A stock market is a designated market for trading various kinds of securities in a controlled, secure and managed environment. A stock market is an index for measurement of a section of the stocks listed. From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index. The values of the grouped stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market and to compare the return on specific investments.
Most of the trading in the Indian stock market takes place on its two stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. The BSE has about 4,700 listed firms, whereas the rival NSE has about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization.
The Bombay Stock Exchange (BSE) – reflect the performance of various broad investment themes. Investment seeks to identify specific social, economic, industrial, environmental or demographic trends and their long-term secular, cyclical and structural influences on the world’s economies and markets. The National Stock Exchange (NSE) – is designed on the basis of quantitative models / investment strategies to provide a single value for the aggregate performance of a number of companies.
Then BSE determines a Free-float factor that is a multiple of the market capitalization of the companies. This helps in determining the free-float market capitalization based on the details submitted by the company. Then, Ratio and Proportion are used based on the base index of 100. This helps to determine the Sensex.
Sensex is the stock market index indicator for the BSE. It was first published in 1986. The calculation of Sensex is done by a Free-Float method that came into existence from September 1, 2003. The level of Sensex is a direct indication of the performance of 30 stocks in the market. The market capitalization is being done by multiplying all the shares issued by the company with the price of its stock.
SEBI (Securities and Exchange Board of India) is the capital market regulator and has made it mandatory for fund houses to declare a benchmark index. A benchmark is a standard against which the performance of a mutual fund can be measured. Since 2012, SEBI made it mandatory for fund houses to declare a benchmark index. It basically indicates what the fund has earned against what it should have earned.
Following are the things to be remembered before investing. There are a lot of factors you should look into before selecting a fund which will match your investment goals.
•Higher rates – don’t blindly invest in the fund with the highest returns. Invest based on the duration you want to invest for. Every person’s financial condition is different.
•Evaluate the funds you invest in yourself – don’t invest in a fund because of its popularity. Review your investment from time to time but not too often. Once a few weeks is good enough.
To ensure that the fund is in good hands, choose a fund house having fund manager with a good amount of experience managing small/mid-cap funds and associated with these funds for some good numbers of years.
The lure of big money has always thrown investors into the lap of stock markets. Although no sure-shot formula has yet been discovered for success in stock markets, here are some golden rules which, if followed prudently, may increase your chances of getting a good return.
•Trading is not gambling, never trade with a profit target in mind.
•You need to preserve your capital for great trades with high probability of high profit.
•A trade is not just up or down, it is a complete plan
Most of the times the best strategy is to sit and watch on the sidelines
•Never buy a stock because its price has come down and never sell a stock because it has gone up.
•Buy a technically strong stock, ideally on dips, and sell a technically weak stock ideally on upticks.
•Risk only what you can afford to lose. Trade with the money you can throw away tomorrow and feel nothing about it.
•If you cannot sleep peacefully with a position, you need to scale down
•Trade with enough buffer margin and keep at least 30% extra margin.
•Let your profits run, cut your losses short.
•After a big win, cool off and take a break. After a big loss, take a week off.
•Invest in business you understand, with your surplus funds
People say in stock exchange, the money disappears and from the losers perspective this is true. Along with wealthy and institutional investors, a very large number of small investors are also served by the stock market for their small amount of investments. It is really a case of value perception. The stock market has an inherent flaw – it is based on unrealistic valuation that people confuse with real cash. Price crashes are the market’s way of destroying fictions and restoring reality.
It was a fiction and where do the money go? There was no money. It is just a fictional estimate of value that the real events didn’t confirm. Due to the way stocks are traded, investors can lose quite a bit of money, if they don’t understand how fluctuating share prices affect their wealth. In the simplest sense, investors buy shares at a certain price and can then sell the shares to realize capital gains. However, if a decline in the perceived value of the stock results in a dramatic drop in the stock price, the investor will not realize a gain.
In short “Stock Market is a mad man’s play ground. Purchase nothing and sell nothing, but you loose everything. A selected few go on gaining by manipulating the gain from ignorant mass. Hence, more people looses to make few people rich”.
(Author is a former banker. Views are personal.)