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Mohit Gaba

Technical Analyst ,

(19 Sep- 14:00hrs)

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Understanding Stocks

  • Earnings per share is the total profit made by a company divided amongst its shareholders depending on their ownership in that company. It serves as an indicator of a company's profitability over the years. EPS tells you how much net income the business earned for every stock you own.


    Depending on the type of outstanding equity shares used for calculation, EPS can be called as Basic EPS or Diluted EPS. Basic EPS is calculated by using the number of shares issued and held by the investors. Diluted EPS takes into account the total number of shares that would have been issued if all the stock options, warrants, convertible debentures, and other potential sources of dilution in equity that are currently exercisable were invoked.


    TTM EPS or Trailing Twelve Month EPS takes into account the EPS figures reported by the company in past twelve months.


    How to interpret EPS

    EPS is one of the most commonly used financial parameters to evaluate a stock. EPS is a base for calculating the Price Earning or commonly known as the PE ratio of a share. A consistent growth in turnover and profits will lead to higher EPS growth. Higher or lower PE ratio should always be compared with its peers having parallel business activity and of similar size to evaluate whether a stock is undervalued or overvalued.


    Formula

    Basic EPS = (Net Profit - Preferential Dividend) Equity shares outstanding Diluted EPS = (Net Profit - Preferential Dividend) (Equity shares outstanding including warrants, stock options, convertible debentures and other potential sources of dilution in equity)


    Example

    Net profit Rs 200 crore Total Equity shares: 50 crore Basic EPS: 4 (200/50) Net profit Rs 200 crore Equity shares: 70 crore Warrants: 5 crore Stock options: 10 crore Convertible Debentures: 15 crore Total equity shares including warrants, stock options, convertible debentures: 100 crore Diluted EPS: 2 (200/100)

  • Cash Earnings Per Share considers cash flow generated by a company on per share basis. It is different from earnings per share, which looks at net income or profit of a company on per share basis. Cash EPS is calculated by adding all the non-cash transactions like depreciation, amortization, deferred tax and intangibles like royalty to net income of the company and then divide it by total number of shares.

    A non-cash expense is an expense that is reported in the income statement, but there was no actual cash outflow from the company during the period.

    How to interpret cash earnings per share

    It shows company's ability to clear off debt, pay dividends and perform other transactions. Higher cash earnings per share means that company has posted strong annual earnings growth over the years and vice-versa.

    Formula

    Cash earnings per share = Net profit+ (Depreciation, amortization, deferred tax and intangibles like royalty)/Weighted average of outstanding shares

    Example

    Assume net profit is Rs. 75 crore, depreciation Rs 15 crore, amortization Rs 5 crore, deferred tax Rs 3 crore and intangibles Rs 2 crore. Number of equity shares: 20 crore Cash earnings per share = 100/20 = 5

  • Price Earnings ratio is the ratio of company's current share price to its earnings per share. It gives us an idea of what the market is willing to pay for company's earnings. It also indicates how the stock is valued in the market.

    How to interpret PE

    Generally a high PE ratio suggests that market participants are bullish on the stock and expect the company to post higher earnings growth going forward. However, it can also be interpreted as an overpriced stock in some cases.

    Generally a low PE ratio can either be interpreted as an undervalued stock or market participants are not too bullish on the company's future earnings growth.

    The above may not always hold true as the PE ratio varies from industry to industry. Traditionally there are certain sectors like diamonds, fertilizers or sectors that are very cyclical that command a low PE ratio. There are certain sectors like FMCG, Pharma, IT that normally have a higher PE. So the PE ratio of a company should either be compared with its peers having parallel business activity and of similar size or with its historical PE to evaluate whether a stock is undervalued or overvalued.

    Formula

    PE ratio = Stock Price Earnings per share

    Example

    Current market Price Rs 100 EPS Rs 10 P/E: 10 (100/10)

  • The Price Earnings to Growth ratio determines the stock's value while taking into account the future earnings growth rate. It is used to get better understanding of whether a company's stock is overpriced, underpriced or just fairly priced. The PEG ratio uses the PE ratio of company and compares it with the estimated annual growth rate of a company.

    How to interpret PEG

    A PEG ratio of 1 indicates that a stock is fairly priced and the current stock price has factored in the anticipated growth rate. A PEG ratio of less than 1 indicates that a stock is undervalued and the stock price has potential to move higher in the future and vice-versa.

    Formula

    PEG = Price Earnings ratio Annual EPS growth PE ratio: 10 Annual EPS growth forecast: 10% PEG ratio will be 1.

  • Return on capital employed is used to determine how much profit the company is able to generate on the capital employed by it. The capital employed is calculated by deducting current liabilities from its total assets.

    How to interpret ROCE

    This ratio indicates efficiency of a company in employing its capital and also used to compare profitability levels between various companies. Higher ROCE indicates that a company is more efficiently using its capital and vice-versa. ROCE has to be higher than company's cost of borrowing. This also helps companies decide if they should take on more debt for expansion projects.

    Formula

    ROCE = Earnings Before Interest Tax (Total Assets Current Liabilities) Company A Company B EBIT of Rs 200 crore EBIT of Rs 300 crore Capital Employed Rs 400 crore Capital Employed Rs 1200 crore ROCE 50% (200/400)% ROCE 25% (300/1200)% Company A is efficiently using its capital than company B. Return on Equity (ROE) or Return on Net Worth

    Return on Equity reveals how much profit a company generates with money that equity share holders have invested. It will indicate to the investors how well their capital is being reinvested by the company.

    How to interpret ROE

    A higher ROE suggests that a company is able to effectively generate cash internally. This ratio is useful for comparing the profitability of a company to that of other firms in the same industry. The better way is to compare a company's ROE with its industry average.

    Company A  Company B
    Net Income Rs 200 crore Net Income Rs 300 crore
    Equity Rs 400 crore  Equity Rs 1200 crore
     RONW 50% (200/400)% RONW 25% (300/1200)%




    Company A generated 50 percent returns in the form of earnings for every rupee invested by shareholders. Company B generated lower returns for its shareholders compared to company A.

  • Book Value is the total value of the company's assets that equity shareholders would get if a company were to be liquidated. Book value is the actual value of a company when all liabilities are deducted from its assets and equity. It values the company based on its net assets value. The market-cap of the company is compared with its book value to evaluate whether a stock is undervalued or overvalued. Since the book value is less volatile compared to company's profits and dividends, price to book value ratio is one of the more reliable ratios.

    How to interpret Price to Book Value ratio

    The ratio determines whether a stock is undervalued or overvalued. Ratio of 1 or less than1 indicates that a company is either undervalued or it is in a declining business. Ratio of more than 1 indicates that a company is either overvalued or the market is willing to pay higher premium above company's assets. Price to book value ratio may differ for various sectors. Private banks quote at a higher price to book value ratio compared to public sector banks. However, asset quality of private banks is far superior compared to public sector banks. One should not consider negative price to book value ratios during analysis.

    Formula

    Price to Book Value = Current Market Price Book value per share Book Value = (Total Assets Intangible Assets & Liabilities) Total equity shares

    Example

    Current market Price Rs 100 Book Value per share: Rs 200 P/BV: 0.5 (100/200)

  • Debt to equity ratio is a type of solvency ratio that suggests the reliability of the company's long term financial policies. Debt to equity ratio suggests proportion of debt (provided by creditors) and equity (provided by equity shareholders) used to finance company's assets. It also indicates company's capability to repay its creditors on time. It is a measure of leverage taken by the company. It is calculated by dividing total debt (secured +unsecured borrowings) to shareholder's funds.

    How to interpret Debt to equity ratio

    A ratio of 1 indicates that the company's capital structure is equally contributed by debt and equity. A high debt to equity ratio means the company is having an excessive debt and has a higher interest burden to service its debt thereby dragging its profits. A debt-free company scores higher over company having debt. A higher debt to equity ratio is not good for the company but one needs to compare it with industry peers since this ratio varies from industry to industry. Certain capital intensive sectors like Shipping, Steel, Power etc may have a higher debt equity ratio than others.

    Formula

    Debt to equity ratio = Total debt

    Total equity

    It is calculated by dividing total debt (secured +unsecured borrowings) to shareholder's funds

    Example

    Assume total debt of company is Rs. 200 crore and total equity is 100 crore Debt to equity ratio = 200/100 = 2 This means that a company has Rs 2 in debt for every equity held.

  • Dividend yield is calculated by dividing the dividend amount declared during a year to the current market price of the company. It indicates the returns your investment would earn by way of dividends if you were to buy the stock at the current price.

    How to interpret dividend yield

    The comparison of dividend yield of companies is helpful for investors who are looking for long term investment. Generally the share prices of companies that offer high dividend yields do not usually fluctuate a lot. So the scope for capital appreciation in these stocks would be lesser. Higher share price leads to lower dividend yield and vice versa. A company with a higher dividend yield is good for long-term investment provided rest of the fundamentals is sound. Along with yield one also needs to examine the dividend policy and the consistency of dividends announced. The added advantage is that dividend income is tax free.

    Formula

    Dividend Yield: [(Interim+Final Dividend) / Market price]*100

    Example

    Interim Dividend: Rs 10 Final Dividend: Rs 20 Market Price: Rs 300 Dividend Yield: 10% (30/300)%

  • Net Interest Margin is mainly used for analyzing bank stocks. It is calculated by dividing the net interest income to loans and advances given by banks to borrowers. Net interest income is the difference between interest earned on loans and interest expended on deposits.

    Formula

    Net Interest Income = Interest earned - Interest expended NIM = Net Interest Income Average loan book

    Example

    Interest earned: Rs 500 cr, Interest expended: Rs 200 cr. Net Interest Income: Rs 300 cr. Loan book at beginning of the year: Rs 10000 Loan book at end of the year: Rs 10500 NIM = [300/(10000+10500/2)] = 2.93%.

  • Enterprise value is the total market value of a firm's entire business. It indicates the cost or amount required to buy a company. It is used as an alternative to company's market-cap and calculated by adding debt to market-cap and subtracts cash and bank balance held on the books from it.

    How to interpret EV

    It can be used as a benchmark for a potential acquisition, if the company has huge debt. It can be also used to measure intangible assets in case the company has ample cash.

    Formula

    EV = Market-cap + Debt Cash & Bank Balance

    Example

    Market-cap: Rs 1000 cr, Debt Rs 500 cr, Cash: Rs 200 Cr EV = 1000+500-200 =Rs 1300 crore

  • This ratio compares the total value of a company with respect to its operating profits. EBIDTA (Earnings before Interest, Depreciation, Tax and Amortization) is used since it's an estimate of a company's cash generated from its core business activities.

    How to interpret EV/EBIDTA

    A company with a lower multiple compared to its peers suggest that it is undervalued. However, the multiple will vary from industry and also on debt levels of a particular company.

    Formula

    EV = Market-cap + Debt Cash & Bank Balance

    Example

    Market-cap: Rs 1000 cr, Debt Rs 500 cr, Cash: Rs 200 Cr. EBIDTA Rs 650 crore. EV = 1000+500-200 =Rs 1300 crore EV/OP = 2.

  • Inventory turnover ratio of a company determines the frequency of sales happening at a company. The ratio also suggests how efficiently and quickly the management is able to convert its inventory into sales, and how better the company is able to fulfill the orders on time.

    The costs associated with retaining excess inventory and not producing sales can prove to be very expensive. Besides incurring storage cost there is also the interest cost on the money locked up in inventory.

    How to interpret inventory turnover ratio

    A low inventory ratio is a sign of company's inefficiency in managing its sales and the company is incurring a high storage cost. It also implies either poor sales or excess inventory. It may also indicate poor liquidity, possible overstocking, and obsolescence.

    High inventory ratio is a positive sign for the company and shows that it is able to sell its products on time which is resulting in lower or no storage cost and reflects better management of inventory by the company. It could also indicate shortage of inventories that may result in lesser sales.

    Formula

    There are two formulas to calculate inventory turnover ratio a) Inventory turnover = Sales / Inventory
    b) Inventory turnover = Cost of goods sold / Average inventory

    Example

    Assume sales of company = Rs. 50 crore and inventory = Rs. 25 crore Inventory turnover = 50/25 = 2 times (2 inventory turns per year) This means that a company would take 6 months to sell and replace all inventories. Average inventory is computed by taking inventory at the beginning and end of the period and then average it.

  • Market cap to sales ratio also known as price to sales ratio indicates how the market is valuing every rupee of the company's sales. It is used to compare the companies in the same sector. It is also useful for valuation of a company that is incurring losses.

    How to interpret market-cap to sales

    Market-cap to sales is used for spotting recovery situations or for double checking that a company's growth has not become overvalued. If the ratio is less than 1 then the stock is considered to be undervalued. Many analysts prefer to use the Market-cap to sales ratio over the PE ratio, because it is easier to manipulate earnings, but sales can be more readily verified.

    It is best to check both these ratios for any company. If both indicate that the stock is undervalued then you can consider buying it. But if the results are contrary to one another then it is possible that the management may be manipulating the books.

    Formula

    Market cap to sales = market cap/total sales or price per share/ sales per share

    Example

    Assume market-cap is Rs. 50 crore and sales is Rs. 100 crore Market cap to sales = 50/100 = 0.50 This means for every rupee of sales you will be paying 50 paisa if you are buying the entire company.

  • Compound Annual Growth Rate (CAGR) indicates the compound growth rate of the amount invested over a specific time interval. It is used to indicate revenue growth or decline of a company over a period of time.

    Formula

    {[(End value)/(Start Value)] ^(1/No of years)} - 1

    Example

    If you want to calculate CAGR of a company over 5 years. Starting value: Rs 10000. Year 1: Rs 12500, Year 2: Rs 25000, Year 3: Rs 30000, Year 4: Rs 40000, Year 5 (Ending Value) : Rs 60000
    [(60000/10000)^(1/5)] - 1
    [6^(0.2)] 1
    1.43 1
    43%.
    Rs 10000 have given a compounded return of 43% in each of the five years.

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What does Quick Ratio indicates?

  • Short term liquidity
  • Long term liquidity
  • Reserves
  • Networth

FAQs

Q. What are DVR shares?

What are DVR shares? 29 May 2012 at 11:00 am DVR or differential voting rights shares are like ordinary equity shares but with differential voting rights. Shares can have higher or lower voting rights as compared to the ordinary equity shares. However, Indian regulations do not permit companies to issue equity shares with higher voting rights. Hence, Indian DVR shares provide for lower voting rights as compared to ordinary equity shares. Companies issue DVRs for several reasons such as prevention of a hostile takeover, bringing in a passive strategic investor or dilution of voting rights. DVR investors are generally compensated with a higher dividend rate. This makes the DVRs attractive for retail investors who do not want control in the company, but are looking at the long-term growth prospects. DVR shares are listed on the stock exchanges and are traded in the same manner as ordinary equity shares, but they mostly trade at a discount, sometimes as high as 30%, due to fewer voting rights. Tata Motors, Gujarat NRE Coke, Pantaloon Retail, Jain Irrigation are some of the Indian companies that have issued DVR shares. E.g.: Tata Motors' DVR shares carry voting rights which are one-tenth of the ordinary equity shares. The DVR shareholders are entitled to an additional 5% dividend, over and above the ordinary equity shareholders. Tata Motors DVR are trading at 800 or 36% discount to the ordinary shares, which are at trading at Rs 1,245 (as of 23rd November 2010). Source: sptulsian.com

Q. What is an Account Period Settlement?

An account period settlement is a settlement where the trades pertaining to a period stretching over more than one day are settled. For example, trades for the period Monday to Friday are settled together. The obligations for the account period are settled on a net basis. Account period settlement has been discontinued since January 1, 2002, pursuant to SEBI directives.

Q. What is swap ratio?

Swap ratio is an exchange ratio used in case of mergers and acquisitions. It is the ratio in which the acquiring company offers its own shares in exchange for the target company's shares. To calculate the swap ratio, companies analyze financial ratios such as book value, earnings per share, profits after tax as well as other factors, such as size of company, long-term debts, strategic reasons for the merger or acquisition and so on. For example, if company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company (company A) for every 5 shares of the company B being acquired. In other words, if company B has 10 crore outstanding equity shares and 100% of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately. Source: sptulsian.com

Q. How long it takes to receive my money for a sale transaction and my shares for a buy transaction?

Brokers were required to make payment or give delivery within two working days of the pay - out day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout.

Q. Learn how to choose a stock

Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong. It's not that difficult: Just follow these 4 golden rules. And while you are at it< why don't you also check out How to buy low, sell high.

Q. What does Open Interest mean?

Open Interest is the total number of outstanding contracts held by market participants at the end of the day. Alternatively, it is the total number of futures contracts that have not yet been exercised (squared off) or expired. Open interest indicates the trend in the F&O market and measures the flow of money into the futures market. The open interest position represents the increase or decrease in the number of contracts for a day, and it is shown as a positive or negative number. Calculation of Open Interest: Each trade completed on the exchange has an impact upon the level of open interest for that day. There a three possibilities - 1.One new buyer, one new seller (both parties initiating a new position) - open interest will increase by one contract 2.One old buyer, one old seller (both parties are closing an existing/old position) - open interest will decline by one contract 3.One old buyer, one new buyer (old trader passing off his position to a new trader) - open interest remains unchanged Increasing open interest means that new money is flowing into the marketplace. The result will be continuation of present trend (up, down or sideways). Declining open interest means that market is liquidating and implies prevailing price trend is coming to an end. Source: sptulsian.com

Q. What kind of details do I have to provide in Client Registration form?

The brokers have to maintain a database of their clients, for which you have to fill client registration form. In case of individual client registration, you have to broadly provide following information: •Permanent Account Number (PAN), which has been made mandatory for all the investors participating in the securities market. •Your name, date of birth, photograph, address, educational qualifications, occupation, residential status(Resident Indian/ NRI/others) •Bank and depository account details •If you are registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number. For proof of address (any one of the following): •Passport •Voter ID •Driving license •Bank Passbook •Rent Agreement •Ration Card •Flat Maintenance Bill •Telephone Bill •Electricity Bill •Insurance Policy Each client has to use one registration form. In case of joint names /family members, a separate form has to be submitted for each person. In case of Corporate Client, following information has to be provided: •Name, address of the Company/Firm •Date of incorporation and date of commencement of business. •Registration number(with ROC, SEBI or any government authority) •Details of PAN •Details of Promoters/Partners/Key managerial Personnel of the Company/Firm in specified format. •Bank and Depository Account Details •Copies of the balance sheet for the last 2 financial years (copies of annual balance sheet to be submitted every year) •Copy of latest share holding pattern including list of all those holding more than 5% in the share capital of the company, duly certified by the Company Secretary / Whole time Director/MD. (copy of updated shareholding pattern to be submitted every year) •Copies of the Memorandum and Articles of Association in case of a company / body corporate, partnership deed in case of a partnership firm •Copy of the Resolution of board of directors' approving participation in equity / derivatives / debt trading and naming authorized persons for dealing in securities. •Photographs of Partners/Whole time directors, individual promoters holding 5% or more, either directly or indirectly, in the shareholding of the company and of persons authorized to deal in securities. •If registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number.

Q. What is EPS?

EPS or Earnings per share, is the net profit earned by the company divided by the number of outstanding equity shares. If any preference dividend is declared, it is subtracted from the net profit. Eg: A company earned net profit of Rs. 100 crore for FY10. It has 5 crore outstanding equity shares. No fresh issue of equity shares was made during the year, implying that the weighted average number of equity shares outstanding during the period is 5 crore. EPS = Net profit earned during the period Weighted average number of equity shares outstanding during the period EPS = 100 / 5 EPS = Rs. 20 Source: sptulsian.com

Q. 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.

Q. How are Net Interest Margins (NIMs) calculated?

Net Interest Margin is the ratio of net interest income to average interest-earning assets NIM = _____Net Interest Income__ Avg Interest Earning Assets Where, Net interest income is the difference between interest income and interest expense. And Average Interest-earning assets are loans / advances given to borrowers by banks / NBFCs. Average of the beginning to end of the period is considered for prudent calculation. E.g. If Interest income = Rs. 150 crore Interest expense = Rs. 80 crore Interest-earning assets (at beginning of year) = Rs. 2,000 crore Interest-earning assets (at end of year) = Rs. 2,500 crore NIM = ____(150 - 80)___ (2000 + 2500) / 2 NIM =ญญ __70___ 2,250 NIM = 3.11% Source: sptulsian.com

Q. What happens if I do not get my money or share on the due date?

In case a broker fails to deliver the securities or make payment on time, or if you have complaint against conduct of the stock broker, you can file a complaint with the respective stock exchange. The exchange is required to resolve all the complaints. To resolve the dispute, the complainant can also resort to arbitration as provided on the reverse of contract note /purchase or sale note. However, if the complaint is not addressed by the Stock Exchanges or is unduly delayed, then the complaints along with supporting documents may be forwarded to SEBI. Your complaint would be followed up with the exchanges for expeditious redressal. In case of complaint against a sub broker, the complaint may be forwarded to the concerned broker with whom the sub broker is affiliated for redressal.

Q. What is Short Selling and Securities Lending & Borrowing?

Short Selling means selling of a stock that the seller does not own at the time of trade. Short selling can be done by borrowing the stock through Clearing Corporation/Clearing House of a stock exchange which is registered as Approved Intermediaries (AIs). Short selling can be done by retail as well as institutional investors. Naked short sale is not permitted in India, all short sales must result in delivery, and information on short sale has to be disclosed to the exchange by end of day by retail investors, and at the time of trade for institutional investors. The Securities Lending and Borrowing mechanism allows short sellers to borrow securities for making delivery. Securities in the F&O segment are eligible for short selling. Securities Lending and Borrowing (SLB) is a scheme that has been launched to enable settlement of securities sold short. SLB enables lending of idle securities by the investors through the clearing corporation/clearing house of stock exchanges to earn a return through the same. For securities lending and borrowing system, clearing corporations/clearing house of the stock exchange would be the nodal agency and would be registered as the "Approved Intermediaries"(AIs) under the Securities Lending Scheme, 1997. Under SLB, securities can be borrowed for a period of 7 days through a screen based order matching mechanism. Securities in the F&O segment are eligible for SLB.

Q. What is a 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.

Q. What is Margin Trading Facility?

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the Margin Trading Facility from time to time. Corporate brokers with net worth of at least Rs.3 crore are eligible for providing Margin trading facility to their clients subject to their entering into an agreement to that effect. Before providing margin trading facility to a client, the member and the client have been mandated to sign an agreement for this purpose in the format specified by SEBI. It has also been specified that the client shall not avail the facility from more than one broker at any time. The facility of margin trading is available for Group 1 securities and those securities which are offered in the initial public offers and meet the conditions for inclusion in the derivatives segment of the stock exchanges. For providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to borrow funds from any other source. The "total exposure" of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his "net worth". While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the "total exposure" of the broker. Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as 40%. In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip. If the broker has borrowed funds for the purpose of providing margin trading facility, the name of the lender and amount borrowed should be disclosed latest by the next day. The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin-trading done on any day shall be made available after the trading hours on the following day. The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange.

Q. What recourses are available to me for redressing my grievances?

You have following recourses available:•Office of Investor Assistance and Education (OIAE) : You can lodge a complaint with OIAE Department of SEBI against companies for delay, non-receipt of shares, refund orders, etc., and with Stock Exchanges against brokers on certain trade disputes or non receipt of payment/securities. Arbitration: If no amicable settlement could be reached, then you can make application for reference to Arbitration under the Bye Laws of concerned Stock Exchange. Court of Law

Q. What is the maximum brokerage that a broker can charge?

The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations and hence, it may differ from across various exchanges. As per the BSE & NSE Bye Laws, a broker cannot charge more than 2.5% brokerage from his clients.

Q. Prepare to invest

Investment planning is simpler than you think, and more rewarding than you would imagine. Your age and investment size does not matter, nor do you have do be a money whiz - just do it NOW. So where do you start? Identify your financial goals What are your goals? What are you saving for - A house? Child's education/ marriage? New car? World tour? Retirement? Quantify this in terms of amount of money needed, and time horizons. To understand the process of defining and quantifying your future goals, use our Retirement Planner . Even if you do not have retirement planning as one of your financial goals, this planning tool should help you understand the process of financial goal planning. Understand your risk profile Depending on our income and needs, we all have different capacity for risk. We also have a different risk tolerance, based on our individual psychological make-up. Understand your risk profile and plan your portfolio accordingly. Find out: Your risk profile Plan your asset allocation Returns should not be your primary objective; you could end up taking more risk than you are financially/ psychologically capable of. It helps seek expert advice and create a portfolio with the right spread across asset classes to minimise risk of incurring a loss. Calculate: Your asset allocation

Q. Who is a broker?

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.

Q. What is the difference between rights and bonus shares?

Bonus shares means new shares given free of cost to all the existing shareholders of the company, in proportion to their holdings. For example, a company announcing bonus issue of 1:5, is issuing one (new) bonus share for every five shares held by the shareholders of the company. Rights issues are a proportionate number of shares available to all the existing shareholders of the company, which can be bought at a given price (usually at a discount to current market price) for a fixed period of time. For example, a company announcing rights issue of 2:3 at Rs. 100 per share (current share price Rs. 130 per share), is issuing two (new) rights shares for every three shares held by the shareholders of the company at Rs. 100 per share. The rights shares can also be sold in the open market. If not subscribed to, the rights shares lapse on closure of the offer. Source: sptulsian.com

Q. What is repo rate and reverse repo rate?

Repo or repurchase option is a means of short-term borrowing, wherein banks sell approved government securities to RBI and get funds in exchange. In other words, in a repo transaction, RBI repurchases government securities from banks, depending on the level of money supply it decides to maintain in the country's monetary system. Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. Thus, repo rate is always higher than the reverse repo rate. Source: sptulsian.com

Q. What is the difference between cash EPS and EPS?

Cash EPS takes into account the cash flow generated by a company on a per share basis, while EPS looks at the net income generated on a per share basis, for a given period. Like EPS, higher the cash EPS, better it is considered. Cash EPS = Operating cash flow for the period Weighted average number of equity shares outstanding Cash EPS can be computed from EPS by adjusting for depreciation, amortization of goodwill and other non-cash items such as deferred tax and intangibles. Source: sptulsian.com

Q. What does ISIN stand for wrt securities?

ISIN stands for International Securities Identification Number (ISIN). It is an international numbering system set up by the International Organization for Standardization (ISO) to number specific securities, such as stocks (equity and preference shares), bonds, options and futures. ISIN contains 12 characters in total, which comprise of both alphabets and numbers. The first two digits stand for the country code, next nine digits are the unique identification number for the security while the last digit is a check digit to prevent errors. E.g.: ISIN for State Bank of India (SBI) is INE062A01012. Source: sptulsian.com

Q. What does 'pari passu' mean?

Pari passu is a Latin term commonly used in legal documents meaning 'equal in all respects' or 'in the same degree or proportion'. For example, if issue of new shares is said to rank pari passu with the existing shares, then the rights associated with both the existing as well as the new shares are exactly the same. Source: sptulsian.com

Q. 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.

Q. What is a 'Put' option?

Put option gives the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date. For e.g.: Buying 1 put option of ONGC 1250 30Dec2010 comprising 250 equity shares for Rs. 15 per put, will give the buyer the right to sell 250 ONGC shares on or before 30th December 2010 at Rs. 1,250 per share, irrespective of the share price (in cash market). Since it is only a right and no obligation to sell, the buyer can let this right lapse, which will be the case when ONGC share price is more than Rs. 1,250 in cash market. In the above case, loss is limited to Rs. 15 while the gains are unlimited to the buyer. Rs. 15 paid is termed as option premium or the cost of purchasing 1 put option containing the pre-determined quantity of the underlying i.e. 250 ONGC equity shares. Selling a put option gives the seller the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date, when the right is exercised by the buyer. For a seller of put option, profit is limited to the premium earned while loss it unlimited, as the buyer can exercise his put option anytime till the expiry of contract. Source: sptulsian.com

Glossary

Accrued Expenses

Expenses shown on the income statement but not yet paid. 

After-Hours Trading

stock trading when the major stock exchanges are closed. 

All or None

This is an instruction you can give your broker when placing a buy or a sell order. This instruction ensures that your order will be filled in its entirety or not at all. This prevents having a partial execution of your trade.

All-or-None Order

An order that must be filled completely or the trade will not take place.

American Depositary Receipt (ADR)

A certificate trading on a U.S. stock exchange that represents shares of a foreign corporation. 

American-Style Options

Options that can be exercised any time during their lifetime. These are also known as open options.

Analyst

Someone typically working for a brokerage house, who publishes buy/hold/sell recommendations and earnings forecasts for a stock. Buy side analysts work for institutional buyers, and sell side analysts work for brokerages. 

Annual Report

A publication, including financial statements and a report on operations, issued by a company to its shareholders at the company's fiscal year-end.

Anonymous Trading

Permits Participating Organizations to voluntarily withhold their true broker identities when entering orders and trades on TSX trading systems.

Ask or Offer

The lowest price at which someone is willing to sell the security. When combined with the bid price information, it forms the basis of a stock quote.

Ask Price

The price you are asked to pay when you buy a stock (see 'Bid Price').

Ask Size

The aggregate size in board lots of the most recent ask to sell a particular security.

Asset Allocation

The process of dividing your funds among different classes of investments such as stock, bond, or real estate. You could further allocate your stock funds into value, growth, foreign, etc.

Assets

Everything a company or person owns, including money, securities, equipment and real estate. Assets include everything that is owed to the company or person. Assets are listed on a company's balance sheet or an individual's net worth statement.

At The Close

This is the price of the last trade of a stock when the market closes for the day. This price is of primary importance in our trading as where a stock closes in its range tells us much about the direction and momentum of the stock.

At-The-Open

This is a stock's trading price when a stock begins trading for the day. It may gap up, gap down, or open where it closed the previous session. Where a stock opens can be deceptive, especially if the stock gaps up or down significantly from the closing price.

Average Daily Volume

Average number of shares traded per day over a specified period.

Average P/E Ratio

Average price/earnings ratio of stocks owned by a mutual fund.

Averages and Indices

Statistical tools that measure the state of the stock market or the economy, based on the performance of stocks, bonds or other components. Examples are the S&P/TSX Venture Composite Index, the S&P/TSX Composite Index, the Dow Jones Industrial Average and the Consumer Price Index.

Averaging Down

Buying more of a security at a price that is lower than the price paid for the initial investment. The aim of averaging down is to reduce the average cost per unit of the investment.

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