Equity

How a trade actually works

An order you place goes to the exchange through a broker, matches against a resting order in the order book, and becomes a trade. Matching is by price first and time second, so at the same price the earlier order fills first.

Order types you will use

• Market fills immediately at the best available price. In an illiquid stock that price can be far from the last traded price.
• Limit fills only at your price or better. It may not fill at all.
• Stop-loss sits dormant until a trigger price is hit, then becomes a market or limit order. A stop-loss market order guarantees exit, not exit price.

Settlement

Indian equities settle on a T+1 cycle. Buy on Monday and the shares are in your demat account on Tuesday; sell on Monday and funds are available Tuesday. Intraday positions never reach settlement because they square off the same day.

Circuit limits

Individual stocks carry price bands, typically 2, 5, 10 or 20 per cent, which halt further movement in that direction for the day. Stocks with derivatives contracts have no fixed band but use a dynamic operating range. Index-wide circuit breakers at 10, 15 and 20 per cent halt the entire market.

Reading a company

Price tells you what the market thinks. The financial statements tell you what the business does. The gap between the two is where returns come from.

Where to look first

• Revenue growth over five years, not one. One good year is noise.
• Operating margin and its direction. A business with expanding margins on flat revenue is a different animal from one buying growth with discounts.
• Return on capital employed. How much profit the business generates on the money it uses. A company earning below its cost of capital destroys value while growing.
• Cash flow from operations against reported profit. Profit is an opinion, cash is a fact. Persistent divergence usually means receivables or inventory are building.
• Debt relative to equity and to operating profit. Interest coverage below three is a warning; below two is a problem.

Valuation multiples and their limits

A multiple is shorthand, not an answer. It compresses growth, risk and capital intensity into one number, and the compression is where mistakes happen.

• P/E works for stable, profitable businesses. It breaks on cyclicals, where the lowest P/E appears at the peak of the cycle, exactly when you should not buy.
• P/B suits banks and financials, where the balance sheet is the business. It says little about an asset-light services company.
• EV/EBITDA neutralises capital structure, which makes it useful for comparing companies with different debt loads. It also ignores the cost of that debt and the capex needed to stay alive.

A cheap stock is a company whose price is below what the business is worth. A low multiple is sometimes that, and is more often the market correctly pricing a deteriorating business.

Indices and size classification

The Nifty 50 is a free-float market capitalisation weighted index. Free float excludes promoter and strategic holdings, so a company with a large promoter stake carries less index weight than its full market cap suggests. Constituents are reviewed periodically and changes are announced in advance.

Size buckets

AMFI publishes a list ranking listed companies by average full market capitalisation. The top 100 are large cap, the next 150 are mid cap, and everything from 251 onward is small cap. Mutual fund schemes are bound by these definitions, which is why a fund can be forced to sell a holding that has simply grown.

What trading costs you

Every round trip loses money before the market moves. The components differ by segment, and the ones people forget are the ones that compound.

The DP charge is the one that catches small traders. It is a flat amount per scrip per day, so selling twenty shares costs the same as selling two thousand. On small delivery positions it can exceed every other charge combined.