Basics of Broking: By: Kaushal Mandalia Associate Financial Planner

Basics of Broking
Kaushal@thefinancialplanners.in www.linkedin.com/in/kaushalmandalia
By : Kaushal Mandalia Associate Financial Planner
Basic Philosophy
Western Philosophy
Earn
Indian Philosophy
Spend
Save
Earn
Save & Invest

Kaushal@thefinancialplanners.in
Spend
Where do People Invest?

Debt Market
Bank FD
Equity Market
Direct Investment in Equity
PPF
RBI Bonds Post Office Schemes Traditional Insurance Fixed Maturity Plans
Market
Mutual Funds Unit Linked Plan PMS
What is Equity Market

Equity Market
Share Market
Share = Share In Business
Profit is divided Among shareholders
Business earns PROFIT
Profit = Earning Per Share
Equity Represents Portion of BUSINESS (PROFIT) which is GROWING

How to EARN From Equity Market

Equity RETURNS = Price GAP (Capital Earnings) + Dividend
Selling Price Less Buying Price

Advise Based Broking. Minimize Loss, Maximize Gains
Share in Profit
Pick fundamentally strong Company based on Advise
If you Believe that Corporate Profits will grow Rest is IRRELAVENT.
Traditional Business V/s Equity Market

Traditional Business
Bottom-line = Profit Time, Energy and Money Needed
Equity Market
Bottom-Line = Profit
Only Money Required.

requirement of Time and Energy
No
Large Capital Required Exit Route is Long and difficult Control required on daily operation
Small Capital Required

Shortest Possible Exit Route
No Control Required. Best of the Best Brains are doing that for you.
Bottom Line of Investment

Earning Savings
Fixed Deposit in Bank @ 10%
Equity Market
Bank lends this money to Businessman and earned 15% Interest
Whether you invest in Debt Market or Equity Market, Money flows to Business Sector only.
Money Finally Invested in Business
Learning.
Equity Market Classification
Exit Route
Entry Route
Who is Broker?
Broker is an intermediary who facilitates Entry or Exit into Equity Market They levy fees on Transactions (Buy or Sell) which is called Brokerage.
What is Stock Exchange

A Place where one can trade his/her Shares. Its a formal or Organized BAZAAR. Two Main Stock Exchanges
Bombay Stock Exchange (BSE)
National Stock Exchange (NSE)
National Stock Exchange is the Worlds Third Largest Stock Exchange in terms of Number of Trades after NASDAQ and NYSE
Electronic Trading
Eliminates the need of physical trading floors Fully Automated. One can trade from anywhere. Workstations are connected to stock exchanges central
computer via VSAT (Very Small Aperture Terminus)

The orders placed by brokers reach exchanges central computer and matched electronically. Completely Hassle FREE.
What is INDEX?
Weighted Average of Selected Stock Price. Measure of Market Trends. Comprises stocks that have large liquidity and market
capitalization.
Two Main Index
BSEs Sensex and NSEs NIFTY
Other Examples
BSE Midcap, BSE Small Cap etc,
ORDER Execution
Select a broker and enter into broker client agreement and fill client
registration form.
Get a trade confirmation through phone and ask for the contract note on the end of the day.
Contract note describes the rate, date, time at which the trade is transacted
and brokerage rate. Contract Note establishes a legally enforceable relationship between the
client and the member.

Client must receive contract note within 24 hours of trade execution.
IMPORTANT TERMS
Book Closure / Record Date

When shares of a joint stock company invariably change hands during trading, identifying owner of share becomes difficult. So when a company declares dividend (Share in Profits) there has to be a cut off date for such benefits to be transferred to the share holders. This date is termed as Book Closure Date or Record Date. It is the date after which company will not handle any transfer of
shares request until the benefits are transferred.

Analogy :For E.g. a company policy says, Candidate joining before 15th Sept of the year are qualified for Performance Appraisal to be conducted at the end of Financial Year.
Book Closure Announcement
Source : Moneycontrol as on 31st October 2008
No Delivery Period, Ex Dividend Date, Ex Date
No Delivery Period
Once company declares record date, Exchange set up No Delivery Period A time during which only trading is permitted and all trades are settled after the period gets over.
Ex Dividend Date
The date on or after which a security begins trading without the dividend included in the contract price.
Ex Date
The first date of the No Delivery Period. The buyers of the shares on or after Ex Date will not get any benefits of Dividend or Bonus.
Bonus Share
It is a free share of stock given to current shareholder in a company, based on number of shares that the shareholder already owns.
E.g Bonus 1:2 means for every one share holding by shareholder,
he/she gets two shares free. It does not increase value of the company.
Bonus Announcement
Share Split
A Split is a book entry wherein the face value of the share is altered to create Volume (Larger number of shares) without calling fresh capital.
For E.g. if a company announce two way split, it means

that the share of a face value of Rs 10 is now having
face value of Rs 5. If you have one share of face value

10, now you have two shares of face value Rs 5 each.
Split Announcement
Buy Back
A process by which a company buys back its shares. No of ways in which company can buy back
From existing Shareholders on proportionate basis Thro tender offer from open market Thro Book Building Process From Stock exchange or From ODD lot holders.(Odd lot is any transaction less than 100 shares are generally called Odd Lots)
A Company can not buy back thro negotiated deals on or off stock exchange, through spot transaction or thro any private arrangement, clearing and settlements.
Pay in and Pay Out

Pay In Date Pay In Date
Securities transferred to Exchange
Funds made available to Exchange
Seller
Funds transferred to Seller
Buyer
Securities Transferred to Buyer
Pay Out Date Stock Exchange
Pay Out Date
Short Selling
A Legal Trading Strategy. Normal Process : First Buy and then Sale
Assumption : Price will go up in near future.
Short Selling : First Sell and then Buy.

Assumption : Price will go down in near future.
Auction
Auction is conducted for those securities that members fall to deliver / short deliver during pay-in There are three factors which give rise to auction
Short Deliveries Un-rectified Bad Deliveries Un-rectified company obligations
The buy / sell auction for a capital market is managed thro auction market If the shares are not bought at auction, i.e. if the shares are not offered for sale, exchange squares up the transaction as per SEBI guidelines. Square-up happens at the highest price from the relevant trading period till the auction day or at 20% above the last available closing price whichever is higher.
Fundamental Analysis
Analysis of Historical Data. Analyzing factual information like
Financial Statement
Management and Competitive Advantage

Industry Current Scenario and Future Outlook Finding out Intrinsic (True) Value of Stock and analyze
whether stock is overpriced or underpriced.

Perfect Blend of Macro and Micro Analysis. Recommended For Long Term Investment.
Technical Analysis
In stock market, share price is fluctuating and resulting in a TREND. This TREND is predictable in NEAR FUTURE (If showing any pre-determined pattern) The analysis of Price Trend is called Technical Analysis.
Example Technical Analysis
Source : Angel Technical Analysis research as on 30th October 2008
Key Ratios
PE ratio
Market Value to Book Value Ratio
PE Ratio
Reliance Industries Ltd
PE ratio = Price per Share / Earning per Share In other words, it indicates how
much money you need to

invest to get one rupee earning per share. Lower the ratio better the investment proposition.
Lowest PE Ratio Scripts

Company Name
Southern Gas Lt Singer India Bombay Oxygen IFB Industries Amtek India CEAT
Last Price (Rs)

231.45 5.76 5371.55 20.05 34.90 39.70
EPS (Rs)
1090.22 16.66 10759 24.29 30.92 32.41
PE Ratio
0.21 0.35 0.50 0.83 1.13 1.22
Highest PE Ratio
Company Name
KGN Industries TCI Industries UTV Software Fortis Health IndiaNivesh Reliance Natural
Last Price (Rs)

1573.75 1180.30 474.90 59.60 631.55 43.55
EPS (Rs)
0.74 1.41 1.41 0.20 4.82 0.43
PE Ratio
2126 837.09 336.81 298 131.03 101.28
Price to Book Value

This ratio is used to find whether stock is undervalued or overvalued. Ratio = Price of Share / Book Value of Share Book Value = Net Worth. If ratio <1, Its undervalued, if Ratio is > 1, its overvalued.
Most Undervalued Stocks

Company Name
MTNL Allahbad Bank Parshvnath Bajaj Hind Essar Shipping Videocon Ind
Last Price (Rs)

65.70 48.70 40.55 45.25 33.50 120
Book Value (Rs)

189.23 117.47 97.81 101.43 72.08 243.14
PBV Ratio
0.35 0.41 0.41 0.45 0.46 0.49
Most Overvalued Stocks

Company Name
Asian Paints Divis Lab ABB NMDC Glenmark GlexoSmithKline
Last Price (Rs)

956.75 1096.65 535.65 143.83 282.15 1070.35
Book Value (Rs)

96.80 135.03 76.06 20.91 41.10 160.67
PBV Ratio
9.88 8.12 7.04 6.88 6.87 6.66
Demat - Meaning
Demat is an abbreviation of Dematerialization which is a process whereby securities like shares, debentures are converted from physical form to electronic form.
There are two depository participants

NSDL and CDSL
The Depository provides its services to investors through its agents called Depository Participants (DPs).
Arbitrage
Its an act of buying securities in One Market and Selling in Another Market at Higher Price. It takes advantage of a price differential existing in the prices of the same commodity or security
in two or more different markets.

IPO and Book Building

An IPO is an abbreviation for initial public offer. Its applicable when any company issues shares for the first time to Retail Investors and Financial Institutions.
Book Building process

A Process of Price Discovery thro Bids from Retail Investors and Financial Institutions
Only Price Range is Provided. Allotment price is decided once book is

closed.
Learning..
INVESTORS PSYCHOLOGY
A Small Complication
Equities are unique assets that investors feel more comfortable buying at higher price and selling at lower price.
Investor psyche - wrong emotion dominates at the wrong time
When everyone is GREEDY you should be FEARFUL and when Everyone is FEARFUL You should be GREEDY
WARREN BUFFET
Sentiments V/s Business Efficiency..
Long Term Earnings..
Important Parameters for Investing in Equity Market

Set your Objective
Long Term or Short Term, Dividend Earning or Taking advantage of Short Term Fluctuation
Diversify
Diversify among sectors and companies. Select 10 Different Stocks
Always Minimize Risk

Use STOP LOSS as feature to minimize losses
Avoid TIPS Check Fundamentals and Technical Check Key Ratios

Price to Book Value PE Ratio
Landmark Study by Hood and Bee bower
Thank You.
Visit www.linkedin.com/in/kaushalmandalia http://kaushalmandalia.rediffiland.com

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Basics of Broking

By : Kaushal Mandalia Associate Financial Planner

Save & Invest

Where do People Invest?

What is Equity Market

Profit is divided Among shareholders

Business earns PROFIT

Profit = Earning Per Share

Equity Represents Portion of BUSINESS (PROFIT) which is GROWING

How to EARN From Equity Market

Selling Price Less Buying Price

Pick fundamentally strong Company based on Advise

If you Believe that Corporate Profits will grow Rest is IRRELAVENT.

Traditional Business V/s Equity Market

Only Money Required.

Small Capital Required

Bottom Line of Investment

Fixed Deposit in Bank @ 10%

Bank lends this money to Businessman and earned 15% Interest

Money Finally Invested in Business

Equity Market Classification

What is Stock Exchange

computer via VSAT (Very Small Aperture Terminus)

client and the member.

Book Closure / Record Date

shares request until the benefits are transferred.

Book Closure Announcement

Source : Moneycontrol as on 31st October 2008

No Delivery Period, Ex Dividend Date, Ex Date

Source : Moneycontrol as on 31st October 2008

For E.g. if a company announce two way split, it means

face value of Rs 5. If you have one share of face value

Source : Moneycontrol as on 31st October 2008

Pay in and Pay Out

Securities transferred to Exchange

Funds made available to Exchange

Securities Transferred to Buyer

Pay Out Date Stock Exchange

Pay Out Date

Short Selling : First Sell and then Buy.

Management and Competitive Advantage

whether stock is overpriced or underpriced.

Example Technical Analysis

Source : Angel Technical Analysis research as on 30th October 2008

much money you need to

Lowest PE Ratio Scripts

Last Price (Rs)

Source : Moneycontrol as on 31st October 2008

Last Price (Rs)

Source : Moneycontrol as on 31st October 2008

Price to Book Value

Most Undervalued Stocks

Last Price (Rs)

Book Value (Rs)

Source : Moneycontrol as on 31st October 2008

Most Overvalued Stocks

Last Price (Rs)

Book Value (Rs)

Source : Moneycontrol as on 31st October 2008

There are two depository participants

in two or more different markets.

IPO and Book Building