Introduction to stock market
Stock market is a place where people buy/sell shares of publicly listed companies. It offers a platform to facilitate seamless exchange of shares. In simple terms, if A wants to sell shares of Reliance Industries, the stock market will help him to meet the seller who is willing to buy Reliance Industries. However, it is important to note that a person can trade in the stock market only through a registered intermediary known as a stock broker. The buying and selling of shares take place through electronic medium.
Major Stock Exchanges in India
There are two main stock exchanges in India where majority of the trades take place - Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). Apart from these two exchanges, there are some other regional stock exchanges.
National Stock Exchange (NSE)
NSE is the leading stock exchange in India where one can buy/sell shares of publicly listed companies. It was established in the year 1992 and is located in Mumbai. NSE has a flagship index named as NIFTY50. The index comprises of the top 50 companies based on its trading volume and market capitalisation. This index is widely used by investors in India as well as globally as the barometer of the Indian capital markets.
Bombay Stock Exchange (BSE)
BSE is Asia’s first as well as the oldest stock exchange in India. It was established in 1875 and is located in Mumbai. It has a total of ~5,295 companies listed out of which ~3,972 are available for trading as on August 21, 2017. BSE Sensex is the flagship index of BSE. It measures the performance of the 30 largest, most liquid and financially stable companies across key sectors.
Regulators of the Stock Market
In India, the stock market regulator is called The Securities and Exchange Board of India, often referred to as SEBI. The objective of SEBI is to promote the development of stock exchanges, protect the interest of retail investors, and regulate market participants and financial intermediaries’ activities. In general, SEBI ensures:
1. The stock exchanges (BSE and NSE) conduct its business fairly
2. Stockbrokers and sub-brokers conduct their business fairly
3. Participants don’t get involved in unfair practices
4. Corporates don’t use the markets to unduly benefit themselves (Example – Satyam Computers)
5. Small retail investors interests are protected
6. Large investors with huge cash pile should not manipulate the markets
7. Overall development of markets
SEBI has prescribed a set of rules and regulations to each kind of entity. The entity should operate within the legal framework as prescribed by SEBI. The specific rules applicable to a specific entity are made available by SEBI on their website. They are published under the ‘Legal Framework’ section of their site.
Participants of a Stock Market
The stock market attracts individuals and corporations from diverse backgrounds. Anyone who transacts in the stock market is called a market participant. The market participant can be classified into various categories. Some of the categories of market participants are as follows:
1. Domestic Retail Participants – Common people transacting in markets usually with an investment of less than Rs 1,00,000.
2. NRI’s and OCI – People who reside outside India but are of Indian Origin. 3. Domestic Institutions – Large corporate entities participating in the market which are based in India. An example would be the LIC of India.
4. Domestic Asset Management Companies (AMC) – Typical participants in this category would be the mutual fund companies such as SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC, etc. They can also be represented as a part of the DII
5. Foreign Institutional Investors – Non-Indian corporate entities who invest in Indian markets. These could be foreign asset management companies, hedge funds, and other investors such as Goldman Sachs, JP Morgan etc.
Since everyone enters the market to make profitable transactions, the chances of using unfair means become high. Hence the role of regulator to control all these entities becomes all the more important.
There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange and CNX Nifty representing the National Stock exchange.
S&P stands for Standard and Poor’s, a global credit rating agency. S&P has the technical expertise in constructing the index which they have licensed to the BSE. Hence the index also carries the S&P tag.
CNX Nifty consists of the largest and most frequently traded stocks within the National Stock Exchange. It is maintained by India Index Services & Products Limited (IISL), a joint venture of the National Stock Exchange and CRISIL. In fact, the term ‘CNX’ stands for CRISIL and NSE.
An ideal index gives us minute by minute reading about how the market participants perceive the future. The movements in the Index reflect the changing expectations of the market participants. When the index goes up, it is because the market participants think the future will be better. The index drops if the market participants perceive the future pessimistically.
Some of the practical uses of Index are discussed below.
Information – The index reflects the general market trend for a period of time. The index is a broad representation of the country’s state of the economy. A stock market index that up indicates people are optimistic about the future. Likewise, when the stock market index is down, people are pessimistic about the future.
Benchmarking – The index often works as a benchmark for investors, i.e., they use the index to examine if they have overperformed or underperformed the market in a specific duration of time.
Portfolio Hedging – Investors usually build a portfolio of securities. A typical portfolio contains 10 – 12 stocks which they would have bought from a long-term perspective. While the stocks are held from a long-term perspective, they could foresee a prolonged adverse movement in the market (2008), potentially eroding the capital in the portfolio. In such a situation, investors can use the index to hedge the portfolio.
Trading – Trading on the index is probably one of the most popular uses of the index. Majority of the traders in the market trade the index. They take a broader call on the economy or general state of affairs and translate that into a trade.
For the last part, we are going to look at some commonly used jargon in the stock market.
• Bull Market (Bullish) – If you believe that the stock prices are likely to go up, you are bullish on the stock price.
• Bear Market (Bearish) – If you believe that the stock prices are likely to go down, you are bearish on the stock price.
• Trend – The term ‘trend’ usually refers to the general market direction and its associated strength.
• Face value of a stock – Face value (FV) or par value of a stock indicates a share’s fixed denomination. The face value is important concerning a corporate action. Usually, when
dividends and stock split are announced, they are issued keeping the face value in perspective.
• 52 week high/low – 52 week high is the highest point at which a stock has traded during the last 52 weeks (which also marks a year) and likewise, 52 weeks low marks the lowest point at which the stock has traded during the last 52 weeks.
• Upper Circuit/Lower Circuit – The exchange sets up a price band at which the stock can be traded in the market on a given trading day. The highest price the stock can reach on the day is the upper circuit limit, and the lowest price is the lower circuit limit. The limit for a stock is set to 2%, 5%, 10% or 20% based on the exchange’s selection criteria.
• Long Position – Long position or going long is simply a reference to the direction of your trade. If someone buys or intends to buy a stock, it means they are going long on that stock. • Shorting – Shorting basically means that someone intends to sell that stock. In the stock market, you can also sell stocks which you don’t own and then you can buy them later on to square off the position.