Shares Simplified
(An Introduction to Investing – Equity Markets)
(Answer your queries about investing in Shares)
Part - 1
An ICICIdirect Institute Knowledge Programme
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This session will help you understand
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What is investing?
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Why should you invest.
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How to invest in equity
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Factors to keep in mind while approaching equity
investments.
What is Capital Market?

Capital market is the broad term for the market
where investment products such as..
Stocks
 Bonds
 Mutual funds are bought and sold

It includes all the people and organizations which
support the process.
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What is Investing?
Any time you invest, you are putting something of yours into
something else in order to achieve something greater.
 One can invest the weekends in a good cause.
 One can invest the intelligence in a job OR
 One can invest the time in a relationship.
“Just as one do each of these with the expectation that
something good will come of it, when one invest savings in a
stock, bond, or mutual fund, One do so because one think its
value will appreciate over time. “
 Investing money is putting that money into some form of
"security" i.e. "secured" by some assets. Stocks, bonds,
mutual funds, certificates of deposit - all of these are types of
securities
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Continued.....
In Simple , One should invest so that the money grows and
shields against rising inflation. The rate of return on
investments should be greater than the rate of inflation,
leaving One with a nice surplus over a period of time.
Whether the money is invested in stocks, bonds, or mutual
funds, the end result is to create wealth for retirement,
marriage, college fees, vacations, better standard of living or
to just pass on the money to the next generation.
 A few important feature of good investment are :✔
Investment for Long Term and
✔
Investment decision is taken after due consideration of
fundamental factors which may help the investment to
appreciate.
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Why do I need to invest?

Investing is important to improve future welfare

To enhance future consumption possibilities

Important - to create a shield against inflation

To create wealth or generate funds for
Education
 Marriage
 Child's Education
 Retirement.
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How much money do I need to invest?
The amount that you invest will eventually depend on
factors such as:
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Your risk profile
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Your Investment time horizon
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Savings made
When should one Invest?
Invest early
- Give your money time to grow.

Invest regularly
- Use the power of compounding.

Invest for long term and not short term
- Give your investments time to weather the ups and
downs in the market.
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Power of compounding…
Rs. 80,80,000
Rs. 10,000 invested for 30 years
Rs. 23,70,000
Rs. 40,000
5%
Rs.
Rs. 6,60,000
1,70,000
10%
15%
20%
25%
Different investment options
Investing options…
• Stocks (Shares)
• Mutual Funds
• Bonds
• Fixed Deposits
• Insurance
• Others – Gold, Real Estate, currency etc.
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Investment options – Stocks
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Shares - Stocks
Shares represent part ownership of a company.
When you buy a share in a company you become a
joint owner of the business and share in the future
of that business. Also known as equity.

Equity Capital
Is the money raised by the company by issuing
shares to the public.
i.e. Equity capital = Number of shares x Face value
of the shares
How can you invest in stocks?
There are two ways in which you can invest in shares
Through the primary market
- by applying for shares that are offered to the public
(IPO)
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Through the secondary market
- by buying shares that are listed on the stock
exchanges – NSE, BSE
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How can you invest in stocks?

Primary Market
Is the market for an IPO (Initial Public Offer).
The first opportunity investors have to buy
newly issued stocks.
After the first purchases, subsequent trading
will occur in the secondary market.
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Initial Public Offer (IPO)
The first public offer of shares by a company is
known as an IPO.
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IPO can be done in two ways:
Fixed price issue - One price is fixed for the issue.
Ex: shares issued at Rs 25.
Book building - Price band is fixed and the
investors have to bid in order to get the share. Ex:
Band of Rs 20-25, shares will be allotted at the price
which has the most demand.
How can you invest in stocks?
Secondary Market
 Shares allotted in the IPO are listed on the
exchanges and then traded in the secondary
market.
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There are over 5000 stocks traded in the
secondary market through NSE and BSE.
How do investments in stocks generate returns?
Like any investment, stocks should also generate a
Return on Investment (ROI).
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ROI in layman terms is the return on capital
invested in business i.e. if you invest Rs 1 crore in
men, machines, land and material to generate Rs
25 lakhs of net profit, the ROI is 25%. For stocks
ROI can calculated in two ways:
Dividends
Capital Appreciation
How do investments in stocks generate returns?
Dividends
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Are a portion of a company's net profit paid to
stockholders. Normally, at the end of the financial
year.
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A stock’s dividend yield is determined by dividing a
company’s annual dividend by its current share
price.

A stock trading at Rs 20 with an annual dividend of
Rs 2 per share yields the investor 10%. Dividends
are calculated on the face value of the share.
Interim Dividend
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Interim dividend is declared and paid during the
year. It can be given any time of the year and is at
the sole discretion of the management of the
company.
How do investments in stocks generate returns?
Capital Appreciation
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Is the rise in share price leading to profits.
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Ex: when the stock price goes up from Rs 100 to Rs
150 in 1 year your capital has appreciated by 50%.
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The total ROI is sum of return from dividends and
capital appreciation during a period.
Terms to know about stocks
Face Value
It’s the nominal value printed on the face of the
share, debenture or bond, unless the issuing
company otherwise specifies the value. Also known
as Par Value. Normally it is Rs.10/-.
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Earning Per Share (EPS)
This ratio determines what the company is earning
for every share issued. EPS is calculated by dividing
the earnings (net profit) by the total number of
equity shares.
Thus, if AB Ltd has 2 crore shares and has earned
Rs 4 crore in the past 12 months, it has an EPS of Rs
2.
Terms to know about stocks
Price/Earning (P/E) Ratio
The P/E gives an indication of how the market values
every rupee earned by the company.
The P/E ratio is the stock price divided by the EPS of
the last four quarters.
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For ex: If AB Ltd is trading at Rs 20 and has a EPS
of Rs 4, it would have a P/E of 5.
Market Capitalisation
Is the current market value of the company's shares.
Market value is the total number of shares multiplied
by the current price of each share.
Market Cap would indicate the sheer size of the
company, it's stocks' liquidity etc.
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Based on Market Cap companies are classified as
Large Cap, Mid Cap and Small Cap.
Terms to know about stocks
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Volume
Volume is the number of shares of a company
traded in a day.
Volume is also an indicator of the liquidity in a
stock. Highly liquid stocks can be traded in large
batches with low transaction costs. Illiquid stocks
trade infrequently and large sales often cause the
price to rise/fall dramatically.
Volume is a key way to measure supply and
demand, and is often the primary indicator of a new
price trend.
Book Value
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Is the difference between a company's assets and
its liabilities, usually expressed in per-share terms.
It is calculated by subtracting total liabilities from
total assets and dividing the result by the number
of shares outstanding.
Book value is what would be left over for
shareholders if the company was sold and its debt
retired. It takes into account all money invested in
the company since its founding, as well as retained
earnings.
Terms to know about stocks
Stock Split
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Reduction in the face value of a stock.
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Additional shares are issued to existing shareholders,
at a rate expressed as a ratio.
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A 2-for-1 stock split, for instance, doubles the
number of shares outstanding. It is the change in a
company's number of shares outstanding that doesn't
change a company's total market value, or each
shareholder's percentage stake in the company.
Continued....
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After the split an investor holding 100 shares of Rs
60 stock would have 200 shares of Rs 30 stock
following a 2-for-1 split. The face value of this share
would also become half. But his percentage of
equity in the company remains the same
Buyback
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A buy back is when a company buys its own stocks
in the open market or from share holders.
Terms to know about stocks
Rights
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When a company wants to raise more funds by
issuing additional shares, it may give its
stockholders the opportunity, ahead of others, to
buy the new shares in proportion to the number of
shares each owns. The piece of paper evidencing
this privilege is called a Right.
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Rights ordinarily have a market value of their own
and are actively traded. In most cases they must be
exercised within a relatively short period.
Continued......
Bonus
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Bonus shares are issued by the company to its
shareholders at a rate expressed as a ratio. A 1for-1 bonus, for instance, doubles the number of
shares outstanding.
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An investor holding 100 shares would get
additional 100 shares free.
Terms used in the market
“Bull & Bear Market” ?
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Bull Market - Upward Cycle
Strong Economy
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Low Inflation/Low Interest Rates
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Positive Corporate Earnings
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Strong Cash Flows
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Low Unemployment
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Bear Market - Downward Cycle
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Slowing rate of earnings growth
High Inflation/High Interest rates
Increased consumer debt
Climbing unemployment
Why Invest In Equities?
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Equities have the potential to increase in value
over time and can provide your portfolio with the
growth necessary to reach your long-term
investment goals
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Equities are known to have outperformed all other
forms of investments in the long-term
10 Steps to equity investing
STEP 1
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Identify your objective
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Know why you want to invest – short term surplus,
long term capital growth.
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If you want a larger sum to spend at a later date,
your main priority will be capital growth.
10 Steps to equity investing
STEP 2
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Invest according to your risk tolerance
Young people at the start of their working lives will have
a greater appetite for taking risk as compared to people
at the end of their career.
At the start capital growth in the key, towards the end
capital preservation.
A thumb rule to invest --- minus your age from 100. The
remainder will determine how much should go to
equity.
Ex: Age 30. 100-30 = 70. Equity exposure 70%.
10 Steps to equity investing
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STEP 3
Categorize stocks as Cyclical, Growth or Defensive
Cyclical
Investing in cyclical stocks -- cement or steel, requires
an understanding of the economic scenario.
An active involvement is required in order to reap the
maximum benefits of swings in economic cycles over
time.
The stock prices are likely to move through extreme
highs and lows, and the ability to time entry and exit
will be necessary.
10 Steps to equity investing
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STEP 3 (contd.)
Categorize stock as Cyclical, Growth or Defensive
Growth
Growth investing is investing in sectors where the
future direction is clear for the medium term - such
as technology.
Timing is key, the stock may do nothing for a long
time as momentum builds up and then move
sharply thereafter.
10 Steps to equity investing
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STEP 3 (contd.)
Categorize stock as Cyclical, Growth or Defensive
Defensive
Defensive investing is done from a long term
perspective.
It is investing in sectors that grow consistently and on
a sustainable basis over time, such as Pharmaceutical
Appreciation may, at times, not be as dramatic as
cyclical or growth stocks. However, stocks that
constitute defensive investments are expected to
grow steadily over longer time periods.
10 Steps to equity investing
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STEP 4
Check market activity
Being able to sell is as important as buying. The
liquidity of a stock is very important in taking an
investment decision.
Look at the price volume relationship for a stock.
If a stock price is moving up or down on high
trading volume, it is more likely that there is real
interest in that price movement than if there is very
little volume supporting the price move.
10 Steps to equity investing
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STEP 5
Know the business you buy
The performance of each stock is linked to the
underlying business, and the market’s perception
of the future prospects for that business.
Study the future potential in terms of demandsupply and the company’s competitive position in
the industry.
The business model of the company should have
the ability to sustain growth and momentum well
into the future.
10 Steps to equity investing
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STEP 6
Know the management
Company with a capable and strong management
is always respected in the market and treated
better.
A shareholder responsive management team is
critical for operating and growing a successful
company.
10 Steps to equity investing
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STEP 7
Study the company’s performance
Look at the year-on-year growth in the company’s
performance.
Look at the price earnings (P/E) for arriving at
comparative valuation.
Finally, look at return on equity (ROE), which is the
year’s earnings divided by the net worth of the
company.
ROE compared to the cost of capital allows the
investor to gauge the company’s wealth creating
ability.
10 Steps to equity investing
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STEP 8
Know the company’s valuation
Two stocks may have the same EPS but different P/E’s
This is because ROE may be different and its
sustainability may be different.
The higher the sustainable ROE, the higher the P/E
rating.
A high P/E does not therefore necessarily imply an
overvalued stock.
Stocks with high sustainable ROE’s are likely to trade
at high P/E multiples.
10 Steps to equity investing
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STEP 9
Set a price target
Set expectations, by identifying a target price, and
re-evaluate the stock when this target is reached.
If there is a loss on a stock and does not show
potential to rise, sell.
By not selling out of low return stocks to get into
higher return stocks, you miss out on opportunities.
10 Steps to equity investing
Step 10
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Tracking your investment
Tracking your investment is as important as buying
it.
Analysing stocks
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Fundamental Analysis
Use of company financials
Ratios, growth in sales, net profits etc.
Largely used by long term investors.
Technical Analysis
Use of past share price movement to ascertain
future trend.
Trend lines, supports/resistance etc.
Largely used by short term investors and traders.
How to spot a good stock
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Growth in future earnings (EPS) is an important
parameter for spotting good stocks.
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The higher the growth the more potential for stock
price to rise.
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Lets see how you can use future earning estimates
to identify growth.
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Future EPS is available on ICICIdirect in Research
Section – Multex Earning Estimates.
How to spot a good stock
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The share price is a function of
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Earning Per Share (EPS) * Price/earning (PE) ratio…
For ex: If company A has EPS = 25
and PE = 10. Then share price = 250.
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So if future EPS is available potential stock price in
future can be estimated. Here’s how…
How to spot a good stock
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Lets look at Infosys
Current EPS (FY2005) = Rs 68.48
Current PE = 35.30
Therefore market price = 2418
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Future Expectation…
Estimated EPS (FY2006) = 91.46
Estimated EPS (FY2007) = 117.30
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Assuming PE remains same…
Potential stock price on FY2006 earnings
91.46 * 35.30 = 3228 or potential to rise 30 per cent.
This is an illustrative example. The actual growth will also depend on market conditions and
potential of other stocks etc.
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Overview of the stock market
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The Bombay Stock Exchange (BSE) and the National
Stock Exchange of India Ltd (NSE) are the two
primary exchanges in India. In addition, there are 22
Regional Stock Exchanges.
NSE has around 1500 shares listed with a total
market capitalization of around Rs 9,21,500 crore (Rs
9215-bln). The BSE has over 6000 stocks listed and
has a market capitalization of around Rs 9,68,000
crore (Rs 9680-bln).
The primary index of BSE is BSE Sensex comprising
30 stocks. NSE has the S&P NSE 50 Index (Nifty)
which consists of fifty stocks.
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Both these indices are calculated on the basis of
market capitalization and contain the heavily traded
shares from key sectors.
The scripts traded on the BSE have been classified
into 'A', 'B1', 'B2', ‘S', ‘T' and 'Z' groups.
The key regulator governing Stock Exchanges,
Brokers, Depositories, Depository participants,
Mutual Funds, FIIs and other participants in Indian
secondary and primary market is the Securities and
Exchange Board of India (SEBI) Ltd.
Indices
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Indices are a barometer or indicators of how the
broad market is moving and the sentiment in the
market.
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The two major indices are BSE Sensex (30 stocks)
and NSE Nifty (50 stocks).
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Each stock has a weightage based on the market
cap.
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The movement in each stock and their weightage
decides how much the index moves up or down.
Settlement System
Rolling market
 In a rolling settlement, each trading day is considered
as a trading period and trades executed during the
day are settled based on the net obligations for the
day.
 At NSE and BSE, trades in rolling settlement are
settled on a T+2 basis i.e. on the 2nd working day.
For arriving at the settlement day all intervening
holidays, which include bank holidays, NSE/BSE
holidays, Saturdays and Sundays are excluded.
 Typically trades taking place on Monday are settled
on Wednesday, Tuesday's trades settled on Thursday
and so on.
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Settlement System
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Trade 2 Trade
In the trade 2 trade settlement the delivery has to
be made as per the rolling market but the only
difference is that every transaction is accounted
for i.e. if a person buys and sell the same quantity
of the same company, he has to take the delivery
of the stocks and at the same time give the
delivery of the stock.
Dematerialization of shares
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Dematerialization in short called as 'Demat is the
process by which an investor can get physical
certificates converted into electronic form maintained
in an account with the Depository Participant
Depository
The organization responsible to maintain investor's
securities in the electronic form is called the
depository.
In India there are two such organizations viz. NSDL
and CDSL.
Depository Participant
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The market intermediary through whom the
depository services can be availed by the investors
is called a Depository Participant (DP).
As per SEBI regulations, DP could be organizations
involved in the business of providing financial
services like banks, brokers, custodians and
financial institutions.
Advantages of Demat
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Trading in demat segment completely eliminates the
risk of bad deliveries.
In case of transfer of electronic shares, you save 0.5%
in stamp duty.
Avoids the cost of courier/ notarization/ the need for
further follow-up with your broker for shares returned
for company objection.
Increasing liquidity of securities due to immediate
transfer & registration
Reduction in brokerage for trading in dematerialized
shares
Continued....
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Receive bonuses and rights into the depository
account as a direct credit, thus eliminating risk of
loss in transit.
Lower interest charge for loans taken against demat
shares as compared to the interest for loan against
physical shares.
How should you classify your money for
investment?
You should divide your total saving into three parts:
 SACRED MONEY: You would never want to risk this
part of your savings. You may keep this at home under
the mattress or invest in bank account and in
government guaranteed schemes.
 SERIOUS MONEY: This part of your savings you are
willing to expose to a little bit of risk. You may buy
debentures issued by high quality companies or you
could invest in FD’s of good corporate or mutual funds.
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Continued....
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AGGRESSIVE MONEY: This you may use to invest in
shares or other relatively risky investments which
have a potential of giving excellent returns.
QUESTIONS TO CONSIDER BEFORE INVESTING?
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How much of my money should I invest?
Where should I invest – stocks, bonds, mutual
funds, FD’s?
When should I invest –is this the right time to
invest?
Study the sector you are investing in?
Study the company balance sheet in brief from
various websites – profit/loss etc?
Is the company paying dividends –how much, since
when?
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Why is the P/E ratio of the company compared to
other companies in the same sector or its
competitors?
What is the growth potential of the company –any
mergers, accusations, new products launch etc.
compared to competitors?
How is the management of the company –
transparent, client friendly etc?
Any new govt. policy in expected in that sector?
What will be my return of investment in 6 months,
1year time?
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Disclaimer
ICICI Securities Ltd., Member of National Stock Exchange of India
Ltd., SEBI Regn. No. INB 230773037 (CM), SEBI Regn. No. INF
230773037 (F&O), Bombay Stock Exchange Ltd., SEBI Regn. No.
INB011286854 (CM) , SEBI Regn No. INF010773035 (F&O).
Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H.
T. Parekh Marg, Churchgate, Mumbai - 400020, India. Kindly read
the Risk Disclosure Documents carefully before investing in Equity
Shares, Derivatives or other instruments traded on the Stock
Exchanges. The contents herein above shall not be considered as
an invitation or persuasion to trade or invest. Investors should make
independent judgment with regard suitability, profitability, and
fitness of any product or service offered herein above. I-Sec and
affiliates accept no liabilities for any loss or damage of any kind
arising out of any actions taken in reliance thereon.
THANK YOU
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