Get AHSEC Class 12 Finance Chapter: 12 METHODS OF TRADING IN A STOCK EXCHANGE Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 12 METHODS OF TRADING IN A STOCK EXCHANGE Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 12 METHODS OF TRADING IN A STOCK EXCHANGE
METHODS OF TRADING IN A STOCK EXCHANGE
1. Discuss the different methods of trading stocks?
Ans: Different methods of trading stocks:
(a) Offline Stock Trading: This is when you talk to a broker on the phone and ask them to buy or sell stocks for you. It can be more expensive because brokers charge fees, but some people like it because they can get advice from their broker.
(b) Day Trading: Day traders buy and sell stocks on the same day. They use charts and analysis to make quick decisions and make money from small price changes.
(c) Swing Trading: Swing traders hold stocks for a few days or weeks. They look for stocks that are moving in a certain direction and try to make money from those trends.
(d) Position Trading: Position traders hold stocks for weeks or months. They make decisions based on things like a company’s earnings and financial health.
(e) Options Trading: Options trading involves buying and selling contracts that give you the right to buy or sell a stock at a specific price in the future. People use options to protect their investments or to bet on how stock prices will move.
2. What do you mean by Online Stock Trading? What are its benefits?
Ans: Online stock trading is the most popular way to trade stocks today. It involves using a trading platform provided by online brokers to buy and sell stocks. These online platforms offer real-time stock quotes, charts, news and easy execution of trades with a simple dick. Online trading is cost-effective and widely used by traders, but other methods like offline trading can also be effective for some investors.
Benefits of Online Stock Trading:
(a) Convenience: Online trading allows traders to buy and sell stocks from anywhere with an internet
connection, eliminating the need to visit a physical trading floor or call a broker
(b) Lower Costs: Orline brokers typically have lower fees and commissions than traditional brokers, saving traders money on trading fees.
(c) Real-Time Information: Online platforms provide real-time stock information, helping traders make informed decisions.
(d) Efficiency of Information: It improves the efficiency of information dissemination, helping to set stock prices more accurately.
(e) Efficiency of Operation: Online trading reduces time, cost and the risk of errors in trading.
(f) Market Liquidity: It attracts investors from around the world, increasing market liquidity.
(g) Increased Control: Traders have more control over their trades and can execute them quickly and independently.
(h) Variety of Investment Options: Online platforms offer a wide range of investment options, including stocks, bonds, mutual funds, ETFs and options.
(i) Educational Resources: Many online brokers provide educational resources to help traders learn more about investing.
(j) Trading Under One Roof: All trading centers are brought together on one computer platform, making it more efficient and accessible.
Thus, online stock trading is a convenient and cost-effective way for traders to participate in the stock market, providing access to a variety of investment options and resources. Stocks are usually held in electronic, or dematerialized, form in this method.
3. State the steps/procedure of trading and settlement in stock exchange.
Ans: Steps in the Trading and Settlement Procedures:
The process of buying and selling securities in a stock exchange involves several steps. Since 2003, trades must be settled within 2 days of the trade date (T+2 basis). Here are the key steps in the trading and settlement procedures:
(a) Selection of Broker: Investors start by choosing a registered broker and entering into an agreement with them. The investor has to provide various details including PAN number, date of birth, address, educational qualifications, occupation, residential status (Indian/NRI), bank account details and a client code number.
(b) Opening a Demat Account with the Depository: Investors must open a ‘demat account (Dematerialized account) or beneficial owner (80) account with a depository participant (DP) for holding and transferring securities in electronic form. They also need to open a bank account for cash transactions in the securities market.
(c) Placing the Order: Investors place an order with their broker to buy or sell shares at a specified price. The order should clearly state the price range for buying or selling, for example, ‘Buy 50 shares of Infosys for not more than Rupees 400 per share.
(d) Matching the Share and Best Price: The broker goes online and connects to the main stock exchange to
match the share with the best available price.
(e) Executing the Order: Once a deal is struck, it’s communicated to the broker’s terminal and executed electronically. The broker issues a trade confirmation slip to the investor.
(f) Issuing a Contract Note: Within 24 hours of execution, the broker issues a contract note to the investor.
This note contains details of the transaction, including the number of shares bought or sold, prices, date and time of the deal and brokerage charges. Each transaction is assigned a unique order code number by the stock exchange.
(g) Delivery of Shares and Payment: On the pay-in-day (before T+2), the investor must either deliver the shares sold or make a cash payment for the shares bought.
(h) Settlement Cycle: The deal must be settled and finalized on the T+2 day (Transaction day plus two more days).
(i) Pay-out Day: On the T+2 day, the exchange delivers the shares or makes payments to the broker. The broker is then responsible for making payments to the investor within 24 hours of the Pay-out day, as they have already received payment from the exchange.
(i) Delivery of Shares: The broker can deliver shares in dematerialized form directly to the investor’s demat account. The investor must provide details of their demat account and instruct their depository participant to receive the securities in their beneficial owner account.
These steps ensure that stock trading is conducted smoothly and efficiently within the established settlement timeline of T+2 days. This process has been made possible through electronic fund transfers and the dematerialization of shares.
4. What is meant by Stock Indices? Illustrate with an example and mention some important global and Indian stock market indices?
Ans: Meaning of Stock Indices: A stock market index serves as a gauge of how the overall stock market is performing. It provides insights into market sentiment by tracking a selected group of representative stocks. This collection of stocks mirrors the broader market’s direction and reveals day-to-day fluctuations in stock prices. A well-constructed index should effectively capture changes in security prices and reflect the movements of typical stocks to represent the market accurately.
Example: Suppose we have a large class with 150 students. To get a sense of how well the class is doing academically, we assess the performance of just 50 students. Similarly, stock indices focus on a select group of top-performing stocks from the thousands listed on exchanges to provide insights into overall market trends.
Here are some important global and Indian stock market indices:
A. Global Stock Market Indices:
a) Dow Jones Industrial Average: One of the oldest stock market indices in the United States.
b) NASDAQ Composite Index: It weighs stock prices based on market capitalization for companies listed on the NASDAQ stock market.
c) Standard and Poor’s (S&P) 500 Index: Comprising the 500 largest publicly traded companies in the US.
B. Indian Stock Market Indices: (a) Benchmark Indices: These include BSE Sensex and NSE Nifty, which represent the overall performance the Indian stock market.
(b) Sectoral Indices: Examples include BSE Bankex and CNX IT, which focus on specific sectors within the market.
(c) Market Capitalization-Based Indices: Such as the BSE Smallcap and BSE Midcap, which group stocks based on their market capitalization.
(d) Broad Market Indices: Like BSE 100 and Nifty 200, which provide a broader view of the market’s performance.
(e) Thematic Indices: These are based on specific themes, such as Nifty Infrastructure and Nifty Commodities, focusing on stocks related to particular industries or sectors.
(f) Strategy-based indices: Strategy-based Indices, like High Beta and High Alpha, focus on specific characteristics of stocks. High Beta indices track volatile stocks that fluctuate more than the benchmark. Conversely, High Alpha indices measure stocks that outperform the benchmark, indicating they provide better returns on investment.
5. Write a short note on:
(a)BSE Sensex (b)Nifty 50 or Discuss the important indices of india?
Ans: (a)BSE Sensex: BSE Sensex was introduced in 1985, it’s India’s oldest index and comprises the top 30 largest and most actively traded stocks on the Bombay Stock Exchange (BSE). When these 30 companies perform well, the Sensex rises; when they don’t, it falls. Sensex is often considered the barometer of the Indian stock market.
(b)Nifty 50: The National Stock Exchange is also known as Nifty 50. This index was created in 1996. It consists of the top 50 largest and most frequently traded stocks on the National Stock Exchange (NSE). Nifty is owned by India Index Services & Products Limited (IISL), a joint venture between CRISIL and NSE. It monitors the performance of these 50 companies.
6. What is role of stock market indices in India?
Or
What is the need of indices in the world of finance?
Ans: Market indices play a vital role in the world of finance. The following are the need/ importance of Indices:-
1. Sorting: With thousands of companies listed in the stock market, it’s like finding a needle in a haystack to choose which stocks to invest in. Indices come to the rescue by categorizing companies based on characteristics like size and industry, making it easier for investors to sort and select suitable investments.
2. Representation: Indices act as representatives of the overall market or specific segments. Benchmarks like BSE Sensex and NSE Nifty in India symbolize the entire market’s performance. Similarly, sector-specific Indices represent the industry’s performance.
3. Comparison: Indices provide a benchmark for performance comparison. Investors can assess if a stock has outperformed the market by comparing its price trends with the index. It’s also useful for comparing a group of stocks against a benchmark, helping investors identify market trends.
4. Reflection: Investor sentiment greatly impacts stock market movements. Indices reflect investor sentiment, both overall and within sectors and company sizes. By comparing an index to a benchmark, investors can gauge if it has performed better or worse, giving insights into investor sentiment.
5.Passive Investment: Many investors prefer passive investment by creating portfolios that mimic an index.
This approach reduces research and stock selection costs. Portfolio returns align with the index’s performance. For instance, if the SENSEX delivers an 8% return in a month, an investor’s portfolio mirroring the SENSEX is likely to produce similar returns.
7. Write the meaning of: (a) Investor (b) Traders (c) Demat (d) Depository Participant (DP)
Ans: (a) Investor: Investor is someone in the stock market who identifies promising companies and holds their stocks for an extended period, anticipating that their value will increase over time.
(b) Traders: These individuals, often day traders, engage in buying and selling securities within the same aiming to make quick profits.
(c) Demat: It is Short term for “dematerialization,” it’s a process that converts physical securities held by investors into electronic form, making them easier to manage.
(d) Depository Participant (DP): DP acts as an intermediary for the depository. They can be stockbrokers or banks that maintain investors’ securities account balances and provide updates on their holdings.
(e) Depository: An organization or institution that holds various securities such as shares, debentures, bonds and mutual funds on behalf of investors.
(f) Beneficial Owner: These are investors who own shares in a company and have the rights and responsibilities associated with holding those securities, including voting rights and receiving dividends.
(e) Hedge: A financial strategy designed to limit risk exposure in assets, typically used to safeguard against potential losses.
8. What are the different Market Capitalization Categories?
Ans: Companies in the stock market are categorized based on their market capitalization into three main groups:
i.Large Cap: These are companies with a market capitalization exceeding Rs 20,000 crores. They are generally well-established and considered less risky.
ii. Mid Cap: Companies falling in the range of market capitalization between Rs 5,000 and Rs 20,000 crores. They are often seen as a middle-ground option in terms of risk and growth potential.
iii. Small Cap: These companies have a market capitalization of less than Rs 5,000 crores. They are typically smaller and may offer higher growth potential but come with higher risk due to their size.
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