FAQ’s on Stock Market

1. What is a Financial Market?

A market that brings buyers and sellers together to trade in financial assets like stocks, bonds, commodities, derivatives and currencies etc is known as a Financial Market. The purpose of financial market is to set prices for global trade and also to raise capital and transfer liquidity and risk.

2. What are the types of Financial Markets?

There are various types of financial markets available today and many of them are known as the Capital markets, Commodity markets, Money markets, Derivatives markets, Future markets, Insurance markets and Foreign exchange markets etc.

3. What is the difference between the Money market and the Capital market?

The Money market is a market especially for the debt securities which provides short term debt financing and investment such as the treasury bills, commercial papers, bankers’ acceptance, certificates of deposits, etc. Whereas, the Capital market a market for long-term debt and equity shares which provides financing and investment through the issuance of both shares and Bonds.

4. What is Derivative Market?

Derivative Market provides a trading platform for the Future and the Option contracts where the stocks are traded in a lot. The number of stocks per lot depends on the valuation of the stock where as the valuation of a lot is decided by the number of stocks per lot when multiplied by the current market price of the stocks.

5. What is a Capital Market?

The Capital Markets usually consist of both the Stock markets and the Bond markets. The Stock market provides financing and investment through the issuance of shares or stocks and their subsequent trading. The Bond market provides financing and investment through the issuance of bonds and their subsequent trading.

6. What are the various types of Capital Markets?

Generally, the Capital markets are categorised into two types – the Primary market and the Secondary market.

7. What is the difference between the Primary market and the Secondary market?

The Primary market is the Stock market where shares are issued to the public for the first time or we can say it is a platform where a company offers the first sale of its stock to the Public also called Initial Public Offering (IPO), where as the Secondary market is the Stock market where the existing stocks are traded by retail investors.

8. What are the products that are traded in the secondary markets?

Products that are traded in the secondary market are Equity, Equity Shares, Rights Issues, Bonus Shares, Preference shares, Cumulative Preference Shares, Cumulative Convertible Preference Shares, Participating Preference Shares, Security Receipts, Government securities (G-Secs), Debentures, Bond, Commercial Paper, Treasury Bills etc.

9. What is Equity?

Equity is known as ownership share because when we buy a stock of any company we become one of the owners of the company.

10. What is an Equity Share?

An equity share is usually referred to as an ordinary share which represents the form of fractional ownership in which a shareholder undertakes the maximum entrepreneurial risk.  The equity share holders are members of the company and have voting rights.

11. What is Rights Issue?

The Rights Issue is the issue of new securities to the existing shareholders at a ratio to those already held.

12. What is Bonus Share?

Bonus share is a share issued by the companies to their shareholders free of cost in proportion to their holdings.

13. What is Preference Share? 

Preference share is a share where its holders are entitled to a fixed dividend or dividend calculated at a fixed rate. Here dividend is paid regularly before paying dividend to equity share holders.

14. What is Cumulative Preference Share?

Cumulative Preference Share is a preference share on which the dividend accumulates only if remains unpaid and all arrears of preference dividend are paid regularly before paying dividend to equity share holders.

15. What is Cumulative Convertible Preference Share? 

Cumulative Convertible Preference Share is a preference share on which  the dividend payable only on the same accumulates, if not paid. These shares will be converted into equity capital of the company after a specified date.

16. What is Participating Preference Share? 

Participating Preference Share provides the right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid.

17. What is Security Receipt? 

Security Receipt is a receipt generally issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.

18. What is a Government security (G-Secs)?

Government securities (G-Secs) are the risk free coupons issued by the Reserve Bank of India under the Central Government’s market borrowing programme. These securities have a fixed coupon which is paid on half yearly basis. It is available for both short term maturity plan (less than one year) and long term maturity plan (upto twenty years).

19. What is Debenture?

A debenture is a certificate of agreement of loans issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures.

20. What is Bond? 

A bond refers to ‘a debt investment where an investor lends money to a company or government for a defined period at a fixed interest rate.’ The rate at which bonds are issued is called its ‘par value’ and the interest rate is called its ‘coupon rate.’ Bonds are issued by various organisations like the government as well as private institutions, central and state governments and other financial institutions to raise huge money from the market that cannot be provided by a single bank.

21. What is Commercial Paper? 

Commercial Paper is a short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary.  It is issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. In other words we can say that the commercial paper is a money market instrument issued normally for tenure of 90 days.

22. What is Treasury Bill?

Treasury bill is a short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.

23. What is SEBI and what is its role?

Securities and Exchange Board of India (SEBI) is a regulatory body which exercises full control over the securities market in India. The main role of SEBI is to protect the interest of investors and also to promote the development of and regulate the stock exchange.

24. What is Fundamental Analysis? 

The Fundamental Analysis is a technique through which the real value of the company’s stocks (whether it is overvalued, undervalued, or correctly valued) is determined by assessing the factors that affects the company’s business model and its future prospects.

25. What is Technical Analysis?

The study of stock market action through use of charts to forecast future trends of the stock market is called Technical Analysis. In technical analysis, we mainly consider the Price, Time, Volume and the Breadth of the stocks upon which analysis are made.

26. What is a company’s Net Profit Margin? 

Net profit margin is also known as a profitability ratio of a company which indicates that how much profit a company is able to squeeze out of each dollar of sales. It is calculated by dividing the net income by total sales. The company having net profit margin 25% means $0.25 of every $1.00 in sales is realized in the profits.

27. What is P/E Ratio? 

The P/E Ratio is also known as Price/Earnings Ratio which indicates that how much an investor must pay to buy $1 of the company’s earnings. It is calculated by dividing the current stock prices by the previous four quarter’s earnings per share. If current stock price is $10 and last four quarter’s earnings is $2 then the P/E Ratio is $5 (i.e.10/2=5).

28. What is Book Value per Share? 

Book Value per Share is a price ratio which indicates whether a stock is overpriced or underpriced. It is calculated by dividing total new assets (i.e. total assets except liabilities) by total shares outstanding.

29. What is Current Ratio? 

Current Ratio is also known as the liquidity ratio of a company which is used to measure the company’s ability to meet current debt obligations. Current Ratio is calculated by dividing current assets by current liabilities. A company’s current ratio of 4.0 indicates that the company’s current asset (if liquidated) is sufficient to pay for four times the company’s current liabilities.

30. What is Debt Ratio? 

Debt ratio is also known as the leverage ratio of a company which is used to measure to what extent the total assets of the company is financed with debt. It is calculated by dividing the total liabilities by the total assets. A company’s debt ratio of 30% means 30% of the company’s assets have been financed with borrowed capital.

31. What is Inventory Turnover? 

Inventory turnover is also known as an efficiency ratio which indicates how effectively the company manages its inventories. It is calculated by dividing the cost of goods sold by inventories.

32. What is Stock Price Valuation? 

Stock Price Valuation is also known as the real value of the stock which is determined by the fundamental analyst whether the company’s stock is overvalued, undervalued, or correctly valued. The fundamental analyst uses several valuation models such as dividend models (focus on expected dividends), earnings models (focus on expected earnings) and assets models (focus on the company’s assets).

33. What is Stock Market Exchange?

Stock Market Exchange provides the meeting place where the stock buyers and sellers place their orders for further execution. In other words we can say that the Stock Market Exchange provides a listing platform where the stocks of the listed companies are traded.

34. List of Stock Market Exchange in India 

In India, there are 23 Stock Market Exchanges available and amongst them two are functioning at national level namely Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), where as the rest 21 stock exchanges are functioning at regional level. The list of all these 23 Stock Market Exchanges is given below:-

1. Bombay Stock Exchange
2. National Stock Exchange
3. Ahmedabad Stock Exchange
4. Bangalore Stock Exchange
5. Bhubaneshwar Stock Exchange
6. Calcutta Stock Exchange
7. Cochin Stock Exchange
8. Coimbatore Stock Exchange
9. Delhi Stock Exchange
10. Guwahati Stock Exchange
11. Hyderabad Stock Exchange
12. Jaipur Stock Exchange
13. Ludhiana Stock Exchange
14. Madhya Pradesh Stock Exchange
15. Madras Stock Exchange
16. Magadh Stock Exchange
17. Mangalore Stock Exchange
18. Meerut Stock Exchange
19. OTC Exchange Of India Stock Exchange
20. Pune Stock Exchange
21. Saurashtra Kutch Stock Exchange
22. UttarPradesh Stock Exchange
23. Vadodara Stock Exchange

35. Who is a broker? 

A broker is a person or an organisation who are required to be a member of stock exchange and also registered with SEBI. A broker is authorised to trade on the computer based trading system of stock exchange.

36. Who is a sub broker?

A sub broker is a person who is required to be affiliated to a member of a stock exchange and also registered with SEBI.

37. List of Stock Brokers in India 

Following are the list of some of the leading Stock Broking firms in India.

1. Angel Broking
2. Geojit Securities
3. HDFC
4. ICICI direct
5. India bulls
6. IndiaInfoline
7. Reliance Money
8. Religare
9. Share khan & several others

38. Charges that can be levied on the Investor by a Stock Broker? 

A Stock Broker can charge brokerage, service tax, Securities Transaction Tax (STT) and also the penalties if arising.

39. What is Securities Transaction Tax (STT)? 

Securities Transaction Tax (STT) is a tax which is levied on all transactions made on the stock market exchanges. It came into effect from October 01, 2004 and the STT rates are decided by the Central Government.

40. What are the various types of accounts required for an investor to trade in Securities Market?

An investor must have the following accounts to trade in securities market:-

1. Demat Account / Beneficial owner Account (B.O. account): This type of account is used for holding and transferring securities. It is opened with a depository participant in the name of client.
2. Trading Account: This type of account is used for the maintenance of all transactions made while buying or selling of securities. It is opened by the broker in the name of the respective investor.
3. Bank Account / Client Account: This type of account is used for debiting or crediting money for trading in securities market. It is opened by the bank in the name of the respective client.

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