Frequently asked Questions (FAQ) about Stock Market

Some frequently asked question about stock market and trading:

  • What is a Stock Exchange ?A Stock Exchange is a place where the buyer and seller meet to trade in shares in an organized manner.
  • What shares can I buy?You can buy the shares that are listed on any of the recognized Stock Exchanges.
  • What is an Equity Share?An equity share represents the form of ownership. The holder of such a share is a member of the company and has voting rights.
  • What is Online share trading?Online share trading is the process of buying and selling of shares through the internet on the secondary market with a view to profiting from the difference in the buying price and selling price. The share price of a stock is determined by the demand and supply of a particular share. Online share trading enjoys various advantages such as accessibility, security, convenience in tracking portfolio etc over traditional branch trading.
  • Whom should I contact for my Stock Market related transactions?To be able to buy or sell shares in the stock markets a client would need to be registered with a stock broker who holds membership in stock exchanges and who is registered with SEBI.
  • Am I required to sign any agreement with the broker or sub-broker?Yes, you have to sign the “Member-Client agreement” for the purpose of engaging a broker to execute trades on your behalf from time to time and furnish details relating to yourself to enable the member to maintain Client Registration Form.
  • What is a Member–Client Agreement form?This form is an agreement entered into between client and broker in the presence of witnesses wherein the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of broker’s capabilities to deal in the same.
  • What is Buying and Selling?There are several types of orders that you can dictate to a broker. The most common type, which is a regular buy or sell order, is called a market order. Another type of order is a limit order wherein you ask the broker to trade only if the price reaches a specific level. In a stop order, you tell the broker to sell your shares if the price drops to a certain level to prevent significant loss because if it drops to that level it is likely to drop further and your losses are likely to increase.
  • What is meant by bullish and bearish trend?When the market goes up it is called a bullish trend and when the market goes down it is called a bearish trend.
  • What is taking a position?When you act upon a stock and buy into it, you are taking a position. A position is an amount of money committed to an investment in anticipation of favorable price movements.There are two kinds of positions : –
    • Long positions are what most people do. When you buy long, that means you are anticipating an upward movement in the price, and that is how you profit. People usually buy stocks at prices expecting to sell them later at higher prices and hence make profits.
    • Short positions are the tricky ones. When you buy short, you are anticipating a fall in the price and the fall is the source of your profits. The shares will be sold and when the price falls they will be repurchased and given back and the difference is the where the investor profits. Of course, the investor who borrowed the shares carries the risk of not having the price move as anticipated, in which case he may lose money in repurchasing the stocks
  • What is a depository?A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. There are two main depositories in India, namely, a) National Securities Depository Ltd. (NSDL) and b) Central Depository Securities Ltd. (CDSL), both of which are regulated by SEBI.
  •  What should I do when I want to open an account with a DP?

           You can approach any DP of your choice and fill up an account opening form. At the time of opening an              account, you have to sign an agreement with DP in a NSDL prescribed standard agreement, which details your and your DP’s rights and duties.

  • What do you mean by ‘Market Trades’ and ‘Off Market Trades’?Any trade settled through a clearing corporation is termed as a ‘Market Trade’. These trades are done through stock brokers on a stock exchange. ‘Off Market Trade’ is one which is settled directly between two parties without the involvement of a clearing corporation. The same delivery instruction slip can be used either for market trade or off-market trade by ticking one of the two options.
  • What is the function of the Capital Market?Capital Market enhances capital formation in the economy and comprises of –
    1. i) Primary Market is a place where new offerings by Companies are made either as an Initial Public Offering (IPO) or Rights Issue.
    2. ii) Secondary Market is 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 trading is done in this market which comprises of equity market and debt market.
  • What returns can I expect from my investments in equity shares? What are the risks?Equity shares are “High-Risk High-Return Investments.” The major distinction of Equity investment from all other investment avenues is that while the return from many avenues such as Bank Deposits, Small Saving schemes, Debentures, Bonds etc are fixed and certain, the earnings from equity investments are highly uncertain and varied. A good scrip picked up at the right time could fetch fairly good returns else the return may be meager or it may even turn negative, i.e. the invested fund itself may be eroded. In short, if the investment in fixed income category instruments is secured and risk-free to a large extent, investment in equities and related fields could be termed as risky.
  • What is Dividend?Dividend is the part of profit distributed by the company among its investors. It is usually declared as a percentage of the paid-up value or face value of the share.
  • What is a Bonus Share?A Share issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.
  • What is a Bond?A Bond is a promissory note issued by a company or government to its lenders. A Bond is evidence of debt on which the issuing company usually promises to pay the bondholder a specified amount of interest at intervals over a specified length of time, and to repay the original loan on the expiration date. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date.
  • What is a Debenture?It is a Bond issued by a company bearing a fixed rate of interest usually payable half-yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures. Debentures are normally secured/charged against the asset of the company in favor of debenture holder.
  • What are the tax implications of investing in Indian equities?Tax rates on investments gains are categorized as long term & short-term capital gains.

i) Long term capital gains

  • Long Term investments that are held for more than 12 months are termed as long term capital assets. Profit on sale of such assets is termed as long term capital gain (LTCG) which as per the latest Budget notification will attract nil tax.

ii) Short term capital gains

  • Shares that are held for less than 12 months are classified as short term capital assets which as per the latest Budget notification will attract 15% tax.
  • Who is a Portfolio Manager?Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be is a Portfolio Manager.


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