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Capital Market enhances capital formation in the economy and comprises of – a) Primary
Market –The primary market provides the medium for sale of new securities. Primary
market provides opportunity to issuers of securities; Government as well as corporate,
to raise monies to meet their requirements of investment and/or discharge some obligation.
b) Secondary Market – This 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 and debt market. |
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It is a common platform where buyers and sellers come together to transact in stocks
and shares. It may be a physical entity where brokers trade on a physical trading
floor via an "open outcry" system or a virtual environment. |
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Total equity capital of a company is divided into equal units of small denominations,
each called a share. For example, in a company the total equity capital of Rs 3,00,00,000
is divided into 30,00,000 units of Rs 10 each. Each such unit of Rs 10 is called
a Share. Thus, the company then is said to have 30,00,000 equity shares of Rs 10
each. The holders of such shares are members of the company and have voting rights.
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Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the country's
two leading Exchanges. There are 20 other regional Exchanges recognized by SEBI,
connected via the Inter-Connected Stock Exchange (ICSE). The BSE and NSE allow nationwide
trading via their VSAT systems. |
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The stock exchanges in India, under the overall supervision of the regulatory authority,
the Securities and Exchange Board of India (SEBI), provide a trading platform, where
buyers and sellers can meet to transact in securities. The trading platform provided
by NSE & BSE is an electronic one and there is no need for buyers and sellers to
meet at a physical location to trade. They can trade through the computerized trading
screens available with the trading members or the internet based trading facility
provided by the trading members.
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Electronic trading eliminates the need for physical trading floors. Brokers can
trade from their offices, using fully automated screen-based systems & processes.
Their workstations are connected to a Stock Exchange's central computer via satellite
using VSAT. The orders placed by brokers reach the Exchange's central computer and
are matched electronically.
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An Index is a comprehensive measure of market trends, intended for investors who
are concerned with general stock market price movements. An Index comprises stocks
that have large liquidity and market capitalisation. Each stock is given 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 Sensex comprises 30 selected stocks.
The Index value compares the day's market capitalisation vis-a-vis base capitalisation
and indicates how prices in general have moved over a period of time.)
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You can buy any of the shares that are listed on any of the recognized Stock Exchanges.
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To be able to buy or sell shares in the stock markets a client would need to be
registered with a stockbroker who holds membership in stock exchanges and who is
registered with SEBI.
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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 recognized Stock Exchange or through a SEBI-registered
sub-broker.
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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.
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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.
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Select a broker of your choice and enter into a broker-client agreement and fill
in the client registration form. Place your order with your broker preferably in
writing or online using brokers’ web trading portal. Get a trade confirmation slip
on the day the trade is executed and ask for the contract note at the end of the
trade date.
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When the market goes up it is called a bullish trend and when the market goes down
it is called a bearish trend.
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There are several types of orders you can place through your broker. The most common
type is a regular buy or a sell order at the current market price also known as
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 loss order, you tell
the broker to buy/sell your shares if the price rises/drops to a certain level and
in order to prevent significant loss.
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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 : - a) 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. b) 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.
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A contract note describes the rate, date, time at which the trade was transacted
and the brokerage rate. A contract note 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 keep a copy each. A client should receive the contract note
within 24 hours of the executed trade.
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The trading member can charge: 1. Securities Transaction Tax. 2. Service tax as
applicable. 3. Transaction charges levied by exchange, Stamp duty and other charges
directly attributable to the transaction. Note : The brokerage and service tax is
indicated separately in the contract note.
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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. Companies announce book closure
dates from time to time. The benefits of dividends, bonus issues, rights issue accruing
to investors 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 receive these 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 a share to ensure that shares purchased at cum benefits prices are
transferred before book-closure. It must be ensured that the price paid for the
shares is ex-benefit and not cum benefit.
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In case of a record date, the company does not close its register of security holders.
Record date is the cutoff 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 does not hold good for the record date.
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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 clearly determined.
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The date on or after which a security begins trading without the dividend (cash
or stock) included in the contract price.
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The first day of the no-delivery period is the ex-date. If there are any corporate
benefits such as rights, bonus, dividend announced for which book closure/record
date is fixed, the buyer of the shares on or after the ex-date will not be eligible
for the benefits.
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Earnings Per Share (EPS) is the net profit earned per share of the company. It can
be obtained by dividing the Profit after Tax (PAT) by the outstanding equity shares
of the company. EPS indicates the profitability of the company in relation to its
share capital.
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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 seldom happens.
Instead, this is transferred to the reserves and surplus account. If the reserves
and surplus amount becomes large, the company may transfer some amount from the
reserves account to the share capital account by a mere book entry. This is done
by increasing the number of shares outstanding and every shareholder is given bonus
shares in 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 bonus
he will hold three. However, one should note that the price of the share may adjust
downwards once it becomes ex-bonus.
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A Split is book entry wherein the face value of the share is altered to create a
greater number of shares outstanding without calling for fresh capital or altering
the share capital account. For example, if a company announces a two-way split,
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.
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It is a process by which a company can buy back its shares from shareholders. A
company may 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.
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Book Value is also called as Net Asset Value per share. It indicates the assets
backing per share of the company. The ratio can be computed as follows: Book Value
= (Paid-up Equity Capital + Reserves & Surplus - Fictitious Assets)/ Number of Equity
Shares Outstanding Book Value can be regarded as the liquidation value of the share.
In case the company is liquidated immediately, the book value is the amount likely
to be available per share (unless all the assets and liabilities are not stated
at their realizable value in the balance sheet),which is often the case.
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Settlement cycle is the accounting period for the securities traded on the exchange.
Settlement Cycle on the BSE
The settlement cycle on the BSE is Trade plus two days, or T+2, as per a Sebi directive
implementing this new cycle from April 1, 2003. Under rolling settlement, trades
done on one day are settled after a certain number of days. So, T+2 will mean that
the final settlement of transactions done on the Trade day, will be settled by exchange
of money and securities on the second business day (excluding Saturday, Sundays,
Bank and Exchange Trading Holidays). Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’,
‘S’, ‘TS’, 'C', "F", "G" & 'Z' group of securities Settlement is done on a T+2 basis.
The pay-in/pay-out process will be settled on the T+2 day.
Summary of the Settlement Cycle
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T
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Trading on BOLT and daily downloading of statements showing details of transactions
and margins at the end of each trading day
Downloading of provisional securities and funds obligation statements by member-brokers.
6A/7A* entry by the member-brokers/ confirmation by the custodians.
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T+1
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Confirmation of 6A/7A data by the Custodians upto 11:00 a.m. Downloading of final
securities and funds obligation statements by members.
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T+2
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Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities
by 1:30 p.m. The member-brokers are required to submit the pay-in instructions for
funds and securities to banks and depositories respectively by 10: 30 a.m.
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T+3
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Auction on BOLT at 11.00 a.m.
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T+4
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Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.m. respectively.
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Source : www.bseindia.com
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NSE Settlement Cycle
The NSE too follows a rolling settlement cycle of T+2.
The stock exchange sends to NSCCL the details of trades at the end of the trading
day. The clearing corporation determines the total obligations of each member and
transfers the data to clearing members (CM). All the trades done during a particular
trading session are clubbed together and settled. NSCCL then determines the net
obligations of members in terms of deliveries of securities and funds, and the settlement
is completed when the funds and securities are paid out. On the securities pay-in
day, members bring in securities to NSCCL whereas on the pay out day, securities
are delivered to members. If there is a shortfall in securities, then an auction
is conducted to meet it. This table makes the process clearer :
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Activity |
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Trading
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Rolling Settlement Trading
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T
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Clearing
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Custodial Confirmation
Delivery Generation
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T+1 working days
T+1 working day
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Settlement
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Securities and Funds pay in
Securities and Funds pay out
Valuation Debit
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T+2 working day
T+2 working day
T+2 working day
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Post Settlement
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Auction
Bad Delivery Reporting
Auction settlement
Rectified bad delivery pay-in and pay-out
Re-bad delivery reporting and pickup
Close out of re-bad delivery and funds pay-in & pay-out
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T+3 working day
T+4 working day
T+5 working day
T+6 working day
T+8 working day
T+9 working day
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Source : www.nseindia.com
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Under rolling settlement all open positions at the end of the day mandatorily result
in payment/ delivery ‘n’ days later. Currently trades in rolling settlement are
settled on T+2 basis where T is the trade day. For example, a trade executed on
Monday is mandatorily settled by Wednesday (considering two working days from the
trade day). The funds and securities pay-in and pay-out are carried out on T+2 days.
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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. Similarly, as a buyer, one should pay immediately on the
receipt of the contract note for purchase but in any case before the pay-in day.
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Short selling is a legitimate trading strategy. It is a sale of a security that
the seller does not own, or any sale that is completed by the delivery of a security
borrowed by the seller. Short sellers take the risk that they will be able to buy
the stock at a more favorable price than the price at which they "sold short."
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An auction is conducted for those securities that members fail to deliver/short
deliver during pay-in. Three factors primarily give rise to an auction: short deliveries,
un-rectified bad deliveries, un-rectified company objections.
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The buy/sell auction for a capital market security is managed through the auction
market. As opposed to the normal market where trade matching is an on-going process,
the trade matching process for auction starts after the auction period is over.
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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 period till the auction
day or at 20 per cent above the last available Closing price whichever is higher.
The pay-in and pay-out of funds for auction square up is held along with the pay-out
for the relevant auction.
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SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad
delivery may pertain to a transfer deed being torn, mutilated, overwritten, defaced,
or if there are spelling mistakes in the name of the company or the transfer. Bad
delivery exists only when shares are transferred physically. In "Demat" bad delivery
does not exist.
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A list documenting reasons by a company for not transferring a share in the name
of an investor is called company objections. Rejection occurs due to a signature
difference, or fake shares, or forgery, or if there is a court injunction preventing
the transfer of the shares.
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The broker must immediately be notified. Company objection cases should be reported
within 12 months from the date of issue of the memo for the original quantity of
share under objection.
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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.
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After a sale, the share certificate along with a proper transfer deed duly stamped
and complete in all respects is sent to 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.
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Demat is a commonly used abbreviation of Dematerialisation, which is a process whereby
securities like shares, debentures are converted from the "material" (paper documents)
into electronic data and stored in the computers of an electronic Depository (SEE
next page). You surrender material securities registered in your name to a Depository
Participant (DP). These are then sent to the respective companies who cancel them
after dematerialisation and credit your Depository Account with the DP. The securities
on dematerialisation appear as balances in the Depository Account. These balances
are transferable like physical shares. If at a later date you wish to have these
"Demat" securities converted back into paper certificates, the Depository can help
to revive the paper shares.
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Check with a DP as to whether the securities you hold can be dematerialised. Then
open an account with a DP and surrender the share certificates.
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A Depository is a securities "bank," where dematerialised physical securities are
held in custody, and from where they can be traded. This facilitates faster, risk-free
and low cost settlement. A Depository is akin to a bank and performs activities
similar in nature. At present, there are two Depositories in India, National Securities
Depository Limited (NSDL) and Central Depository Services (CDS). NSDL was the first
Indian Depository. It was inaugurated in November 1996. NSDL was set up with an
initial capital of Rs 124 crore, promoted by Industrial Development Bank of India
(IDBI), Unit Trust of India (UTI), National Stock Exchange of India Ltd. (NSEIL)
and the State Bank of India (SBI).
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NSDL carries out its activities through business partners - Depository Participants
(DPs), Issuing Corporates and their Registrars and Transfer Agents, Clearing Corporations/Clearing
Houses? NSDL is electronically linked to each of these business partners via a satellite
link through Very Small Aperture Terminals (VSATS). The entire integrated system
(including the VSAT linkups and the software at NSDL and at each business partner's
end) has been named the "NEST" (National Electronic Settlement & Transfer) system.
The investor interacts with the Depository through a Depository Participant of NSDL.
A DP can be a bank, financial institution, a custodian or a broker.
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The right to get - Proof of price/brokerage charged, Money/shares on time, Statement
of Accounts and Contract Note from trading member.
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The obligation to - Sign a proper Member-Constituent Agreement Possess a valid contract
or purchase/sale note Deliver securities & make payment on time Provide Margin before
trade.
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Tax rates on investments gains are categorized as long term & short term capital
gains. (a) 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). (b) Short term capital gains Shares
that are held for less than 12 months are classified as short term capital assets.
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The analysis of factual information like financial figures, balance sheet, and other
information publicly available is known as fundamental analysis. This information
is used to derive a fair price of the share of the company. The faithful fundamentalists
believe that the market incorporates all facts relating to the financial performance
of the company. But a systematic analysis will ensure a more accurate valuation
of the price. Fundamental analysts use tools such as ratio analysis (P/E, MV/BV)
and discounted cash flow analysis in order to arrive at the fair value of a company
and hence its share.
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A ratio is a comparison of two figures. They are culled from the financial statements
of a company. These help in assessing the financial health of a company. It could
be a ratio between an item from a balance sheet versus another item on the balance
sheet. Or it could be a ratio between one figure of the balance sheet with a figure
from Profit and Loss account or it could be comparison of one year's figure with
a figure from the previous year.For example Return on Equity = Net profit (A Profit
and a Loss figure) divided by Net Worth (a balance sheet figure) in percentage terms.
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There are many financial ratios. Some of the better known include:
Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet
its current obligations. Liquidity ratios by establishing a relationship between
cash and other current assets to current obligations give measure of liquidity.e.g.
Current ratio [CR] = Current Assets/Current liabilities.A high CR ratio (>2.5) indicates
that a company can meets its short term liabilities.
Leverage Ratios: Leverage ratio indicates the proportion of debt and equity
in financing the firm's assets. They indicate the funds provided by owners and lenders.e.g
-----Debt-equity ratio (D-E ratio) total long term debt/net worth.A high D-E ratio
indicates that the company's credit profile is bad.
Activity Ratios: Activity ratios are employed to evaluate the efficiency
with which firms manage and run their assets. They are also called turnover ratios.e.g--
Sales Turnover ratio = sales/total assets .A Sales Turnover ratio indicates how
much business a company generates for every additional rupee invested.
Profitability Ratios: These ratios indicate the level of profitability of
the business with relation to the inputs or capital employed. Some better-known
profit ratios include operating profit margin (OPM). Operating profit margin is
a measure of the company's efficiency, either in isolation or in comparison to its
peers.
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Earning Per Share (EPS): EPS represents the portion of a company's profit
allocated to each outstanding share of common stock. Net income (reported or estimated)
for a period of time is divided by the total number of shares outstanding during
that period. It is one of the measures of the profitability of common shareholder's
investments. It is given by profit after tax (PAT) divided by number of common shares
outstanding.
Price Earning Multiple (P/E): Price earning multiple is ratio between market
value per share and earning per share.
Book Value (BV): (of a common share) The company's Net worth (which is paid-up
capital + reserves & surplus) divided by number of shares outstanding. Market value
to book value ratio (MV/BV ratio): It is the ratio between the market price of a
security and Book Value of the security.
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Technical analysis is the study of historic price movements of securities and trading
volumes. Technical analysts believe that prices of the securities are determined
largely by forces of demand and supply. Share prices move in patterns which are
easily identifiable. Crucial insights into these patterns can be obtained by keeping
track of price charts, leading to predictions that a stock price may move up or
down. The belief is that by knowing the past, future prices can predict.
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