Indian stock market terms you must know
The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities.
The Bombay Stock Exchange (BSE) formerly, The Stock Exchange, Bombay is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange in Asia.BSE is the 4th largest stock exchange in Asia and the 8th largest in the world.
The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty nicknamed Nifty 50 or simply Nifty (NSE: ^NSEI), is the leading index for large companies on the National Stock Exchange of India. The Nifty is a well diversified 50 stock index weighted by market capitalisation accounting for 23 sectors of the economy.The index is a free float market capitalisation weighted index. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL (Credit Rating and Information Services of India Ltd).
The S&P CNX Nifty covers 23 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio.The S&P CNX Nifty stocks represent about 60% of the total market capitalization of the National Stock Exchange (NSE).
The Bombay Stock Exchange SENSEX also referred to as BSE 30 is a free-float market capitalization-weighted index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The word Sensex comes from sensitive index.
The Sensex captures the increase or decrease in prices of stocks of companies that it comprises. A number represents this movement.
Each company has a weight assigned to it.
The increase or decrease in this index, the Sensex, is the effect of a corresponding increase or decrease in the stock market price of these 30 companies.
As per free float capitalization methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is multiplied by a free float factor to determine the free float market capitalization. Free float factor is also referred as adjustment factor. Free float factor represent the percentage of shares that are readily available for trading.
The calculation of SENSEX involves dividing the free float market capitalization of 30 companies in the index by a number called index divisor.The divisor is the only link to original base period value of the SENSEX. It keeps the index comparable over time and is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips, etc.
Shares are the best investment available over a long period of time. A "share" is nothing more, and nothing less than a partial ownership of a business.Share is a unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends.
A dematerialised account for individual Indian citizens to trade in listed stocks or debentures, required for investors by The Securities Exchange Board of India (SEBI).In a demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A Demat Account is opened by the investor while registering with an investment broker (or sub broker). The Demat account number is quoted for all transactions to enable electronic settlements of trades to take place.
Benefits Of Demat Account
* A safe and convenient way of holding securities (equity and debt instruments both).
* Transactions involving physical securities are costlier than those involving dematerialised securities (just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges applicable to an investor are lesser for each transaction.
* Securities can be transferred at an instruction immediately.
* Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time.
* No stamp duty charges.
* Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated.
* Pledging of securities in a short period of time.
* Reduced paper work and transaction cost.
* Odd-lot shares can also be traded (can be even 1 share).
* Nomination facility available.
* Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately.
* Securities are transferred by the DP itself, so no need to correspond with the companies.
* Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat account of the investor.
* Shares allotted in public issues are directly credited into demat account of the applicants in quick time.
Trading is the process of buying and selling securities. The procedure of trading consists of two processes, i.e. Delivery (when securities are sold) and Receipt (when securities are purchased).
A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery.
A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism.
Intraday / Day trading
Within the day. Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day. Traders that participate in day trading are called active traders or day traders.Day trading can be very risky. See square off below.
A process whereby investors/traders buy or sell shares and later reverse their trade to complete a transaction is called squaring off of a trade.
Indian equity markets remain open between 9:00 am and 3:30 pm normally (At times there are sun outages when satellites fail to link with ground infrastructure of the two exchanges (the servers where buy and sell orders are matched). During these times the trading period is extended till 4:15 pm to compensate for the time lost in between).
If you purchase 50 shares of a company and sell them later before the market closes then you have squared off your buy position.Similarly, if you sell 100 shares of a company and purchase them later then you have squared off your sell position.
Delivery based trading involves buying shares on a market day and selling them only after receiving the delivery of those shares in demat account.
The gain made by the Sensex or Nifty during the course of the day. If such gains are made on a regular basis then market participants like investors, brokers etc call it as a market rally. Bulls are always said to be active during a market rally.
Crash refers to a fall in the value of Sensex and Nifty.Bears are said to be active and happy during the market crash as their style of trading (sell first and buy later) helps them make good money during a crash.
A correction (or a measured fall) in the Sensex and Nifty takes place when these indices rise for a few days and then retrace or shave off some of these gains.Market experts consider such corrections healthy because during this period the ownership of shares moves from weak hands (short-term investors) to strong hands (long-term investors). Corrections are generally considered as signs of strength after which the markets (the Sensex and Nifty) gets once again poised for a further rally.
These are the free shares that a listed company gives its shareholders. A bonus is declared after a company board meeting.
A bonus is usually declared as a ratio. A bonus issue in the ratio of 1:1 means you will get one free share for every one share of the company you own. A 2:1 bonus issue (or two for every one held) means you will get two free shares of a company for every one that you own. Similarly, a 5:1 bonus issue will give you five free shares for every one share that you own.
Dividends are the payouts to shareholders made by companies as a reward for buying stock in that company. A dividend is generally issued as a percentage of the face value of a share. Face value is the nominal price of a company's share.
A share can have different face values like Re 1, Rs 2, Rs 5, Rs 10 or Rs 100. An 80% dividend on a share of face value Rs 2 (Rs 1.6) will always be less than a dividend of 20% declared on share of face value Rs 10 (Rs 4).
Like bonus shares, dividend amount also comes from a company's free cash reserves.
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.
Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.
When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies:
* Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.
* Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.
Fundamental analysis includes:
On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share . If it is equal to market price hold the share and if it is less than the market price sell the shares.
The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area.
The bottom-up investor starts with specific businesses, regardless of their industry/region.
Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.
While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.Technicians use various methods and tools, the study of price charts is but one.
Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.
Technical analysts also widely use market indicators of many sorts. Examples include the relative strength index, and MACD.
In simple terms, margin refers to the collateral that a member has to deposit with the exchange to be able to trade on any given day. It is a risk management system backed with the objective of protecting the exchange against any potential adversity that may arise in the future.
Clearing & Settlement
For all trades executed on a given day, it is important to determine the obligations standing at the end of the day against parties to trade. This process of ascertaining obligations is known as clearing, and the process of meeting or discharging these obligations is known as settlement. NSCCL (The National Securities Clearing Corporation Limited, a subsidiary of National Stock Exchange of India Ltd.) is the corporation that deals with all clearing and settlement activities at NSE.
Market Orders, Stop Orders & Limit Orders
The stock market orders that are placed with the exchanges for buying or selling stocks can be classified into different types. An instruction to buy or sell a stock at the current market price is called a “market order.” This order is usually executed near the quoted price at the time of the order was made. There may be a difference between the actual transaction and the quote if there is some inactive trading of stocks or rapid fluctuation of prices.
An expectation of stock price movements that leads to the interest of buying or selling stocks at a certain price above or below the current price initiates the placing of either a “stop order” or a “limit order.” A stop order instructs the broker to trade at a certain stock price, while a limit order instructs the broker to trade at a specified stock price or something better.
Stop orders (also referred as Stop Loss Orders), which help in limiting losses and protecting profits, become effective when the market hits the stop price. Because the stocks are traded at market price after they become active, brokers who are given stop orders are allowed to trade above or below the stop price. Limit orders, on the other hand, may not be placed at all even if the market reaches the limit price. The fast movement of the market may not provide enough time to execute the order before the price falls out of the limit price range.
For example, an investor buys a share of xyz company at Rs. 2000 and put in a stop order of Rs. 1900. If the stock price of xyz company falls to Rs. 1900, the stop order will become effective and the stock will become available at market price. Conversely, if an investor buys xyz company for Rs. 2000 and put in a limit order to sell at Rs. 2200, then his stocks will be sold at a profit only when the price rises to that level of Rs. 2200 or higher. The investor can also buy xyz company with a limit buy order for Rs. 1900 to allow him to possibly buy the stock at a price that is less than the current market price. If the price doesn’t fall to the limit buy price, however, the investor cannot buy that stock.
All orders can be placed as either “good until canceled” (GTC) or “day order” or “immediate or cancel ”(IOC). A GTC order will remain in effect until it is canceled but a day order will remain in effect only until the end of the current trading day. Stocks are commonly traded in multiples of 100 that are called “round lots.” Trading other amounts of stocks, which is called an “odd lot,” is also possible. Trading software can handle either type of orders but odd lot orders are considered to be more difficult to fill than round lot orders.
|Category: Stock market terms | Added by: aji (22 June 2011)
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