Stock Market Terms You Must Know

Ever come across words like Sensex, Nifty, correction, rally et al?

Well, a regular reader of business newspapers must have come across these and a host of other terms that describe the stock market activities.

You must have also come across research reports from brokerage houses that talk of buying, selling and holding of a company's share.

Let us go through a few of these terms used in routine stock market parlance.

Sensex

It is an index that represents the direction of the companies that are traded on the Bombay Stock Exchange, BSE. 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. Currently, all the 30 stocks that make up the Sensex have reached a value of 14,355 points.

These companies represent the myriad sectors of the Indian economy. A few of these companies and the sector they represent are: ACC (cement), Bajaj Auto, Tata Motors, Maruti (automobile), Infosys, Wipro, TCS (information technology), ONGC, Reliance (oil & gas), ITC, HLL (fast moving consumer goods) etc.

Each company has a weight assigned to it. Companies like Reliance, Infosys, and HLL have higher weightages compared to others like HDFC, Wipro, or a BHEL.

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.

Nifty

It is the Sensex's counterpart on the National Stock Exchnage, NSE.

The only difference between the two indices (the Sensex and Nifty) is that the Nifty comprises of 50 companies and hence is more broad-based than the Sensex.

Having said that one must remember that the Sensex is the benchmark that represents Indian equity markets globally.

The Nifty 50 or the S&P CNX Nifty as the index is officially called has all the 30 Sensex stocks.

The NSE Nifty functions exactly like (explained above) the BSE Sensex.

Bull

A particular kind of investor who purchases shares in the expectation that the market price of that company's share will increase.

S/he sells her/his stock at a higher price and pockets the profit. Simply put, the bulls buy at a lower price and sell at a higher price.

For instance, if a bull buys a company's share at Rs 100, s/he would prefer selling the same stock at Rs 120 or any price higher than Rs 100 to make a profit.

Usually, a bull buys first at a lower price and sells later at a price higher than her/his cost of purchase.

Bulls are happy when the markets (the Sensex and Nifty) move upwards. A falling market takes bulls into hibernation.

Bear

Bull's counterpart is the bear.

A bear sells stocks first that s/he owns or borrows from, say a friend, and then purchases the same quantity of shares at a lower price.

If a bear sells first, say 100 shares of Ranbaxy at Rs 400, and later purchases the same number of shares at Rs 375, then her/his profit is Rs 25 (400-375) per share.

This way s/he has got back the 100 shares of Ranbaxy and simultaneously made a profit of Rs 2500. The shares can later be returned to the bear's friend if s/he had borrowed the same from a friend.

There are bears in the market that sell shares first without actually owning them unlike in the above example. Such selling is called naked short selling or going short on a stock.

Bears are happy in a falling market.

While individual investors can engage in selling first and buying later (also referred to as short selling), mutual funds and foreign institutional investors are not allowed this luxury in India yet.

Squaring off

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 9:55 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 say Infosys and sell them later before the market closes then you have squared off your buy position.

Similarly, if you sell 100 shares of Maruti and purchase them later then you have squared off your sell position.

Equity market rules in Indian allow investors/traders to engage in day trading.

Day trading is a mechanism whereby investors/traders can buy, say 100 shares of a company as soon as the BSE, NSE opens (the working hours are 9:55 am to 3:30 pm in normal times) and sell the same amount of shares later (bulls) before the two stock exchanges close. However, a stock bought on the BSE cannot be sold on the NSE and vice-versa.

Similarly investors/traders can also sell first and buy later (bears) during the course of the day to square off their sell positions.

Rally

The word suggests 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.

If the Sensex moves from 14,000 points to 15,000 points in a span of say 14 or for that matter 20 trading sessions (the stock markets remain closed on Saturdays, Sundays and other bank holidays) then the phenomenon is referred to as a rally.

Bulls are always said to be active during a market rally.

Crash

As the word suggests, crash refers to a fall in the value of Sensex and Nifty. In the first three trading days of this week(February 12-14) alone the Sensex had crashed by more than 700 points.

The Sensex then had plummeted from around 14,700 levels to around 14,000 points. This sudden and violent 700-point fall is referred to as th crash or market crash.

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.

Correction

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.

Say if the markets rally from 13,000 to 14,000 points in 10 days and the again fall to 13,700 points in the next five-six days then this action is termed as a market correction.

It is like a woman/man resting for some time after running a long distance race. Like human beings the market too needs to take rest after a smart rally.

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.

Bonus shares

These are the free shares that a listed company gives its shareholders.

A bonus is declared after a discussion amongst the board members that make up the management of a company.

A bonus issue is looked upon as a way of rewarding shareholders.

For instance, let us take a company A that has made a profit of Rs 100 crore in the financial year 2007 (April 1, 2006 to March 31, 2007).

Out of this amount the company may need Rs 50 crore for say buying machinery or constructing a new warehouse. And the remaining Rs 50 crore the company puts into its reserve pool or idle cash that the company has no plans to spend.

It can then issue bonus shares out of these Rs 50 crore.

When a company declares a bonus issue it converts this idle cash into shares that are then distributed amongst its shareholders. This process is called capitalising of reserves.

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.

Dividend

It is again a way of rewarding a company's shareholders. 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.

Book closure date

This is the date on which a company closes its books for business after it announces a bonus or dividend. The company's registrar keeps a track of who owns how many shares of that particular company.

Any investor having shares in his/her demat account before this date becomes eligible for the bonus issue or the dividend declared.

Say a company A announces a 1:1 bonus issue and the book closure date is February 28, 2007.

If you don't own this company's share and want to avail of the bonus offer then you must not only buy this share before February 28 but also make sure that the number of shares purchased by you are transferred to your account from the seller before this date.

If the ownership of shares is reflected in your account after February 28 then you will not get any bonus shares. The same is also true for dividend announcements.

Indian Stock Market Overview

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April - August 1999).

NSE has around 1500 shares listed with a total market capitalization of around Rs 9,21,500 crore (Rs 9215-bln). The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9,68,000 crore (Rs 9680-bln). Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses.

The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE On Line Trading) and NEAT (National Exchange Automated Trading) System. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency.

The scrips traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrips are the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

Sensex? What's That?

The Sensex, which has crossed the 14,000 mark, seems unstoppable.
Which makes it the right time to give you some dope on the hot new craze in town.
What's so hot about the Sensex?
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.
The index has just one 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.
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.
In case you are wondering why a stock market index has a provocative term like Sensex, let me tell you it stands for something quite mundane -- The Bombay Stock Exchange Sensitive Index.

What is the Sensex made of?
Thirty stocks. That's right. Just 30 stocks tell you how the market is faring.
Before you throw up your hands in protest, there is something you should know about these 30 stocks.
For one, they are the most actively traded stocks in the market. In fact, they account for half the BSE's market capitalisation.
Besides, they represent 13 sectors of the economy and are leaders in their respective industries. Now that sounds fair, doesn't it?
Who selects these 30 stocks?
They are selected by the Index Committee.
This committee consists of all sorts of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
How do they select these 30 stocks?
Well, they definitely don't do it on the basis of their individual whims and fancies. Some of the criteria they follow include:
~ The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year.
~ It should be among the top 150 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.
Does the Sensex have any contemporaries?
In terms of age? No.
The Sensex is the oldest index in the country. It was born in 1986.
In terms of popularity, the Nifty follows close.
The Nifty? What's that?
Well, the National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index.
Isn't that a broader representation than the Sensex?
You're right. The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex.
In case you are shaking your head about 50 also being too small a number, let me remind you these 50 stocks account for around 60 percent of the market capitalisation.
If these indices tell us about the market, why do people talk about sectoral indices?
The price of every stock price increases or decreases for two possible reasons:
~ News about the company, like a product launch, closure of a factory, the government providing tax or duty exemptions to the sector so more profits expected, a feud among the company's top bosses, etc. This will be stock specific news.
~ News about the country, like testing a nuclear bomb, a terrorist attack, a budget announcement, etc. This will be called index news.
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.
A good index will only capture news that is common to all stocks in India. This is what the Sensex and the Nifty do.
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.
So a look at the specific sector index will tell you about that particular sector. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up.Did you know the NSE has a mid-cap index that is made up of mid-sized companies?
This index has run up smartly in recent months, rising even more than the Nifty, which shows that people have been investing more in smaller companies. This could be because the price for the stocks of bigger companies has increased recently.

Now, let's see how globally savvy you are.

Guess the countries these indices represent -- Dow Jones Industrial Average, the FTSE (Footsie) and the Nikkei?
The US, the UK and Japan.

What is an IPO?

An Initial Public offering is the first sale of a corporation’s common shares to public investors. The main purpose of an IPO is to raise capital for the corporation.
IPOs generally involve one or more investment banks as “underwriters”. The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

IPO Basics

Selling Stock

An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.
Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock. Why Go Public? Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:
Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

Who is the UnderWriter?

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting.
When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley. More Details..

Trading Basics for the Beginners

The Share market immediately conjures up stories of fortunes made and lost. A share makes the holder a partial owner of the company and different types of shares have different rights associated with them. If you are able to sell off your share at a price higher than your buying price, you make a profit but you also run the risk of incurring a loss if the share price falls. The business you invested in makes profit and they provide you part of it as dividend. In the share market you are an anonymous player and many have made a reasonable profit. There is no unique formula to ensure consistent gain but before you venture into this market you should know the basics of stock trading.

What does trading stocks mean?

Buying and selling of stocks is referred to as trading in the financial market.

You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor. Exchange floor scene must be familiar to you; the NYSE has been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. . The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized.

Electronic transaction is very common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .In online investing your broker will connect to the exchange network and search for a buyer or seller according to your order.

How are the stock prices determined?

The stock prices cannot be predicted, they depend on various factors like political unrest, if there is a huge demand for a particular share at a given time, prices can fluctuate, any event that could adversely affect the company will also cause the share prices to drop.

Before you decide on which stock to buy you must answer the following questions.

Do you know the company well enough?

What is the company’s reputation in the market?

Have you gone through their annual report?

Do you have the confidence to invest in this company?

Is some negative news about the company circulating?

How are analysts predicting the future?

How is the management of the company?

What are their growth prospects?

Am I aware of the insider activity?

Is it an internationally renowned company?

How is their marketing strategy?

Have there been any changes in the management recently?

How consistent has been their performance?

Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk , risk taking could either lead to fortunate gains or to bankruptcy.

• You should avoid investing money more than you can actually afford.

• Know about your investment well and do not blindly depend upon your broker.

• Follow regular stock market quotes to keep yourself abreast of the market swings.

The share provides you with an earning power, gives you partial ownership of a company and the freedom to buy or sell at any moment. But if you are a novice in stock trading you need to play safe and equip yourself with a lot of information. Unless you are a seasoned player you should invest only after surveying all the alternatives and never go beyond your risk tolerance. Know where to draw the line and begin trading in stocks! Happy Trading Friends!