EQUITY FAQ’s
What are the various types of financial markets?
The financial markets can broadly be divided into money and capital market.
Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.
Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.
What is meant by the Secondary Market?
Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.
What is the difference between the primary market and the secondary market?
In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.
What are the products dealt in the secondary markets?
Following are the main financial products/instruments dealt in the secondary market:
Equity: The ownership interest in a company of holders of its common and preferred stock. The various kinds of equity shares are as follows –
Equity Shares: An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held.Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders.Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.
Debentures: Bonds 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. Debentures are normally secured/ charged against the asset of the company in favour of debenture holder.
Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan.
Security Receipts: Security receipt means a receipt or other security, 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.
Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government’s market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (upto twenty years).
Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually 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. Commercial paper is a money market instrument issued normally for a tenure of 90 days.
Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.
What is SEBI and what is its role?
The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto.
Whom should I contact for my Stock Market related transactions?
You can contact a broker or a sub broker registered with SEBI for carrying out your transactions pertaining to the capital market.
A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI.
How do I know if the broker or sub broker is registered?
You can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration number begins with the letters “INB” and that of a sub broker with the letters “INS”. For the brokers of derivatives segment, the registration number begins with the letters “INF”. There is no sub-broker in the derivatives segment.
What is Member –Client Agreement Form?
This form is an agreement entered between client and broker in the presence of witness where the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of brokers capabilities to deal in securities. The member, on the other hand agrees to be satisfied by the genuineness and financial soundness of the client and making client aware of his (broker’s) liability for the business to be conducted.
What documents should be obtained from broker on execution of trade?
You have to ensure receipt of the following documents for any trade executed on the Exchange:
a. Contract note in Form A to be given within stipulated time.
b. In the case of electronic issuance of contract notes by the brokers, the clients shall ensure that the same is digitally signed and in case of inability to view the same, shall communicate the same to the broker, upon which the broker shall ensure that the physical contract note reaches the client within the stipulated time.
It is the contract note that gives rise to contractual rights and obligations of parties of the trade. Hence, you should insist on contract note from stock broker. A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following:
Name, address and SEBI Registration number of the Member broker.
Name of partner /proprietor /Authorised Signatory.
Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange.
Unique Identification Number
Contract number, date of issue of contract note, settlement number and time period for settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and Kind of Security brought/sold by the client.
Brokerage and Purchase /Sale rate are given separately.
Service tax rates and any other charges levied by the broker.
Securities Transaction Tax (STT) as applicable.
Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated stamp duty is paid.
Signature of the Stock broker/Authorized Signatory.
Contract note provides for the recourse to the system of arbitrators for settlement of disputes arising out of transactions. Only the broker can issue the contract notes.
Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. Pursuant to the enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities Transaction Tax Rules, 2004 and STT came into effect from October 1, 2004.
COMMODITY FAQ’s
What is a commodity?
A commodity is a product having commercial value that can be produced, bought, sold, and consumed. It is normally in a basic raw unprocessed state. But products derived from primary sector and structured products are also traded at these exchanges. In India, the list includes precious metals, ferrous and nonferrous metals, spices, pulses, plantation crops, sugar, and other soft commodities.
What are the different types of participants in commodity markets?
Broadly, the participants can be classified as hedgers, arbitragers, and speculators. In other words manufacturers, traders, farmers, exporters, and investors are all participating in this market.
Like stock exchanges in capital markets, a commodity exchange is an association or a company or any other body corporate that is organizing futures trading in commodities. The new-generation national level exchanges have been set up in a corporatised / demutualised environment. There are three nationally recognized commodity exchanges in India and 22 regional exchanges. The national exchanges are Multi Commodities Exchange of India (MCX), National Commodities and Derivatives Exchange of India (NCDEX), and National Multi Commodities Exchange.
How is trading done in the commodity exchanges?
Like the stock market online trading system, commodity exchanges are also typically on the online trading system. It is an order-driven, transparent trading platform, which is reachable to the various participants through the Internet, VSAT, and leased line modes operated by members or sub-brokers spread across the country.
Commodity exchanges have a membership framework somewhat similar to the stock exchanges. Members of the exchange and registered, approved/ authorized users (i.e. clients) of the members can trade on commodity exchanges.
A futures contract is an agreement between two parties to buy or sell a specified quantity and defined quality of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract. This is typically traded at regulated commodity exchanges.
What is the difference between spot market and futures market?
In a spot market, commodities are physically bought or sold usually on a negotiable basis resulting in delivery. While in the futures markets, commodities can be bought or sold irrespective of the physical possession of the underlying commodity. The futures market trades in standardized contractual agreements of the underlying asset with specific quality, quantity, and mode of delivery whose settlement is guaranteed by regulated commodity exchanges.
What is arbitrage in commodity markets?
Arbitrage is making purchases and sales simultaneously in two different markets to profit from the price differences prevailing in those markets. The factors driving arbitrage are the real or perceived differences in the equilibrium price as determined by supply and demand at various locations.