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ZERODHA  Introduction to Stock Markets ZERODHA.COM VARSITY
TABLE OF CONTENTS  1  The Need to Invest  1  1.1  Why should one invest  1  1.2  Where to invest  3  1.3  Fixed income ins...
5.2  Why do companies go public  33  5.3  Merchant bankers  34  5.4  IPO sequence of events  35  5.5  What happens after t...
9.2  The Login Process  66  9.3  The Market Watch  66  9.4  Buying a stock through the trading terminal  69  9.5  The orde...
13  Getting started  13.1 So many modules - how are they interrelated  99 100
C H A PT E R 1  The Need to Invest  1.1 - Why should one Invest  Before we address the above question, let us understand w...
Table 1.1 - Total cash balance in twenty years If one were to analyze these numbers, you would soon realize this is a scar...
Few things are quite startling from the above calculations  1. After 20 years of hard work you have accumulated Rs.1.7 Crs...
Table 1.2 - Cash invested at 12  per annum  Years  Yearly income  Yearly expense  Cash retained  Retained Cash Invested  1...
An asset class is a category of investment with particular risk and return characteristics. The following are some of the ...
You may also be interested to know that the returns generated over a long term period  above 365 days, also called long te...
A note on investments Investments optimally should have a strong mix of all asset classes. It is smart to diversify your i...
Key takeaways from this chapter 1. Invest to secure your future 2. The corpus that you intend to build at the end of the d...
C H A PT E R 2  Regulators  2.1 - What is a stock market      Investing in equities is an important investment that we mak...
Also, it is important to note that you can access the stock market via a registered intermediary called the stock broker. ...
2.3 - The Regulator In India the stock market regulator is called The Securities and Exchange board of India often referre...
Table 2.1 - Regulators in India  Entity  Example of companies  What do they do  They rate the credit  Credit Rating Agency...
Entity  Example of companies  Merchant  Karvy, Axis Bank,  Bankers  Edelweiss Capital  What do they do   Help companies ra...
Key takeaways from this chapter 1. Stock market is the place to go to if you want to transact in equities 2. Stock markets...
C H A PT E R 3  Financial Intermediaries  3.1 - Overview From the time you access the market     let   s just say, to buy ...
3.2 - The Stock Broker The stock broker is probably one of the most important financial intermediaries that you need to kn...
4. Issue contract notes for the transactions     A contract note is a written confirmation detailing the transactions you ...
are sitting in your DEMAT account will get debited, and the shares move out of your DEMAT account. At present there are on...
Rs.446 from your trading account and someone must be credited that Rs.446 toward the sale of Biocon. In a typical transact...
Key takeaways from this chapter 1. The market ecosystem is built by a cluster of financial intermediaries, each o   ering ...
C H A PT E R 4  The IPO Markets - Part 1 4.1 - Overview The initial three chapters has set the background on some of the b...
SCENE 1     THE ANGELS  Let us imagine a budding entrepreneur with a brilliant business idea     to manufacture highly fas...
this context, Rs.10 is called the    Face value     FV  of the share. The face value could be any number. If the FV is Rs....
Backed by his confidence, the promoter now wants to expand his business by adding 1 more manufacturing unit and few additi...
Table 4.3 - Third stage shareholding pattern Name of Share  Initial  Initial  Shareholding  Valuation  Wealth  Holder  Sha...
3. The company can approach a bank and seek a loan. The bank would be happy to tender this loan as the company has been do...
Few years pass by and the company   s success continues to shine on. With the growing success of this 8 year old, 200 Cr C...
Please note, the company has retained back 16  stake which has not been allotted to any shareholder. This portion is value...
shares to the general public. The general public will subscribe to the shares  i.e if they want to  by paying a certain pr...
Key takeaways from this chapter 1. Before understanding why companies go public, it is important to understand the origin ...
18.The valuation of the company increases as and when the business , revenues and profitability increases 19.An IPO is a p...
C H A PT E R 5  The IPO Markets - Part 2 5.1 - Overview The previous chapter gave us an understanding on how a company evo...
5.2 - Why do companies go public  We closed the previous chapter with few very critical questions. One of which     Why di...
If you recollect, the company requires 200 Crs to fund their capex and the management had decided to fund this partly by i...
    Appointment of other intermediaries namely, registrars, bankers, advertising agencies etc. The Lead manager also makes...
    Fix the price band     Decide the price band between which the company would like to go public. Of course this can   t...
is said to be under subscribed. This is not a great situation to be in as it indicates negative public sentiment     Over ...
Table 5.1 - Recent IPO   s in India Sl No  Name of Issue  1  Wonderla Holidays Limited  2  Power Grid Coporation of India ...
Key takeaways from this chapter 1. Companies go public to raise funds, provide an exit for early investors, reward employe...
C H A PT E R 6  The Stock Markets 6.1 - Overview Having understood the IPO process and what really goes behind the company...
6.2 - What really is the stock market  Like we discussed in chapter 2, the stock market is an electronic market place. Buy...
6.3 - What moves the stock  Let us continue with the Infosys example to understand how stocks really move. Imagine you are...
In this particular case, the stock moves up because of two reasons. One, the leadership issue has been fixed, and two, the...
So as you notice, market participants react to news and events and their reaction translates to price movements  This is w...
a. Details of your trading account through which you intend to buy Infosys shares     therefore your identity is reveled. ...
portunity. Just to remind you, this is very much possible in real markets. When things are hot, such moves are quite commo...
Applying this to answer the question..   3550 3030   1 2      1    8.2  This means the investment grew at a rate of 8.2  f...
1000 - profit in this trade. In a typical day, he would have placed many such trades. As you may have noticed a scalp trad...
Key takeaways from this chapter 1. A stock market is a place where a trader or an investor can transact  buy, sell  in sha...
C H A PT E R 7  The Stock Markets Index  7.1 - Overview If I were to ask you to give me a real time summary on the tra   i...
Instead you would just check few important companies across key industrial sectors. If majority of these companies are mov...
ture. For example the Nifty value on 1st of January 2014 was 6301 and the value as of 24th June 2014 was 7580. This repres...
Portfolio Hedging     Investors usually build a portfolio of securities. A typical portfolio contains 10     12 stocks whi...
Table 7.1 - Nifty stocks as per their weightage Sl No  Name of the company  Industry  Weightage      1  ITC Limited  Cigar...
Sl No  Name of the company  Industry  Weightage      20  Sesa Sterlite Ltd  Mining  1.38  21  Dr.Reddy   s Lab Ltd  Pharma...
Sl No  Name of the company  Industry  Weightage      37  Grasim Industries Ltd  Cements  0.79  38  Gail  India  Ltd  Gas  ...
As you can see, ITC Ltd has the highest weightage. This means the Nifty index is most sensitive to price changes in ITC Lt...
Key takeaways from this chapter 1. An index acts as a barometer of the whole economy 2. An index going up indicates that t...
C H A PT E R 8  Commonly Used Jargons  The objective of this chapter is to help you learn some of the common market termin...
    52 week high low     52 week high is the highest point at which a stock has traded during the  last 52 weeks  which al...
But then, it was not a bad deal after all. I agree, I had sold a phone that I dint own. However I could always buy the pho...
An obvious question you may have     How can one sell Wipro shares without owning it. Well you can do so, just like the wa...
Table 8.1- Long and short positions Make Position  1st Leg  2nd Leg  Expectation  You will lose  money  money if  when Lon...
Market Segment     A market segment is a division within which a certain type of financial instrument is traded. Each fina...
C H A PT E R 9  The Trading Terminal  9.1 - Overview When a market participant wants to transact in the market, he can do ...
1. Buy 1 share of ITC, and 2. Track the price of Infosys While we achieve the above two tasks, we will also learn about al...
You hit enter when the stock you want is identified. The stock now sits in the market watch column titled    symbol   .  T...
To add these columns one has to right click keeping the cursor near the column space and select on reposition column optio...
9.4 - Buying a stock through the trading terminal Our goal is to buy 1 share of ITC. We now have ITC in our trading termin...
You can opt for a    Limit    order when you are very particular about the price you want pay for a stock. In our case, th...
tity box. We ignore the trigger price and disclosed quantity for now. The next thing to select would be the product type. ...
The order book provides the details of the orders you have placed. You should access the order book to      Double check t...
By clicking    modify    the order form will be invoked and you can make the desired changes to the order. Once the order ...
You now o   icially own 1 share of ITC. This share will reside in our DEMAT account till you decide to sell it.  The next ...
Have a look at the snapshot below  The price of Infosys dropped from 3295.0 to 3292.3, and hence the color changed to red ...
Table 9.1 - Top 5 ask prices Sl No  Ask Price  Ask Quantity  Number of Sellers  1  3294.80  2  2  2  3294.85  4  2  3  329...
Table 9.2 - Top 5 bid prices Sl No  Bid Price  Bid Quantity  Number of Buyers  1  3294.75  10  5  2  3294.20  6  1  3  329...
Key takeaways from this chapter 1. A trading terminal is your gateway to markets. You must know the operations of a tradin...
C H A PT E R 10  Clearing and Settlement 10.1 - Overview While the topic on clearing and settlement is quite theoretical i...
10.2 - What happens when you buy a stock  Day 1     The trade  T Day , Monday Assume on 23rd June 2014  Monday  you buy 10...
So an amount of Rs.100,000 - plus Rs.126.32 -  which includes all the applicable charges  totaling Rs.100,126.32 - will be...
So for all practical purposes if you buy a share on day T Day, you can expect to receive the shares in your DEMAT account ...
Key takeaways from this chapter 1. The day you make a transaction, it is called the trade date, represented as    T Day   ...
C H A PT E R 11  Five Corporate Actions and its Impact on Stock Prices  11.1 - Overview Corporate actions are initiatives ...
11.2 - Dividends Dividends are paid by the company to its shareholders. Dividends are paid to distribute the profits made ...
Ex Date Ex Dividend date  The ex dividend date is normally set two business days before the record date. Only shareholders...
Table 11.1 - Bonus Issue  Bonus Issue  No of shares held before bonus  Share price before Bonus issue  Value of Investment...
Table 11.2 - Stock Split No of shares you own before split  Share Price before split  Investment Value before split  New F...
There could be many reasons why corporates choose to buy back shares.. 1. Improve the profitability on a per share basis 2...
Key takeaways from this chapter 1. Corporate actions has an impact on stock prices 2. Dividends are means of rewarding the...
C H A PT E R 12  Key Events and Their Impact on Markets 12.1 - Overview For a market participant transacting just based on...
12.2 - Monetary Policy The monetary policy is a tool with which the Reserve Bank of India  RBI  controls the money supply ...
12.3 - Inflation Inflation is a sustained increase in the general prices of goods and services. Increasing inflation erode...
As you can notice, the CPI inflation has kind of cooled o    from the peak of 11.16  in November 2013. The RBI   s challen...
12.5 - Purchasing Managers Index  PMI  The Purchasing managers index  PMI  is an economic indicator which tries to capture...
12.7 - Corporate Earnings Announcement This is perhaps one of the important events to which the stocks react. The listed c...
Every quarter when the company declares their earnings, the market participants match the earnings with their own expectat...
Key takeaways from this chapter 1. Markets and individual stocks react to events. Market participants should equip themsel...
C H A PT E R 13  Getting started   Assuming you are done reading and understanding the entire 12 chapters in our very firs...
5. Option Theory 6. Option Strategies 7. Quantitative Concepts 8. Commodity Markets 9. Risk Management   Trading Philosoph...
To develop a point of view, one needs to develop a systematic approach to analyze the markets. There are a few methods usi...
i   Within the option market there are call options and put options.  ii  You can also do a combination of call and put op...
After reading through these two modules you will get a sense of developing a point of view on markets. The later modules w...