Your guide to shares and bonds


What is a stock market index?

The stock market index portrays ‘‘the overall average performance’’ of the equity portfolio of all shareholders in India, put together. It shows the average performance of the owners of all large companies of India. As an example, if you see that a budget speech led to a 10 per cent rise in the stock market index, this means that the value of owning all the large companies of India went up by 10 per cent owing to the budget speech.

What are the major indexes?

Nifty, Nifty Junior and the BSE Sensex. The BSE Sensex is the biggest 30 companies. Nifty is the biggest 50 companies. Nifty Junior is the next biggest 50 companies (ie rank 51 to 101). These indexes seem small compared with the thousands of companies listed in the country. However, they do successfully represent the behaviour of the overall equity market.


When a trade goes through properly, in what form do I get shares?

All traded shares in India are now ‘‘dematerialised’’. This means that a central database knows that you own (say) 100 shares of Infosys. But no physical share certificates are issued.

I like touching physical share certificates. It reassures me. Why are share certificates not issued?

Physical share certificates are vulnerable to theft, counterfeiting, mutilation, termites, rats, and other such problems. Shipping physical share certificates across the country runs up substantial costs. Moreover, you don’t actually need the physical share certificate. You merely want to be sure that dividends come to you, and that you can sell off the shares when you feel like. These facilities work perfectly fine using dematerialised shares.

Who keeps this database about ownership of shares?

There are two ‘depositories’ in the country which keep databases about who owns what shares. The biggest is National Securities Depository (NSDL). As with NSE and BSE, you do not directly deal with NSDL. In the case of the exchange, you deal with the stock broker. In the case of the depository, you deal with the ‘depository participant’ (DP). Many banks, stock brokers etc are depository participants, who will give you DP services. The DPs offer services from thousands of offices in the country, so you have plenty of choice.

How much do I end up paying for all these services—stock broker, depository participant etc?

A critical strength of the securities industry is the lack of entry barriers in both stockbroking and DP services. It is easy for any company to put up the requisite capital and get into business. This helps preserve very high levels of competition. Typically, you might end up paying about 0.4 per cent of the transaction value as the brokerage fee. For example, if you buy shares worth Rs 5,000, the brokerage fee might work out to Rs 20. Do shop around; some brokers are cheaper than others.

NSDL has a model of a flat tariff per transaction, regardless of the value of the transaction. NSDL charges Rs 8 to the seller and nothing to the buyer. Depository participants pass on this cost to customers, adding in their own mark-up. There are many different rates charged by different DPs, ranging from zero to bigger numbers. Some DPs even charge an ‘‘ad valorem fee’’, where your payment is proportional to the transaction size (even though NSDL has a flat charge).

Different DPs are offering different kinds of services. You should be aware of the prices being charged by the DP, and choose a price/performance package that fits your needs. The fee charged often reflects differences in services and you should ask the DP about it.

Can I do all this over the Internet?

Yes, the early pioneers in the country, such as ICICI Direct, Share Khan, India Bulls etc are offering all the above steps over a web browser. These services are witnessing rapid growth. In 2003-04, turnover of Rs 80,000 crore took place on NSE over the Net, which was roughly 3 per cent of the total. People from Kashmir to Kanyakumari are logging into these systems using a web browser, buying and selling shares, and enjoying fully automated processes spanning broker, exchange, bank and DP.

How many people participate in the securities markets in the country?

Roughly speaking, every owner of shares in the country now has a depository account. There are now 6 million depository accounts. The number of accounts is growing at the rate of roughly 2,500 per day. NSDL now has roughly Rs 10 lakh crore of securities in its safekeeping in demat form. Every week, settlement of Rs 6,000 crore of equity and Rs 4,000 crore of debt takes place at NSDL.


All this works for shares. What about bonds?

The picture is quite dismal. India got a revolution in the stock market in the period from 1994, when the NSE started trading, to 2001, when it moved to rolling settlement. This revolution required vision and enormous efforts on the part of a lot of individuals and organisations. No comparable effort took place on the bond market.

Can I buy and sell bonds?

No. There is a small club of big finance companies in Mumbai which are participants in the debt market. Entry into the club is essentially closed. These companies buy and sell bonds from each other, by talking to each other on the phone. This is called ‘‘an over-the-counter (OTC) market’’. You, gentle reader, are not welcome.

On the NSE equity market, the top 25 brokerage firms account for only 30 per cent of stock trading. In bond markets, roughly 85 per cent of bond trading takes place between the biggest 25 firms. Similarly, while about 66 per cent of stock trading takes places outside Mumbai, in the case of the bond market, this amount is negligible.

There are over 10,000 offices across the country where you can place orders to buy shares. You practically cannot buy and sell bonds from these offices. Most corporate bonds are not listed—i.e. they do not figure on the NSE/BSE screens. So you cannot place orders for these. Government bonds are listed. However, the liquidity on the screen is negligible. RBI’s efforts on the government bond market have been to foster non-transparent phone conversations between big finance companies. This vision of the market does not include you.

What is wrong with participating in a telephone market?

Trades on the telephone are not transparent. Nobody knows what is taking place in the market. When someone buys bonds, he is never sure that he got them at the lowest price in the country. Also, trading on the stock market is anonymous. The computer matches buy and sell orders, without any names being displayed. In contrast, the bond market (like the real estate market) is rich with gossip about who is doing what. It makes it a hotbed of cartels and conspiracies.

Participants in the bond market routinely get ripped off in their transactions by others in the market who know who they are dealing with. This could happen to you. If you tell a bond dealer to buy 100 bonds for you, he will say that your price is (say) Rs 150. You have no way to crosscheck what is the price at which he bought, and whether you are being cheated in the deal. In contrast, on the stock exchange, after the 1990 reforms, there is full clarity and the price you pay is unbundled to separate out the price at which the trade took place on the exchange, and the brokerage fee.


What are derivatives and what is their link to the stock market? What do you mean by Nifty futures, short selling...?

Now that is the subject of another ‘Gained in Translation’!

Ila Patnaik