The sale of a non-owned share. This is done after someone borrows shares from stockbrokers with the promise of replacing them at a later date in the hope (speculation) that the price will have fallen by then. He makes a profit if the price of the stock fell by the replacement date, and he loses money if the price increases. The SEBI recently approved short selling in India.
Bear and Bull
A bear is someone who expects stock prices to fall in the future and sells their stock to profit. He profits from a market that is falling. In other words, he’s shorting the stock. In contrast to a bear, a bull is someone who believes share prices will rise in the future and thus either stop selling a specific group of shares until that time arrives (essentially taking a long position on those shares) or begins purchasing that specific group of shares.
As a result, a bear increases the number of shares in a stock market, causing the index to fall overall—a bearish market. A bull, on the other hand, creates a scarcity of shares in the stock market, resulting in a general increase in share prices and the index—a bullish market.
Brokers take positions as bears for some stocks and bulls for others. A bull is remembered for a long time, whereas a bear is forgotten—Harshad Mehta was known as the Great Bull.
All Initial Public Offerings (IPOs) in which individual investors are reserved and allotted shares by the company are permitted by SEBI. However, the price must be disclosed by the issuer (at which shares have been allotted the size of the issue and the number of shares offered to the public).
Initial Public Offer (IPO) is an event of share issuing when a company comes up with its share/securities issued for the first time.
The company sets a price range (known as a price band) and the share applicants must quote their prices within that range, with the highest bidders receiving the shares. This is a type of premium share issue that is considered to be a safer option.
A share is given to the existing shareholders without any charge—also known as a bonus share.
A share is given to the employees of the company without any charge.
In mid-2001, the Indian stock market implemented a significant reform measure under which all sale and purchase commitments result in payment/delivery at the end of ‘X’ days (where ‘X’ stands for 5 days). X can also be one, two, or three days in some shares). Currently, this provision applies to all shares.
When the buyers want postponement of the transaction—in the Western world called Contango.
When the sellers want postponement of the transaction—also known as the reverse badla or backwardation.
Trading is allowed in shares where a future price is quoted for the shares and the payment and delivery take place on the pre-determined dates.
The process of converting stocks into ‘paperless form’ (dematerialization of shares, or ‘Demat’) began in 1996. India currently has two public sector depositories (Mumbai) operating under the Depositories Act of 1996.
(i) NSDL (National Securities Depositories Ltd.)
(ii) CDSL (Central Depositories Services Ltd.) Spread
The difference between the buying and selling prices of a share is called the spread. Higher the liquidity of a share lowers its spread and vice versa. Also known as Jobber’s Turn or Margin or Hair cut.
The transactions of stocks that take place outside the stock exchanges—unofficially take place after the normal trading hours.
The National Securities Clearing Corporation (NSCC), a government-owned corporation founded in 1996, assumes the counter-party risk of all NSE transactions, much like an intermediary does.
SEBI began a process in 2002 in which ownership, management, and trading membership were to be separated from one another. A stock exchange’s Board of Directors or office-bearers could not be brokers. Except for three regional stock exchanges (RSEs), all stock exchanges in India have done so.
The maximum number of shares that a company can issue, is also known as the nominal or registered capital. As required by the Companies Act, this is stated in the company’s Memorandum of Association (MoA) and Articles of Association (AoA) (Law).
The portion of a company’s authorized capital that has been paid by shareholders. Because all shares authorized may not be issued or issued shares are only partially paid up, a difference may arise.
The amount actually paid by the shareholders or has been committed by them for contribution. Issued Capital
The amount which is sought by a company to be raised by issuing shares that cannot exceed the authorized capital of the company.
The over-allotment provision refers to a provision that allows a company issuing shares for the first time to sell some additional shares to the public—usually 15%. It gets its name from the first company to be given this option (Greenshoe Company, USA).
The stock has remained low-priced on a stock exchange for a longer period of time. Speculators may begin to hoard them for large profit margins, as happened in India in mid-2006. Because such stocks are hoarded, their market prices eventually rise. Speculators profit by offloading (selling) these shares at high prices, while those who buy them end up with huge losses because the price rises of these stocks are unintentional or intentional manipulation and nothing else.
Employee Stock Ownership Plans (ESOPs) allows a foreign company to offer its stock to employees in other countries. It was permitted in India (February 2005) if the MNC owned at least 51 percent of its Indian subsidiary. Previously, such an option required permission from the RBI.
Screen-Based Trading (SBT) is stock trading that takes place over an electronic medium, such as a computer monitor or the internet. Bond broker Cantor Fitzgerald was the first to introduce such trading in New York in 1972. It was first presented by India at the OTCEI in 1989. It is now performed at all exchanges.
Debentures are debt instruments that can be issued by a public or private company to raise funds in the securities market. Redeemable, Non-redeemable, Partially Convertible, and Fully Convertible are some of the different types. In the case of ‘fully convertible debentures,’ debenture holders are given the option (hence the name OFCDs, i.e., Optionally Fully Convertible Debentures) to convert their OFCDs into shares (after the ‘lock-in’ period set by the debenture issuing firm expires). However, the ‘rate’ will be set by the company (e.g., how many shares are against how many debentures). When either of the following conditions is met, the ‘option’ to convert debentures into shares is profitable and/or safer for debenture holders:
(i) The firm is likely to make a high profit (so the shareholder can earn a higher dividend), or
(ii) Firm’s share price is likely to rise in the share market (profit can be made by selling shares).
However, if the company’s balance sheet is weak (it may go bankrupt), it is preferable to keep the debentures rather than convert them into shares, because when a company is liquidated (its assets are sold off), debenture holders receive priority in payment over shareholders. It means that OFCD is a risky business, but it is the only way to invest in the stock market for investors who have a basic understanding of share prices, company performance, and so on.
The OFCDs issued by Sahara (an NBFC regulated by the RBI) recently made headlines due to some irregularities – it was a simple case of certain loopholes in the regulation of OFCDs and some violations by Sahara:
(i) Actually, an OFCD issue process has to be completed within 10 working days (Sahara continued for over two years).
(ii) Only 50 individuals/institutions can subscribe to the OFCD if it is issued through the ‘Private Placement’ route (Sahara issued it to over 23 million people and raised over 24,000 crores). The issuance of such complicated instruments to the general public was a clear case of financial irregularities.
(iii) Unlisted companies are not subject to SEBI’s regulatory oversight. They are currently governed by the Ministry of Corporate Affairs (both the Sahara firms which issued OFCDs are unlisted). However, SEBI argued that because OFCDs are defined in the SEBI Act of 1992, it can regulate even unlisted companies that issue them. There was a lot of regulatory ambiguity. This is why the government included a “clause” in the Companies (Amendment) Act, 2012, giving SEBI undisputed jurisdiction over any investment scheme involving more than 50 investors, whether the company is publicly traded or not. Meanwhile, Sahara has been ordered to repay all of the money it raised through OFCDs, plus interest of 15% per year.
A derivative is a product whose value is contractually derived from the value of one or more basic variables, referred to as bases (underlying asset, index, or reference rate).
The underlying asset can be a stock, a currency, a commodity, or anything else. Wheat farmers, for example, may prefer to sell their harvest at a later date to avoid the risk of price fluctuations. A derivative is an example of such a transaction. The underlying, the spot price of wheat, determines the price of this derivative.
The Securities Contracts (Regulation) Act, 1956 [SC(R)A] defines derivatives in the Indian context as:
- A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences, or any other form of security.
- A contract, derives its value from the prices, or index of prices, of underlying securities.
Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A and is allowed to be traded on the floors of the stock exchanges.