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Saturday, July 15, 2006

Indian Stock market: The basics

I am writing this post because two of my friends wanted me to. I will be just dealing with the Secondary market in general and the BSE or SENSEX in particular.
The Financial market in India is broadly divided into
1) Money market- for short term money
2) Capital market- for long term money
Money market consists of the Treasury bills, the call money market etc. I won’t be going more into it. Coming to the capital market, it’s further classified into
1) Primary market
2) Secondary market
The primary market deals with the Initial public offerings (IPO) or sales of shares by companies to the public for the first time. The recent IPO’s that took place in BSE can be viewed here. Once the IPO’s are completed all further transactions of the sold shares take place in the secondary market, more commonly known as stock markets or as bourses (jargon in finance). The major stock exchanges in India are the BSE and the NSE.

The National Stock Exchange or NSE was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. The NSE’s index is known as S&P CNX Nifty which is a 50 stock index which covers almost 25 sectors of the economy.
Bombay Stock Exchange Limited is the oldest stock exchange in Asia. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The BSE’s index is the SENSEX which is a 30 stock index. The SENSEX is an acronym for Sensitive index of the BSE.

Current scenario
The price of shares/scrips is fixed in the market by the invisible forces of demand and supply. When the purchase price is more than the selling price, the prices of share rise i.e. if A wants to sell a TCS share at Rs 40 but B is willing to buy the share at Rs 45, then automatically the transaction is carried out by the computer, and the price of the share increases.
The regulator of the Indian capital market is the Securities and exchange board of India (SEBI). It makes sure that the small investors are not cheated and ensures transparency of the transactions.
Recently, our markets witnessed a drastic fall, owing to the pull out of the foreign institutional investors (FII). The recent Mumbai blasts have also affected it.

My views
The investors in these markets form consortiums among themselves such that, a group of these investors are able to make changes in the overall market indices. FII’s are one such group. When they think, the time has come to book profits; they take up a selling position. This causes the market to fall and when the market falls, these groups again buy the shares; thus making profits again out of their buying back the shares. This phenomenon is possible only if the group’s transactions can exercise a considerable influence in the concerned market.
Market sentiments play an increasingly important role in the fixing of share prices. News such as decrease in interest rates, good rainfall, etc promotes investment thereby raising the price of the indices in the process. But bad news such as a bomb blast or an earthquake quake the investors see, thereby lowering the indices. The reasons for the markets showing a buoyant face during good news in understood clearly. A reduction in interest rates, promotes cheaper borrowing, thus facilitating more investment. While a good rainfall increases agricultural production, which has an impact on the various industries which make use of agricultural inputs. But, during a bomb blast, what I believe happens is that, investors (very much attached to their money) tend to sell. Game theory helps in explaining how the investors react. The typical example of game theory is that of the prisoner’s dilemma. When an investor hears a bad news, he thinks that other investors will pull out their investment owing to increased need of contingency funds. When all the investors think alike, a large scale selling occurs. I classify it as a typical group phenomenon, arising out of an individualistic tendency.

Some related information
There are other financial instruments in the market known as the Mutual Fund (MF). They are specialised institutional investors who mobilise funds from the public and invest in the capital markets. The people consider investing in such MF’s less risk than shares. It is a booming market but has not utilised its full potential. MF’s are a good option for those investors who do not have time to make a detailed analysis about the economics of the capital market.
Recently investment gurus have been stressing the importance of commodity markets. They are gaining importance in the Indian market.
Some economists and finance analysts believe that when an industry is overvalued, a correction takes place. Say, if the asset prices are increasing but the intrinsic value has remained almost the same, then a bubble is said to occur, which is sure to burst in the near future. Likewise, some believe that the Indian markets were overvalued and the recent crash which occurred was just a correction.


Indicator?
In the previous months, we might all have come across the headline that Indian economy is booming with the stock market touching its record peak of 12,000. The market indices are just indicators of the investor’s confidence levels and the business enthusiasm levels. We should not view the markets in isolation and say that the economy is doing well.

Jargons used
Bear- a selling spree where the prices are falling
Bull-a buying trend with rising prices
short & long position-you can view it here
Bourses-stock market

Hope this post has been of use to my friends and others. If you have liked it, please do let me know in my comments. If you have any questions or clarifications, do let me know.

53 comments:

Trader said...

Hi

It was nice to read your views on Indian markets.

Hope this could be of some help to you/your friends.

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Specially it will benefit IT sector so we can expect Indian stock market becoming more stronger.

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Sharetipsinfo said...

Hi,

Stock market India is volatile and all those who speculate in market are loosing everyday. Please remember stock market is not for speculation purpose. If one feel investing in stock market is gamble then its better to think again.

One should always note that if they want to invest money they should do proper research be it fundamental research or technical research. Just think how come you can invest
your money without any convincing reason for the same?

Indian stock market is one of the most happening and emerging market. Major Indian stock exchanges are BSE and NSE and both are of world class standards.

So grab good stocks and invest that’s the bottom line.

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santoshi prasad said...

A near one-fifth value erosion in A2Z Maintenance and Engineering Services, backed by billionaire Rakesh Jhunjhunwala , in its debut week is denting confidence of investors who follow him, which may make his other portfolio companies price their initial public offers reasonably.

The sliding value of the stock forced the Midas touch investor to buy more than 16-lakh shares from the secondary market in an attempt to boost his followers’ confidence, which also yielded him profits since he sold shares at a higher price in the IPO .

“Many investors behave like a herd and follow him,” says Aspi Beastie, a Mumbai-based investor, who heads the cost-accountancy firm Aspi Bhesania & Co. “Next time his IPO comes, people who used to trust him blindly, will be a bit cautious. In case of Reliance Power too, they had burnt their fingers and they will be cautious when any other IPO comes from the same group.” read more news please visit-: http://www.puntercalls.com

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