participant. I In this form of trading, your bro ker provides you an Internet broking account which allows you to buy and sell shares at your con venience. *o put it simply, the bro ker is providing an interface on the computer that acts like a broker. &o you no longer have to call

? W!= &!.;8? I *)A?+ .'8I'+

your broker to place a trade. Oust go online to your account, select the shares you want to buy or sell and e$ecute the trade> It6s as simple as that. ?uring this trade, your bankers provide the feature of transferring money from or to your bank account. *he brokers then collect this trade information in real time using software at their end and for ward it to the e$change. *he e$change e$ecutes the trade and informs the broker. *he broker in turn informs you and also ensures that your depository account gets updatedS and in case of selling shares it places the value of

shares you sold in your account. =ou can transfer this amount back to your bank or use it for buying shares.

grated with your bank, your depos itory and digital contracts. It thus eliminates all paperwork. 5. Instant credit and transfer .nline trading gives you instant credit money transfer to and from your bank account, enabling you to trade surplus credit without delay. 7. *rade from anywhere A ma%or benefit of online trading is the facility of trading from any where. +ven when you are in a new place, %ust connect to the Internet, log on to your account on sharekhan.com and start trading. 9. )eal time portfolio tracking .nline trading provides auto update of trades e$ecuted by you and gives you real time information on your investments and the current value of your portfolio. &harekhan provides portfolio tracking service to its clients absolutely free of cost. 1. After hour orders =ou can place orders even when the market is closed. *he order gets queued up and gets e$ecuted the ne$t time the markets open. J. Aet live quotes .nline trading provides you live, minute by minute streaming quotes

!ow do I start trading online?

*here are three basic steps in trad ing online. 0. Ao to your broker and open an online account. ?uring this stage you also need to take a depository account. 5. +nsure that you have a bank account with a bank that facilitates online transactions Fie allows for net bankingG. #ost leading banks such as !?(- 3ank and -itibank allow this. 7. .nce you open an account, you get a username and password for checking your account details as well as another password for carry ing out your actual transactions. *his ensures a double layer of secu rity. ;sing these details you go to your broker6s website Fsharekhan.com in your caseG, log on to your account and start trad ing.

Why should I trade online? .nline trading is a highly convenient and transparent medium that ensures that you are in total control of your investments. ?oes online trading have security risks? #illions of customers trade online daily. 'o security risk has been reported on any of those online transactions. ?o I have to be computer savvy? If you can check your e mail, then you can trade online. .nline trading on sharekhan.com is also very user friendly. Is the brokerage different for those who trade online? *he brokerage is almost the same as in case of offline trading. !owever you are required to pay a small amount as account opening fee. 3ut you will realise that the savings in time and the fle$ibility that your online trading account shall offer will make up for that e$pense>
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What are the benefits of trading online?

.nline trading is quite convenient for the following reasons. 0. (reedom from paperwork =our online trading account is inte

1 . !o w c an I bene fi t f rom onl ine tradi ng?

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and using the software you can cre ate appropriate filters to watch the movement of the stocks that you are interested in. :. !ost of features a click away ,lace limit orders, check your port

folio and calculate your earnings, check your depository account, transfer money from your bank to the broking account and vice versa, at %ust a click of your mouse.

.-.#? !.W &A(+ I& .'8I'+ *)A?I'A .' &!A)+K!A'

B@+)=>D 3ecause we have an effective security system in place2

0. &trong encryption2 we use a 05< bit encryption to ensure a secure connection. *he most advanced encryption technol ogy, &ecure &ocket 8ayer F&&8G, is used to ensure that the information transmitted between the trading engine and the customer across the Internet is safe and cannot be accessed by any outsider. In addition firewalls, internal controls and procedures put in place have made the entire system robust. 5.,assword protection2 to trade on your account, you will need to provide a user I? and a password to enter the secure area of the site Fsharekhan.comG as well as an additional password to place trades. *he user I? and password allotted to a customer are kept completely confidential. 7.(ully integrated2 third, if the transaction system requires no manual intervention, you further improve the safety in the transactions. sharekhan.com is one of the very few fully integrated online trading sites. *his eliminates the possibility of any manual intervention. Which means orders are directly sent to the e$changes, ensuring that you get the best and right price each time.

*he advantages of trading in shares online are many. =ou can buy or sell shares from the convenience of your homeLoffice. .nline trading also removes the hassle of doing paperwork. =ou can even place orders when the market is closed.
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J benefits of trading on
0 *rack the markets pulse
Aet live quotes of companies, know the number of shares avail able for buyingLselling and track the overall market movements.

sharek han.com
9 -heck your demat account and account statement
-heck the balance of shares available in your demat account. =ou can also track the status of the orders placed online.

*ransfer money toLfrom your online bank account

*ransfer money to your &harekhan account. When you buyLsell shares, money will be debitedL credited to your &harekhan account. =ou can also transfer money from &harekhan account back to your online bank account.

Aet research based advice

Access research reports F&harekhan @alue8ineG and get stock picking advice for both short term and long term investing needs

J Apply for an I,.

'ow you dont have to fill lengthy forms or stand in a queue to apply for an I,.. Instead you can apply for an I,. from the comfort of your home or office through sharekhan.com.

7 3uy and sell shares

3uy and sell shares online. =ou can place market as well as limit orders and get instant confirmation for orders that get e$ecuted.

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A)3I*)AA+2

free lunch/the opportu

non delivery can arise on account of short delivery, bad deliveries and com pany ob%ections that go unrectified. In the process an e$changes purchases the requisite quantity in the auction market and gives them to the buyer and the costs are borne by the seller. If the shares could not be bought in the auction, ie shares are not offered for sale in the auc tion, the transactions are squared up as per &ebi guidelines. 3I?2 this is the highest price an investor is willing to pay to buy a stock. 38;+ -!I,&2 the term blue chips refers

*rade Oargon
A brief introduction to some terms you are likely to encounter as you start investing...

nity to profit from two offsetting trans actions with Tero risk. Arbitrage basically involves spotting price differ entials for the same asset at different places at a given time and simultane ously buying at a place where it is cheaper and selling where it is more e$pensive. A transaction of this nature obviously means that the profits are made with Tero risk. A&K2 this is the lowest price an investor will accept to sell a stock. ,ractically speaking, this is the quoted price at which an investor can buy sharesS also called the offer price. A;-*I.' &!A)+&2 the securities put up for auction by the e$changes are of those transactions that remain incom plete due to non delivery of securities by sellers. *his is to ensure that a buyer receives the securities due to him. *he

to stocks of renowned companies with established and stable businesses. &uch companies have a steady earnings stream and are preferred by market players because of the predictability and stability of their earnings. 3.'?2 simply put, a bond is an I.; of

3+A)2 an investor who believes that a secu rity, a sector or the overall market is about to fall Fopposite of bullG. A bear has a pessimistic view of the market. A weak and declining market is known as a bear market. When bears are active, stock prices tend to decline. 3;882 an investor who believes that a partic ular security, a sector or the overall market is about to rise Fopposite of bearG. A bull has an optimistic view of the market. A strong and rising market is known as a bull market. When bulls swing into action, the prices tend to rise.

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sorts. It is an agreement under which a sum is repaid to an investor after an agreed period of time. 3onds are thought of as safe and reliable instru ments. 3onds provide a worry free stream of income. 3ut this class of secu rities includes a wide array of instru ments with varying degrees of risk and reward. 3.';& I&&;+2 issue of new shares at Tero cost to e$isting shareholders. *his is carried out by creating fresh equity by capitalising the reserves that a company has built through its operations. 3..K @A8;+2 ratio of net worth of a company to the outstanding equity share capital. It represents the net worth available for each outstanding share of a company. 3ook value stands for the money that the owner of a single share would realise. In other words, the book value of a company is very similar to the net asset value F'A@G of a fund. !owever the book value can at times be a very conservative estimate of the value that a shareholder can realise, as assets are valued at cost. 3..K 3;I8?I'A ,).-+&&2 process by which the offer price of an I,. is determined based on actual demand from investors. 3ook building is called so because it refers to the collec tion of bids from investors which is based on an indicative price range Ffloor priceG. *he issue price is fi$ed after the bid closing date. It is a process of secur ing the optimum price for a company6s a

share. *he issuing company decides the price of the security by asking investors how many shares they want to buy and at what price they would be interested in buying them. *he book building process allows for price and demand discovery. In book building the demand for the share is known before the issue closes. A placement process is typically followed with an offer to the public at large at the same price. 3&+ &+'&+I2 the 3&+ &+'&+I, as it is popularly referred to, is short for the 3&+ &ensitive Inde$ or &ense$. (irst compiled in 04<J it is a #arket -apitalisation Weighted inde$ of 7C component stocks with the base April 04:4 Q 0CC. It represents a sample of large, well established and financially sound companies. *hese companies account for around one fifth of the mar ket capitalisation of the 3&+. *he &ense$ is essentially a small sub set of the A group scrips. *he inde$ is widely reported in both the domestic and inter national print and electronic media and is widely used to measure the perform ance of the Indian stock markets. *he &ense$ also has the largest social recall attached with it. 3;= 3A-K2 a method by which a com pany uses surplus cash to cancel its own shares. *his process also enables pro moters to increase their stake in the company. *his is typically done when the company feels that the stock is under priced and the prospects are bright. 3uy backs are much in vogue in global mar

3)+AK +@+'

2 this is the point of no profit, no loss. *his happens when the

present net value of a pro%ect is Tero. *he break even point reveals the mini mum level of operations when the e$isting value of outflows equals the e$isting value of inflows. In terms of sales, the present value formula works out to be2 break even sales Q Ffi$ed costG L Fsales variable costG. *he analysis of the level of sales at which a pro%ect would %ust break even is called break even analysis.

kets and have now their feet established in the Indian markets too. -A,+I2 capital e$penditure/this is the e$penditure that a company undertakes towards building up capital like plants, machinery etc. *hese e$penses do not pertain to a single year as the benefits accrue over a larger time frame. *hus these are normally not charged to the profit and loss account of a single year but amortised over a period of time. -A,I*A8 AAI'2 the returns from a stock emanate from two sources2 divi dend Fa ta$ free and risk free sourceG and appreciation in the share price. *he gain that accrues to a shareholder due to the appreciation in price is called capital gain. -A&! +,&2 cash earnings per share/

cash e$penditure. It is %ust a book entry, an amount set aside to account for the use of assets. In order to compute the cash profits F-ash +,&G accruable to each share, we add back depreciation to the net profit. -I)-;I* 3)+AK+)2 there are limits within which a stock can move during a single day. *hese are called circuit breakers, which are mechanisms to curb e$cessive volatility. At present a stock cannot move more than 0JE in either direction during one single trading ses sion. If there are more buyers beyond M0JE, then trading stops. *his applies in the reverse direction as well. -.'*)A-*2 contract is an agreement between two parties to buy and sell an inde$ at a fi$ed time in future at a price fi$ed today. -ontract value is derived by multiplying the &ense$ with 1C and the 'ifty by 5CC.

cash earnings are the sum of net profit and depreciation. ?epreciation is non

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-)+?I* )A*I'A2

credit rating is an

?+#A'? ,;882

the use of advertising

?+,.&I*.)= ,A)*I-I,A'* F?,G2 is a member of a depository through whom investors deal with a depository e$change.

a ?,

issue. It is used in determining the divi dend to be given to the shareholders. 8ets understand this with an e$ample. A company declares a dividend of 1CE. Assuming that the face value of its share is )s0C and the current market price of its share is )s0CC, the amount per share that a shareholder is entitled to is )s1, ie 1CE of )s0C Fand not 1CE of )s0CCG. Apart from its use in determin ing dividend, face value has lost its rele vance in the modern day and has no link with the market price. In todays conte$t, even )s0CLshare is not sacrosanct as the shares are split and they can have face values of less than )s0C. (;*;)+&2 a futures contract is a legally binding contract to make or take deliv ery of a specified quantity of a specified instrument on a specific date in the future, at a price agreed at the time of dealing. When two parties enter into a futures contract, the buyer of the con tract assumes the obligation to buy a specified quantity of a specified instru ment from the seller at a specified price on a future date. *he contract is binding on both the parties. AAA,2 Aenerally Accepted Account ing ,rinciples FAAA,G is a combination of authoritative standards set by stan dard setting bodies as well as accepted ways of doing accounting. !+?AI'A2 taking positions in securi

e$ercise conducted by a rating organisa tion to e$plore the credit worthiness of the issuer with respect to the instrument being issued or a general ability to pay back debt over specified periods of time. *he rating is given as an alphanumeric code that represents a graded structure or creditworthiness. *ypically the high est credit rating is that of AAA, the low est being ? Ffor defaultG. -;# ?I@I?+'?2 you must have heard of stocks quoting cum dividend. It means before dividends. A stock trading cum dividend allows its purchaserLtransferor the right to receive dividend. *he cum dividend date is set by the stock e$changes. ?+3+'*;)+2 akin to promissory notes, debentures are instruments for raising long term debt capital. ?ebenture holders are the creditors of the company. *he obligation of the company towards its debenture holders is similar to that of a borrower who promises to pay interest and capital at specified times.

to generate consumer interest and demand. ?+#A*2 demat or dematerialisation is

the conversion of physical share certifi cates into an electronic format. *he shares are credited in the investor6s account with his depository participant. ?emat protects the shareholder from all the risks associated with physical certifi cates, such as loss, theft, mutilation and forgery as well as the risk that arises from handling large volumes of paper. &hares can be immediately transferred from one person to another. ?emat eliminates the need to fill transfer deeds and affi$ share transfer stamps. ?+,.&I*.)=2 a depository is like a

+A)'I'A ,+) &!A)+2 earnings per share/it is the ratio of net profit to the outstanding equity capital. +,& stands for the net profit on each outstanding share. *his is very useful while deter mining the value of a companys busi ness. *his is because the shareholders pay a price for these earnings that the business generates for the shareholders. +U;I*= ?I8;*I.'2 whenever the

equity capital of a company is increased by way of a rightsLpreferential issue, the equity is diluted. (ollowing an equity dilution, there is more paper floating in the market. Whether it is good or bad depends on the issue price and the future servicing capacity of that equity. +&-).W2 an account in which money is placed in trust with a third party and that can be used only for specific pur poses or used by a specific entity after the fulfillment of certain conditions. +I ?I@I?+'?2 a stock is e$ dividend

bank as it holds the securities of investors in electronic form. A deposi tory holds securities Flike shares, deben tures, bonds and unitsG of investors in electronic form. Investors can depositLwith draw and transfer securities from their accounts. 3esides holding securities, a deposi tory also provides services related to transac tions in securities.

when it is quoting after the announce ment of dividends. An e$ dividend stock does not allow its purchaserLtransferor

?I@I?+'? =I+8?2 annual dividend paid on a share of a company divided by the current share price of the company. ?ividend yield stocks are for safe investors, who look at pure returns from a stock and not capital appreciation.

the right to receive the last dividend declared. *he e$ dividend date is set by the stock e$changes. (A-+ @A8;+2 this is the nominal value that is assigned to a share at the time of

ties so that each offsets the other. (or e$ample, if you buy security A and sell

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security 3 so that the overall risk of your e$posure is reduced, then it is called hedging. A perfect hedge produces a risk free portfolio. !.8?I'A -.#,A'=2 when a company holds shares in another com pany, the former is refereed to as the holding company for the latter. I'&I?+) *)A?I'A2 trading on infor mation which is not really available to the general public. 8IA3I8I*=2 a financial obligation that Fis pendingG must be made at a specific time. +quity and debt are both liabilities that a company owes to the respective investors. 8I#I* .)?+)2 this is an order to buy or sell a stock at a pre determined price only. *he order will get e$ecuted only if the market price reaches the price point

at which you are willing to buyLsell a stock. 8IU;I?I*=2 the ability of a security to get converted into cash without any loss of time or value is called its liq uidity. In the stock market, a good indi cator of the liquidity of a stock is the volume of shares that get traded in the e$changes. #A)AI' )+U;I)+#+'*&2 is the amount of money, or collateral, that a member will be required to lodge with the clearing corporation as a per centage of his total value of trades. #argins strengthen the risk manage ment system as they help in maintaining the market integrity and averting pay ment defaults by the members. #A)K *. #A)K+*2 the value of investments Fespecially secondary mar ket securitiesG undergoes a change over margin

time. !ence the acquisition price does not reflect the true worth of these assets. It is prudent to take the current value of the investments. #A)K+* -A,I*A8I&A*I.'2 market capitalisation is the market value of the equity of a company. &imply put, it is the number of outstanding shares multiplied by the market price of the company. It is also the currency which can be used in case of acquisitions. #A)K+* #AK+)2 a member of an e$change who quotes simultaneous bid and offer prices for an issue of securities. ;sually market makers undertake to offer quotes in certain securities, thereby creating liquidity in the security. #A)K+* .)?+)2 this is an order to buy or sell a stock at the market price. #A)K+* @A8;+2 the market value refers to the current resale value of a security. *he market value of a security is easily computed as the closing price multiplied by the shares outstanding. '+* W.)*!2 shareholders funds comprise equity share capital and the reservesLsurpluses of their company. 'et worth is the funds that shareholders own/their equity in other words. It represents the capital infused by share holders and the accumulated net profits after paying out dividends Fretained earningsG. !ence in the event the busi ness is wound up, the net worth is what the shareholders get.

.((+) (.) &A8+2

when an e$isting

shareholder of a company offers shares to the general public through a prospectus. .)?+) ).;*I'A &=&*+#2 order routing system a broker offering Internet trading facility provides an elec tronic template FspaceG for the customer to enter the name of the security being bought or sold, the quantity and the price specifications. .nce the brokers system receives this information, it is checked electronically against the customers account and is routed to the appropriate e$change for e$ecution by the broker. After the order is e$ecuted, the customer receives a message confirming the order. *he customers portfolio and ledger account will also be updated online. ,)I-+L+A)'I'A& )A*I.2 this oft tracked ratio is the ratio of the price per share to the earnings per share. *his indicates the number of years that will be required to recover the amount paid for the shares of a company when the latters earnings are constant over a period of time. *his is a widely used benchmark for stocks and associates a fundamental variable FearningsG with a market variable FpriceG. )+-.)? ?A*+2 a date set by a com pany on which it checks the records of its shareholders to allocate their entitle ments Fof rights, dividend etcG. )IA!*& I&&;+2 issue of additional in an

I'*+)'+* 3).KI'A 2 Internet based trading on conventional stock e$changes uses the Internet as a medium for communicating client orders to the e$changes through broker websites. *hese sites may serve a variety of functions from allow ing full trading through the website to features like on line stock quotes, information and analy sis etc. &ebi has allowed Internet trading in India, albeit in a limited form. *he &ebi -ommittee on Internet based &ecurities *rading and &ervices has allowed the Internet to be used as an order routing system through registered stockbrokers on behalf of clients, for trading in the securi ties market.

equity to e$isting shareholders of a com pany. *he e$isting shareholders have the

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'+* ,).(I*2

net profit sports various names,

including bottom line and profit after ta$. In sim ple terms net profit stands for the money that a business makes after paying off all its costs, both operational and capital, and ta$. In other words, it belongs to the shareholders. It can be either given to the shareholders as dividend or retained to further the business.

?I&-8AI#+)
* hi s b ookl et has been p repa red by &&K I In vesto r &e rvice s ,v t. 8 td. F &! A) +K ! A' G. I t i s su b% ect to c hang es wi thou t p rior noti c e an d i s i nten ded onl y f or th e pe rson or en tity to whi c h it is addressed to and may c on tai n c onf i dent ial andLorp riv i leged materia l andi s not f or an y typ e of c irc ul atio n. An y rev ie w, retra nsmissi on, or o ther any use is p rohi bite d. Ki ndl y n ote th at th is d oc umen t does not c onsti tute an of f er or sol ic i tation f or the p urc hase or sal e of

right to e$ercise this option to subscribe to these shares. )I&K ,)+(+)+'-+2 each individual has a personal tolerance for risk. *o set an investment course that you will be comfortable with, you need to think about your willingness to accept declines in the value of your investments and you will need to consider your investment goals. &+**8+#+'*2 the mechanism

back to close out the transaction. *his technique is used when an investor believes the stock price will drop. &!.)* &A8+2 it suggests selling a stock that is not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. +ventually the investor must buy the stock back in the open market. &,+-;8A*I.'2 it suggests taking

an y f in anc i al instru ment or as an o ff i c ial c onf i rmatio n of any transac ti on. * houg h di ssemin ated to al l th e c ust omers si multan eousl y, not all c ustome rs may rec eiv e this report at th e same ti me. &! A) +K ! A' wil l not treat re c ipi ents as c ustome rs by v irtu e of t heir rec eiv i ng thi s report . * he i nf ormat ion c ontai ned herei n is f rom publ ic l y av ai lab le d ata or othe r sourc es bel iev ed to be rel iabl e. Wh ile we wou ld en deav our to up date the in f ormati on herei n on reason abl e b asis, &! A) +K !A' , i ts subsid iari es and assoc i ated c ompan ies, th eir dire c tors an d emp loy ees F B&! A)+K ! A' an d af f i lia tesDG are u nder no obl igati on to u pdate or keep the in f ormati on c urre nt. Al so, t here may be regu latory , c ompl ian c e, or o ther reaso ns tha t may prev en t &! A)+ K! A' and af f il ia tes f rom d oing so. W e d o not represe nt th at in f ormati on c on tain ed h erein is a cc u rate or co mplet e and it sh oul d no t be rel ied u pon a s suc h. * hi s doc ume nt is p repared f or assistan c e onl y an d is no t int ended to be an d must n ot alo ne bet aken as the basi s fo r an i nv estmen t dec isi on. * he u ser assu mes the enti re risk of any use made of thi s i nf ormat ion. +ac h rec i pien t of th is bo oklet shoul d make suc h i nv esti gati ons as i t de ems nec essa ry to ar riv e at an i ndep ende nt ev al uati on of a n i nv estmen t i n th e sec ur iti es of c omp ani es ref erred to in thi s doc u ment F in c lud ing the merits and risks in vo lv edG , an d shou ld c on sult i ts own adv iso rs to dete rminet he meri ts and risks of suc h an i nv estmen t. * he i nv estmen t di sc ussed or v iew s e$ pre ssed may not be sui tabl e f or al l inv est ors. We d o n ot unde rtake to adv ise you a s to an y c h ange of our v ie ws. Aff i li ates o f &harekh an may h av e i ssued other report s that are inc on sisten t wi th and reac h dif f eren t c on c lusi on f rom t he i nf ormati on presen ted i n this report . * his repo rt i s n ot d irec ted or in tend ed f o r di strib utio n to, or u se b y, any pe rson or e ntit y w ho is a c i tiT en or resi den t of or loc ated in any loc al ity , stat e, c ou ntry or oth er %u risdi c tion , wh ere su ch di strib ution , p ubl ic ati on, av ail abi lit y or use woul d b e c ont rary to law , reg ulat ion or wh ic h woul d sub %ec t &!A )+K ! A' and af f il iates to an y reg istrati on or l ic ens in g req uir ement with in suc h %uri sdic t ion. * he sec uri ties desc rib ed h erein may or may no t be eli gibl e f or sale in all % uris di c tion s or to c ertain c ategory o f i nv estor s. ,erson s in wh ose posses sion th is doc u ment may c ome ar e r equi red to in f orm th emselv es of an d to observ e suc h restric ti on. &! A)+ K! A' N af f i lia tes may h av e used t he in f ormati on set f ort h herei n b ef ore pub li ca tion and ma y hav e p ositi ons in , ma y f rom t ime to time purc h ase or se ll or may be mat erial ly int erested in any of the sec urit ies me ntio ned or rel ated sec uri tie s. &!A )+K ! A' may f rom ti me to ti me soli ci t f rom, or perf orm in v estment ban kin g, or other serv i c es f or, a ny c ompan y m enti oned herei n. W ith out l imi tin g an y o f the f oregoi ng, in n o ev en t sha ll &! A)+K ! A' , any of i ts af f il iat es or an y th ird party in v olv ed in , o r rel ated to, c omputi ng or c omp ili ng the in fo rmation ha v e any l iabi li ty f or any dama ges of

through which all parties to a transac tion get their receivables, ie either funds or shares, is known as clearing and set tlement or simply settlement. &!A)+ &WA,2 an arrangement by which shares of one company are swapped for another in a specified ratio. &!A)+!.8?+) @A8;+2 an ethos of managing that calls for a business to be run with the ob%ective of ma$imisation of the wealth of the shareholders. &!.)* ,.&I*I.'2 it occurs when a

large risks, especially with respect to try ing to predict the future or gambling, in the hope of making quick, large gains. &*.-K .,*I.'2 an option given to a person to buy a stock at a predetermined price on a future date. *)+'?2 trend is a basic direction in which the prices are moving. *rends are of three types, namely ;ptrend, ?owntrend, &ideways trend. @.8A*I8I*=2 the sharp movement, up or down, in the price of a security, or in the overall prices prevailing in the market.

an y ki nd . Any c omment s or statemen ts made herei n are those of t he anal yst and do not ne c essaril y ref lec t those of &! A)+ K! A' .

&&K I In v estor &e rv ic es , v t. 8 td. F&ha rekhan G A 5C J, ,h oeni $ ! ouse, ,h oeni $ #i ll s -omp ound , &en apati 3 apat #arg, 8ow er ,a rel, #u mbai 9C CC 07 . *e l2 C5 5 5 94 < 5 CC C

person sells stocks he does not yet own. +ventually the shares must be bought

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