Here is a highly readable introductory article on stock markets by my friend Venkat . Apart from being a software professional he is an avid market watcher cum investor. He shares his wisdom for the benefit of the uninitiated in this article which he contributed for his Company magazine.. .
Venkat can be reached at venkata.narasimhan@db.com.
Stock Markets - An Overview
It is only when you sell, It counts :-- Warren Buffet
True it is . Particularly in the case of any security investment that you may have at this moment. So what am I talking about. Stock markets ofcourse.With the markets in a state of mini bull rally, its time that we get out of shares that we have held all these time hoping for a rally.
So what is a stock market. ? It is a place for trading the securities,bonds and debuntures of a paricular company which has to get itself listed through a intermediary mechanism called Stock Exchange.Thus the primary function of a stock exchange is to facilitate the trading in securities and to regulate to some extent the price fluctuations and the manipulations of vested interests.
Security trading in India started as early as in 1875 when a group of enthisiastic men set up a trading center ( then called "The native share and stock broker's association ) of what is today known as the Bombay stock exchange.From there till today the concepts and method of trading has changed several times , according to the demands and technology of the modern times.Starting with a group of men sitting on a round table and trading of stocks to public outcry system to the present computerised and satellite based trading the markets has come a long way.
In India, two major stock exchanges are there, namely the Bombay Stock exchange( BSE ) and the National Stock Exchange ( NSE ).The oldest of the two the Bombay Stock exchange is existent for more than a century ( it is also the oldest stock exchange to be established in Asia ) and the recent entrant is NSE.Other than this we have Lyons range ( Calcutta Stock exchange ) ,Madras Stock Exchange ( MSE ) and Delhi stock exchange ( DSE ). Other than these there are a host of small regional stock exchanges and OTCEI ( Over the Counter Exchange of India ).
In market parlance the trading of the securities is based on a certain index which each exchange has on its own. In India we have BSE- Sensex and NSE-Nifty ( there are a host of other indexes , some sector specific as well ), which can be taken for as an mark of the price changes that take place in the exchanges for the particular day.
The Bombay Stock Exchange calculates a index called the 'SENSEX' which is a indicator of the current price movement of stocks. Also known as BSE-SENSEX 30 this comprises of stock prizes of thirty companies in the specified group with the base year as 1978-79.The companies in this bracket are those from the the top thirty sectors which represent the economy as a whole. We can see companies from cement, steel, paper, Software, Engineering, telecom,textile,petrochemical, bank and construction industries amongst others.
The NSE has Fifty - Nifty - 50 , a index which takes 50 companies in the core sectors of the economy and calculates its index.It also bases its index calculation on the market capitalisation, volume of turnover and the strength of the company fundamentals.
Today's modern world has seen trading in the traditional public outcry system ( where jobbers goes to the trading ring and shout for the stock prices with a cryptic sign which their breed only understand ) being replaced by a more modern satellite based trading.In this case the trading system in the NSE is a trend setter.
Modelled after the best stock exchanges in the world the NSE is different from most Stock Exchanges in India where membership on an exchange also
meant ownership of the exchange. The ownership and management of the Exchange is completely separated from the right to a trading members, to trade on the NSE. The Exchange is managed by a Board of Directors. Decisions relating to market operations are delegated by the Board to an Executive Committee which includes representatives from the Trading Members, the public and the management. Besides, the Exchange operates various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc. These committees are manned by industry professionals, Trading Members and Exchange staff. The day to day management of the Exchange is delegated to the Managing Director who is supported by a team of
professional staff.
To trade in NSE, you have to be an associate member. But for ordinary investor like us we can trade in the NSE through an authorised NSE member.Alternatively we can trade through some of the authorised associate sub-brokers of the members. Typically a member or an associate of the member with whom you start trading levies a fee of 1- 2 % of the script value as a commission for the trade that he does on your behalf.You are normally expected to place the trade order in the marketable lot ( a minimum lot shares that can be brought or sold for a particular equity).The trading system is NSE is based on weekly settlement basis. A typical settlement starts on every Wednesday and ends the following tuesday ( Bombay has Monday to Friday settlement ).
We can place order for a buy or a sell to this particular agent ( whom we have identified) and immediately the order is placed on the trading system.Your order is given an unique Order number against which the trading will be done.The normal payin time for a buy is the last trading day for a particular settlement ( although some members insist on the payment to be done on Saturday or before that ) and the stocks will reach you after 21 days. Similarly for a stock sell the stock deposit is typically on the last day of the current settlement and the pay out day is after 14 days.The pay in , payout and the stock transfer goes through a complicated system of clearance through a clearing house .
NSE's NEAT ( National stock exchange Electronic Automated Trading) system always matches the best order i.e.,the best buy and the best sell. In this way the investor gets more value for the scrip which he wants to buy or sell. For example if you want to buy 100 shares of colgate at 178.10 and you will get the buy result only when some seller comes to sell to rate you have specified or he decides to sell
" MARKET". In this way the buyer gets the scrip at the rate he wants to buy and the seller gets a best price. There are some instances when a buyer would typically key in a buy order for the same scrip at 179.10 and the seller selling at "MARKET" will see that his scrip is matched with the best buy and the order is executed.
Another important Concept to be unerstood is if two different members try to trade the same scrip at the same rate then the time difference between the order acceptance ( each order keyed in has a timestamp associated with it) will be given prefernce. Suppose trader A has keyed in to buy ACC for 1210.50 at 10.00 A.M in the morning and trader B also has keyed in the same price for the same scrip ( but at 10.01 A. M) then the system gives prefernce for trader A over trader B. What if another trader comes into picture and key's in a buy at 1212.00 at 10.15 A.M . Naturally this trader's ( trader C) price will get preference over trader A & trader B since the system goes for best trade matching at all the time.
In the market terms a person who takes a aggressive and postive outlook of the market is called a Bull and a person who takes a negative view of the market and is often pessimistic is called a bear. While a bull will always strive to take the stock price higher, a bear will do the reverse and the market will generally reflect the trend as a result of this bout between the bulls and the bears.
Apart from the bull and bear market we also have this steady market where there is a anticipation from the either side to accumulate or to disinvest in a particular market.This is called sideways movement of the market which will typically move up some 25 points up one day and 20 points down the next day.
Manipulation of stocks is a major and dangerous issue. For no reason we can see prices of some of the stocks hit sky high and some even after a good performance will be battered by the market. It is here the overall view of the market pertaining to the particular stock and the power of bulls and bears come into play.There are a lot of instances where a group of investors ( high net worth to particular mutual funds to associate members) team up to peg up the price of a particular scrip or to mow down the price.It is due to their game the market facilitator ( read the exchange ) puts trading ban and margin on the scrips. Inspite of checks and counter checks there are still some who rig the prices of the scrips.
Future market :
Demat trading :
The future of the stock market is trading in dematerialised segment. Demat trading is a mechansm by which we can buy and sell stock and there is no physical possession of stock. Instead a account statement is provided by your demat trader.This is a more safer mode of trading as this elimanates the cumbersome process of physical share transfer and the risks associated with it. Already both the major exchanges in india have started trading in the demat segment.Steps are on the way for complete trading in demat segment atleast for the specified ( group - A ) stocks .
Venture Capital :
Also venture capital funds which invest in growing industries and take up full equity at the earlier stages and divest at the appropiate time.More sector specific mutual funds are expected to hit the market which will give an oppurtunity for the investor the pick up scrips in the bluechip companies , which he cannot buy at the prevailing higher rates.
Initial Public Offerings :
Initial Public Offerings in India have been typically fixed price offers. A major problem with such fixed price offerings has been the information asymmetries between the issuers and the investors. To revive the primary market, NSE is proposing to provide a facility for conducting primary issues for Initial Public Offers (IPOs), subsequent issues by companies, private placements as well as book building through screen based automated trading system. The advantages of this system will be on-line issue of securities thereby reducing the cost of issue of securities and an efficient retail distribution network among others.
Retail Debt Market
Fixed income securities such as debentures are an ideal investment avenue for risk
averse investors. It provides a fixed and regular income with safety of capital. The
deregulation of interest rates has led to borrowings by the Government, Corporates
and Institutions at market determined rates. This has enabled retail investors to invest in fixed income securities particularly Corporate and Institutional bonds in favourable terms vis a vis other investment opportunities.
With a view to providing liquidity to these instruments, the Exchanges plans to start a retail debt segment to cater to the growing demands of the investors in the debt segment.
Derivatives
As soon as regulatory approvals are obtained, Both BSE & NSE plans to launch a futures and options segment. NSE initially plans to launch trading of futures and options on Nifty, an index that is uniquely suited to the demands of index-based products. The Exchange will subsequently initiate trading in options on individual stocks and select securities. The Exchange also has plans to launch fixed income derivatives. The Clearing Corporation will guarantee settlement through a separate settlement fund. There will be an equally focussed margin and risk management system in place to monitor and manage the clearing and settlement of the derivatives segment.
For those who are interested in market the following websites are must in their bookmarks.
www.economictimes.com
www.business-standard.com
www.nseindia.com
www.bseindia.com
www.capitalmarket.com
Pick from the market : -
While the whole market is in fire after the budget with allround buying, there are a few scrips worth watching in the medium to long term. While every body is after software,FMCG and pharma stocks i would like to recommend the following stocks for any furthur future investment.
The following are the scrips which I feel will give a decent return in the medium to long term.
1 . Orchid Chemicals
While it is foolish to invest in this over heated market, one can carefully watch the price movements and take into consideration the overall political situation, the emerging global scenario, the fundamentals that shape up the company , the technicals of both the market and the company and the industry scenario before investing in these companies. I Hope that investing in these companies will not prove wrong if one does a careful consideration and times the market as it is said
It is not only important to sell, but it is Important to time the buy on a particular stock.
Happy Investing !!
V.Venkatanarasimhan