Market Basics

Almost everybody of us, feel very excited when the stock market indices go up and make the front page news. Needless to say, almost everybody of us, feel very disheartened when the stock market indices dip down. It can be said, that without stock markets and its news, our day does not start and end.

What’s so exciting or what’s so disheartening about these Stock Markets?

Well, it would not be easy to explain the phenomenon, but let’s try to first get our Market Basics right.

This series of article aims to introduce and explain some basic fundamentals about Stock Markets.

Primarily, stock markets have two sub divisions viz. Primary Market and Secondary Market.

What is a Primary Market?

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO).

Methods of issuing securities in the primary market are:

• Initial public offering;
• Rights issue (for existing companies);
• Preferential issue.

What is a Secondary Market?

The secondary market is the financial market where previously issued securities (in primary market) and financial instruments such as stock, bonds, options, and futures are bought and sold.

Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly;

Primary and Secondary Markets function through Stock Exchanges. In India, there are many Stock Exchanges (Regional as well as National), through which dealings in primary and secondary markets are carried out.

As said earlier, the functioning/performance of these Stock Markets is depicted by Stock Market Indices/Indexes. In India, the Indexes of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two major Indices, which are looked at as a barometer of the performance of the Stock Markets.

Bombay Stock Exchange is the oldest and National Stock Exchange is the largest stock exchange in India.

We normally hear that Bombay Stock Exchange’s Index is called as SENSEX and National Stock Exchange’s Index is called NIFTY. What are theses Indexes?

An index is basically a numerical indicator. It gives us a general idea about whether most of the stocks have gone up or most of the stocks have gone down.

The Sensex & Nifty are mere “Index (number)” calculated by BSE & NSE.

The Sensex is an indicator of all the major companies of the BSE.

The Nifty is an indicator of all the major companies of the NSE.

If the Sensex/Nifty goes up, it means that the prices of the stocks of most of the major companies on the BSE/NSE have gone up. If the Sensex/Nifty goes down, this tells you that the stock price of most of the major stocks on the BSE/NSE have gone down.

What is the composition of the SENSEX and NIFTY?

BSE SENSEX comprises of 30 stocks / companies and NSE NIFTY comprises of 50 stocks / companies.

BSE (SENSEX) Constituents: 30 Companies/Stocks

The only difference between the two indices (the Sensex and Nifty) is that the Nifty

comprises of 50 companies and hence is more broad-based than the Sensex.

NSE (NIFTY) Constituents: 50 Companies/Stocks

Source: BSE India

On what basis are these companies/stocks chosen to be a part of the Indexes?

The main criterions for selecting the 30 (SENSEX) and 50 (NIFTY) stocks are as follows:

1. Listed History: The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ de-merger/ amalgamation, minimum listing history would not be required.
2. Trading Frequency: The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.
3. Final Rank: The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.
4. Market Capitalization Weightage: The weight of each scrip in the SENSEX on three-month average free-float market capitalization should be at least 0.5% of the Index.
5. Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.
6. Track Record: In the opinion of the BSE Index Committee, the company should have an acceptable track record.

Source: BSE India

We very often hear that terminology ‘market Capitalization’. What does this mean?

Market cap or market capitalization is simply the worth of a company in terms of its shares! To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”!

To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”! Just to give you an idea, ONGC, has a market cap of “Rs.170,705.21 Cr”.

Let us have a glimse of other Stock Market Exchanges around the world:

• New York Stock Exchange (NYSE) is an equity (stock) exchange located at 11 Wall Street in lower Manhattan, New York, USA). It is the largest stock exchange in the world by dollar value of its listed companies’ securities.

• The NASDAQ (acronym of National Association of Securities Dealers Automated Quotations) is an American stock exchange. It is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,200 companies, it has more trading volume per hour than any other stock exchange in the world.

• The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, INDP, or informally the Dow Jones or The Dow) is one of several stock market indices, created by nineteenth-century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is an index that shows how certain stocks have traded. The average is computed from the stock prices of 30 of the largest and most widely held public companies in the United States.

“The Q1 was a Bull market”, “The Bears are back”…

These are some of the statements we get to hear or read somewhere or the other.

What is this Bull & Bear Market?

A “bull market” tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements.

India’s BSE Index SENSEX was in a bull run for almost five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly.

A “bear market” is a steady drop in the stock market over a period of time. It is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history followed the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s.

Day trading – Most Risky & Most Profitable:

Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close of the trading day. Traders that participate in day trading are called active traders or day traders. Traders do not take delivery of the securities traded.

Intraday trading refers to opening and closing a position in a security in the same trading day. This can be buying and selling to capitalize on a potential rise in a security’s value or shorting and covering the short to capitalize on a potential drop in value.

Because of the nature of financial leverage and the rapid returns that are possible, day trading can be either extremely profitable or extremely unprofitable, and high-risk profile traders can generate either huge percentage returns or huge percentage losses. Some day traders manage to earn millions per year solely by day trading.

This is how money can be made… But don’t forget a flat Short Term Capital Gains Tax @ 15%

– Anand Wadadekar