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Chapter 1.13: Basic Queries About Stock Market
Have some more questions about the stock market? Here are answers to some common questions:
WHY WOULD I CHOOSE STOCKS?
Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.
WHAT INSTRUMENTS ARE TRADED IN THE STOCK MARKETS?
There are various types of instruments traded in the stock market. They include shares, mutual funds, IPOs, futures and options.
WHERE DO I BUY STOCKS?
Stock trading happens on stock exchanges. However, you cannot buy directly at the exchange. To buy stocks, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission. You can easily buy stocks through Kotaksecurities.com, one of India's leading stock brokers, with a variety of services and products to cater to all your investment needs at very reasonable brokerage rates. Once you are registered with us, you can trade using the Kotak Securities website, our mobile trading app, our desktop trading application, or through the phone using our Call & Trade facility.
WHERE DO I FIND STOCK RELATED INFORMATION?
Some of the most accessible avenues to get stock information are the internet, business news channels and print media. You could alternatively access the Kotak Securities website and get all the information that you wanted within a matter of seconds.
WHAT ARE SOME OF THE ORDERS I CAN PLACE?
You can place different kinds of orders such as market orders, limit orders, stop loss orders, good-till-cancelled orders, after-market orders (AMOs), etc.
A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the current market price. However, although a limit order guarantees a price, it cannot guarantee execution of the trade. This is because the stock might not reach the desired price on that particular trading day owing to market-related factors.
Stop loss order
A stop loss order is a normal order placed with a broker to sell a security when it reaches a certain predetermined price called the trigger price. Sometimes the market movements defy your expectations. Such market reversals often result in loss-bearing transactions. The stop loss trigger price is your defense mechanism – an amount at which you will be able to sustain yourself against such unanticipated market movements. For example, if you bought a stock at Rs. 10, you place a stop loss order with your broker to sell it, if it reaches Rs. 8. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.
GTC or Day Orders are orders given to your broker that hold true only during the trading day when the order was placed. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus, they are orders that are only 'good until it is canceled' or 'good for the day'. For example, suppose that you have placed a stop loss order with your broker to sell a stock once the price reaches level X. If it does not reach limit X, your broker will not sell the stock. However, the stop loss order given to your broker will not hold true for the next day. So, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again.
An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security as soon as the order is released into the market, in case order failed to full fill the total quantity it will be removed from the market. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.
WHAT HAPPENS IN CASE MY SHARES ARE SHORT SOLD?
At any point of time when the shares are short sold and the same are not delivered to the exchange, the shares go in for auction. Here, the shares are purchased on behalf of the client in the auction market and delivered to the actual buyer. To carry on the auction procedure, 150% of the amount shall be blocked in your account. This amount will be reversed once the actual auction charges are debited from your account.
You also have the option to transfer shares from some other demat account to your demat account with Kotak Securities in order to adjust for the shares short-sold. However, the shares should be transferred one day prior to the pay-in date before 3.30 p.m.
WHAT ARE ADVANCES AND DECLINES?
Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest 'advances' inform you how the market has progressed. In contrast, 'declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical analysis tool that indicates market movement. The ratio is calculated using the formula:
- Generally, it is seen that in bullish markets, the number of stocks that advance is more than the ones that declined; the converse holds true in a bearish market. The indicator – market breadth – is used to gauge the number of stocks advancing and declining for the day.
- 'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day.
- Advances and declines are calculated from the previous day’s closing results. However, a market with an advance-decline ratio that is significantly down or up may have a hard time reversing out of that direction the next day.
CAN I TRADE WHEN MARKETS ARE SHUT?
No, you cannot trade when the markets are shut but you can place orders . Such orders are called After-Market Orders. AMO is for those customers who are busy during market hours but wish to participate. When you place an AMO, you have to keep in mind the closing price of the stock. You can choose a price which is 5% higher or lower than the closing price. That said, your order will be processed as soon as the market opens the next day at the opening price if it falls within this 5% band.
AMOs come handy when you need time to plan your orders after conducting research. During market hours, you need to actively track the price as it is constantly fluctuating. This is not the case for AMOs.
WHAT ARE STOCK RECOMMENDATIONS?
You cannot invest without conducting research. Often, many analysts and brokerage firms undertake their own stock market research keeping in mind the economy, industries, currency valuation, and so on. They often use public data from institutions like the Reserve Bank of India and speak to experts as part of their research. This is not easily possible for retail investors. As a result, findings of such research are extensively followed by investors, which also give a buy or sell recommendation for specific stocks.
CAN I OWN MORE THAN ONE DEMAT OR TRADING ACCOUNT?
Yes, you can own more than one demat and trading account. However, these may be with multiple brokers and firms. While you have the freedom to open many accounts, it is not a viable option. This is because you would have to pay maintenance charges for each of these accounts, which may turn out to be costly affair in the long run.
HOW CAN YOU QUALIFY THE MARKET AS BULL OR BEAR?
Bull and bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements that last for a few days, as they may only indicate corrections or short-lived movements.
WHAT IS BOTTOMING OUT?
Stock prices move in trends – an upward and a lower trend. During periods of bear markets, prices keep falling. However, there will come a time when the market starts to look cheap. This is when it starts to rise again as people start buying slowly. This phenomenon when the market free-fall ends and the rise begins is called bottoming out.
Similarly, on the higher end, there will come a point when too much buying has made the stock costly. Traders then start selling in droves to book profits. So, the price does not rise beyond this level. This is called 'peaking'.
WHAT ARE THE VARIOUS TYPES OF THE RISKS ONCE I START TRADING?
This is the risk of investing in the stock market in general. It refers to a chance that a security’s value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors like inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affected by market risk.
This is a risk that affects all companies in a particular industry. This is because the companies in an industry may work in a similar fashion. This exposes them to certain kinds of risk unique to the industry.
Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations that will dramatically affect a business.
These are the risks unique to an individual company. It refers to the uncertainty regarding the organization’s ability to conduct its business. Products, strategies, management, labor force, market share, etc. are among the key factors investors consider in evaluating the value of a specific company.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer meet its financial obligations. Both stocks and bondholders fear bankruptcy. This is because you are unlikely to get all your money back. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible. However, in case the liabilities exceed the value of the company’s assets, even creditors may be at a loss.
Congrats, now you know all about the trading in the equity markets, different kinds of stocks as well as the prerequisites for trading – demat and trading accounts. Now, let’s move on to the currency market. Click here.
In case you have any more queries regarding your accounts or trading, check here.
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