Basics of Share Markets

8/8/2019 Basics of Share Markets

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What are shares?

Owning shares (sometimes called stock) means you have a part-ownership of a company. You may be

surprised to know that nearly half of all Australian adults have now become shareholders. This does not

mean that shareholders can identify a physical asset that they personally own, but rather that they have

invested in the management of the company. Nevertheless, the amount of shareholdings indicate a

percentage ownership ion the company e.g. if you have 1000 shares of a company that has a share issue of

100,000 shares, you have a 1% shareholding in the company. In theory you can also participate in thecompany policy by way of the annual general meting.

What is the stock market?

The stock market (sometimes called the stock exchange) is quite literally a "market" in which people get

together to buy and sell shares in companies.

The prices that are set for shares also reflect this "market" condition. At bottom line, like many goods

markets, the share market sets prices according to supply and demand. So a stock that is highly in demand

will increase in price, whereas a stock that is being heavily sold will decrease in price.

Companies that are permitted to be traded in this market place are called "listed companies".

Listed companies

In order to be listed, a company must reach certain standards of the Australian Securities and Investments

Commission (ASIC) and the Australian Stock Exchange (ASX). When companies launch on the stock

exchange it is called a "float". Information on upcoming floats can be obtained from the ASX.

In general companies list because they require liquid assets in order to grow their businesses.

Initial Public Offering

Often known as a float, this is when the company first offers its shares for trading on the ASX. An official

prospectus is published to allow prospective investors to gauge whether they wish to invest. You can fill in a

form in the prospectus to apply for the initial share offering. Remember, under the Corporations Law a

prospectus must contain all the information that is reasonably required to allow you to make an informed

investment decision about the company. Importantly, it must also disclose any risks that accompany an

investment. It should also discuss assumptions on which profit forecasts are made.

Usually shares in a float are restricted, often to people who have some relationship with the underwriter, theinstitution that takes a commission for managing the IPO. They also guarantee to purchase any unsold

shares.

Capital growth

People invest in the stock market, as opposed to some other assets, because they hope that there will be

"capital growth" in the stock they have selected. This generally occurs over the longer term, although at

times shares rise and fall dramatically.

Rights issues



Having shares sometimes allows investors to grow their investments by way of a "rights issues" i.e. they are

offered the right to buy more shares in the company at a discounted rate. You can also sell these rights to

another person.

Sometimes companies offer free ("bonus") shares to existing shareholders.

Tax

Shareholders are required to give their tax file number (TFN) when they purchase shares. Of course capital

gains tax is also payable on profit from the sale of shares, and this often affects the decision to sell shares.

These rules have been changed, depending on when you bought the shares, so speak to your accountant or

investment adviser.

On the other hand, brokerage fees are generally tax deductible, and the losses that are incurred through the

sale of shares may be offset against profits. Speak to your financial adviser about the best time to use losses

to offset profit (this is because in some instances the losses can be offset in financial years subsequent to the

year they were actually incurred).

Making a complaint

You always have the right to complain about the activities of any broker or financial adviser. Sometimes it is

best to first approach the firm you have dealt with, especially if you believe the problem can be readily

sorted out.

If this does not work you should approach an independent body. If the complaint concerns a broker, it is best

to get in touch with ASIC and ask for advice - ring 1300 300 630. If you have a complaint about a financial

adviser ring the Financial Industry Complaints Service Ltd. on 1800 335 405.

What Is the Stock Market?Basics for bulls and bears

by Holly Hartman

The word stock simply refers to a supply. You may have a stock of T-shirts in your closet, or a stock of pencils in your

desk. In the financial market, stock refers to a supply of money that a company has raised. This supply comes from

people who have given the company money in the hope that the company will make their money grow.

A market is a public place where things are bought and sold. The term "stock market" refers to the business of buying

and selling stock. The stock market is not a specific place, though some people use the term "Wall Street"—the main

street in New York City's financial district—to refer to the U.S. stock market in general.

Why Companies Issue Stock...

If a company wants to grow—maybe build more factories, hire more people, or develop new products—it needs

money. It could get a loan from a bank. But then it would owe money. By issuing stock, a company can raise money

without going into debt. People who buy the stock are giving the company the money it needs to grow.

Not every company can issue stock. A business owned by one person (a proprietorship) or a few people (a

partnership) cannot issue stock. Only a business corporation can issue stock. A corporation has a special legal status.

Like a school, its existence does not depend on the people who run it. Under the law it is separate from the people

associated with it, and has special legal rights and responsibilities as well as its own unique name.

..And Why People Buy It



Owning stock in a company means owning part of that company. Each part is known as a share. If a company has

issued 100 shares of stock, and you bought one, you own 1% of that company. People who own stock are called

stockholders, or shareholders.

Stockholders hope the company will earn money as it grows. If a company earns money, the stockholders share the

profits. Over time, people usually earn more from owning stock than from leaving money in the bank, buying bonds, or

making other investments.

One Man, 5,000 Votes?

Stockholders in a company usually have voting rights. They vote on such issues as who will be elected to the board of

directors—the group of people who oversee company decisions—and whether to buy other companies. Stockholders

typically have one vote for each share they own. Every vote counts, but a stockholder with 5,000 shares will have

more influence on the company than someone with only one share.

Most companies have annual meetings, where stockholders cast votes and ask questions of the company's leaders. If

they cannot attend, stockholders may use an absentee ballot to vote. Shareholders also receive quarterly and annual

reports that tell them how the company is doing.

What Goes Up Earns Bucks

When the price of a particular stock rises, that stock is said to be "up," meaning up in price. When the price falls, the

stock is said to have gone "down." The terms "up" and "down" are also used to describe the rise and fall of the market

as a whole.

As a company makes money, the value of its stock goes up. For instance, pretend you bought some shares of stock

for $10 each. Since you share the company's profits, if it does well the shares might later be worth $15 each. You

could then sell your stock and make $5 on each share. If the company loses money, however, you would also shareits losses. Those $10 shares might each be worth $3 if the company fell on hard times.

Those Funny Fractions In April 2002, all stock exchanges in the U.S. began trading their stocks in dollars and

cents. For instance, the price of a particular stock might go up $1.10. This means that the price of a stock increased

$1.10 over its previous price. If a share of stock had been worth $10, it would now be worth $11.10.

This is different from the earlier system, when stocks were traded in fractions based on 1/8th. If a stock worth $10

went up 1 and 5/8ths, it meant that the stock had risen $1 plus 5/8ths of a dollar in price, or a total of $1.62. In other

words, if each share had been worth $10 previously, it would now be worth $11.62.

But why divide each dollar into eighths when it could simply be divided into hundredths—a hundred pennies, to be

exact? It's because the U.S. dollar is a relatively new kind of currency. When the stock market opened at the end ofthe eighteenth century, prices were based on the Spanish dollar, which is divided into eighths

What is stock?

A stock represents partial ownership of a corporation. When you buy shares of a stock, the company gives you astock certificate which shows that you own a small fraction of that company. As with most anything in life, owningstocks has its advantages and disadvantages.

The benefit of owning stock is that when the company makes money, so do you. For example, through your research,you learn that Disney is building new theme parks in Hong Kong, Japan, and Anaheim. They also launched go.comon the Internet and their show Who Wants to be a Millionaire? is the most popular show on network television. With

this information, you decide to buy 100 shares of Disney stock in hopes that the company will announce goodearnings and that the stock price will go up in the future. As a shareholder, you will be rewarded with a higher shareprice of the stock, meaning that you made money. Not only millionaires can buy shares of a stock but kids,schoolteachers, policemen, housewives, and just about every one can also buy shares of a corporation.

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On the other hand, owning stock has its disadvantages. When you buy shares of a stock, you get a full share of therisk of an operating business. Owning stock does not guarantee that you make money. For example, you hear Theglobe.com was a very hot Internet stock. However, you didn’t do too much research but bought 100 shares atover $100 per share. A few months later, the share price is less than $10. Your hard-earned savings are now gone.Some stocks may even go bankrupt and you could lose even more money.

Whether you make or lose money with stocks, you still have voting power in the company. As a shareholder, you areallowed one vote per share of stock that you own. In order to vote, you must either attend a corporation meeting or fillout a proxy ballot, which is just like an absentee ballot in an election. With the proxy ballot, another person casts your

vote for you. The voting usually decides who will be on the board of directors, just like voting for Senators and HouseRepresentatives to the Congress. The board of directors oversees matters such as the company budget, purchasingother companies, issuing additional stock, and paying a dividend. Overall, the board oversees major decisions madeby the executives of company.

Owning shares of a stock has its risk and reward. However, from the above examples you can see that if youresearch a company before buying it, stocks can be profitable. Stock prices may go up or down on a daily basis. Inthe long run if the company is making money, the share price will go up because as a shareholder you share the profitof the company.

Stock dividents

Dividends are just like a small reward a company pays you for owning shares of its stock. The company takes aportion of its earnings, which it divides and distributes to shareholders. In general, a company that has a slow growthrate pays high dividends. On the other hand, a company with a high growth rate usually pays no dividends.

Historically, large corporations and utility stocks have paid regular dividends. Utility stocks such as Real EstateInvestment Trust (REIT) and Southern California Edison pay high dividends. These companies usually have growthrates of less than 10% and slow stock price appreciation but have high cash flow. They can pay dividends toinvestors attracted to income. Contrastly, large corporations such as Microsoft and Cisco have growth rates around30% and high stock appreciation but do not pay dividends. Instead, they reinvest the earnings into the company inorder to make the business grow.

The board of directors votes on the various aspects of dividends such as their approval and dates of distribution.Dividends are usually paid quarterly and sometimes annually or semiannually. However, many companies don’t pay

dividends at all. Older stocks are more likely to pay dividends than the latest IPO.

If the board of directors does decide to issue dividends, it will be announced at a set amount and will be paid to theshareholders as of a record date. Dividends will be paid on the distribution date, sometimes called the payable date.In order to receive the dividend, you must own shares of the stock on the record date. Since almost all stock tradesare settled in 3 business days, you must buy the shares at least 3 days before the record date. Historically, largecorporations and utility stocks have paid regular dividends. In recent years, events have changed greatly. Largecorporations like IBM have cut its dividend payments considerably. Other large companies such as Microsoft do notpay any dividends at all. An increasing number of public companies offer a dividend reinvestment program (DRIP). Itautomatically uses your cash dividends to purchase additional shares of the stock without a broker. Shareholders notparticipating in a DRIP will receive a check from the company when the dividends are distributed.

When investing in the stock market, the main objective is to look for stocks that have high stock price appreciation.Dividends are a small bonus for owning certain stocks.Market Basics

What is a Stock Exchange?

A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physicalentity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment.

What is electronic trading?

Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fullyautomated screen-based processes. Their workstations are connected to a Stock Exchange's central computer via

satellite using Very Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's centralcomputer and are matched electronically.

How many Exchanges are there in India?

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The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leadingExchanges. There are 20 other regional Exchanges, connected via the Inter-Connected Stock Exchange (ICSE). TheBSE and NSE allow nationwide trading via their VSAT systems.

What is an Index?

An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stockmarket price movements. An Index comprises stocks that have large liquidity and market capitalisation. Each stock isgiven a weightage in the Index equivalent to its market capitalisation. At the NSE, the capitalisation of NIFTY (fifty

selected stocks) is taken as a base capitalisation, with the value set at 1000. Similarly, BSE Sensitive Index or Sensexcomprises 30 selected stocks. The Index value compares the day's market capitalisation vis-a-vis base capitalisationand indicates how prices in general have moved over a period of time.

How does one execute an order?

Select a broker of your choice and enter into a broker-client agreement and fill in the client registration form. Placeyour order with your broker preferably in writing. Get a trade confirmation slip on the day the trade is executed and askfor the contract note at the end of the trade date.

Why does one need a broker?

As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can operate in the stock

market. One can trade by executing a deal only through a registered broker of a recognised Stock Exchange or through a SEBI-registered sub-broker.

What is a contract note?

A contract note describes the rate, date, time at which the trade was transacted and the brokerage rate. A contractnote issued in the prescribed format establishes a legally enforceable relationship between the client and the member in respect of trades stated in the contract note. These are made in duplicate and the member and the client both keepa copy each. A client should receive the contract note within 24 hours of the executed trade. Corporate Benefits/Action

What is a book-closure/record date?

Book closure and record date help a company determine exactly the shareholders of a company as on a given date.

Book closure refers to the closing of register of the names or investors in the records of a company. Companiesannounce book closure dates from time to time. The benefits of dividends, bonus issues, rights issue accruing toinvestors whose name appears on the company's records as on a given date, is known as the record date.

An investor might purchase a share-cum-dividend, cum rights or cum bonus and may therefore expect to receivethese benefits as the new shareholder. In order to receive this, the share has to be transferred in the investor's name,or he would stand deprived of the benefits. The buyer of such a share will be a loser. It is important for a buyer of ashare to ensure that shares purchased at cum benefits prices are transferred before book-closure. It must be ensuredthat the price paid for the shares is ex-benefit and not cum benefit.

What is the difference between book closure and record date?

In case of a record date, the company does not close its register of security holders. Record date is the cut off date for determining the number of registered members who are eligible for the corporate benefits. In case of book closure,shares cannot be sold on an Exchange bearing a date on the transfer deed earlier than the book closure. This doesnot hold good for the record date.

What is a no-delivery period?

Whenever a company announces a book closure or record date, the Exchange sets up a no-delivery (ND) period for that security. During this period only trading is permitted in the security. However, these trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for the corporate benefit is clearlydetermined.

What is an ex-dividend date?

The date on or after which a security begins trading without the dividend (cash or stock) included in the contract price.



What is an ex-date?

The first day of the no-delivery period is the ex-date. If there is any corporate benefits such as rights, bonus, dividendannounced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not beeligible for the benefits.

What is a Bonus Issue?

While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from

the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldomhappens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomestoo large, the company may transfer some amount from the reserves account to the share capital account by a merebook entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus sharesin a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonushe will hold three.

What is a Split?

A Split is book entry wherein the face value of the share is altered to create a greater number of shares outstandingwithout calling for fresh capital or altering the share capital account. For example, if a company announces a two-waysplit, it means that a share of the face value of Rs 10 is split into two shares of face value of Rs 5 each and a person

holding one share now holds two shares.

What is a Buy Back?

As the name suggests, it is a process by which a company can buy back its shares from shareholders. A companymay buy back its shares in various ways: from existing shareholders on a proportionate basis; through a tender offer from open market; through a book-building process; from the Stock Exchange; or from odd lot holders.A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot transactions or through any private arrangement. Clearing and Settlement

What is a settlement cycle?

The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins on Wednesday andends on the following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday.At the end of this period, the obligations of each broker are calculated and the brokers settle their respectiveobligations as per the rules, bye-laws and regulations of the Clearing Corporation.If a transaction is entered on the first day of the settlement, the same will be settled on the eighth working dayexcluding the day of transaction. However, if the same is done on the last day of the settlement, it will be settled onthe fourth working day excluding the day of transaction.

What is a rolling settlement?

The rolling settlement ensures that each day's trade is settled by keeping a fixed gap of a specified number of workingdays between a trade and its settlement. At present, this gap is five working days after the trading day. The waitingperiod is uniform for all trades.

When does one deliver the shares and pay the money to broker?

As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. Simliarly, as a buyer, one should payimmediately on the receipt of the contract note for purchase but in any case before the pay-in day.

What is short selling?

Short selling is a legitimate trading strategy. It is a sale of a security that the seller does not own, or any sale that iscompleted by the delivery of a security borrowed by the seller. Short sellers take the risk that they will be able to buythe stock at a more favourable price than the price at which they "sold short."

What is an auction?

An auction is conducted for those securities that members fail to deliver/short deliver during pay-in. Three factorsprimarily give rise to an auction: short deliveries, un-rectified bad deliveries, un-rectified company objections



Is there a separate market for auctions?

The buy/sell auction for a capital market security is managed through the auction market. As opposed to the normalmarket where trade matching is an on-going process, the trade matching process for auction starts after the auctionperiod is over.

What happens if the shares are not bought in the auction?

If the shares are not bought at the auction i.e. if the shares are not offered for sale, the Exchange squares up the

transaction as per SEBI guidelines. The transaction is squared up at the highest price from the relevant trading periodtill the auction day or at 20 per cent above the last available Closing price whichever is higher. The pay-in and pay-outof funds for auction square up is held along with the pay-out for the relevant auction.

What is bad delivery?

SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery may pertain to atransfer deed being torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the companyor the transfer. Bad delivery exists only when shares are transferred physically. In "Demat" bad delivery does notexist.

What are company objections?

A list documenting reasons by a company for not transferring a share in the name of an investor is called companyobjections. Rejection occurs due to a signature difference, or fake shares, or forgery, or if there is a court injunctionpreventing the transfer of the shares.

What should one do with company objections?

The broker must immediately be notified. Company objection cases should be reported within 12 months from thedate of issue of the memo for the original quantity of share under objection.

Who has to replace the shares in case of company objections?

The member who has sold the shares first on the Exchange is responsible for replacing the shares within 21 days of

the Exchange being informed. Company objection cases that are not rectified or replaced are normally auctioned.

How does transfer of physical shares take place?

After a sale, the share certificate along with a proper transfer deed duly stamped and complete in all respects is sentto the company for transfer in the name of the buyer. Once the transfer is registered in the share transfer register maintained by the company, the process of transfer is complete.

Generally investors invest in equity for the potential capital gain. The increase in the value of their investments is the main

motivator behind the additional risk they undertake by choosing to invest in equity rather than the less risky fixed income route.

However, apart from capital gains, equity instruments can confer certain other benefits to investors such as dividends, bonuses,

stock splits and share buybacks. In this piece we examine the significance of these to investors and the tax consequences of each

such corporate action.

2. Bonus shares

Bonus shares are nothing but shares issued free of cost to the shareholders of a company, by capitalizing a part of the company's

reserves. Following a bonus issue, though the number of total shares increase, the proportional ownership of shareholders does not

change.

Also, post the bonus the cum bonus share price should fall in proportion to the bonus issue, thereby making no difference to the

personal wealth of the share holder. However, more often than not, as explained earlier, a bonus is perceived to be a strong signal

given out by the company and the consequent demand push for the shares causes the price to move up.

As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be valued at nil cost while making

calculations for capital gains. An incidental benefit is that since the price more or less falls in proportion to the bonus, there may



arise an opportunity to book loss on the original shares.

3. Stock splits

Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons that

companies may split their shares and how a stock split is different from a bonus issue.

A stock split is when the number of shares in a stock is increased and the value per share is decreased. This in no way affects the

intrinsic value of your investment and has no effect on your net wealth.

A typical example is a 2-for-1 stock split. Say a company announces a 2-for-1 stock split in one month. That means one month

from that date, the company's shares will start trading at half the price from the previous day. Consequently you will own twice

the number of shares that you originally owned and the company in turn will have twice the number of shares outstanding.

Consider the following example.

Shares Price (Rs.) Value (Rs.)

Stock X Before split 100 3,000 3,00,000

Stock X After Split 200 1,500 3,00,000

The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split.

Well, the primary reason is to infuse additional liquidity into the shares by making them more affordable. Here it has to be

reiterated that the shares only appear to be cheaper, it makes no difference whether you buy one share for Rs.3,000 or two for

Rs.1,500 each.

As far as the tax implications for stock splits are concerned, well, there aren't any. A stock split, like a bonus issue, is tax neutral.

However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here,

the original cost of the shares also has to be reduced. For instance, in the above example if the cost of the 100 shares at Rs. 150 per

share was Rs. 1,50,000, after the split the cost of 200 shares would be reduced to Rs. 75 per share, thereby keeping the total cost

constant at Rs. 1,50,000.

4. Share buybacks

Even share buybacks are a comparatively new phenomenon. Reliance and Siemens are a couple of examples of companies which

have bought back their shares.

A buyback is essentially a financial tool in the hands of the corporate that affords flexibility in the capital structure. A buyback in

this case allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Generally

companies buyback when they perceive their own shares to be undervalued or when they have surplus cash for which there is no

ready capital investment need.

Stock buybacks also prevent dilution of earnings. In other words, a buyback program enhances the earnings per share, or

conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc.

Last but not the least, a buyback also serves as a substitute for dividend payments. This brings us to the crucial issue of tax

implications of a buyback. A very important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If it is indeed considered to be dividend, the same will not be taxable in the hands of the investors. Also, to what

extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium

paid over the face value?

Documents

Basics of Share Markets