Section 2: EQUITY

Chapter 2:Getting Familiar with Market Related Concept

Once you enter the Stock market, you will frequently come across terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks and Large-Cap Stocks. n this section you will get an understanding of what these terms mean in the conte!t of stock markets. Let us first understand M"#$%& C"' &"L ("& O) M!R"ET C!#IT!$I%!TI&' "* +Cap+ is short for capitalization, the market ,alue of a stock, indicating the size of the stock a,aila-le. Calculating a stock.s capitalization Market Capitalization / Market 'rice of the stock ! &he num-er of the stock.s outstanding0 shares

0Outstanding means the shares held -y the pu-lic 1or e!ample, if Stock " has a Current Market 'rice of #s 23 per share, and there are 4,33,333 shares in the hands of pu-lic in,estors, then Stock " has a capitalization of 23,33,333. &he company.s capitalization is an effecti,e parameter to group corporate stocks. n the 5S, mid-cap shares are those stocks that ha,e a market capitalization ranging from #s 6,333 crore to #s 78,333 crore. n ndia, these shares would -e classified as large-cap shares. &hus, classification of shares into large-cap, mid-cap, small-cap is made on the -asis of the relati,e size of the market in that particular country. &he total market capitalization of 5S markets is 948 trillion. n ndia, the market capitalization of listed companies is around 9:33-n. SM!$$(C!# ST&C"S "* &he stocks of small companies that ha,e the potential to grow rapidly are classified as small-cap stocks. &hese stocks are the -est option for an in,estor who wishes to generate significant gains in the long run; as long he does not require current di,idends and can withstand price ,olatility. <enerally companies that ha,e a market Capitalization in the range of upto 283 Corores are small cap stocks

"s many of these companies are relati,ely new, it is difficult to predict how they will perform in the market. =eing small enterprises, growth spurts dramatically affect their ,alues and re,enues, sending prices soaring. On the other hand, the stocks of these companies tend to -e ,olatile and may decline dramatically. Most nitial 'u-lic Offerings are for small-cap companies, although these days large companies do tend to source the capital markets for e!pansion plans. "ggressi,e mutual funds are also enthusiastic a-out adding small-cap stocks in their portfolios. =ecause they ha,e the ad,antage of -eing highly growth oriented, small-cap stocks can forego paying di,idends to in,estors, which ena-les the profits earned to -e rein,ested for future growth. MI)(C!# ST&C"S "* Mid-cap stocks are typically stocks of medium-sized companies. &hese are stocks of well-known companies, recognized as seasoned players in the market. &hey offer you the twin ad,antages of acquiring stocks with good growth potential as well as the sta-ility of a larger company. <enerally companies that ha,e a market Capitalization in the range of 283-7333 crores are mid cap stocks Mid-cap stocks also include -a-y -lue chips; companies that show steady growth -acked -y a good track record. &hey are like -lue-chip stocks >which are large-cap stocks? -ut lack their size. &hese stocks tend to grow well o,er the long term. $!RGE(C!# ST&C"S "* Stocks of the largest companies >many -eing -lue chip firms? in the market such as &ata, #eliance, C C are classified as large-cap stocks. =eing esta-lished enterprises, they ha,e at their disposal large reser,es of cash to e!ploit new -usiness opportunities. &he sheer ,olume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them o,er time. n,estors, howe,er gain the ad,antages of reaping relati,ely higher di,idends compared to small- and mid-cap stocks while also ensuring the long-term preser,ation of their capital. *hat dri+e ,-ll and ,ear market . "* &he uses of +=ull+ and +-ear+ to descri-e markets ha,e -een deri,ed from the manner in which each of these animals attacks its opponents. " -ull thrusts its horns up into the air, and a -ear swipes its paws down. &hese actions are metaphors for the mo,ement of a market* if the trend is up, it is considered a =ull market. "nd if the trend is down, it is considered a =ear market. &he supply and demand for securities largely determine whether the market is in the =ull or =ear phase. 1orces like in,estor psychology, go,ernment in,ol,ement in the economy and changes in economic acti,ity also dri,e the market up or down. &hese com-ine to

make in,estors -id higher or lower prices for stocks. /ow can 0o- 1-ali20 the market a ,-ll or ,ear. "* =ull and =ear markets signify relati,ely long-term mo,ements of significant proportion. @ence, these runs can -e gauged only when the market has -een mo,ing in its current direction >-y a-out 23A of its ,alue? for a sustained period. One does not consider small, short-term mo,ements, lasting days, as they may only indicate corrections or short-li,ed mo,ements. *hat are tock 0m,ol . "* " stock sym-ol is a unique code that is gi,en to all participating companies in securities trading. Once you know the stock codeBsym-ol of the company >sometimes referred to as a ticker sym-ol? you can easily o-tain information a-out the company. &his is important, as a wise in,estor will always do a financial analysis -efore purchasing a stock. 1or e!- tcs stands for &ata Consultancy Ser,ices nfy stands for nfosys 'ote :( Chile placing orders with $otaksecurities.com you need to type in Dust the first three alpha-ets of the company and our site will display all possi-le com-inations, from which you may select the stock that you wish to in,est in. *here do I 2ind tock related in2ormation. "* &he most accessi-le a,enue to get stock information is the nternet, -usiness news channels and print media. Eou could alternati,ely access the$otak Securities )ews Channel and get all the information that you wanted within a matter of seconds. 5sing $otak Securities )ews Channel, you can get the latest news, on %quity, Feri,ati,es,Mutual 1unds G 'O.s *hat are rolling ettlement . "* Let us understand #olling Settlements with an e!ample. Supposing your friend agrees to -uy a -ook for you from a -ookshop, you will ha,e to pay him for it e,entually. Similarly, after you ha,e -ought or sold shares through your -roker, the trade has to -e settled. Meaning, the -uyer has to recei,e his shares and the seller has to recei,e his money. Settlement is Dust the process where-y payment is made -y all those who ha,e made purchases and shares are deli,ered -y all those who ha,e made sales. " #olling Settlement implies that all trades ha,e to settled -y the end of the day. @ence the entire transaction, where the -uyer has to make payments for securities purchased and seller has to deli,er the securities sold, ha,e to completed in a day. n ndia, we ha,e adopted the &H2 settlement cycle, which means that a transaction entered into on Fay 4 has to -e settled on the Fay 4 H 2 working days, when funds pay in or securities pay out takes place. .&H2+ here, refers to &oday H 2 working days. 1or instance, trades taking place on Monday are settled on Cednesday, &uesday.s trades settled on &hursday and so on. @ence, a settlement cycle is the period within which the settlement is made.

1or arri,ing at the settlement day, all inter,ening holidays -- -ank holidays, %!change holidays, Saturdays and Sundays are e!cluded. 1rom a settlement cycle taking a week , the %!changes ha,e now mo,ed to a faster and efficient mode of settling trades within &H2 Fays. *hat i the meaning o2 the term elling hort. "* "n in,estor sells short when he anticipates that the price of the shorted stock will fall from the e!isting price. @e -orrows a share and sells it. "s the share price dips, he -uys the same share at a lower price and returns it -ack, while pocketing a profit in the -argain. "n adage that descri-es short selling is >+selling high and -uying low..? Selling Short >Shorting? is an effecti,e tool for traders as it allows us to profit from declining stock and inde! prices. " definition of +Selling Short+ Selling short implies esta-lishing a market position -y selling a security one does not own, in anticipation that the price of the security will fall. 1or eg. &rader anticipates stock "=C will decline &rader enters order to S%LL 2333 shares of "=C at market price and later -uys the 2333 shares of "=C at a much-reduced price. &he difference in the prices of the selling and -uying is his profit. @owe,er if the share prices increase after he has sold at a reduced price earlier, then he ends up with a loss. @ence Shortselling is something that is speculatory to a certain e!tent and is done in anticipation of quick profits. *hat i margin trading. "* Margin trading is trading with -orrowed fundsBsecurities. t is almost like -uying securities on credit. Margin trading can lead to greater returns, -ut can also -e ,ery risky. Chile it lets you acti,ely seize market opportunities it also su-Dects you to a num-er of unique risks such as interest payments charged for the -orrowed money.$otaksecurities.com offers its customers the facility of Margin trading. Chat are Circ-it 2ilter G trading ,and I "* n order to check the ,olatility of shares, S%= has come up with the concept of Circuit 1ilters. 5nder this, Se-i has specified the fi!ed price -ands for different securities within which they can mo,e on a gi,en day. #ecently, in a -id to check the rampant price manipulation in small-cap stocks >known as penny stocks?, stock e!changes reduced the circuit filter ma!imum permissi-le rise in prices in a day to 8 per cent. %arlier, stocks were allowed to rise up to 23 per cent in a session. &he )S% has also reduced the circuit filter in all the stocks, which are traded on a tradeto-trade -asis to 8 per cent. "s the closing price on =S% and )S% can -e significantly

different, this means that the circuit limit for a share on =S% and )S% can -e different. *hat i 3adla 2inancing. "* "s the term itself signifies, .=adla. means .something in return.. =adla is the charge, which the in,estor pays for carrying forward his position. &his hedge tool lets the in,estor take a position in a scrip without actually taking deli,ery of the stock, thus carrying forward his position on the payment of small margin. &he -adla system of transactions has -een in practice for se,eral decades in the Stock %!change, Mum-ai and ser,es J needs of any stock e!change* "? Kuasi-hedging* f an in,estor feels that the price of a particular share is e!pected to go up or down, without gi,ing or taking the deli,ery he can participate in the possi-le ,olatility of the share. =? Stock lending* f a stock lender wishes to short sell without owning the underlying security, he employs the -adla system and lends his stock for a charge. C? 1inancing mechanism* f he wishes to -uy the share without paying the full consideration, the financier steps into the C1 system and pro,ides the finance to fund the purchase &he scheme is known as +LyaD =adla+ or +=adla+ financing. 1or e!ample, M has -ought a stock and does not ha,e the funds to take deli,ery he can arrange a financier through this carrying-forward mechanism. &he financier would make the payment at the pre,ailing market rate and would take deli,ery of the shares on M.s -ehalf. M will only ha,e to pay interest on the funds he has -orrowed. Lis-N-,is, if you ha,e a sale position and do not ha,e the shares to deli,er, you can still arrange through the stock e!change for a lender of securities. "n in,estor can either take the ser,ices of a -adla financier or can assume the role of a -adla financier and lend either his money or securities. /ow the 3adla 0 tem work . "* On e,ery Saturday, a C1 system session is held at the =S%. &he scrips in which there are outstanding positions are listed along with the quantities outstanding. &he C1 rates are determined depending on the demand and supply of money. &here is more demand for funds when the market is o,er -ought, and consequently the C1 rates tend to -e high. @owe,er, when the market is o,ersold the C1 rates are low or e,en re,erse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same. &he scrips that ha,e -een put in the Carry 1orward list are all .". group scrips, which ha,e a good di,idend paying record, high liquidity and are acti,ely traded. &he scrips are not specified in ad,ance, as it then gets difficult to get ma!imum return. &he &rade <uarantee 1und of =S% guarantees all transactions; hence, there is ,irtually no risk to the

-adla financier e!cept for -roker defaults. %,en if the -roker through whom you ha,e in,ested money in -adla financing defaults, the title of the shares would remain with you and the shares would -e lying with the +Clearing house+. @owe,er, the risk of ,olatility of the scrip will ha,e to -e -orne -y the in,estor. *hat i Insider Trading? "* n your dealings with the stock world, you will often come across the term .insider trading.. n simple words, the meaning of insider trading is .the trading of shares -ased on knowledge not a,aila-le to the rest of the world. nsider trading has 2 connotations. Corporate personnel of a company -uying and selling stock in their own company. Chen corporate insiders trade in their own securities, they must report their trades to the e!change. llegal insider trading refers to -uying or selling a security after recei,ing .tips. of confidential securities information. &hus it is considered as a -reach of confidence while in possession of non-pu-lic information a-out the company. %!amples of insider trading 4 Corporate officers, directors, and employees who traded the corporation.s securities after learning of significant, confidential corporate de,elopments; 4 %mployees of law, -anking, -rokerage and printing firms who were gi,en such information to pro,ide ser,ices to the corporation whose securities they traded; 4 <o,ernment employees who learned of such information -ecause of their employment -y the go,ernment; and 4 Other persons who misappropriated, and took ad,antage of, confidential information from their employers. *hat are the +ario- t0pe o2 the ri k once I tart trading. "* Market Ri k &his is the risk of in,esting in the stock market in general. t refers to a chance that a securitys ,alue might decline. "lthough a particular company may -e doing poorly, the ,alue of its stock can go up -ecause the stock market ,alue is collecti,ely going up. Con,ersely, your company may -e doing ,ery well, -ut the ,alue of the stock might drop -ecause of negati,e factors inflation, rising interest rates, political insta-ility etc that are effecting the whole market. "ll stocks are "ffecting -y market risk. Ind- tr0 Ri k &his is risk that affects all companies in a certain industry. 1or eg. 5tility companies, are often ,iewed as relati,ely low in risk -ecause the utility industry is sta-le and operates in a predicta-le en,ironment with relati,ely little change. n contrast, internet and other technology industries are usually ,iewed as high in risk -ecause the industry is changing so quickly and unpredicta-ly. &he dotcom -u--le -urst in the 63s affected the ,aluation of all stocks in that industry.

"ll stocks within an industry are su-Dect to industry risk. Reg-lator0 Ri k Lirtually e,ery company is su-Dect to some sort of regulation. t refers to the risk that the go,ernment will pass new laws or implement new regulations, which will dramatically affect a -usiness. 3- ine Ri k &hese are the risks unique to an indi,idual company. t refers to the uncertainty regarding the organizations a-ility to perform -usiness or pro,ide ser,ice 'roducts, strategies, management, la-or force, market share, etc.,Chich are among the key factors in,estors consider in e,aluating the ,alue of a specific company.