Unpacking the Core Principles of Stock Trading Functionality
India has been renowned for its stock market which has witnessed an exponential rise in its participation in recent times. The Indian stock market is divided into two categories i.e. the primary market and the secondary market. The primary market is the place where new security issues are offered for sale, while the secondary market is where the already issued securities are traded. One of the popular types of securities traded in the Indian stock market is preference shares.
Preference shares are a type of shares that have a preference over equity shares in receiving dividends or claims against assets. They offer a fixed rate of return and the investors receive their dividend before the equity shareholders in case of liquidation. Preference shares can be redeemed after a certain period or at the discretion of the company. Moreover, preference shares can be cumulative or non-cumulative in nature.
Understanding the Core Principles of Stock Trading Functionality
The Indian stock market is one of the most dynamic financial markets in the world. Investors have the opportunity to trade in different securities like shares, bonds, debentures, derivatives, etc. One of the core principles of stock trading functionality is the concept of demand and supply. The price of securities fluctuates based on the demand and supply of that particular security.
For example, if a particular company’s shares are in high demand and the available shares in the market are limited, then the price of those shares will increase. On the other hand, if there is a surplus supply of shares and fewer buyers, then the price of those shares will decrease. Therefore, investors need to keep track of the demand and supply of securities before investing.
Another core principle of stock trading functionality is the analysis of the financial statements of the company. Investors need to analyze the financial statements of the company before investing. Financial statements like the balance sheet, income statement, and cash flow statement provide investors with an idea of the company’s financial health. For example, if a company has high debt and low cash levels, then it may indicate financial instability. Conversely, if a company has high cash reserves and low debt levels, it may indicate financial stability.
Calculating Returns from Preference Shares
Preference shares offer a fixed rate of return. The rate of return may vary depending on the type of preference shares held. To calculate the return from preference shares, the following formula can be used:
Return on Preference Shares = (Dividend per share / Market price per share) x 100
For example, let us assume that an investor purchased 100 preference shares of ABC Ltd. The dividend per preference share is INR 5 and the market price of each preference share is INR 100. Therefore, the return on preference shares can be calculated as:
Return on Preference Shares = (5 / 100) x 100 = 5%
The investor would receive a return of 5% on the investment.
Risks Involved in Trading in the Indian Stock Market
Like any financial market, the Indian stock market also involves certain risks. It is essential for investors to be aware of these risks before investing. Some of the risks involved in trading in the Indian stock market are:
Market Risk: The price of securities in the market fluctuates based on the demand and supply of that particular security. Market risk is the risk of loss due to adverse movement in the market prices.
Credit Risk: Credit risk is the risk of default by the issuer of the securities. If the issuer defaults on its payment, then the investors may face a loss.
Liquidity Risk: Liquidity risk is the risk of not finding a buyer or seller for the securities in the market. If the investor is unable to find a buyer or seller, then it may impact the investor’s ability to sell or purchase the securities.
In conclusion, the Indian stock market offers a wide range of securities to investors like preference shares, equity shares, bonds, debentures, etc. Preference shares are a type of shares that offer a fixed rate of return. Investors need to understand the core principles of stock trading functionality before investing. Moreover, it is essential to analyze the financial statements of the company before investing. Investors also need to be aware of the risks involved in trading in the Indian stock market. Therefore, investors must gauge all the pros and cons of trading in the Indian stock market before investing. This article is for information purposes only and does not constitute investment advice. It is recommended that investors seek professional advice before making any investment decision.