stock market

1. AN Introduction to Stock Market
Rohit Duggal
Lect. In Finance
LHSB

2. Sensex: What is that?
It is the benchmark index for the Indian stock market. It is the most
frequently used indictor while reporting on the state of the market
Its job: To capture the price movement. So a stock index will reflect the
price movements of shares while a bond index captures the manner in
which bond prices go up or down.
If the Sensex rises, it indicates the market is doing well. Since stocks are
supposed to reflect what companies expect to earn in the future, a rising
index 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. If
Indian companies are expected to do well, obviously the economy
should do well too.

3. Sensex: What is it made of?
No. of Scrips: Sensex (BSE)-30 Scrips and NSE-50 Scrips
How these scrips are selected: 1. Most actively traded stocks in the market 2.
Have market capitalization of more than 50%, 3. Represents 13 Sectors
NSE:1. Most actively traded stocks in the market 2. Have market capitalization of
more than 60%, Represents 24 Sectors
Who selects these stocks:
Index Committee consisting of all sorts of individuals including academicians,
mutual fund managers, finance journalists, independent governing board
members and other participants in the financial markets
Basis for Selection: 1. Listed History, 2. Trading Frequency, 3. Final Rank,
4.Track Record, 5. Market Capitalization Weight (3 month average weight 0.5% of
index)
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 of
shares) 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.

4. Sensex: Some FAQs?
Don’t you think 30 and 50 are too small a no: But it isn’t the case as market
representation is huge
If these indices tell us about the market, why do people talk about
sectoral indices: Actually price of a stock changes for two possible reasons: 1.
News about company and 2. News about the Country
The job of an index is mainly to capture the news about the country. This will
reflect the movement of the stock market as a whole
What about stock specific news then:
This is where the sector-specific indices come into the picture. They reflect the
performance of the stocks in a particular sector only
For example, the BSE's IT Index captures the price movements of information
technology stocks while its Bankex represents the change in the prices of bank
stocks

5. Why the Sensex rises or Falls
As you know, the Sensex comprises of 30 stocks. When the prices of these
stocks increase, the Sensex goes up. When the prices decrease, the Sensex
falls
How?
Market cap method: Full market capitalization methodology:
Each of the 30 stocks in the Sensex has a weight attached to it. This weight
depends on the market capitalization of the stock
Market capitalization: Market capitalization refers to the number of shares of a
company multiplied by its market value

6. Free-float weightage:
The Sensex shifted to the free-float weightage method on September 1, 2003.
Here, a company's 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

7. What's 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

8. How the stock exchange protects your money: Market led By
Emotion : So Circuit Breakers are applied
What happens when the price of potatoes rises?
People buy fewer potatoes. In other words, demand falls. To counter this, sellers
of potatoes will lower the price to entice more people to buy them.
When it comes to stocks, though, the same pattern does not apply
When the price of a stock rises, nobody runs away or looks in the other
direction.
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 almost
everybody decides to sell that particular stock.

9. 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 percent
Should a 10 percent Trading gets Should a 15 percent Trading gets
rise/ fall in the Nifty/ suspended for rise/ fall in the Nifty/ suspended for
Sensex occur
Before 1 pm 1 hour Sensex1 pm
Before occur 2 hours
Between 1 pm to 30 minutes Between 1 pm to 2 1 hour
2.30 pm pm
2.30 pm onwards Trading continues
2 pm onwards Trading is
stopped
In case of a 20 percent movement of the index (at whatever time), trading
is halted for the rest of

10. When applied to individual stocks, circuit filters are known as price bands or
price 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.

11. If you have been watching the news closely, you would have realized how
these circuits have come into play.
In fact, out of the total 2,425 stocks traded on (December 28), 441 hit the
upper circuit.
Of these, 98 closed at 20 percent higher
150 others gained between 10 percent and 20 percent against their
previous day's closing price.

12. Should I buy shares ?
Quote by an Article: Some are laughing all the way to the bank, others
are falling over each other as they scramble to buy more mutual fund
units
A newspaper article said that in November mutual fund investors in Mumbai
withdrew huge amounts from their equity mutual funds. Almost Rs 4,000
crore went out from the fund houses.
Those investors were smart. They sold their mutual fund units back to the
fund houses, booked profits and deposited the moolah in the bank.
But the mutual fund companies still had reason to smile. Even as they bid
goodbye 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

13. 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 book
profits (to sell your mutual fund units/ shares).
They believe the markets will stay strong for a while and the Sensex will rise
even higher.
Others are saying the situation is shaky and it's a smart idea to exit now.
That brings us to you. What must you do with your shares

14. My options ?
1. Get Rid of Junk Now:
In hindsight, a lot of our decisions appear rather unappropriate or downright
stupid. This applies to investments too
In May 1995, the price of my shares was around Rs 92. The price has
consistently 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 are
making a loss, it is a good time to sell now.
But, just because the price has risen, don't change your mind about selling
your shares if you have already decided you don't want them
2. Sell and make a profit: This would be the safest move, The temptation
to stay invested in a bull run is high. Many find this temptation too strong to
resist. There is always the possibility that the Sensex may climb higher and
one would rake in better returns (make more money).
3. Sell some, hold on to some:

15. My options ?
3. Sell some, hold on to some: If you own some stocks that promise to rise
in value in the future, hold on to them. You then have the option of selling
them if the Sensex rises even more.
If you really want them to be part of your investments for a long time, then
be prepared to ignore the highs and lows of the market over the next few
years.
Now that you've 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 companies
now 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 also
means you don't miss out completely if the Sensex continues to climb.

16. Should I buy the shares ?
Why Do one Buys Shares?
3.you don't want to feel left out
2. Want to brag to your in-laws that you 'play the market'.
3. My Friend thinks so that I am made for it
You 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 give
you a good return.
Otherwise you need the price to move up drastically. This is something you have
no control over.
Thirdly, you must be willing to take the risk of making a loss (something everyone
chooses to ignore).

17. Will you be willing to hold on to your shares if the market comes tumbling
down?
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 up
some shares.
In technical terms: The correction (a short-term drop in stock market prices) is
bound 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 them
and sell them maybe a year later, when the Sensex rises to a level higher than
what it is today.
Learn From the History: