AN Introduction to Stock Market Rohit Duggal Lect. In Finance LHSB
Sensex: What is that?It is the benchmark index for the Indian stock market. It is the mostfrequently used indictor while reporting on the state of the marketIts job: To capture the price movement. So a stock index will reflect theprice movements of shares while a bond index captures the manner inwhich bond prices go up or down.If the Sensex rises, it indicates the market is doing well. Since stocks aresupposed to reflect what companies expect to earn in the future, a risingindex indicates investors expect better earnings from companies.Relation with State of Economy:It is, therefore, also a measure of the state of the Indian economy. IfIndian companies are expected to do well, obviously the economyshould do well too.
Sensex: What is it made of?No. of Scrips: Sensex (BSE)-30 Scrips and NSE-50 ScripsHow these scrips are selected: 1. Most actively traded stocks in the market 2.Have market capitalization of more than 50%, 3. Represents 13 SectorsNSE:1. Most actively traded stocks in the market 2. Have market capitalization ofmore than 60%, Represents 24 SectorsWho selects these stocks:Index Committee consisting of all sorts of individuals including academicians,mutual fund managers, finance journalists, independent governing boardmembers and other participants in the financial marketsBasis for Selection: 1. Listed History, 2. Trading Frequency, 3. Final Rank,4.Track Record, 5. Market Capitalization Weight (3 month average weight 0.5% ofindex)The stock should have been traded on each and every trading day for the past one year.~ It should be among the top 100 companies listed by average number of trades (buying or selling ofshares) and the average value of the trades (in actual rupee terms) per day over the past one year.~ The stock must have been listed on the BSE for at least one year.
Sensex: Some FAQs?Don’t you think 30 and 50 are too small a no: But it isn’t the case as marketrepresentation is hugeIf these indices tell us about the market, why do people talk aboutsectoral indices: Actually price of a stock changes for two possible reasons: 1.News about company and 2. News about the CountryThe job of an index is mainly to capture the news about the country. This willreflect the movement of the stock market as a wholeWhat about stock specific news then:This is where the sector-specific indices come into the picture. They reflect theperformance of the stocks in a particular sector onlyFor example, the BSEs IT Index captures the price movements of informationtechnology stocks while its Bankex represents the change in the prices of bankstocks
Why the Sensex rises or FallsAs you know, the Sensex comprises of 30 stocks. When the prices of thesestocks increase, the Sensex goes up. When the prices decrease, the SensexfallsHow?Market cap method: Full market capitalization methodology:Each of the 30 stocks in the Sensex has a weight attached to it. This weightdepends on the market capitalization of the stockMarket capitalization: Market capitalization refers to the number of shares of acompany multiplied by its market value
Free-float weightage:The Sensex shifted to the free-float weightage method on September 1, 2003. Here, a companys entire lot of shares are not taken into account (which means we are not looking at the entire market capitalization). Only the shares readily available for trading are considered. In every company, a certain amount of shares are not available for trading on the stock exchange. These shares could be held by the government or the promoters of the company. Under the free-float weightage method, they are not taken into account These 30 stocks account for more than half of total capitalization of market and represent 13 sectors and are the most actively traded stocks
Whats in a share? Money! Or Tension! Or Growth! Stocks are not only for the brilliant: Through mutual funds or portfolio managers What is a share: Means Ownership (A-L=C) Do I become a partial owner: Yes What do you mean by rise in value and how it rises: Face Value v/s Market value How do I buy the shares: Broker, Online account, IPO
How the stock exchange protects your money: Market led ByEmotion : So Circuit Breakers are appliedWhat happens when the price of potatoes rises?People buy fewer potatoes. In other words, demand falls. To counter this, sellersof potatoes will lower the price to entice more people to buy them.When it comes to stocks, though, the same pattern does not applyWhen the price of a stock rises, nobody runs away or looks in the otherdirection.In fact, the reverse usually happens. More and more people pile on to the stock.As demand for the stock rises, so does its price.What happens if the price of the stock starts falling?Well, people start selling it. Sometimes, panic grips the investors and almosteverybody decides to sell that particular stock.
The index-based market-wide circuit breaker applies at three stages When the index moves up or down by 10 percent When the index moves up or down by 15 percent When the index moves up or down by 20 percentShould a 10 percent Trading gets Should a 15 percent Trading getsrise/ fall in the Nifty/ suspended for rise/ fall in the Nifty/ suspended forSensex occurBefore 1 pm 1 hour Sensex1 pm Before occur 2 hoursBetween 1 pm to 30 minutes Between 1 pm to 2 1 hour2.30 pm pm2.30 pm onwards Trading continues 2 pm onwards Trading is stopped In case of a 20 percent movement of the index (at whatever time), tradingis halted for the rest of
When applied to individual stocks, circuit filters are known as price bands orprice filters. There are no circuits on the 30 stocks included in the Sensex or the 50 included in the Nifty. These are also known as non-index stocks. The NSE has price bands of two percent, five percent and 10 percent for specified stocks. The remaining stocks have price bands of 20 percent. The BSE has a price band of 20 percent for all non-index stocks, but it often reduces it 10 percent, five percent or two percent depending on the movement in the price of the stock. Special attention is paid to illiquid stocks (stocks not traded too much), because the low volumes mean the stock can be easily manipulated.
If you have been watching the news closely, you would have realized howthese circuits have come into play.In fact, out of the total 2,425 stocks traded on (December 28), 441 hit theupper circuit.Of these, 98 closed at 20 percent higher150 others gained between 10 percent and 20 percent against theirprevious days closing price.
Should I buy shares ?Quote by an Article: Some are laughing all the way to the bank, othersare falling over each other as they scramble to buy more mutual fundunitsA newspaper article said that in November mutual fund investors in Mumbaiwithdrew huge amounts from their equity mutual funds. Almost Rs 4,000crore went out from the fund houses.Those investors were smart. They sold their mutual fund units back to thefund houses, booked profits and deposited the moolah in the bank.But the mutual fund companies still had reason to smile. Even as they bidgoodbye to a few investors, they were busy saying hello to many more.The article went on to explain that, in cities other than Mumbai, the inflow(fresh investments into mutual funds) was Rs 2,228 crore
Who are the wise Men ?The Ones entering the market or Exiting it?Quite a few are echoing the sentiment that it is not a good idea to bookprofits (to sell your mutual fund units/ shares).They believe the markets will stay strong for a while and the Sensex will riseeven higher.Others are saying the situation is shaky and its a smart idea to exit now.That brings us to you. What must you do with your shares
My options ?1. Get Rid of Junk Now:In hindsight, a lot of our decisions appear rather unappropriate or downrightstupid. This applies to investments tooIn May 1995, the price of my shares was around Rs 92. The price hasconsistently fallen over the years and in May, this year, it touched Rs 15.Well, the good news is that it has crept up to Rs 25. So, even if you aremaking a loss, it is a good time to sell now.But, just because the price has risen, dont change your mind about sellingyour shares if you have already decided you dont want them2. Sell and make a profit: This would be the safest move, The temptationto stay invested in a bull run is high. Many find this temptation too strong toresist. There is always the possibility that the Sensex may climb higher andone would rake in better returns (make more money).3. Sell some, hold on to some:
My options ?3. Sell some, hold on to some: If you own some stocks that promise to risein value in the future, hold on to them. You then have the option of sellingthem if the Sensex rises even more.If you really want them to be part of your investments for a long time, thenbe prepared to ignore the highs and lows of the market over the next fewyears.Now that youve selected your chosen few, sell the rest and make a profit.What you can also do is sell portions of your portfolio at various stages.Say you have shares of 10 companies. Sell the shares of three companiesnow and hold on to seven.If the Sensex continue to rise, sell another three and hold onto four.This way, you can take part in the rally without selling at one go. It alsomeans you dont miss out completely if the Sensex continues to climb.
Should I buy the shares ?Why Do one Buys Shares?3.you dont want to feel left out2. Want to brag to your in-laws that you play the market.3. My Friend thinks so that I am made for itYou are not thinking logically.If you think you can make a fast buck in no time, you are kidding yourself.For starters, you need to invest huge amounts for even a small price rise to giveyou a good return.Otherwise you need the price to move up drastically. This is something you haveno control over.Thirdly, you must be willing to take the risk of making a loss (something everyonechooses to ignore).
Will you be willing to hold on to your shares if the market comes tumblingdown?Right now, as the bulls and bears fight it out, there is a lot of dust being kicked up.And the bulls clearly winning. When the dust settles, it would be safe to pick upsome shares.In technical terms: The correction (a short-term drop in stock market prices) isbound to come but the market will bounce back.What you can do is wait for the correction to buy shares.Alternatively, you could pick them up now if you are prepared to hold onto themand sell them maybe a year later, when the Sensex rises to a level higher thanwhat it is today.Learn From the History: