Stock Markets: The Most sought-after Investment avenue in India
Popularity of stock markets is on the rise in India with more and more people turning to the markets to invest their savings. Major bourses, NSE and BSE have reported upsurge in daily trading turnovers, reflecting this trend. Here I am attempting to give an overview of stock markets in India. A few popularly used market terminologies are also given.
An Overview of Stock Markets in India
Stock markets have become popular avenues for investments in India. With the establishment of widespread networks of broking houses and trading terminals, now a lay investor can access markets even from the remotest corners of the country. India has two major bourses located in Mumbai, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
BSE was established in 1975, and is the first stock exchange in the entire Asia. BSE exchange was the first in India to launch Equity Derivatives, Free Float Index, USD adaptation of BSE Sensex and Exchange facilitated Internet buying and selling policy. BSE exchange was the first in India to acquire the ISO authorization for supervision, clearance & Settlement.
Its On-Line Trading System has been felicitated by the internationally renowned standard of Information Security Management System.
Online trading system of BSE is known as BOLT or BSE Online Trading System.
The index of BSE is known as SENSEX, which is comprised of 30 stocks of major companies belonging to various industrial segments. BSE 100 is another index that reflects the market mood more realistically as it is composed of 100 scrips from the "Specified" and the "Non-Specified" list of the five major stock exchanges, viz. Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The shares have been selected on the basis of market activity, due representation to various industry-groups and representation of trading activity on major stock exchanges.
NSE was incorporated in 1992. The Equities division of NSE began its operations in 1994 while in 2000 the corporation incorporated its Derivatives division.
The equities division of NSE covers around 300 Indian cities, while its derivates section covers 305 cities.
The number of securities accessible for buying and selling in NSE exchange in its equities and derivates section are about 1,400 and 3,150 respectively.
The average daily turnover of NSE equities division is approximately Rs 10,400 crores, for derivates segment is about Rs 32,800 crores.
NSE uses satellite communication technology known as VSAT on its network. The exchange administers around Rs 1 million of buying and selling on daily basis.
It is one of the biggest VSAT incorporated stock exchange across the world.
NSE trading system is known as NEAT, which stands for National Exchange for Automated Trading.
Index of NSE is popularly known as NIFTY, which stands for NSE Fifty. It is comprised of fifty stocks of major companies belonging to different industrial segments. NIFTY is also known as S&P CNX NIFTY. In addition to this there are also other indices meant for different industrial segments like Banking, IT, etc. There are also indices based on the capitalization of stocks, like the CNX Midcap, CNX Nifty Junior, S&P CNX 500, CNX Midcap 200, S&P CNX DeftyRegional Stock Exchanges
In addition to these Exchanges, there are also Regional Stock Exchanges to facilitate listing of shares locally, and to provide access to the investing public to trade in these stocks. There are 21 regional stock exchanges. They are:
• Ahmedabad Stock Exchange
• Bangalore Stock Exchange
• Bhubaneshwar Stock Exchange
• Calcutta Stock Exchange
• Cochin Stock Exchange
• Coimbatore Stock Exchange
• Delhi Stock Exchange
• Guwahati Stock Exchange
• Hyderabad Stock Exchange
• Jaipur Stock Exchange
• Ludhiana Stock Exchange
• Madhya Pradesh Stock Exchange
• Madras Stock Exchange
• Magadh Stock Exchange
• Mangalore Stock Exchange
• Meerut Stock Exchange
• OTC Exchange Of India
• Pune Stock Exchange
• Saurashtra Kutch Stock Exchange
• Uttar Pradesh Stock Exchange
• Vadodara Stock Exchange
There is also another stock exchange known as the OTCEI or Over The Counter Exchange of India, which was incorporated in 1990 to aid enterprising promoters to raise finance for new projects in a cost effective manner, and to provide a transparent and efficient trading system for investors. This was the first exchange in India to introduce market makers, which are firms that hold shares in companies and facilitate the trading of securities by buying and selling from other participants.
Terminologies used in the Stock Market
Asking Price: The lowest price at which someone is willing to sell the security.
Bull Market: A market characterized by rising prices.
Bear Market: A market characterized by falling prices.
Bull: An investor or market operator or trader, who buys into a share in the hope of future price rise.
Bear: An investor or market operator or trader, who sells a stock in anticipation of a fall in the price of that stock.
Call Option: An option which gives the holder the right, but not the obligation, to buy a fixed amount of a certain stock at a specified price within a specified time. Calls are purchased by investors who expect a price increase.
Earnings per share(EPS): Annual net profit of company divided by the total number of outstanding equity shares. Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Fundamental Analysis: A method of evaluating a security to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).
The aim of fundamental analysis is to provide insights to an investor, to help him figure out the security's current worth, so that he can take a decision as to what position he should take in that security at the current market price. (underpriced = buy, overpriced = sell or short).
Futures: Contracts to buy or sell securities at a future date.
Hedge: A strategy used to limit investment loss by making a transaction that offsets an existing position.
IPO: Initial Public Offering. Equity offer to the public by an unlisted company. After the issue and finalization of allotment, shares will be listed on the stock exchanges.
Limit Order: An order to buy or sell stock at a specified price. The order can be executed only at the specified price or better. A limit order sets the maximum price the client is willing to pay as a buyer, and the minimum price they are willing to accept as a seller.
Liquidity: This refers to how easily securities can be bought or sold in the market. A security is liquid when there are enough units outstanding for large transactions to occur without a substantial change in price. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their securities into cash and to a corporation's cash position, which is how much the value of the corporation's current assets exceeds current liabilities.
Listed Stock: Shares of an issuer that are traded on a stock exchange. Issuers pay fees to the exchange to be listed and must abide by the rules and regulations set out by the exchange to maintain listing privileges.
Market Capitalization: The number of issued and outstanding securities listed for trading for an individual issue multiplied by the market price of the security. Total market capitalization for a market is obtained by adding together all individual issue market capitalizations.
Market Order: An order to buy or sell stock immediately at the best current price.
Odd Lot: A number of shares that are less than a market lot, which is the regular trading unit decided upon by the particular stock exchange.
Offer Price: The highest price a buyer is willing to pay for a stock.
Open Interest: The net open positions of a futures or option contract.
Open Order: An order that remains in the system for more than a day.
Option: The right, but not the obligation, to buy or sell certain securities at a specified price within a specified time. A put option gives the holder the right to sell the security, and a call option gives the holder the right to buy the security.
Option Writer: The seller of an option contract who may be required to deliver (call option) or to purchase (put option) the underlying interest covered by the option, before the contract expires.
Par Value: A security's nominal face value.
Penny Stock: Low-priced speculative issues of stock selling at less than the face value.
Portfolio: Holdings of securities by an individual or institution. A portfolio may include various types of securities representing different companies and industry sectors.
Price-Earnings (P/E) Ratio: Last closing market price per share divided by the latest reported 12-month earnings per share. This ratio shows you how many times the actual or anticipated annual earnings a stock is trading at.
Private Placement: The private offering of a security to a small group of buyers.
Put Option: A put option is a contract that gives the holder the right to sell a specified number of shares at a stated price within a fixed time period. Put options are purchased by those who think a stock may decline in price.
Record Date (dividend / bonus): The date on which a security holder must be registered as a holder of an issue to receive the dividend / bonus.
Rights: A temporary privilege that lets shareholders purchase additional shares directly from the issuer at a stated price. The price is usually less than the market price of the shares on the day the rights are issued. The rights are only valid within a given time period.
Stop Loss: A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price). Stop loss is usually used to limit losses in the market. A trailing stop loss can be used to maximize profits.
Stock Split: A corporate action that increases the number of securities issued and outstanding, without the issuer receiving any consideration for the issue. Approval by share holders is required in many jurisdictions. Each security holder gets more securities, in direct proportion to the amount of securities they own on the record date; thus, their percentage ownership of the issuer does not change. For example, a two-for-one stock split involves the issuance of two new securities for every old security.
Technical Analysis: Is a method of evaluating stocks by using past price and volume. Technical analysts use tools like charts and moving averages to predict market's future course. Technical analysis is not concerned about the intrinsic value of a stock.
Yield: This is the measure of the return on an investment and is shown as a percentage. A stock yield is calculated by dividing the annual dividend by the stock's current market price. For example, a stock selling at Rs. 50 and with an annual dividend of Rs. 5 per share yields 10%.
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