STOCK GYAN. (Part – 1, Basics)Atul Khurana
Let’s have a discussion on the stock markets, trading and all that stuff which must be known to one who wants to be share investor.
The information will be supplied to you in parts. so, stay tuned to this website.
What is Stock Market?
The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership.
For example: ABC Private Ltd. Company has offered 10,000 shares of Rs. 250 each to the general public. Now, the people who will subscribe to these shares will become the shareholders of the company. The shareholders are the owners of the company.
If a person A subscribe 500 shares of this company, then he will be termed as a shareholder with 5% shareholding (500/10000*100) in the company.
The Process of shares subscription takes place in following steps:
Step 1: The Company invites the public or specific section of people as they want to subscribe to their shares. The company issues Prospectus for this purpose in which all the details regarding shares are mentioned.
The applicants have to pay a small amount of the total share price which have been demanded by the company. The amount so demanded by the company on application is called Application money.
This whole process is governed by the Companies Act, 2013 and under the supervision of SEBI – Securities Exchange Board of India (only in case the shares are listed in stock exchange)
Why the company doesn’t demand for whole amount in the one go?
As I had already mentioned that this process is governed by the companies act, 2013, so let’s discuss how?
Section 39 of the companies act, 2013 states that the company can only allot the shares to the applicants if the company has received the amount of minimum subscription as mentioned in the prospectus within 30 days of the invitation of the shares to the public.
Also,the amount payable on application on every security shall not be less than five per cent of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf.
So, if the company doesn’t receive the minimum subscription amount within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received as application money has to be returned back to the applicants.
Reputed companies require the applicants to send the full value of the shares along with the applications. This is because, the Companies Act does not prohibit companies to collect the entire amount at the time of issue itself. But the usual practice of the companies is to collect a certain percentage of the face value of the shares on application and allotment and the balance in one or more installments known as calls.
Step 2: Now, after receiving the minimum subscription amount (application money),the company will allot the shares to the applicants on the payment of amount which is called Allotment money.
Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed.
Step 3: In this step, the company will demand for call money i.e. the money left to be paid after application and allotment.
Suppose: A company had issued a share of Rs. 10, out of which the following demands were made:
Application Money: Rs. 2 per share
Allotment Money: Rs. 5 per share
So, the total amount paid till yet is Rs. 7 per share that means Rs. 3 per share is still left. This pending amount is called call money on shares.
These were the steps followed by the company for issuing the shares. The above procedure is not the detailed procedure as there are lots of compliances on the part of the company for issuing shares like filing required forms, passing resolutions etc. These all compliances are framed by Companies Act, 2013 and SEBI.
Trading is much more than Shares but a layman knows only about shares and share trading or “Share Bazaar”. Let’s broaden the knowledge and discuss about the Financial Instruments and Types.
What are the Financial Instruments?
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).
Financial instruments can be either cash instruments or derivative instruments:
Cash instruments —instruments whose value is determined directly by the markets. They can be securities, which are readily transferable, and instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.
Derivative instruments —instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be exchange-traded derivatives and over-the-counter (OTC) derivatives.
Alternatively, financial instruments may be categorized by “asset class” depending on whether they are equity-based (reflecting ownership of the issuing entity) or debt-based (reflecting a loan the investor has made to the issuing entity).
If the instrument is debt, it can be further categorised into short-term (less than one year) or long-term.
Foreign exchange instruments and transactions are neither debt- nor equity-based and belong in their own category.
|Asset class||Instrument type|
|Securities||Other cash||Exchange-traded derivatives||OTC derivatives|
|Debt (long term)|
> 1 year
Options on bond futures
|Interest rate swaps|
Interest rate caps and floors
Interest rate options
|Debt (short term)|
≤ 1 year
|Bills, e.g. T-bills|
Certificates of deposit
|Short-term interest rate futures||Forward rate agreements|
|Foreign exchange||N/A||Spot foreign exchange||Currency futures||Foreign exchange options|
Foreign exchange swaps
For further details on these instrument types, wait for the second part.
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