Ledger & Candle
Chapter 01 · Foundations

Market Foundations

Reading time ~60 min · Data as of 30 Sep 2026 · Based on Zerodha Varsity Module 1 (Introduction to Stock Markets) and charge/tax notes from Module 7 (Markets & Taxation)

1. What you'll learn and why it matters

Before you draw a single trendline or read a balance sheet, you need to know what you are actually buying, who stands on the other side of your order, what happens to your money between clicking "Buy" and seeing shares in your demat account, and what the whole thing costs. This chapter is the plumbing. It is not glamorous, but every later chapter assumes it.

By the end you will be able to:

Why this matters for your style

Swing traders (days to weeks) live on order types, gaps, stop-losses, circuit limits and costs. Positional and long-term investors need corporate actions, CAGR, benchmarks and the index you will be measured against. Futures traders (Chapter 9) need the clearing and margin system, NRML positions and session timings. All three need to understand that drawdowns are normal: the Nifty is down 14% from its high as this chapter is written.

2. Why invest: inflation, compounding, asset classes

2.1 Idle money shrinks

Prices of goods and services rise over time. This is inflation. India's CPI inflation was 4.82% year-on-year in August 2026 (MoSPI release of 14 Sep 2026). If your cash earns nothing, a basket that costs ₹100 today costs about ₹104.82 next year, so your rupee buys less. Varsity's opening example makes the point with a salaried person who saves part of every month's salary for 20 years but keeps it as cash: because expenses keep rising every year, the cash pile runs out only a few years into retirement, while the same savings invested at a reasonable rate of return grow several times larger.

The logic is simple. Your savings must grow faster than prices just to stand still. What actually matters is the real return: what you earn after inflation and tax.

Real return\[ r_{real} = \frac{1 + r_{nominal}}{1 + \text{inflation}} - 1 \]
\(r_{nominal}\)
The return you earn in rupees over one year, as a decimal (6.5% = 0.065). Use the after-tax rate if you want the after-tax real return.
\(\text{inflation}\)
How much prices rose over the same year, as a decimal (CPI inflation of 4.82% = 0.0482).
\(r_{real}\)
The real return: how much more your money can actually buy after the year, as a decimal.

How it works: add 1 to both rates, divide the first by the second and subtract 1. A positive answer means your money buys more than before. A negative answer means you are falling behind prices, even though the rupee amount grew. Simply subtracting (6.5% − 4.82% = 1.68%) is a rough shortcut that works when both rates are small.

Worked example · FD vs inflation · Aug 2026 CPI

Is a 6.5% fixed deposit actually growing your money?

  1. Nominal rate 6.5% (an assumed FD rate; large banks were quoting roughly 6–6.5% for one year in Sep 2026, so check your own bank). Inflation 4.82%.
  2. Pre-tax real return: \( \frac{1.065}{1.0482} - 1 = 1.60\% \).
  3. FD interest is added to your income and taxed at your slab (your income-tax bracket). At 30%, post-tax interest = \( 6.5\% \times 0.7 = 4.55\% \).
  4. Post-tax real return: \( \frac{1.0455}{1.0482} - 1 = -0.26\% \). You are slowly getting poorer in real terms, with your capital fully "safe".

2.2 Compounding: why the rate matters so much

Compounding means you earn returns on past returns. The value after \(n\) years at rate \(r\) is:

Future value (lump sum)\[ FV = PV \times (1 + r)^n \]
\(PV\)
Present value: the lump sum you invest today, in ₹.
\(r\)
The yearly rate of return, as a decimal (10% = 0.10).
\(n\)
The number of years the money stays invested.
\(FV\)
Future value: what the lump sum grows to after \(n\) years, in ₹.

How it works: each year the pot is multiplied by \((1 + r)\). The return stays in the pot, so next year's return is earned on a bigger amount. Doing this \(n\) times is the same as multiplying once by \((1 + r)\) raised to the power \(n\).

Example: ₹1 lakh at 10% for 20 years. \(1.10^{20} = 6.7275\) (1.10 multiplied by itself 20 times), so \(FV = 100000 \times 6.7275\) = ₹6,72,750.

The exponent is why a few percentage points matter so much over long periods. ₹1 lakh left for 20 years becomes ₹2,19,112 at 4%, ₹3,52,365 at 6.5%, ₹6,72,750 at 10%, ₹9,64,629 at 12% and ₹16,36,654 at 15%. Moving from 10% to 15% does not add half as much again. It more than doubles the result. A handy shortcut is the rule of 72: money doubles in roughly \(72 / r\) years (at 10%, about 7.2 years).

Growth of 1 lakh over 30 years at 4, 6.5, 10, 12 and 15 percent per year
Figure 1.1: Compounding is very sensitive to the rate. Values are pure arithmetic, not market data.

2.3 Asset classes

An asset class is a group of investments with similar risk and return behaviour. Varsity lists four main ones for Indian investors:

Asset classExamplesReturn driverMain risks
Fixed incomeBank FDs, G-Secs/T-bills, PSU and corporate bondsInterestInflation, taxation, credit default (corporate bonds), interest-rate changes
EquityShares of listed companies, equity ETFs/mutual fundsEarnings growth and dividendsLarge drawdowns, company-specific failure, no capital guarantee
Real estateFlats, plots, commercial property, REITsRent and price appreciationIlliquid, large ticket size, legal complexity, uneven returns
Commodities (bullion)Gold/silver ETFs, physical goldPrice change only, no cash flowLong flat periods, currency moves

Here is what actually happened to ₹1 lakh put into each over the last decade, using the course data. NIFTYBEES and GOLDBEES are exchange-traded funds (ETFs): funds that trade on the exchange like a share and simply track the Nifty 50 or the price of gold, so they are the easiest way for an ordinary investor to own the asset class.

Rs 1 lakh invested in Oct 2016 in Nifty 50, NIFTYBEES, GOLDBEES and a 6.5 percent FD
Figure 1.2: ₹1 lakh invested on 3 Oct 2016 and held to 29 Sep 2026. Nifty 50 price index → ₹2,59,967; NIFTYBEES (a Nifty ETF that keeps dividends inside, so it is close to a total-return version) → ₹2,90,964; GOLDBEES → ₹4,28,120; FD at an assumed 6.5% → ₹1,87,568. One bad vendor print in GOLDBEES (Dec 2019) was removed. Source: NSE data via Yahoo Finance.
10.04%
Nifty 50 price CAGR (same window)
11.29%
NIFTYBEES CAGR (incl. dividends, after costs)
15.67%
GOLDBEES CAGR
6.5%
FD (assumed)
An honest result: gold beat equity this decade

Varsity notes that equities have historically delivered the best long-run returns. Over this particular 10-year window, gold did better (15.67% vs 11.29% a year), mostly because of a very strong 2024–26 gold rally: GOLDBEES rose 25.80% in the 12 months to 29 Sep 2026 while the Nifty fell 7.79% (−8.09% if you measure to 30 Sep, as Section 9 does). The lessons are that asset-class returns depend heavily on the start and end dates, that the leader changes from one decade to the next, and that no single asset class should hold all your money. Spreading money across asset classes is called asset allocation. A common starting point for a young investor is a mostly-equity mix with some gold and fixed income, adjusted for age, goals and risk tolerance. Equity also showed the deepest falls on the way, so you need the stomach to sit through them.

Price index vs total return

The Nifty 50 number you see quoted is a price index: it ignores dividends. NSE also publishes a Total Return Index (TRI) that reinvests them. Per NSE's 30 Sep 2026 factsheet, the Nifty 50's 5-year CAGR was 5.13% on price but 6.38% on total return. Compare your portfolio, which receives dividends, with the TRI, not the price index.

3. Measuring returns: absolute, annualised, CAGR

Varsity's rule: use absolute return for holding periods of up to a year, and CAGR to compare anything longer.

Absolute return\[ R_{abs} = \left(\frac{V_{end}}{V_{start}} - 1\right) \times 100 \]
\(V_{start}\)
The value when you bought: a price, an index level or a portfolio value (₹ or points).
\(V_{end}\)
The value at the end of the holding period (or today, if you still hold), in the same units.
\(R_{abs}\)
Absolute return: the total gain or loss over the whole holding period, in %. It ignores how long you held.

How it works: dividing the end value by the start value gives the growth multiple (1.28 means 1.28 times). Subtract 1 to keep just the gain, and multiply by 100 to turn it into a percentage. A result of 28 means the value is 28% above where it started; a negative result is a loss.

CAGR (compound annual growth rate)\[ CAGR = \left(\frac{V_{end}}{V_{start}}\right)^{1/n} - 1, \quad n = \text{years held (days} / 365.25) \]
\(V_{start}, V_{end}\)
The start and end values, as in the absolute-return formula above.
\(n\)
Years held: the number of calendar days between the two dates divided by 365.25 (the extra quarter day allows for leap years). Six months is about 0.5.
\(CAGR\)
The steady yearly return that would turn \(V_{start}\) into \(V_{end}\), as a decimal (0.0513 = 5.13% a year).

How it works: \(V_{end}/V_{start}\) is the total growth multiple. Raising it to the power \(1/n\) takes its \(n\)-th root, which splits the multiple into \(n\) equal yearly steps. Subtract 1 to get the yearly rate. It is the future-value formula of Section 2.2 run backwards.

Why CAGR? An absolute return of 28% means very different things over one year and over five. CAGR answers the question: "What constant yearly rate would have turned my start value into my end value?" That makes investments of different lengths comparable. It is a smoothed figure. The real path was bumpy, and CAGR hides that (Section 9 shows the bumps).

Real example · Nifty 50 · 30 Sep 2021 → 30 Sep 2026

"Up 28%" sounds fine. Is it?

  1. Start (last close on or before 30 Sep 2021): 17,618.15. End (30 Sep 2026): 22,620.45.
  2. Absolute: \( (22620.45 / 17618.15 - 1) \times 100 = 28.39\% \).
  3. CAGR over 5 years: \( (22620.45/17618.15)^{1/5} - 1 = 5.13\% \) a year, which matches NSE's own factsheet figure.
  4. Verdict: over these five years the index did no better than a fixed deposit: 5.13% a year on price (6.38% with dividends) against 6.5% before tax for the FD in Section 2.1. Only after tax, for someone in the 30% slab, does equity edge ahead. Starting 10 years back (8,738.10 on 3 Oct 2016) gives \( (22620.45/8738.10)^{1/9.99} - 1 = 9.99\% \). Your start date shapes your experience.
Worked example · annualising a short holding

17.16% in six months

  1. Varsity's example: buy at 3,030, sell at 3,550 → absolute \( 3550/3030 - 1 = 17.16\% \).
  2. If that took 2 years: CAGR \( = (3550/3030)^{1/2} - 1 = 8.24\% \).
  3. If it took 6 months, simple annualisation gives \( 17.16\% \times 2 = 34.32\% \). Compounded annualisation \( (1.1716)^{2} - 1 = 37.27\% \) assumes you could repeat the trade, which is a strong assumption. Annualising a short, lucky trade inflates it. Use annualised figures to compare opportunities, not to forecast.

Rule of 72 check: the Nifty first closed above double its Oct 2016 level (17,519.45) on 15 Sep 2021, about 4.95 years later. That implies roughly 15% a year over that stretch (72 / 4.95 ≈ 14.5), much faster than its full-decade 9.99%.

4. The market ecosystem: SEBI, exchanges, clearing, depositories, brokers

A stock market is an electronic marketplace where buyers and sellers of securities meet. India has two main national stock exchanges, the National Stock Exchange (NSE) and BSE (formerly the Bombay Stock Exchange). A third, the Metropolitan Stock Exchange (MSE), has negligible equity volume, and the old regional exchanges such as Bangalore, Madras and Calcutta have shut down. This course uses NSE data throughout. You cannot trade on an exchange directly. You go through a registered stockbroker, and a group of regulated intermediaries works behind the scenes on every trade.

Diagram of SEBI, investor, broker, exchange, clearing corporation, depository and bank
Figure 1.3: The Indian market plumbing. Three accounts are linked together: your bank account, your trading account (with the broker) and your demat account (with a depository, opened through a DP).
EntityExamplesWhat it does for you
SEBI (Securities and Exchange Board of India)The regulatorWrites the rules for exchanges, brokers, listed companies, mutual funds and others; protects investors; punishes manipulation and insider trading. Complaints go to SEBI's SCORES portal after the intermediary's own grievance desk.
Stock exchangesNSE, BSERun the order-matching engine, list companies, set trading rules and price bands, publish prices and indices.
Clearing corporationsNSE Clearing Ltd (NSE), Indian Clearing Corporation Ltd (BSE)Step in between buyer and seller (novation) and guarantee settlement: if the other side's broker defaults, the trade still settles (in the rare case of a seller failing to deliver, through an exchange auction or a cash close-out). They also run the margin system for F&O (futures and options, the derivatives segment covered in Chapters 9–10).
DepositoriesNSDL, CDSLHold your shares electronically in a demat (dematerialised) account. India's paper-share era ended in the late 1990s, prompted partly by the frauds of the early 90s. Together they serviced about 23 crore demat accounts by mid-2026.
Depository Participant (DP)Most brokers and banks (Zerodha is a CDSL DP)Your agent with the depository. You open and operate a demat account through a DP, never directly with NSDL/CDSL.
Stockbroker (trading member)Zerodha, Upstox, Groww, ICICI Securities, Fyers…Gives you a trading account and terminal, checks your funds and margin through its risk-management system (RMS), sends orders to the exchange, issues contract notes, collects charges.
BanksYour savings bankMove money to and from your trading account. Withdrawals and dividends go to your primary linked account.
RTAs (registrars)KFin, MUFG Intime (formerly Link Intime), CAMSKeep companies' shareholder registers, process IPO allotments and pay dividends.
Other regulated intermediariesMerchant bankers, credit rating agencies (CRISIL, ICRA, CARE), debenture trustees, AMCs, PMS, research analysts, investment advisersRun IPOs, rate debt, protect bondholders, manage pooled money and give advice. All need SEBI registration. Check the registration number before you trust anyone's tips.
Three accounts, one experience

When you "buy Infosys", the trading account handles the transaction, the demat account receives the shares, and the bank account supplies the money. Selling reverses the flow. Most brokers open all three links in one onboarding (KYC, PAN, Aadhaar, bank proof, nominee).

In your framework: the course framework's framework.data.load_ohlc(symbol) reads the same NSE price history used in this chapter. update_ohlc(symbols) refreshes it.

5. Who trades: retail, FPIs, DIIs, and where you fit

Every trade has a buyer and a seller with opposite views. In Varsity's words, "different opinions make a market". The main participant groups:

FPIs and DIIs move huge sums, so their net flows are watched daily (NSE publishes provisional FII/DII cash-market figures every evening). Recent reality: FPIs were net sellers of roughly ₹1.66 lakh crore of Indian equities in calendar 2025 and pulled out about ₹1.92 lakh crore more in Jan–Apr 2026, while DIIs, powered by SIP flows, put a record of over ₹6 lakh crore into equities in 2025 (Business Standard, citing NSDL/BSE data). That domestic tug-of-war is a big part of why the market fell only moderately rather than crashing.

Real data · shareholding pattern · screener.in, Jun 2026 quarter

Who owns what

HolderHDFC BankCoal IndiaITC
Promoters0.00%61.13%0.00%
FIIs/FPIs41.82%10.37%34.23%
DIIs41.75%22.20%49.13%
Government0.18%0.10%0.04%
Public (incl. retail)16.27%6.18%16.61%

HDFC Bank's FPI holding fell from 47.67% (Dec 2025) to 41.82% (Jun 2026) while DIIs rose from 37.00% to 41.75%. That is the 2026 FPI-selling story inside a single stock. Coal India's 61.13% government promoter stake matters for index weighting (Section 8).

5.1 Traders vs investors: where do you fit?

StyleHolding periodWhat they need most
Scalper / day traderMinutes to hours, flat by closeSpeed, liquidity, depth, very low costs. Not this course's focus.
Swing traderDays to a few weeksTechnical setups, stop-losses that survive gaps, cost control (Ch 2–5, 11)
Positional traderWeeks to months, sometimes via futuresTrend following, position sizing, futures mechanics (Ch 4–5, 9, 12)
Growth investorYearsBusinesses riding long industry trends (Ch 6–8)
Value investorYearsGood businesses temporarily cheap, e.g. the March 2020 crash (Ch 6–8)

6. The primary market: how companies list (IPOs)

6.1 From idea to IPO

Varsity tells the story of a T-shirt start-up to show why companies go public. The funding ladder usually looks like this:

  1. Seed / angel round. The founder, friends or angel investors put in, say, ₹5 crore. Shares are issued at a face value (e.g. ₹10 each, so 50 lakh shares). Face value is just an accounting unit, not what the share is worth.
  2. Series A (venture capital). The business has revenue and needs to expand. VCs invest at a higher valuation. The founder's percentage is diluted, but the stake is worth more.
  3. Series B, bank debt, internal accruals. Capex is funded from a mix of retained profits, new equity and loans. Debt brings interest costs.
  4. Private equity (Series C+). Larger cheques, mature business, PE nominee on the board.
  5. IPO. When the capital need is large, early investors want an exit, or the company wants visibility and liquid ESOPs, it offers shares to the public for the first time: the Initial Public Offering.

The IPO happens in the primary market, where the company or its existing shareholders sell to new investors. Once listed, shares trade between investors in the secondary market, and the company receives nothing from those trades.

6.2 The IPO process

  1. Appoint merchant bankers (Book Running Lead Managers, BRLMs). They do due diligence, draft documents, help set the price band, market the issue (roadshows) and coordinate registrars, bankers and advertisers.
  2. File the DRHP (Draft Red Herring Prospectus) with SEBI. It covers the business, financials, risks, management, objects of the issue (what the money is for) and who is selling.
  3. SEBI observations, then the RHP with a price band (e.g. ₹1,080–1,140) and lot size.
  4. Anchor investors (large institutions) are allotted shares a day before the issue opens, with a lock-in.
  5. Book building: for usually 3 working days, investors bid within the band. Retail investors apply through ASBA (Application Supported by Blocked Amount, now usually via a UPI mandate). Money is blocked, not debited, until allotment.
  6. Price discovery: the final issue price is usually set at the top of the band when demand is strong. Retail investors can bid at the "cut-off" price.
  7. Allotment and listing in T+3 working days after the issue closes (SEBI's timeline since Dec 2023). Oversubscribed retail categories are allotted by lottery, at least one lot per successful applicant.
  8. Listing day: a special pre-open call auction (9:00–9:45 am order entry, then matching) discovers the opening price, and normal trading starts at 10:00 am.

Investor categories in a typical book-built issue by a profitable company: QIBs (qualified institutional buyers) up to 50%, NIIs (non-institutional, above ₹2 lakh) at least 15%, and Retail Individual Investors (RIIs, up to ₹2 lakh per application) at least 35%. Jargon: oversubscribed 50× = bids for 50 times the shares on offer. Undersubscribed = less demand than supply. If subscription falls below the minimum, the issue fails and money is unblocked. Green-shoe = an option to allot about 15% extra if demand is strong. Fixed-price issue = a single price instead of a band. Fresh issue = new shares, so money goes to the company. Offer for Sale (OFS) = existing holders sell, so money goes to them and the company gets nothing.

IPO vs FPO vs OFS vs rights (Varsity supplementary note)

After listing, a company or its promoters can raise or unlock money through: a FPO (follow-on public offer: a second public issue with a prospectus, now rare), an OFS through the exchange (promoters sell existing shares through a special exchange window over 1–2 days at or above a floor price; common for government disinvestment), or a rights issue (new shares offered only to existing holders, Section 15).

Real example · LG Electronics India · Oct 2025

A blockbuster listing where the company received nothing

  1. Issue: 7–9 Oct 2025, price band ₹1,080–1,140, issue size about ₹11,607 crore. 100% OFS: the Korean parent sold about 15% of its stake, so LG Electronics India itself raised nothing. Lot size 13 shares → one lot cost \( 13 \times 1140 = \text{₹}14{,}820 \).
  2. Demand on the final day: QIB about 166.5×, NII about 22.4×, retail about 3.55× (about 54× overall).
  3. Retail odds: at 3.55× retail subscription, and with most applicants bidding one lot, roughly \( 1/3.55 \approx 28\% \) of retail applicants could expect an allotment.
  4. Listing, 14 Oct 2025: opened at ₹1,710.10 → listing gain \( (1710.10/1140 - 1) = 50.01\% \), i.e. ₹7,411 per lot. Day-1 close ₹1,689.90.
  5. Afterwards: the stock fell to a closing low of ₹1,318.80 before recovering to ₹1,723.50 on 30 Sep 2026, which is +51.18% vs the issue price but only +0.78% for someone who bought at the listing-day open. The Nifty fell 10.33% over the same period.
Real example · Tata Capital · Oct 2025

The biggest NBFC IPO, and a flat listing

  1. Issue: 6–8 Oct 2025, price band ₹310–326, size about ₹15,512 crore: a fresh issue of 21 crore shares (money to the company, to grow its loan book) plus an OFS of 26.58 crore shares by Tata Sons and IFC. Subscribed about 2× overall.
  2. Listing, 13 Oct 2025: opened at ₹330.00, only +1.23% over ₹326. Next day it closed at ₹319.80, below the issue price.
  3. 30 Sep 2026: ₹327.95, +0.60% after almost a year, with closes ranging from ₹297.80 (21 May 2026) to ₹382.70 (6 Aug 2026) in between.
Price since listing for LG Electronics India and Tata Capital versus issue price
Figure 1.4: Two Oct-2025 mega IPOs. Most of the money is often made (or not) on listing day by allottees. Buyers after listing face ordinary secondary-market risk. Source: NSE via Yahoo Finance; issue details from the RHPs as reported by Chittorgarh and Business Standard.
IPO reality check

Of 38 mainboard listings in Jan–Sep 2026, about 15 listed below the issue price (ipoplatform.com tally). Read the RHP's "Objects of the Issue": a pure OFS means insiders are cashing out. That is not necessarily bad, but no new money goes into the business. Price relative to peers (Chapter 8) matters more than hype or grey-market premiums.

7. The secondary market: what moves prices

After listing, a stock's price moves because buyers and sellers keep updating their expectations about the company's future cash flows, and because of plain demand and supply. Varsity's Infosys example: good news (a new CEO) means buyers accept whatever sellers ask, and the price ticks up 3,000 → 3,002 → 3,006 → 3,011 → 3,016. Industry-wide bad news (IT budgets cut) then hits all IT stocks together. Large, widely held companies move every day even without news. Thinly traded small companies can sit still.

7.1 Events every participant should track

EventWhat it isCurrent reading (as of Sep 2026)Typical market logic
RBI monetary policyThe Monetary Policy Committee (MPC) sets the repo rate (RBI's lending rate to banks), plus reverse repo/SDF and CRRRepo 5.25% (cut in Dec 2025, held on 5 Aug 2026); next meeting 5–7 Oct 2026Rate cuts make borrowing cheaper and help growth (banks, autos, real estate react first). Hikes do the opposite.
Inflation (CPI, WPI)MoSPI publishes CPI around the 12th of each monthCPI 4.82% (Aug 2026), highest since Dec 2024Rising inflation lowers the chance of rate cuts
IIP and PMIIndustrial output index; survey-based PMI (above 50 = expansion)MonthlySignals the economic cycle
Union Budget1 Feb each year: taxes, spending, policyBudget 2026 raised STT (Securities Transaction Tax, Section 17) on futures to 0.05% and options to 0.15% (from 1 Apr 2026)Sector-specific moves (e.g. ITC on tobacco duty)
Quarterly resultsQ1 (Apr–Jun) reported Jul–Aug, Q2 Oct–Nov, Q3 Jan–Feb, Q4 Apr–MayQ2 FY27 season starts mid-Oct 2026Price reacts to results versus expectations, not to the absolute numbers
Non-financial eventsPandemics, wars, elections, governance shocksSee HDFC Bank, Mar 2026 (Section 11)Sudden repricing, gaps

8. Indices: Nifty 50, Bank Nifty and free-float weighting

8.1 What an index is and what it's for

India has thousands of listed companies. An index tracks a selected basket to summarise "how the market did", much as checking a few key junctions tells you how a city's traffic is moving. The Nifty 50 (NSE, 50 large liquid stocks, maintained by NSE Indices Ltd) and the BSE Sensex (30 stocks) are the headline indices. Nifty Bank (Bank Nifty) tracks banks, and Nifty IT tracks IT companies. Varsity lists four uses:

8.2 How it is built: free-float market capitalisation

Each stock's weight is proportional to its free-float market cap: the market value of only those shares that are actually available to trade. Promoter, government and other strategic holdings are excluded through an Investible Weight Factor (IWF).

Free-float market cap and index level\[ FFMC_i = P_i \times \text{Shares}_i \times IWF_i \] \[ \text{Index}_t = \frac{\sum_i FFMC_{i,t}}{\text{Base FFMC}} \times \text{Base value} \] \[ w_i = \frac{FFMC_i}{\sum_j FFMC_j}, \qquad \Delta\text{Index} \approx \sum_i w_i \, r_i \times \text{Index}_{t-1} \]
\(i\)
One stock in the index (for the Nifty 50, \(i\) runs over the 50 stocks). \(\sum_i\) means "add up over every stock in the index" (\(\Sigma\) is the Greek capital S, for "sum"). \(j\) does the same job inside the weight formula.
\(P_i\)
Stock \(i\)'s share price, in ₹.
\(\text{Shares}_i\)
The total number of shares the company has issued.
\(IWF_i\)
Investible Weight Factor: the fraction of those shares that is free to trade, between 0 and 1 (0.50 means half are locked up with promoters, government or other strategic holders).
\(FFMC_i\)
Free-float market cap of stock \(i\), in ₹. The extra subscript \(t\) means "on day \(t\)".
\(\text{Base FFMC}\)
The total free-float market cap of the index stocks on the base date. In practice it acts as a divisor that is adjusted for constituent changes and corporate actions.
\(\text{Base value}\)
The index level chosen for the base date (1,000 for the Nifty 50, on 3 Nov 1995).
\(\text{Index}_t\)
The index level on day \(t\). \(\text{Index}_{t-1}\) is the level on the previous trading day.
\(w_i\)
Stock \(i\)'s weight: its share of the total free-float market cap, as a fraction (all weights add up to 1).
\(r_i\)
Stock \(i\)'s return for the day, as a decimal (+10% = 0.10).
\(\Delta\text{Index}\)
The change in the index, in points, from day \(t-1\) to day \(t\) (\(\Delta\) means "change in").
  1. For each stock, multiply price × shares × IWF to get its free-float market cap.
  2. Add up the free-float market caps of all the stocks, divide by the base-date total and multiply by the base value. If the total free-float value is 2% higher than at the base, the index is 2% above its base value.
  3. A stock's weight is its free-float market cap divided by the total. To see how one day's moves change the index, multiply each stock's return by its weight, add these up and multiply by yesterday's index level. A 10% move in a stock with a 10% weight moves the index about 1%.

The logic: an index should reflect what investors can actually buy. A company whose government holds 61% has far fewer shares in public hands than its total market cap suggests. Weighting by free float also lets index funds hold the index without becoming dominant owners of thinly floated stocks. The base value (1,000 for the Nifty 50, base date 3 Nov 1995) only sets the starting scale, and the divisor is adjusted for constituent changes and corporate actions so that the index doesn't jump artificially.

Worked example · toy 3-stock index

Weights, and how one stock moves the index

  1. Stock A: price ₹100, 1 crore shares, IWF 0.50 → FFMC = ₹50 crore. Stock B: ₹250, 40 lakh shares, IWF 0.90 → ₹90 crore. Stock C: ₹40, 5 crore shares, IWF 0.25 → ₹50 crore.
  2. Total FFMC = ₹190 crore. Weights: A 26.32%, B 47.37%, C 26.32%. Set base value 1,000.
  3. Stock A rises 10% to ₹110 → its FFMC becomes ₹55 crore, the total ₹195 crore, and the index \( 195/190 \times 1000 = 1026.32 \).
  4. Check with the weights: \( 26.32\% \times 10\% = 2.63\% \) of 1,000 = 26.32 points. ✓
Real example · Coal India vs HDFC Bank · screener.in snapshot, 2 Oct 2026

Why the free float matters

  1. Coal India full market cap ₹2,59,478 cr; government/promoter holding 61.13% → free float ≈ \( 2{,}59{,}478 \times (1 - 0.6113) = \text{₹}1{,}00{,}859 \) cr.
  2. HDFC Bank full market cap ₹11,10,422 cr; promoter holding 0% → free float ≈ the full ₹11,10,422 cr.
  3. By total market cap Coal India is 23.37% of HDFC Bank's size. By free float it is only 9.08%. In the index, HDFC Bank therefore counts for about 11 times as much as Coal India, not about 4 times. (NSE's exact IWF also excludes some other locked-in holdings. This is an approximation.)
Top 10 weights of Nifty 50 and Nifty Bank on 30 Sep 2026
Figure 1.5: Top-10 weights from NSE factsheets dated 30 Sep 2026. The top 10 make up 52.27% of the Nifty 50, and financial services alone are 37.45%. In Nifty Bank the top three (HDFC, ICICI, Kotak) total 42.99%.

8.3 Eligibility, rebalancing and caps

Real example · Nifty 50 rebalance effective 30 Sep 2026

BSE in, Wipro out

In the September 2026 review, BSE Ltd (six-month average free-float market cap about ₹1,40,879 crore) replaced Wipro in the Nifty 50 from 30 Sep 2026. Over the preceding year BSE rose 51.55% while Wipro fell 33.78% and the Nifty fell 8.09%. An index is a living list that quietly drops losers and adds winners, which is one reason it is hard to beat.

BSE vs Wipro vs Nifty rebased to 100 over one year
Figure 1.6: Index membership follows size and liquidity. Rebased to 100 on 30 Sep 2025. BSE data adjusted for its May 2025 split.
Real data · Nifty 50 · 30 Sep 2026

Which heavyweights moved the index today?

Nifty prior close 22,716.20 and close 22,620.45: change −95.75 points. Approximate contribution = weight × stock return × previous index level (weights from the same-day factsheet):

StockWeightDay return≈ Points
HDFC Bank10.38%−1.937%−45.7
ICICI Bank9.05%+2.283%+46.9
Reliance7.58%+0.423%+7.3
Bharti Airtel5.10%−0.802%−9.3
L&T4.20%+0.291%+2.8
SBI3.79%−0.539%−4.6
Axis Bank3.37%+1.147%+8.8
Infosys3.35%−2.098%−16.0
Kotak Bank2.93%+2.709%+18.0
Sum of these nine49.75%+8.2

Worked line for HDFC Bank: \( 0.1038 \times (-0.01937) \times 22716.20 = -45.7 \) points. The interesting part is that these nine of the ten biggest stocks together added about 8 points, yet the index fell 96. The other 41 stocks did the damage. The index captures breadth as well as heavyweights.

9. Benchmark returns: 10 years of Nifty, honestly measured

9.99%
Nifty 50 price CAGR, 3 Oct 2016 – 30 Sep 2026
−38.44%
Max drawdown (14 Jan → 23 Mar 2020)
−14.08%
Drawdown on 30 Sep 2026 from the 2 Jan 2026 high
10.81%
Bank Nifty CAGR (max DD −47.86%)

A drawdown is the percentage fall from the highest value reached so far. It is how losses actually feel while you live through them. Market slang builds on it: a bull market is a sustained rise, and a bear market is commonly defined as a fall of 20% or more from the peak. A 10–20% fall is usually called a correction, which is where the Nifty sits today.

Drawdown\[ DD_t = \frac{P_t}{\max_{s \le t} P_s} - 1, \qquad \text{Max DD} = \min_t DD_t \]
\(P_t\)
The price or portfolio value on day \(t\) (index points or ₹).
\(\max_{s \le t} P_s\)
The running peak: the highest value on any day \(s\) up to and including day \(t\). "max" means "the largest of".
\(DD_t\)
The drawdown on day \(t\), as a decimal. It is 0 on a day that sets a new high and negative on every other day (−0.14 = 14% below the peak).
\(\text{Max DD}\)
Maximum drawdown: the worst (most negative) daily drawdown over the whole period, the deepest peak-to-trough fall. "\(\min_t\)" means "the smallest value over all days \(t\)".
  1. Go through the data day by day and keep note of the highest value so far.
  2. Each day, divide that day's value by the running peak and subtract 1. That is the day's drawdown.
  3. The lowest of all the daily drawdowns is the maximum drawdown.

Example: the Nifty closed at 22,620.45 on 30 Sep 2026. Its running peak was the 26,328.55 close of 2 Jan 2026, so \(DD = 22620.45 / 26328.55 - 1 = -14.08\%\). The deepest drawdown in the 10-year data was the COVID crash: \(7610.25 / 12362.30 - 1 = -38.44\%\), so that is the Nifty's maximum drawdown here.

Nifty 50 ten-year chart with drawdown panel
Figure 1.7: Nifty 50 from 8,738.10 to 22,620.45 (×2.589, +158.87%). The COVID crash took it from 12,362.30 to 7,610.25 (−38.44%), and it recovered the old peak by 9 Nov 2020. The all-time closing high was 26,328.55 on 2 Jan 2026.
Bar chart of Nifty yearly returns 2017 to 2026 YTD
Figure 1.8: Calendar-year returns: 28.65%, 3.15%, 12.02%, 14.90%, 24.12%, 4.33%, 20.03%, 8.80%, 10.51% and −13.43% (2026 to 30 Sep). No single year looked like the 10% "average".
Rolling 1, 3 and 5 year Nifty CAGR
Figure 1.9: Rolling returns over this data, using windows of 252, 756 and 1,260 trading days (≈ 1, 3 and 5 years). 1-year windows were negative 16.63% of the time (range −31.04% to +90.63%). 3-year windows were negative 1.64% of the time (worst −5.01% a year). No 5-year window was negative, and the worst was +6.34% a year (median 13.67%).
What this means for you

Equity rewards time in the market, but only on average and only over long periods. The three most recent years (2024–2026) are all among the decade's five weakest: the 1-year return to 30 Sep 2026 is −8.09%, and 3-year and 5-year CAGRs are only 4.83% and 5.13%. If you plan to invest, plan for a 30–40% fall at some point. If you plan to trade, your strategy must beat simply holding the Nifty after costs and taxes, or it is not worth the effort. The framework function framework.risk.max_drawdown computes the same statistic for any equity curve.

10. How a trade flows: order to T+1 settlement

  1. Order entry: you log in to the terminal (user ID + password + TOTP, a time-based one-time code from an authenticator app; SEBI requires two-factor login) and place an order: symbol, exchange, quantity, price/order type, product type.
  2. Broker RMS check: the broker verifies funds or margin (for a buy) or holdings (for a delivery sell) before forwarding. Insufficient funds means a rejection.
  3. Exchange matching: the exchange's order book matches buy and sell orders by price-time priority: the best price first, and among equal prices, the earliest order first. A match creates a trade. You may be filled by one seller or by many.
  4. Contract note: by the end of T day the broker emails a contract note listing every trade and every charge. Keep it, because it is your legal record for tax.
  5. Clearing: the clearing corporation becomes the counterparty to both sides (novation), nets everyone's obligations, and guarantees settlement.
  6. Settlement on T+1: buyers' funds and sellers' shares are paid in, and shares and funds are paid out. A Monday buy shows in your demat on Tuesday. India moved fully to T+1 in January 2023, one of the first major markets to do so. An optional T+0 cycle also exists for a limited set of stocks through participating brokers, but T+1 remains the standard.
Timeline from T to T+1 for buy and sell
Figure 1.10: The T+1 lifecycle for equity delivery.

Selling from demat: you must authorise the debit, either through a CDSL/NSDL eDIS (TPIN/OTP) step or a standing DDPI (which replaced the old POA). Shares are earmarked (blocked) in your own demat rather than moved to the broker's pool account, a SEBI safeguard in force since Nov 2022. You can also sell on Tuesday shares bought on Monday, before they are credited to your demat. This is called BTST (buy today, sell tomorrow), and it carries a small risk: if your seller fails to deliver, you cannot deliver to your buyer either, and the exchange auctions or closes out the shortfall at a penalty price.

Dividend timing follows the same clock

Because settlement is T+1, the ex-date now normally equals the record date. To receive a dividend or bonus you must buy before the ex-date, i.e. by the close of the previous trading day (Section 15).

11. Order types: market, limit, SL, SL-M, GTT, AMO

OrderWhat you specifyExecutes whenTrade-off
MarketQuantity onlyImmediately, at the best available pricesCertain to fill (if liquid), uncertain price. Brokers now attach market protection: Zerodha's Kite turns market orders into limit orders a set % away from the price, so an unfilled remainder rests as a limit order instead of filling at a wild price.
LimitPrice (max to buy / min to sell)Only at your price or betterPrice control, but may never fill
SL (stop-loss limit)Trigger price + limit priceBecomes a limit order once the LTP (last traded price) touches the triggerControls slippage, but can stay unfilled if price gaps through the limit
SL-M (stop-loss market)Trigger priceBecomes a market order once triggeredGets you out, at whatever price is available (with market protection)
GTT (Good Till Triggered, broker feature)Trigger(s) + limit price; single or OCOBroker places a limit order when the trigger hits; valid up to 1 year at ZerodhaGreat for swing and positional stops and targets that outlive one session. OCO (one-cancels-other) sets a stop and a target together. Not exchange-guaranteed: it is a broker-side trigger.
AMO (After-Market Order)Any regular order, placed outside market hoursSent to the exchange at the next open (at Zerodha, roughly from after the close until just before the 9:00 am pre-open; the exact window varies by broker)Convenient for people with day jobs. Market AMOs can fill at a gap-open price.

Other validity and quantity options: DAY (default: cancelled at close if unfilled), IOC (immediate-or-cancel), disclosed quantity (shows only part of a large order), and iceberg orders (the broker slices a big order). Trigger rule for a long position's SL: the trigger is at or above the limit price, e.g. trigger 820, limit 819.

Real example · HDFC Bank · 16–23 Mar 2026

When a stop-loss "fails": the overnight gap

  1. Hypothetical swing trade: buy 100 HDFC Bank at the 16 Mar 2026 close, ₹840.60. Place a stop-loss with trigger ₹820. Planned risk = \( (840.60 - 820) \times 100 = \text{₹}2{,}060 \).
  2. On the evening of 18 Mar, the bank's part-time chairman resigned, citing differences over "values and ethics". The stock had closed at ₹843.05.
  3. 19 Mar: opened at ₹770.00, a −8.66% gap, straight through the stop. Volume was 4.96 times the previous month's average, and the Nifty fell 3.26% that day.
  4. SL-M (or a stop that triggers into a market order): fills near the open, say ₹770 → loss \( (840.60 - 770) \times 100 = \text{₹}7{,}060 \), 3.4 times the planned risk.
  5. SL-limit with limit 819: triggered, but the day's high was only ₹815.65, so the sell never filled. Holding on to the 23 Mar close of ₹744.15 meant a loss of ₹9,645.
  6. Lesson: a stop sets a trigger, not a guaranteed exit price. Overnight and news gaps are the main risk of swing trading. Size positions so that a gap of two to three times your stop distance is survivable (Chapter 11), and know which order type you are using.
HDFC Bank candles March 2026 with stop-loss line and gap down
Figure 1.11: The 19 Mar 2026 gap: opened 770.00, low 770.00, high 815.65, close 798.20. A stop at 820 could not be honoured near 820.

12. Product types: CNC, MIS, NRML, MTF; long and short

The product type tells your broker how long you intend to hold the position and how it is funded. Names below are Zerodha's. Other brokers use similar labels ("Delivery", "Intraday", "Carry forward", "Pay later").

ProductSegmentMeaningKey rules
CNC (Cash & Carry)Equity cashDelivery: shares come into your dematFull payment upfront. Hold as long as you like. This is what swing traders and investors use.
MIS (Margin Intraday Squareoff)Equity, F&OIntraday with leverageAuto squared off by the broker before the close (at Zerodha, from 3 Aug 2026: 3:12 pm for stocks in the F&O list because of the closing auction, 3:25 pm for other stocks, 3:26 pm for F&O contracts; other brokers differ, so check yours). Needed for intraday shorting.
NRML (Normal)F&O (and commodities)Carry forward until expiryFull SPAN + exposure margin. Used for positional futures, long or short (Chapter 9).
MTF (Margin Trading Facility)Approved equity stocksBroker funds part of a delivery buyThe shares are pledged to the broker and you pay interest daily (Zerodha: 0.04% a day ≈ 14.6% a year simple). Example: ₹1 lakh funded for 30 days costs \( 100000 \times 0.0004 \times 30 = \text{₹}1{,}200 \) in interest.
Leverage cuts both ways

MTF and MIS let you control more stock than your cash covers. A 10% fall on a position funded 50% by the broker costs you 20% of your own money, plus interest. Beginners should start with CNC only.

12.1 Long, short and square-off

Position1st leg2nd leg (square-off)ViewProfit ifLoss if
LongBuySellBullishPrice risesPrice falls
ShortSellBuyBearishPrice fallsPrice rises (losses are theoretically unlimited)

Varsity's analogy: selling a phone you have not bought yet at ₹16,500 and buying it later at ₹14,000 is a short trade. In the Indian cash segment, a short must be squared off the same day (MIS). If you cannot deliver the shares, the exchange auctions them and you pay a penalty. To carry a short position overnight, use stock or index futures (NRML) or options. Squaring off a long is not "going short". It simply closes the position.

13. Reading a quote and market depth

Real data · HDFC Bank · 30 Sep 2026 (NSE)

Decoding a market-watch line

FieldValueMeaning
Previous close722.70Yesterday's official close (the reference for % change)
Open / High / Low711.50 / 720.30 / 708.70The day's range so far (High and Low update live)
LTP / Close708.70Last traded price. After the close, the official closing price.
Change−14.00 (−1.94%)\( 708.70 / 722.70 - 1 \)
Volume3,93,65,496Shares traded today (each share bought and sold counts once)
52-week high / low1,020.50 / 681.90Range over the last year. Here the stock is near its low.

The market depth window shows the best five (or, on some platforms, twenty) bids (buyers' prices and quantities) and offers/asks (sellers'). The gap between the best offer and the best bid is the spread. A market buy takes offers from the top of the ladder downward and pays more as it eats deeper. This is impact cost, the same liquidity measure NSE uses for index eligibility.

Illustrative five-level market depth ladder
Figure 1.12: An illustrative depth ladder (the quantities are invented for teaching; the historical data set has no order-book snapshots). Buying 2,000 shares at market: \( (400 \times 708.70 + 900 \times 708.75 + 700 \times 708.80)/2000 = \text{₹}708.76 \) average, about 0.008% above the best offer. In an illiquid small-cap the same order could move the price several percent.
Using depth in practice (Varsity's 20-depth note)

Before placing a large order in a less liquid stock, open the 20-level depth to check that enough quantity exists near your price. Large clusters of bids or offers often show up around chart support and resistance levels (Chapter 3). For a swing trader, the practical rule is to use limit orders in thin stocks and to avoid stocks where your normal order size would eat several levels of the book.

14. Market hours, pre-open, closing auction, circuit limits

14.1 NSE equity sessions (as of Oct 2026)

Time (IST)SessionNotes
9:00–9:05Pre-open phase IEnter, modify or cancel market and limit orders
9:05–9:10Pre-open phase IILimit orders only (new structure since 7 Sep 2026; previously 9:00–9:08 for all orders). Order entry closes at a random moment between 9:08 and 9:10 so nobody can game the last second, and market orders get priority in matching.
9:10–9:12MatchingA call auction finds the single price that matches the most quantity → opening price
9:12–9:15BufferTransition to continuous trading
9:15–15:30Normal marketContinuous order matching. F&O stocks trade continuously only until 3:15 pm, then enter the Closing Auction Session (3:15–3:35 pm, introduced 3 Aug 2026), whose single auction price becomes the official close. Inside it: 3:15–3:20 no orders (the 3:00–3:15 VWAP, volume-weighted average price, is fixed as a reference price), 3:20–3:25 market and limit orders, 3:25–3:30 limit orders only, 3:30–3:35 matching. Other stocks still close at 3:30 pm with the close computed from the last half-hour's volume-weighted average price.
9:15–15:40F&O segmentExtended by 10 minutes from 3 Aug 2026 to align with the closing auction
15:50–16:00Post-closeTrade at the official closing price, market orders only (per Zerodha support)
Rules change: always check

Two session changes happened within five weeks in Aug–Sep 2026. Treat any timing table, including this one, as "as of" its date, and check your broker's support page and NSE circulars. On IPO listing days and after demergers or relistings, a special pre-open (9:00–9:45) applies and continuous trading begins at 10:00 am.

14.2 Circuit limits (price bands)

Index moveBefore 1:00 pm1:00–2:30 pmAfter 2:30 pm
10%45-min halt15-min haltNo halt
15%1 hr 45 min halt45-min halt if before 2:00 pm; rest of day halted from 2:00 pmRest of day halted
20%Trading halted for the rest of the day
Real example · Nifty 50 · March 2020

Two circuit-breaker days in ten sessions

  1. 13 Mar 2020: previous close 9,590.15. The index fell to 8,555.15 (−10.79% intraday), so the 10% breaker triggered a 45-minute halt. After the halt it rallied to close at 9,955.20, +3.81%, a 16% swing from low to close in one day.
  2. 23 Mar 2020: previous close 8,745.45. It hit the 10% circuit early, halted for 45 minutes, then kept falling. Low 7,583.60 (−13.29%), close 7,610.25 (−12.98%), the decade's worst day and the exact bottom of the COVID drawdown.
  3. Lesson: circuit breakers pause panic, but they don't stop it. Anyone using leverage could not exit during the halts.
Nifty daily candles Feb to Apr 2020 with circuit breaker days annotated
Figure 1.13: Nifty 50 daily candles, 17 Feb – 9 Apr 2020. Source: NSE via Yahoo Finance.

15. Corporate actions: dividends, bonus, splits, rights, buybacks, demergers

A corporate action is a board- and shareholder-approved event that changes what you hold or receive. The key dates are the same for most of them:

15.1 Dividends

A dividend is a share of profit (or reserves) paid in cash per share. It can be interim (during the year), final (after the year) or special (one-off). It is quoted per share or as a % of face value. Logic of the price drop: cash leaves the company on the ex-date, so the company is worth that much less, and the price adjusts down by roughly the dividend. You are no richer or poorer on the day: price falls, cash arrives. (Dividends are taxed at your slab rate, so a dividend can even leave you slightly worse off after tax. See Chapter 13.)

Ex-dividend price and dividend yield\[ P_{ex} \approx P_{cum} - D, \qquad \text{Dividend yield} = \frac{D_{annual}}{P} \]
\(P_{cum}\)
The cum-dividend price: the last close before the ex-date, when a buyer still gets the dividend, in ₹.
\(P_{ex}\)
The expected price on the ex-date, in ₹. It is only approximate (\(\approx\)) because the market also moves for other reasons that day.
\(D\)
The dividend per share being paid, in ₹.
\(D_{annual}\)
The total dividends per share paid over a year, in ₹. (Put a single payout here to get the yield of that one payout.)
\(P\)
The share price you compare against, in ₹.

How it works: on the ex-date the dividend cash leaves the company, so the price drops by about the dividend. The yield divides a year's dividends by the price and is usually shown as a percentage (multiply by 100). It is the return you would get from dividends alone if the price did not change.

Real example · ITC · ex-date 27 May 2026

₹8 final dividend

  1. Cum-dividend close (26 May): ₹301.65. Dividend ₹8.00 (800% of the ₹1 face value; that is how companies announce it).
  2. Theoretical ex price: \( 301.65 - 8.00 = 293.65 \). Actual open on 27 May: ₹295.65, close ₹291.95.
  3. Yield of this one payout: \( 8 / 301.65 = 2.65\% \).
  4. Data note: the course files carry both Close (as traded, not dividend-adjusted) and Adj Close (dividend-adjusted). The vendor scales all prices before the ex-date by \( 293.65/301.65 = 0.97348 \), which is why total-return charts don't show a fake drop.
ITC candles around ex-dividend date with adjusted close line
Figure 1.14: ITC around its 27 May 2026 ex-date. Another high-yield example: Coal India went ex ₹10.25 on 4 Nov 2025 (cum close ₹388.55, ex open ₹380.00).
"Dividend capture" doesn't work as a free lunch

Buying the day before the ex-date to collect the dividend fails because the price drops by about the same amount, and you also pay costs and tax on the dividend. Judge a dividend payer on its sustainable cash flows (Chapters 6–8).

15.2 Bonus issues

A bonus issue gives free extra shares out of the company's reserves, in a ratio such as 1:1 (one new for each held) or 1:2 (one new for every two held). Face value is unchanged, the share count rises, and the price falls proportionally. Your holding's value is unchanged. Companies do this to make the per-share price more accessible.

Bonus a:b (a new shares for every b held)\[ P_{ex} = P_{cum} \times \frac{b}{a+b}, \qquad N_{new} = N \times \frac{a+b}{b} \]
\(a\)
The number of free bonus shares given.
\(b\)
The number of shares you must already hold to get them. A 1:2 bonus has \(a = 1\), \(b = 2\).
\(P_{cum}\)
The price before the ex-date, in ₹.
\(P_{ex}\)
The theoretical price on the ex-date, after the bonus, in ₹.
\(N\)
The number of shares you held before the bonus.
\(N_{new}\)
The number of shares you hold after it.

How it works: every \(b\) shares become \(a + b\) shares, but the company is worth the same. So the share count is multiplied by \((a+b)/b\) and the price by the upside-down fraction \(b/(a+b)\). The two cancel out: \(N_{new} \times P_{ex} = N \times P_{cum}\), so your holding's value does not change.

Real example · HDFC Bank · 1:1 bonus, ex 26 Aug 2025

The first bonus in HDFC Bank's history

  1. On 25 Aug 2025 the stock traded around ₹1,964.10 on your screen. (The data file shows ₹982.05, because all earlier prices are divided by 2 after the bonus.)
  2. 1:1 bonus → \( 1964.10 \times \tfrac{1}{2} = 982.05 \) theoretical ex price. Actual ex-date open ₹979.50, close ₹973.40.
  3. 100 shares × ₹1,964.10 = ₹1,96,410 before; 200 shares × ₹982.05 = ₹1,96,410 after. Same value.
  4. Side effect in data: the ₹5 special dividend paid in July 2025 appears as ₹2.50 in the file, because it is adjusted for the bonus too.

15.3 Stock splits

A split divides each share into several, reducing the face value (the key difference from a bonus). The economics are identical to a bonus: more shares at a lower price and the same total value.

Real example · Kotak Mahindra Bank · 5-for-1 split, record/ex 14 Jan 2026

Face value ₹5 → ₹1

  1. 13 Jan 2026 close on screen: about ₹2,132.60 (file: ₹426.52 = 2,132.60 / 5).
  2. Ex-date 14 Jan: opened ₹426.00, closed ₹421.00. 10 shares worth ₹21,326 became 50 shares worth about the same.
HDFC Bank bonus and Kotak split, raw screen price vs adjusted price
Figure 1.15: What you saw on screen (red) versus the adjusted series in data files (blue). If you ever compute a stop or a return across a bonus or split with raw prices, you will get nonsense.

15.4 Rights issues

A rights issue sells new shares only to existing holders, in proportion to their holdings and usually at a discount. Unlike a bonus, you pay money, so subscribe only if you would buy the stock anyway at that price. The rights entitlement (RE) itself trades for a while and can be sold.

Theoretical ex-rights price (TERP), ratio n new for every N held at price R\[ TERP = \frac{N \times P_{cum} + n \times R}{N + n} \]
\(N\)
The number of shares you must hold to be offered new ones (25 in a 3-for-25 issue).
\(n\)
The number of new shares offered for those \(N\) (3 in a 3-for-25 issue).
\(P_{cum}\)
The market price before the shares go ex-rights, in ₹.
\(R\)
The rights price: what you pay for each new share, in ₹.
\(TERP\)
The theoretical ex-rights price: the value of one share once the new shares exist, in ₹.

How it works: it is an average. Take \(N\) old shares worth \(P_{cum}\) each, add \(n\) new shares bought at \(R\), and divide the total value by the total number of shares, \(N + n\). Because the rights price is below the market price, the TERP comes out a little below the old price.

Real example · Adani Enterprises · 3-for-25 rights at ₹1,800, record date 17 Nov 2025

About ₹24,930 crore raised, partly paid

  1. The price before the announcement was reported at ₹2,370.20. Rights price ₹1,800 is a \( 1 - 1800/2370.20 = 24.06\% \) discount. ₹900 was payable on application and the rest in later calls.
  2. TERP \( = (25 \times 2370.20 + 3 \times 1800)/28 = 2309.11 \).
  3. So even before any market reaction, the share is "worth" about 2.6% less after the rights. Data vendors scale earlier prices by about \( 2309.11/2370.20 = 0.9742 \) (the course file's pre-record-date prices are adjusted in this way).
  4. If the market price falls below ₹1,800 before you pay, it is cheaper to buy in the market than to subscribe.

15.5 Buybacks

In a buyback the company buys its own shares, usually at a premium through a tender offer, and extinguishes them. Fewer shares means a larger share of earnings for each remaining share. It also signals that management thinks the stock is cheap (judge that yourself). Holders of shares worth ≤ ₹2 lakh on the record date get a reserved "small shareholder" quota with a much better acceptance ratio. Tax (rules changed twice recently): from 1 Oct 2024 to 31 Mar 2026 the whole buyback amount was taxed as dividend income at your slab rate, with your cost of the shares treated as a capital loss. Budget 2026 reversed this from 1 Apr 2026: for ordinary shareholders only the gain (buyback price minus your cost) is taxed, as a capital gain, while promoters pay an additional tax that takes their effective rate to roughly 22% (companies) or 30% (individuals). See Chapter 13.

Real example · Infosys · ₹18,000 crore buyback at ₹1,800, record date 14 Nov 2025

What a small shareholder actually gained

  1. Announced 11 Sep 2025 when the stock closed at ₹1,509.70 → premium \( 1800/1509.70 - 1 = 19.23\% \). Record-date close (14 Nov): ₹1,502.80 → premium 19.78%.
  2. Small-shareholder entitlement: 2 shares for every 11 held (the general category got about 2.4%).
  3. A holder of 110 shares (about ₹1.65 lakh, so a small shareholder) could tender 20 shares at ₹1,800 instead of about ₹1,502.80 → extra \( 20 \times (1800 - 1502.80) = \text{₹}5{,}944 \), about 3.6% on the whole holding, before tax. (This buyback fell under the old regime, so the full ₹1,800 per accepted share was taxed as dividend income.)
  4. The premium applies only to the accepted fraction, not to your whole holding. That is why buyback "arbitrage" returns are smaller than the headline premium suggests.

15.6 Demergers, and price drops that aren't losses

Varsity's five corporate actions don't include it, but you will meet demergers, where a company spins off a business into a separately listed company. On the record date the parent's price drops by roughly the value of the spun-off business, and you receive shares of the new company.

TRENT data glitch and Tata Motors demerger price drop
Figure 1.16: Left: TRENT in the Yahoo data. Its genuine 1:2 bonus had a record date of 4 Jun 2026, but the vendor applied the 1.5× adjustment only back to 1 Jan 2026, creating a fake −33.05% "crash" between 31 Dec 2025 (₹4,279.00) and 1 Jan 2026 (₹2,864.93). Right: Tata Motors (now TMPV) fell from ₹660.75 to ₹395.45 on its 14 Oct 2025 demerger record date. Holders received one Tata Motors CV share per share (CV shares listed 12 Nov 2025).
Data hygiene matters for your future backtests

Before trusting any big one-day move in historical data, check for a corporate action. A backtest that "shorts the TRENT crash of 1 Jan 2026" made money only on a data error. Chapter 12 builds this check into the framework.

16. Market-cap categories and reading a stock page

Market capitalisation\[ \text{Market cap} = \text{Share price} \times \text{Total shares outstanding} \]
Share price
The current market price of one share, in ₹.
Total shares outstanding
All the shares the company has issued, including promoter holdings. (Free-float market cap in Section 8 counts only the tradable part.)
Market cap
What the market values the whole company at, usually quoted in ₹ crore.

How it works: multiply the two. Because the price changes every day, so does the market cap. A company at ₹1,000 with 10 crore shares has a market cap of ₹10,000 crore.

SEBI's mutual-fund categorisation uses AMFI's half-yearly ranking of all listed companies by average market cap: large cap = ranks 1–100, mid cap = 101–250, small cap = 251 and below. In the July 2026 list the large-cap cut-off was about ₹1,06,300 crore and the mid-cap cut-off about ₹33,500 crore (as summarised by Mata Securities from the AMFI list). Upgrades to large cap included BSE, Hitachi Energy India, Indian Bank and Groww's parent Billionbrains Garage Ventures. Smaller companies tend to be more volatile, less liquid and less researched. That gives more opportunity, more risk and wider spreads.

Real data · screener.in "top ratios", fetched 2 Oct 2026

Reading the header of a stock page

FieldHDFC BankCoal IndiaITCWhat it tells you
Market cap₹11,10,422 cr₹2,59,478 cr₹3,19,440 crSize → category, liquidity
Current price₹721₹420₹256Live LTP when fetched
52w high / low1,020 / 682491 / 370426 / 255Where the price sits in its yearly range
Stock P/E14.08.3216.2Price ÷ earnings per share (Ch 8)
Book value₹390₹193₹57.9Net worth per share (Ch 6)
Dividend yield1.80%6.30%5.67%Last year's dividends ÷ price
ROCE / ROE7.02% / 13.6%35.0% / 28.2%38.9% / 29.3%Profitability of capital (Ch 7)
Face value₹1₹10₹1Accounting unit; matters for dividends "in %"

Lower down the same page you'll find quarterly results, the P&L, the balance sheet, cash flows, key ratios and the shareholding pattern (Section 5). Chapters 6–8 teach you to read them. For now, note that a low P/E or high yield is not automatically "cheap": ITC sat at its 52-week low with a 5.67% yield. Understanding why the market prices it that way is the investor's job. The framework's framework.data.fetch_fundamentals(symbol) pulls these screener tables into pandas.

17. What a delivery trade really costs (current charges)

Varsity's settlement chapter shows the charges on a ₹1 lakh Reliance purchase. Rates have changed since it was written, so here are the charges verified for October 2026 (Zerodha charges page; NSE circular effective 1 Mar 2026; Budget 2026 for F&O STT):

ChargeEquity delivery (CNC)Equity intradayFuturesOptions
Brokerage (Zerodha)₹00.03% or ₹20/order, lower0.03% or ₹20/order, lower₹20 flat per order
STT (govt tax)0.1% on buy and sell0.025% on sell0.05% on sell (from 1 Apr 2026; was 0.02%)0.15% of premium on sell (from 1 Apr 2026)
Exchange txn charge (NSE)0.00307%0.00307%0.00183%0.03553% of premium
SEBI fee₹10 per crore of turnover
GST18% on (brokerage + exchange charges + SEBI fee)
Stamp duty (buy side)0.015%0.003%0.002%0.003%
DP charge₹15.34 per scrip per sell day (incl. GST)—
Real example · ICICI Bank · bought 1 Apr 2026, sold 30 Sep 2026

A winning swing/positional trade, all costs in

  1. Buy 75 shares at the 1 Apr 2026 close ₹1,212.70 → buy value ₹90,952.50. Sell at the 30 Sep 2026 close ₹1,321.70 → sell value ₹99,127.50. Turnover = ₹1,90,080.
  2. STT = \( 0.001 \times 1{,}90{,}080 = \text{₹}190.08 \).
  3. Exchange charge = \( 0.0000307 \times 1{,}90{,}080 = \text{₹}5.84 \). SEBI fee = \( 10/10^7 \times 1{,}90{,}080 = \text{₹}0.19 \).
  4. GST = \( 0.18 \times (0 + 5.84 + 0.19) = \text{₹}1.08 \).
  5. Stamp duty = \( 0.00015 \times 90{,}952.50 = \text{₹}13.64 \). DP charge on the sell day = ₹15.34.
  6. Total = ₹226.17 (0.249% of the buy value). Gross profit ₹8,175.00 → net ₹7,948.83. Costs took 2.77% of the profit, and STT alone is 84% of the costs.
  7. Held 12 months or less → short-term capital gain taxed at 20% (plus surcharge/cess). STT is not deductible for capital-gains purposes, but the other charges are: taxable gain ≈ \( 8175 - 36.09 = 8138.91 \) → tax ≈ ₹1,627.78. For holdings of more than 12 months, long-term gains are taxed at 12.5% above ₹1.25 lakh a year (rates unchanged in Budget 2026; details in Chapter 13).
Bar chart of the charges on a 75 share ICICI Bank round trip
Figure 1.17: Where the ₹226.17 went. Rates as of Oct 2026. Confirm on your broker's calculator before trading, because rates change often.
Small trades are disproportionately expensive

Buying 5 ITC at ₹291.70 (₹1,458.50) and selling 5% higher costs about ₹18.66 in total, which is 1.28% of the position. The flat ₹15.34 DP charge dominates, and total costs eat about a quarter of the ₹72.93 gain. Rule of thumb: for swing trades, keep each position large enough that round-trip costs are well under 0.5%, and remember that STT alone makes a delivery round trip cost at least 0.2% of the position value.

In your framework: framework.costs.equity_delivery_charges(buy_value, sell_value) and framework.costs.capital_gains_tax implement exactly this arithmetic, and the backtester (Chapter 12) deducts them from every simulated trade.

18. Developing a point of view: the road ahead

Varsity closes Module 1 with the key idea: success needs a point of view (POV) on a stock or index (bullish or bearish), formed by your own analysis, and then the right instrument to express it.

Instrument choice follows the POV: a 1-year bullish view suits a delivery buy; a short-term directional view on the index can use futures (with strict sizing, Ch 9); a view where you want limited downside can use options (Ch 10). Every instrument sits under the same risk rules (Ch 11) and is tested before use (Ch 12).

19. Try it yourself (Python)

These snippets need a copy of the course repository and Python with pandas and numpy (setup steps are in its framework/README.md). Run them from the repository's root folder, for example with .venv/bin/python, because the file paths are relative to that folder. All figures in this chapter come from course/scripts/ch01_figures.py.

1. CAGR, drawdown and calendar returns for any index or stock

import pandas as pd
df = pd.read_csv("data/ohlc/IDX_NSEI.csv", index_col=0, parse_dates=True)
c = df["Close"]
years = (c.index[-1] - c.index[0]).days / 365.25
cagr = (c.iloc[-1] / c.iloc[0]) ** (1 / years) - 1
dd = c / c.cummax() - 1
print(f"CAGR {cagr:.2%}  max DD {dd.min():.2%} on {dd.idxmin().date()}")
print((c.resample("YE").last().pct_change() * 100).round(2))
# try "IDX_NSEBANK", "HDFCBANK", "TITAN" ...

2. Find every bonus/split and dividend in the data, and check the ex-date move

import pandas as pd
d = pd.read_csv("data/ohlc/ITC.csv", index_col=0, parse_dates=True)
d = d[d["Volume"] > 0]                       # drop vendor holiday rows
d["prev_close"] = d["Close"].shift()
ev = d[(d["Dividends"] > 0) | (d["Stock Splits"] > 0)]
ev = ev.assign(expected_open=ev["prev_close"] - ev["Dividends"])
print(ev[["prev_close", "Dividends", "Stock Splits", "expected_open", "Open", "Close"]].tail(8))

3. Delivery-trade cost calculator (Oct 2026 rates)

def delivery_costs(buy_val, sell_val):
    turn = buy_val + sell_val
    stt, txn, sebi = 0.001 * turn, 0.0000307 * turn, 10 / 1e7 * turn
    gst = 0.18 * (0 + txn + sebi)          # brokerage is 0 for delivery
    stamp, dp = 0.00015 * buy_val, 15.34
    return round(stt + txn + sebi + gst + stamp + dp, 2)

print(delivery_costs(75 * 1212.70, 75 * 1321.70))   # 226.17
print(delivery_costs(5 * 291.70, 5 * 291.70 * 1.05)) # small trade

4. Rebuild the "price you saw on screen" across a split

import pandas as pd
k = pd.read_csv("data/ohlc/KOTAKBANK.csv", index_col=0, parse_dates=True)["Close"]
raw = k.where(k.index >= "2026-01-14", k * 5)   # undo the 5-for-1 adjustment
print(raw.loc["2026-01-09":"2026-01-16"])
Exercise

Modify snippet 1 to compute the rolling 3-year CAGR for Bank Nifty and find the share of windows that were negative. Compare it with the Nifty's 1.64%.

20. Checklist, key takeaways, quiz, sources

Practical checklist: before your first trade

Key takeaways

Quiz and exercises

Q1. You invested ₹2,00,000 and it became ₹3,10,000 after 4 years and 3 months. What are the absolute return and the CAGR?
Absolute = \( 310000/200000 - 1 = 55\% \). Years = 4.25, so CAGR = \( 1.55^{1/4.25} - 1 = e^{\ln(1.55)/4.25} - 1 = e^{0.4383/4.25} - 1 = e^{0.1031} - 1 \approx 10.86\% \) a year.
Q2. A bank offers 7% on a 1-year FD. CPI inflation is 4.82% and you are in the 20% slab. What is your post-tax real return?
Post-tax nominal = \( 7\% \times 0.8 = 5.6\% \). Real = \( 1.056/1.0482 - 1 = 0.74\% \). Positive, but small.
Q3. Why does Coal India, with a market cap of about ₹2.59 lakh crore, carry far less index weight than its size suggests?
Index weights use free-float market cap. About 61% of Coal India is held by the government (promoter), so only about 39% (≈ ₹1.01 lakh crore) counts. Against HDFC Bank's ≈ ₹11.1 lakh crore free float, that is about 9% of HDFC's weight instead of about 23%.
Q4. A stock with 9% Nifty weight rises 3% when the Nifty is at 23,000. Roughly how many Nifty points does it contribute?
\( 0.09 \times 0.03 \times 23000 = 62.1 \) points. The approximation assumes the weight is the previous day's weight.
Q5. A company's record date for a ₹12 dividend is Friday. Under T+1, what is the last day you can buy and still receive it, and what should happen to the price on the ex-date if the stock closed at ₹480 the day before?
Ex-date = record date = Friday, so you must buy by Thursday's close. Expected ex-date price ≈ 480 − 12 = ₹468 (plus or minus normal market moves). Your total value is unchanged before tax: ₹12 in cash plus a stock worth ₹12 less.
Q6. You hold 60 shares at ₹1,500 when a 1:2 bonus is announced. What do you hold after the ex-date, and at what theoretical price?
1 bonus for every 2 held → 30 new shares, 90 in total. Price × \( 2/3 \) = ₹1,000. Value 60 × 1,500 = 90 × 1,000 = ₹90,000, unchanged.
Q7. A stock trades at ₹600 before a 1-for-5 rights issue priced at ₹480. Compute the TERP. Should you subscribe if the stock later falls to ₹470 before payment?
TERP = \( (5 \times 600 + 1 \times 480)/6 = 3480/6 = \text{₹}580 \). If the market price is ₹470, below the ₹480 rights price, buying in the market is cheaper. Don't subscribe just because a discount was advertised.
Q8. You are long at ₹250 with an SL order: trigger ₹240, limit ₹239. Bad news comes out overnight and the stock opens at ₹225 and never trades above ₹232 that day. What happens? What would an SL-M have done?
The SL triggers (LTP ≤ 240) and becomes a limit sell at ₹239, but the price never trades that high, so it stays unfilled and you are still long. An SL-M would have sold near the open (about ₹225, within market protection), a loss of about ₹25 per share instead of the planned ₹10, but you would be out. This is exactly the HDFC Bank 19 Mar 2026 situation.
Q9. Compute the full delivery cost of buying 200 shares at ₹450 and selling at ₹480 at Oct 2026 Zerodha rates.
Buy ₹90,000, sell ₹96,000, turnover ₹1,86,000. STT = ₹186.00; exchange = \( 0.0000307 \times 186000 = \text{₹}5.71 \); SEBI = ₹0.19; GST = \( 0.18 \times 5.90 = \text{₹}1.06 \); stamp = \( 0.00015 \times 90000 = \text{₹}13.50 \); DP = ₹15.34. Total ≈ ₹221.80 against a gross profit of ₹6,000 (3.7% of the profit).
Q10. An IPO is 100% offer for sale. What does that tell you, and what doesn't it tell you?
It tells you all the money goes to the selling shareholders (promoters/investors), the company raises nothing, and there is no new dilution. It does not tell you whether the price is fair. LG Electronics India (pure OFS) listed +50%, so pricing relative to fundamentals and peers is what matters. Read the RHP's objects, the financials and the valuation.
Q11. The Nifty falls 10.5% by 12:15 pm. What happens? What if the same fall occurs at 2:45 pm?
A 10% market-wide circuit breaker before 1:00 pm → a 45-minute halt across equity and equity-derivative markets. If the 10% fall happens after 2:30 pm, there is no halt (only a 15% or 20% move would halt trading then).
Q12. Your 3-year portfolio CAGR is 9%. The Nifty 50 price CAGR over the same period was 4.83%. Did you beat the market? What else should you check?
Probably yes, but compare against the Total Return Index (dividends included, about 1.2 points a year higher for the Nifty recently). Your returns should be after all costs and taxes. Also compare risk: if your drawdowns were much deeper than the index's, part of the outperformance may simply be extra risk taken.
Q13. In the course data, TRENT drops 33% from 31 Dec 2025 to 1 Jan 2026. How would you check whether it's real?
Look for a corporate action (the Stock Splits column shows 1.5 on 4 Jun 2026, a 1:2 bonus). A one-day move of about −33% (1/1.5 − 1 = −33.3%) on no news is a red flag. Cross-check with NSE's corporate-action list or another data source. Here the vendor applied the adjustment to the wrong date range, so the "drop" is fake and must be repaired before any backtest.
Q14. You expect a stock you don't own to fall over the next two weeks. Can you short it in your demat account with CNC? What are your options?
No. In the cash segment a short sale must be squared off the same day (MIS). If you don't buy it back, you cannot deliver, and the exchange auctions the shares at your cost plus a penalty. To hold a bearish view for two weeks you need derivatives: sell the stock's futures under NRML (only if the stock is in F&O, Chapter 9) or buy a put option (Chapter 10). Selling shares you already own is simply exiting a long, not shorting.

Sources: Zerodha Varsity Module 1: The Need to Invest, Regulators, Financial Intermediaries, The IPO Markets – Part 1, Part 2, The Stock Markets, The Stock Markets Index, Commonly Used Jargons, The Trading Terminal, Clearing and Settlement Process, Five Corporate Actions, Key Events and their Impact, Getting Started, Supplementary: 20 Market Depth, Supplementary: IPO, OFS, FPO. Module 7: Taxation for Investors, Classifying your Market Activity.
Rules and rates (checked 1–2 Oct 2026): Zerodha charges; Zerodha support: market sessions (pre-open from 7 Sep 2026, closing auction from 3 Aug 2026); Zerodha support: GTT validity; Kite Connect docs: market protection; NSE transaction-charge circular effective 1 Mar 2026 (Rs 307/crore cash market, via TeamLease RegTech summary); ClearTax: STT rates after Budget 2026; Value Research: STCG/LTCG FY 2026-27; Business Standard: SEBI Bank Nifty caps; Upstox: market-wide circuit breakers; Business Standard: T+3 IPO listing; Forbes India: RBI policy Aug 2026; CPI August 2026; AMFI categorisation July 2026 (Mata Securities); Business Standard: FPI flows 2025, 2026, DII flows 2025.
Index data: NSE Indices factsheets dated 30 Sep 2026 (Nifty 50, Nifty Bank); Business Today: BSE replaces Wipro.
Corporate actions and IPOs: Chittorgarh: Tata Capital IPO; Upstox: LG Electronics India listing; IPO performance 2026; HDFC Bank bonus; Kotak split; Trent bonus; Zerodha: Tata Motors demerger; Infosys buyback and entitlement ratios; Adani Enterprises rights; CNBC: HDFC Bank chairman resignation.
Price data: course data set data/ohlc/ (NSE via Yahoo Finance, to 30 Sep 2026); extra series fetched with yfinance into data/extra/ (NIFTYBEES, GOLDBEES, BSE, LGEINDIA_ipo, TATACAP_ipo). Fundamentals snapshot: screener.in (fetched 2 Oct 2026). Figures: course/scripts/ch01_figures.py. Educational content only, not investment advice.

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