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Vaishnavi Investments
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Frequently Asked Questions
Frequently Asked Questions
Hello Friends!

Before you start investing and trading, it would be advisable to understand a few basic concepts related to Stocks and Finance.

Here we have compiled some questions related to stocks for your reference.


What are Stock markets ?
What is a Stock Exchange ?
What are Share, Stock, Equity ?
What is a Demat Account ?
Who is a Stock Broker ?
What are Futures & Options ?
8-year equity model
What are Stock markets ?
A stock market, or (equity market), is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

Primary markets:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

Secondary markets:
The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.
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What is a Stock Exchange ?
A stock exchange, is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities.

The Bombay Stock Exchange Limited, or BSE has a nation-wide reach in cities and towns of India. Its index, or market indicator is known as Sensex.

Nifty, is the leading index for large companies on the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy, and representing approximately 47% of the traded value of all stocks on the National Stock Exchange of India.
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What are Share, Stock, Equity ?
A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share. Voting and non-voting shares are also known as Class A and B shares respectively.

Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company increases.

The terms share, equity and stock mean the same thing and can be used interchangeably.
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What is a Demat Account ?
In India, a demat account, the abbreviation for dematerialised account, is a type of banking account which dematerializes paper-based physical stock shares. The dematerialised account is used to avoid holding physical shares: the shares are bought and sold through a stock broker.

This account is popular in India. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading above 500 shares. As of April 2006, it became mandatory that any person holding a demat account should possess a Permanent Account Number (PAN), and the deadline for submission of PAN details to the depository lapsed on January 2007.

Investors who wish to trade in the market need to have a Dematerialized, or Demat, account. In India, the government has mandated two entities –National Securities Depository, or NSDL, and Central Depository Services (India), or CDSL – to be the custodian of dematerialized securities.
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Who is a Stock Broker ?
A stock broker or stockbroker is person who is licensed to trade in shares. Brokers also have direct access to the sharemarket and can act as your agent in share transactions. For this service they charge a fee. They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts.

In addition a stock broker can plan, implement and monitor your investment portfolio, conduct research and help you optimize your returns.
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What are Futures & Options ?
Futures and options represent two of the most common form of "Derivatives". Derivatives are financial instruments that derive their value from an 'underlying'. The underlying can be a stock issued by a company, a currency, Gold etc., The derivative instrument can be traded independently of the underlying asset.

The value of the derivative instrument changes according to the changes in the value of the underlying.

Derivatives are of two types -- exchange traded and over the counter.

Exchange traded derivatives, as the name signifies are traded through organized exchanges around the world. These instruments can be bought and sold through these exchanges, just like the stock market. Some of the common exchange traded derivative instruments are futures and options.

Over the counter (popularly known as OTC) derivatives are not traded through the exchanges. They are not standardized and have varied features. Some of the popular OTC instruments are forwards, swaps, swaptions etc.

Futures

A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a particular time. Every futures contract has the following features:
Buyer
Seller
Price
Expiry

Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.

The difference between the price of the underlying asset in the spot market and the futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is usually negative, which means that the price of the asset in the futures market is more than the price in the spot market. This is because of the interest cost, storage cost, insurance premium etc., That is, if you buy the asset in the spot market, you will be incurring all these expenses, which are not needed if you buy a futures contract. This condition of basis being negative is called as 'Contango'.

Sometimes it is more profitable to hold the asset in physical form than in the form of futures. For eg: if you hold equity shares in your account you will receive dividends, whereas if you hold equity futures you will not be eligible for any dividend.

When these benefits overshadow the expenses associated with the holding of the asset, the basis becomes positive (i.e., the price of the asset in the spot market is more than in the futures market). This condition is called 'Backwardation'. Backwardation generally happens if the price of the asset is expected to fall.

It is common that, as the futures contract approaches maturity, the futures price and the spot price tend to close in the gap between them ie., the basis slowly becomes zero.

Options

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put' option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is called 'strike price'. It should be noted that while the holder of the call option has a right to demand sale of asset from the seller, the seller has only the obligation and not the right. For eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.

Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

So in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the contract has only the obligation and no right. As the seller of the contract bears the obligation, he is paid a price called as 'premium'. Therefore the price that is paid for buying an option contract is called as premium.

The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the asset in the spot market is less than the strike price of the call. For eg: A bought a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call. Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of the asset in the spot market is more than the strike price of the call. For eg: B bought a put at a strike price of Rs 600. On expiry the price of the asset is Rs 619. A will not exercise his put option. Because he can sell the same asset in the market at Rs 619, rather than giving it to the seller of the put option for Rs 600..
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8-year equity model
The 8-year equity model
Sensex has been following the eight-year equity cycle since 1984 but the data from the 1984 cycle is not collated.

The 1992 cycle
Equity markets peaked in April, 1992 and 40% correction happened in just three-months between April-July, 1992. The markets then bottomed out in April, 1993 (60% off peak). It reached Sensex PE bottom at 10x earnings (4-quarter trailing). It retraced previous high in October, 1999. So, it took 6.5 years to reach April, 1992 highs.

The 2000 cycle
Equity markets peaked out in February, 2000 and 40% correction was between February-October, 2000. Sensex then bottomed out in September, 2001 (58% off peak). Sensex PE at bottom was at 10x earnings (4-quarter trailing). It retraced previous high in January, 2004 and took 4.25 years to reach February, 2000 highs.

The 2008 Cycle
Sensex peaked in January, 2008 and 40% correction was between January-August, 2008. The expected bottom was seen around 8320 (60% off peak). Expected Sensex PE at the bottom was at 10x earnings (4-quarter trailing).

So, what we witness in all the 8-year equity cycles is that markets bottoms out at 10x PE. From the past, we see that consolidation is getting narrowed down and reach to the previous highs is getting shorter. We can see the markets bottoming out at 8320 levels based on the 8-year equity market. Consolidation phase would take anywhere between 24-36 months.
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VaishnaviInvestments.com advices users to check with certified experts before taking any investment decision. However, VaishnaviInvestments.com does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

VaishnaviInvestments.com especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.
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