Basics of stock_market


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Basics of stock_market

  1. 1. 1. Stock Market1.1 Stock Plain and simple, a “stock” is a share in the ownership of a company. Astock represents a claim on the companys assets and earnings. As you acquiremore stocks, your ownership stake in the company becomes greater. (Note: Some times different words like shares, equity, stocks etc. are used.All these words mean the same thing.)1.2 Share Market A Share market or Stock market, is a private or public market for thetrading of company stock and derivatives of company stock at an agreed price;these are securities listed on a stock exchange as well as those only tradedprivately. The stocks are listed and traded on stock exchanges which are entities acorporation or mutual organization specialized in the business of bringing buyersand sellers of the organizations to a listing of stocks and securities together. Stock market is known as the cradle of capitalism. It is a place wherecompanies come to raise their share capital and investors go to invest their surplusfunds. Stock market essentially discharges the functions of "the invisible hand"that channels investment into the most productive ventures so as to optimize theoverall productivity of the economy. Stock Market is a place where financial instruments like shares, debentures,commercial papers, bonds etc are bought and sold. Stock markets are popularlyknown as stock exchanges. There are many popular stock markets in the world.NASDQ, Tokyo Stock Exchange, London Stock Exchange are the most popular ofthe lot. There are many participants in a stock market. Investors, Speculators,Arbitrators, Traders are different type of participants of a Stock
  2. 2. Market. Brokers are intermediaries who bring together various participantsin a Stock Market. Most important function of the stock market is to facilitate trading offinancial instruments. Brokers submit a quote at the stock market on behalf oftheir clients. Quotes are specific to the scrip. The quote of the buyer is matchedto the quote of the seller and the transaction takes place. All transactions enteredin a stock market are guaranteed by the Stock Exchange. That means if the buyeror seller fails to meet his obligation, the stock exchange steps in and meets thecommitment of the participant. This instills a lot of confidence and credibilityabout the sanctity of the transaction amongst the investing public. That is thereason why a stock exchange is preferred by investing public to a gray market inshares even though the latter has much lower transaction cost. All the participants in the stock market have the same objective i.e. to makea profit. Investors invest in the stock market with the hope that market value oftheir investment will go up and they will be able to make higher returns than inbank deposits. Arbitrages buy in one market and sell in another market with anobjective of making a profit. For example if the shares of Caltex are quoting at alesser price at Amsterdam Stock Exchange in comparison to London StockExchange, arbitrages will buy at Amsterdam and sell at London. This will resultin a rise in share price at Amsterdam and fall in share price at London, thusbringing in price equilibrium among various stock markets in the world. Speculators operate in the stock market with an objective to make quickmoney by guessing the direction of the stock market. If they expect the market torise, they buy shares with a very small investment horizon. Similarly if theyexpect a correction in stock market, they sell shares, thus imparting an essentialelement of liquidity in the market. Those who expect a rise in the stock market andbuy relentlessly are known as bulls. Bulls keep the buying pressure and attempt to
  3. 3. take the stock market to dizzy heights. Bull market is a market scenario wherebulls have complete control over the stock markets. When bull market reaches itspeak, investors will make huge profit. Many investors start booking their profit byselling the investments. Slowly the bulls find that there are more shares than theycould perhaps buy in the stock market. When supply of shares exceeds thedemand in the stock market prices start coming down. This is called correction.Correction is a normal phenomenon in any bull market. Some times if the sellersare huge in numbers, a negative sentiment takes over the stock market. Every oneattempts to sell their investments with an objective to salvage profit or reducelosses. When this phase set in, bulls loose control. Sellers will control stockmarket. This phase is popularly known are bear run. Bull and Bear runs follow acyclical pattern in a stock market. Normally in a booming economy, companies make huge profits, so marketstend to be bullish. When the trend of the economy reverses Stock Marketexperience a bear hug. Thus the Stock markets reflect the health if the economyand are often called as "barometers" of the economy
  4. 4. 1.3 Shares in the Share Market are either traded through :-(a) Stock Exchange(b) Over-the -Counter (OTC)(a) Stock Exchange These are organized market places where stocks, bonds are otherequivalents are traded between the buyers and sellers where exchange acts as acounter-party to both the participants in case of any default. The contracts arestandardized and not customized ones. For example, NYSE, NASDAQ, NSE,NIKKEI, etc.(b) Over-the -Counter (OTC) These are not centralized exchanges. Here, the trade takes place through anetwork of dealers. Generally, the OTC contracts are bilateral customizedcontracts and not standardized ones.Important Participants of Share Market Trading are :-Buyer An investor who buys a script in the belief that the market will rise. If hishinge becomes right then he makes profit otherwise he suffers loss. Seller Seller of a stock sells in the hope that the stock price will go down. Stock Broker Brokers are persons or firms who execute buy/sell order onbehalf of the investors and charge a commission for rendering the service.
  5. 5. 1.4 Share Trading are done in three ways:- (a) Offline Share Trading (b) Online Share Trading (c) Open Outcry Trading(a) Offline Share Trading In this form of trading the customer either goes to the share brokers placeand sits before the share trading terminal and asks the dealer to place orders in hisaccount. or rings the share broker, asks the share quotes and other relevantinformations, and accordingly places orders over the phone.(b) Online Share Trading The client could avail the share market and could place his order on his ownfrom any place he wants, provided he has a computer with an Internet connection.(c) Open Outcry Trading Here, the investors put their orders through the brokers and these sharebrokers in turn place and execute orders on behalf of them on the floor of theexchange. These brokers gather in a particular place on the trading floor known asTrading Post. There is a person called as the Specialist present in the trading postwho does the matching of the buy and sell orders. This type of auction method iscalled Open Outcry Method.
  6. 6. 2. Online Share Trading Online Share Trading is becoming the order of the day in share trading.Now-a-days one could hardly see a person going to the stock exchange floor andplacing his order. Electronic media has played an important role in flourishing theshare market. In case of online share trading an investor could place his orderfrom his own house if he has internet connection.There are two types of trading that can be done through online share trading 1. Intra-day Trading 2. Delivery Trading2.1 Intra-day Trading They enter and exit out of the market like the thief in the night. Traderscontinuously have a watch on the market during the trading hours and the momentthey see any opportunity arising they pounce on it for scalping the profit out.These type of trading generally are risky in nature. They buy and sell stocksduring the same day.Intra day Traders are of two types :- a. Scalp Traders b. Momentum Tradersa. Scalp TradersInvestors who perform many trades per day for scalping out small profits out ofthe bid-ask spread from each trade are known as scalp traders.b. Momentum Traders Investors who pounce on those stocks which move significantly in onedirection and book desired profit are called momentum traders. They do thiswithin a day.2.2 Delivery trading
  7. 7. The investor buys the share for holding purposes. The brokerage chargesare a bit more than the intraday ones. Delivery Traders are : a. Technical Traders b. Fundamental Traders c. Swing Tradersa. Technical Traders They believe that buying/selling signals are present within the graphs andcharts of the stock.b. Fundamental Traders They perform trade on the basis of study of fact-sheets of the company likehistorical profit graph, balance sheet, anticipated earning reports, stock splits,mergers and acquisitions, etc.c. Swing Traders They are basically fundamental traders who take delivery of trades for aspan of short period generally more than one day. In this electronic form of trading, the shares are not in the physical form fortheir inconvenience to handle. So, they are now converted to dematerialized form .So, one investor does not have to worry about the safety of the physical sharesbecause the bought shares get transferred to the respective D-mat account . Thus,online share trading has helped the investors a lot as it is hassle-free and timeefficient. For the intraday traders the brokerage costing is minuscule in comparison tothe delivery trades.
  8. 8. 3. Securities and Exchange Board of India3.1 Introduction SEBI is the Regulator for the Securities Market in India. Originally set upby the Government of India in 1988, it acquired statutory form in 1992 with SEBIAct 1992 being passed by the Indian Parliament.Chaired by C B Bhave, SEBI isheadquartered in the popular business district of Bandra-Kurla complex inMumbai, and has Northern, Eastern and Southern regional offices in New Delhi,Kolkata and Chennai. It is in the news that a new Western Regional Office hasbeen proposed at Ahmedabad.3.2 Function of SEBI SEBI has to be responsive to the needs of three groups, which constitute themarket: • The issuers of securities • The investors • The market intermediaries. SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, itconducts investigation and enforcement action in its executive function and itpasses rulings and orders in its judicial capacity. Though this makes it verypowerful, there is an appeals process to create accountability. There is a SecuritiesAppellate Tribunal which is a three member tribunal and is presently headed by aformer Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal liesdirectly to the Supreme Court. SEBI has enjoyed success as a regulator by pushing systemic reformsaggressively and successively (e.g. the quick movement towards making themarkets electronic and paperless rolling settlement on T+2 basis). SEBI has beenactive in seting up the regulations as required under law.
  9. 9. 4. Bombay Stock Exchange The Bombay Stock Exchange is the oldest Stock Exchange in Asia locatedin Dalal Street , Mumbai in India.4.1 Evolution of the Bombay Stock Exchange and its Size The Bombay Stock Exchange was established in 1875 as the “ Native Shareand Stock Brokers Association ” in 1875. It earned a formal status under theSecurities and Exchange Board of India ( SEBI) in 1956. Market Capitalization ofthe BSE was about Rs 33.4 trillion as on 2006 , October. The Bombay StockExchange uses the Bombay Stock Exchange Sensex as the market index in Asiaand India. The Bombay Stock Exchange deals with trading in derivatives, equity andother debt instruments. The Bombay Stock Exchange Limited has the greatestnumber of listed companies in the world, with 4700 listed as of August 2007. It is
  10. 10. located at Dalal Street, Mumbai, India. On 31 December 2007, the equity marketcapitalization of the companies listed on the BSE was US$ 1.79 trillion, making itthe largest stock exchange in South Asia and the tenth largest in the world. The Bombay Stock Exchange was established in 1875. Around 6,000 Indiancompanies list on the stock exchange, and it has a significant trading volume. TheBSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely usedmarket index in India and Asia. Though many other exchanges exist, BSE and theNational Stock Exchange of India account for most of the trading in shares inIndia.
  11. 11. 4.2 Bombay Stock Exchange history Following is the timeline on the rise and rise of the Sensex through Indianstock market history.1978-79 Base year of Sensex, defined to be 100.1986 Sensex first compiled using a market Capitalization-Weighted methodologyfor 30 component stocks representing well-established companies across keysectors.Since 19901900sJuly 25, 1990. The Sensex touched the magical four-digit figure for the first time andclosed at 1,001 in the wake of a good monsoon season and excellent corporateresults.July 1991 Rupee devalued by 18-19 %January 15, 1992 The Sensex crossed the 2,000-mark and closed at 2,020 followed by theliberal economic policy initiatives undertaken by the then finance minister andcurrent Prime Minister Dr Manmohan Singh.February 29, 1992 The Sensex surged past the 3000 mark in the wake of the market-friendlyBudget announced by the then Finance Minister, Dr Manmohan Singh.March 30, 1992
  12. 12. The Sensex crossed the 4,000-mark and closed at 4,091 on the expectationsof a liberal export-import policy. It was then that the Harshad Mehta scam hit themarkets and Sensex witnessed unabated selling.October 8, 1999 The Sensex crossed the 5,000-mark as the BJP-led coalition won themajority in the 13th Lok Sabha election.2000sFebruary 11, 2000 The infotech boom helped the Sensex to cross the 6,000-mark and hit andall time high of 6,006.June 20, 2005 The news of the settlement between the Ambani brothers boosted investorsentiments and the scrips of RIL, Reliance Energy, Reliance Capital, and IPCLmade huge gains. This helped the Sensex crossed 7,000 points for the first time.September 8, 2005 The Bombay Stock Exchanges benchmark 30-share index -- the Sensex --crossed the 8000 level following brisk buying by foreign and domestic funds inearly trading.
  13. 13. November 28, 2005 The Sensex on November 28, 2005 crossed the magical figure of 9000 totouch 9000.32 points during mid-session at the Bombay Stock Exchange on theback of frantic buying spree by foreign institutional investors and well supportedby local operators as well as retail investors.February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points during mid-session.The Sensex finally closed above the 10K-mark on February 7, 2006.March 21, 2006The Sensex on March 21, 2006 crossed the magical figure of 11,000 and touched alife-time peak of 11,001 points during mid-session at the Bombay Stock Exchangefor the first time. However, it was on March 27, 2006 that the Sensex first closedat over 11,000 points.April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark and closed at a peakof 12,040 points for the first time.October 30, 2006 The Sensex on October 30, 2006 crossed the magical figure of 13,000 andclosed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days for theSensex to move from 12,000 to 13,000 and 123 days to move from 12,500 to13,000.
  14. 14. December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-mark to touch 14,028points. It took 36 days for the Sensex to move from 13,000 to the 14,000 mark.July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of 15,000 to touch15,005 points in afternoon trade. It took seven months for the Sensex to movefrom 14,000 to 15,000 points.September 19, 2007 The Sensex scaled yet another milestone during early morning trade onSeptember 19, 2007. Within minutes after trading began, the Sensex crossed16,000, rising by 450 points from the previous close. The 30-share Bombay StockExchanges sensitive index took 53 days to reach 16,000 from 15,000. Nifty alsotouched a new high at 4659, up 113 points.The Sensex finally ended with a gain of 654 points at 16,323. The NSE Niftygained 186 points to close at 4,732.September 26, 2007 The Sensex scaled yet another height during early morning trade onSeptember 26, 2007. Within minutes after trading began, the Sensex crossed the17,000-mark . Some profit taking towards the end, saw the index slip into red to16,887 - down 187 points from the days high. The Sensex ended with a gain of 22points at 16,921.
  15. 15. October 09, 2007 The BSE Sensex crossed the 18,000-mark on October 09, 2007. It took just8 days to cross 18,000 points from the 17,000 mark. The index zoomed to a newall-time intra-day high of 18,327. It finally gained 789 points to close at an all-time high of 18,280. The market set several new records including the biggestsingle day gain of 789 points at close, as well as the largest intra-day gains of 993points in absolute term backed by frenzied buying after the news of the UPA andLeft meeting on October 22 put an end to the worries of an impending election.October 15, 2007 The Sensex crossed the 19,000-mark backed by revival of funds-basedbuying in blue chip stocks in metal, capital goods and refinery sectors. The indexgained the last 1,000 points in just four trading days. The index touched a freshall-time intra-day high of 19,096, and finally ended with a smart gain of 640points at 19,059.The Nifty gained 242 points to close at 5,670.October 29, 2007 The Sensex crossed the 20,000 mark on the back of aggressive buying byfunds ahead of the US Federal Reserve meeting. The index took only 10 tradingdays to gain 1,000 points after the index crossed the 19,000-mark on October 15.The major drivers of todays rally were index heavyweights Larsen and Toubro,Reliance Industries, ICICI Bank, HDFC Bank and SBI among others. The 30-share index spurted in the last five minutes of trade to fly-past the crucial level andscaled a new intra-day peak at 20,024.87 points before ending at its fresh closinghigh of 19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high5,922.50 points before ending at 5,905.90, showing a hefty gain of 203.60 points.January 8, 2008 The sensex peaks. It crossed the 21,000 mark in intra-day trading after 49trading sessions. This was backed by high market confidence of increased FII
  16. 16. investment and strong corporate results for the third quarter. However, it later fellback due to profit booking. 4.3 SENSEX Archives For the period From Year 1991 to Year 2009 Year Open High Low 1991 1,027.38 1,955.29 947.14 1992 1,957.33 4,546.58 1,945.48 1993 2,617.78 3,459.07 1,980.06 1994 3,436.87 4,643.31 3,405.88 1995 3,910.16 3,943.66 2,891.45 1996 3,114.08 4,131.22 2,713.12 1997 3,096.65 4,605.41 3,096.65 1998 3,658.34 4,322.00 2,741.22 1999 3,064.95 5,150.99 3,042.25 2000 5,209.54 6,150.69 3,491.55 2001 3,990.65 4,462.11 2,594.87 2001 3,990.65 4,462.11 2,594.87 2002 3,262.01 3,758.27 2,828.48 2003 3,383.85 5,920.76 2,904.44 2004 5,872.48 6,617.15 4,227.50 2005 6,626.49 9,442.98 6,069.33 2006 9,422.49 14,035.30 8,799.01 2007 13,827.77 20,498.11 12,316.10 2008 20,325.27 21,206.77 7,697.39 2009 9,720.55 10,469.72 8,631.60
  17. 17. 5. National Stock Exchange of India5.1 Introduction In the year 1991 Pherwani Committee recommended to establish NationalStock Exchange (NSE) in India. In 1992 the Government of India authorized IDBIfor establishing this exchange. In National Stock Exchange there is trading ofequity shares, bonds and government securities. Indias Stock Exchangesparticularly National Stock Exchange has achieved world standards in the recentyears. The NSE India ranked its 3rd position since last four years in terms of totalnumber of trading per calendar year. Presently there are 24 stock exchanges in India, out of which 20 haveexchanges National Stock Exchange (NSE), over the Counter Exchange of IndiaLtd, (OTCEI) and Inter-connected Stock Exchange of India limited (ISE) havenationwide trading facilities. The National Stock Exchange of India Limited or S&P CNX NIFTY(NSE), is a Mumbai-based stock exchange. It is the largest stock exchange inIndia in terms of daily turnover and number of trades, for both equities and
  18. 18. derivative trading.[1]. Though a number of other exchanges exist, NSE and theBombay Stock Exchange are the two most significant stock exchanges in India,and between them are responsible for the vast majority of share transactions. TheNSEs key index is the S&P CNX Nifty, known as the Nifty, an index of fiftymajor stocks weighted by market capitalisation. NSE is mutually-owned by a set of leading financial institutions, banks,insurance companies and other financial intermediaries in India but its ownershipand management operate as separate entities. There are at least 2 foreign investorsNYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities acrossIndia. In October 2007, the equity market capitalization of the companies listed onthe NSE was US$ 1.46 trillion, making it the second largest stock exchange inSouth Asia. NSE is the third largest Stock Exchange in the world in terms of thenumber of trades in equities. It is the second fastest growing stock exchange in theworld with a recorded growth of 16.6%.5.1 Origins The National Stock Exchange of India was promoted by leading Financialinstitutions at the behest of the Government of India, and was incorporated inNovember 1992 as a tax-paying company. In April 1993, it was recognized as astock exchange under the Securities Contracts (Regulation) Act, 1956. NSEcommenced operations in the Wholesale Debt Market (WDM) segment in June1994. The Capital Market (Equities) segment of the NSE commenced operationsin November 1994, while operations in the Derivatives segment commenced inJune 2000.5.2 NSE has the following major segments of the capital market:
  19. 19. (a) Equity (b) Futures and Options(c) Retail Debt Market (d) Wholesale Debt Market(e) Currency futures5.3 Working Hours NSEs normal trading sessions are from 09:55am to 03:30pm on all days ofthe week except Saturdays, Sundays and holidays declared by the Exchange inadvance.
  20. 20. 6. Sensex & Nifty The Sensex is an "index". What is an index? An index is basically anindicator. It gives you a general idea about whether most of the stocks have goneup or most of the stocks have gone down. The Sensex is an indicator of all themajor companies of the BSE. Returns for every possible 15 yr period starting from Apr 79 to Aug 0435.0030.0025.0020.0015.0010.00 Mar-96 Mar-97 Mar-98 Mar-01 Mar-02 Mar-03 Mar-04 Mar-94 Mar-95 Mar-99 Mar-00 The Nifty is an indicator of all the major companies of the NSE. If theSensex goes up, it means that the prices of the stocks of most of the majorcompanies on the BSE have gone up. If the Sensex goes down, this tells you thatthe stock price of most of the major stocks on the BSE have gone down. Just like the Sensex represents the top stocks of the BSE, the Niftyrepresents the top stocks of the NSE. Just in case you are confused, the BSE, is theBombay Stock Exchange and the NSE is the National Stock Exchange. The BSEis situated at Bombay and the NSE is situated at Delhi. These are the major stockexchanges in the country. There are other stock exchanges like the Calcutta StockExchange etc. but they are not as popular as the BSE and the NSE. Most of thestock trading in the country is done though the BSE & the NSE.
  21. 21. Besides Sensex and the Nifty there are many other indexes. There is anindex that gives you an idea about whether the mid-cap stocks go up and down.This is called the “BSE Mid-cap Index”. There are many other types of indexes.
  22. 22. 7. Demat account In India, a demat account, the abbreviation for dematerialised account, is atype of banking account which dematerializes paper-based physical stock shares.The dematerialised account is used to avoid holding physical shares: the shares arebought and sold through a stock broker. This account is popular in India. The Securities and Exchange Board ofIndia (SEBI) mandates a demat account for share trading above 500 shares. As ofApril 2006, it became mandatory that any person holding a demat account shouldpossess a Permanent Account Number (PAN), and the deadline for submission ofPAN details to the depository lapsed on January 2007.7.1 Procedure 1. Fill demat request form (DRF) (obtained from a depository participant or DP with whom your depository account is opened). 2. Deface the share certificate(s) you want to dematerialise by writing across Surrendered for dematerialisation. 3. Submit the DRF & share certificate(s) to DP. DP would forward them to the issuer / their R&T Agent . 4. After dematerialisation, your depository account with your DP, would be credited with the dematerialised securities.
  23. 23. 7.2 Required Documents for Demat Account The extent of documentation required to open a demat account may varyaccording to your relationship with the institution. If you plan to open a demataccount with a bank, a savings, current and, or other account for which the holderhave been issued a check book, such holder has an edge over the non-accountholder. In fact, banks usually offer additional incentives to customers who open ademat account with them. Along with the application form, your photographs(with co-applicants) and proof of identity/residence/date of birth have to besubmitted. The DPs also ask for a DP-client agreement to be executed on non-judicial stamp paper. Here is a broad list: 1. A canceled check, preferably MICR 2. Proof of Identification 3. Proof of Address 4. Proof of Pan card (mandatory) 5. Recent photographs (one and/or more) For proof of identification and, or address self-attested facsimile copies ofPAN card, Voter’s ID, Passport, Ration card, Driver’s license, Photo credit card,Employee ID card, Bank attestation, latest IT returns and, or latestElectricity/Landline phone bill are sufficient. While they only ask for photocopiesof the documents, they will need the originals for verification.
  24. 24. 7.3 The benefits of Demat Account 1. A safe and convenient way to hold securities. 2. Immediate transfer of securities. 3. No stamp duty on transfer of securities. 4. Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. 5. Reduction in paperwork involved in transfer of securities; 6. Reduction in transaction cost; 7. No odd lot problem, even one share can be sold; 8. Nomination facility; 9. Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately; 10. Transmission of securities is done by DP eliminating correspondence with companies Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc. 11. Holding investments in equity and debt instruments in a single account.
  25. 25. METHODOLOGY ADOPTED In order to achieve the above objectives the following method of the datacollecton has been adopted.Data Collection : The required data for above study is collected through sources. 1. Primary Data 2. Socondary Data1. Primary Data : Primary data refers to information that is generated to meet the specificrequirements of the investigation at hand. This data is collected by me and myfriends observation. The primary data collection is also conducted for more information neededfor research purpose.2. Secondary Data :- Secondary data is information that is collected for purpose other to solve thespecific problem under investigation. This data may be available in the pastrecords, reports or in any previous written documents, which documents, whichmay include report of the surveys, pamphlets & newspapers. Secondary data is collected from the Journals, Magazines & Various reportsavailable with the Environmental Studies. The data whatever is required iscollected through Books.
  26. 26. BIBILIOGRAPHY1. From the internet Websites a) b) c)