IS SECOND SOURCE OF INCOME NECESSARY?
In the present day scenario second source of income is very much necessary for every family as the inflation rise, job security, standard of life, uncertainties etc as year passes the value of money earned reduces. To beat the inflation, it is necessary to save and invest is one of the paths to earn more money.
In our country the investment activity started during 19th Century, In 1854 the stock brokers had already outnumbered and had to locate themselves in one place and had moved to Dalal street in Mumbai. This was the birth of Stock Exchanges in India.
WHAT IS STOCK MARKET?
Stock of a company refers to the Share Capital of the company which is divided into smaller denomination called Shares.
These shares are of two types namely:
- Equity Shares and
- Preference Shares
The main difference between these two types of shares are the Preference shareholders get the priority for payment of dividend and also the capital at the time of liquidation.
Stocks ( Equity securities) and Bonds ( Debt Securities ) of various companies are bought and sold by the investors and general public in the capital Market.
Other than the distinction between equity and debt, capital markets are also generally divided into two categories of markets:
- Primary market – In the primary markets, stocks and bonds are issued directly from companies to investors, businesses and other institutions, often through underwriting. Primary markets allow companies to raise capital through initial public offering .company will generally sell its shares to a few investment banks or other firms.
- Secondary Market- Inthe Secondary market the investment banks, other firms, private investors and a variety of other parties resell their equity and debt securities to investors. This takes place on the stock market or the bond market, which take place on exchanges around the world, like NSE in India, NASDAQ in USA.
When securities are resold on the secondary market, the original sellers do not make money from the sale. Yet, these original sellers will likely to continue to hold some amount of stake in the company, often in the form of equity, so the company’s performance on the secondary market will continue to be important to them.
The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the largest and deepest capital markets.
Advantages of Capital Market :
- Capital markets are very important and critical for smooth functioning of modern economy because they mobilize money from people ( who have saved it ) to organizations (who need it) in order to be more productive.
- They are also particularly important in that equity and debt securities are often seen as representative of the relative health of markets around the world.
Disadvantages of Capital Market:
As capital markets are increasingly interconnected in a globalized economy, ripples in one corner of the world can cause major waves elsewhere.
The best example of the drawback of this interconnection is :
- The global credit crisis of 2007-09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.
- The Recent China Market crash in January 2016.
OVERVIEW OF GLOBAL MARKETS
20 LARGEST STOCK EXCHANGES IN THE WORLD- NOVEMBER 2014
|Sl No||Stock Exchange||Short Form||Country||Amount Traded in US Dollars|
|1||New York Stock Exchange||NY, USA||$ 18.77 Trillion|
|2||National Association of Securities Dealers Automated Quotations||NASDAQ||NY, USA||$ 6.68 Trillion|
|3||Japan Exchange Group||Japan||$ 4.48 Trillion|
|4||Euronext||FTSE||Members: Netherlands, France, Belgium, Portugal||$ 3.50 Trillion|
|5||London Stock Exchange Group||London||$ 3.39 Trillon|
|6||Hong Kong Stock Exchange||China||$ 3.14 Trillion|
|7||Shanghai Stock Exchange||China||$ 2.86 Trillion|
|8||TMX Group||Toranto Canada||$ 2.20 Trillion|
|9||Shenzhen Stock Exchange||SZSE||China||$ 1.91 Trillion|
|10||Deutsche Borse||DAX||Germany||$ 1.71 Trillion|
|11||Six Swiss Exchange||Switzerland||$ 1.52 Trillion|
|12||Bombay Stock Exchange||BSE||India||$ 1.51 Trillion|
|13||National Stock Exchange of India||NSE||India||$ 1.48 Trillion|
|14||Australian Stock Exchange||Australia||$ 1.34 Trillion|
|15||Korean Stock Exchange||KRX||South Korea||$ 1.27 Trillion|
|16||NASDAX OMX Nordic Exchange||Members:Denmark, Finland, Iceland, Norway, Sweden + Territories:Greenland, Faroe Island and Aland Islands||
$ 1.24 Trillion
|17||BME Spanish Exchanges||Spain||$ 1.14 Trillion|
|18||BM & F Bo Vespa||$ 992 Billion|
|19||JSE Limited||Johannesburg, South Africa||$ 951 Billion|
|20||Taiwan Stock Exchange||China||$ 848 Billion|
NOTE: As on 23rd November 2015 NSE stands 12th ranking with more than US $ 1.65 Trillion and BSE stands 11th ranking with more than US $ 1.7 Trillion.
NATIONAL STOCK EXCHANGE OF INDIA – NSE
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in the country.
NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across all over the country.
NSE has a market capitalization of more than US$1.65 trillion, making it the world’s 12th-largest stock exchange as of 23 January 2015.
NSE’s flagship index, the Nifty is used extensively by investors in India and around the world as a barometer of the Indian capital markets. More than 1696 Indian companies have been listed on the NSE.
Main Indexes under NSE:
- Nifty 50
- Nifty IT
- Nifty Midcap 50
- Nifty PSE
- Nifty Bank
- Nifty Pharma
- Nifty Auto
- Nifty Infrastructure
BOMBAY STOCK EXCHANGE – BSE
The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street, Kala Ghoda, Mumbai, Maharashtra, India.BSE was established in 1875.
The BSE is Asia’s first stock exchange and the world’s fastest stock exchange with a median trade speed of 6 microseconds.
The BSE is the world’s 11th largest stock exchange with an overall market capitalization of $1.7 trillion as of January 23, 2015.
More than 5749 Indian companies have been listed on the BSE.
SENSEX is the BSE index; it measures the overall performance of the exchange.
HOW TO DO TRADING?
With the advancement of Technology, Trading has become very easy. Online Trading has made both investor’s and stock broker’s life at ease.
Anyone interested in trading has to open Trading and Demataccount with recognized Broker/ Stock Exchange Member as first step. This online trading account can be accessed from your computer system by using your User ID, Password and Access code. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares.
We offer various unique user friendly trading tools and charts to buy and sell shares that caters to our diversified set of traders and investors.
WHAT IS TRADED IN STOCK MARKET?
Financial Instruments like Bonds, Shares, Derivatives and Mutual Funds are traded in the Stock Market.
Shares: Shares are the financial instrument issued by the company for raising funds to manage or expand the company. The shareholders hold a stake in the company proportion to their share holdings. These shares issued in Primary market are then traded in the secondary market which is stock market.
Bond: Bond is a debt instrument and is a liability to the company. Bonds are issued to general public and interest is paid on it. It is similar to the Bank loan borrowed from the Bank. Bonds are repaid back after completion of specific period of time.
Derivatives: Derivatives are the instrument that are traded in future at a price fixed as on today. This financial instrument is very helpful in the dynamic stock market where the price keeps on fluctuating.
Mutual Funds: A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The person who invests becomes a Unit Holder and Units are issued to him.
WHAT IS THE ROLE OF SEBI IN STOCK MARKET?
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.
SEBI is responsible to the needs of the three groups, which constitute the market:
- the issuers of securities
- the investors
- the market intermediaries
The basic objectives of SEBI is to protect the interests of investors, promoting the development of the stock market and regulating the stock market.
WHAT MAKES THE STOCK PRICE TO GO UP AND DOWN?
In simple terms the market price of a stock is the ‘price’ at which a ‘willing buyer’ and a’ willing seller’ agree to trade.The stock prices change because of “supply and demand”. If more people want to buy stock than sell it then the price goes up as Demand is greater than Supply. And if more people wants to sell stock than buying it, then Supply is greater than Demand resulting in fall in price. Also the investors’ sentiments, attitudes and expectations affect stock prices.
Apart from the Market Price there are other factors like internal factors, external factors and the Media Hype which result in drastic changes in stock price.
Internal factors maybe events like:
- Release of quarterly financial report of a company, which may be positive or negative and the impact on the market will have similar effect.
- If the company signs up with a large new client
- any government action on the company or the management,
- If any new innovative product is released into the market.
All these will cause the price of a stock to either shoot up or fall drastically for a short duration.
These are major political, economic and social events that occur in the world that indirectly affect the company and its industry
Publicity about the stock can be made by the company itself /broker/media, resulting in positive reports in stock market newsletters, Internet chatter on bulletin boards, press releases and news reports.
Even if such publicity may or may not have any base, it may cause a short-term spike in stock price.
WHO ARE TRADER/SPECULATORS ?
A Trader/speculator is a persons who
- trades derivatives, commodities, bonds, equities or currencies
- takes large risks
- sacrifice the safety of their principal amount
- hopes to make large small term gains
- anticipates future price movements
- often use technical analysis and other trading tools to make investment decisions.
- Buys stocks at lower price and sells at higher price
- Sells stocks at higher price and buys at lower price
- Not much worried about the financial reports of a company
- Is interested mainly in quick profits.
To summarize :
Traders/Speculators are typically sophisticated, risk-taking traders with expertise in the market in which they are trading and will usually use highly leveraged investments such as futures and options. For example, purchasing a very volatile stock hopingto make profitsby few movements, in points of the stocks traded.
Investors are those who tend to buy stocks they believe will soon see a large growth in price and then sell them at the top of the market. For Example:
Investments in a company’s stocks which has got strong financial background.
Hedgersbuy futures and options mainly to protect their financial interests. For example, a Goldsmith buys a Gold futures contract in order to protect the cost of Jewellery production. This is hedging the risk that Gold prices will rise. The Goldsmith is willing to spend a certain amount to protect against a potentially larger loss in future.
WHAT IS TREND?
Trend refers to the direction, course, tendency, swing, shift or movement. In Stock Market Trend indicates the movement of Stock price. The price of stock whether it’s rising or falling can be made out by a technique called Trend Analysis.
Under Trend Analysis there are basically three types of Primary Trends which are as follows:
1. UP TREND
Upward Trend refers to a process of gradual change in the stock price from lower price to higher price. It is defined as “Series of higher highs and higher lows”.
Uptrend, also known as rising trend, is the trader’s favorite trend type. In this trend, stock price trends in upward directions by making series of higher high and higher lows. Though, it is safe to make a buy decision anywhere in uptrend, it gives best returns when bought near pullback or intermittent lows.
Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent.
2. DOWN TREND
Downward Trend refers to a process of gradual change in the stock price from higher price to lower price. It is defined as “Series of lower highs and lower lows”.
A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent.
3. SIDEWAYS TREND
The sideways trend describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move.
Sideways Trend is defined as a “series of relatively equal highs and equal lows”
WHAT IS BULL/BEAR?
The use of “bull” and “bear” to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a “bull” and is said to have a “bullish outlook”.
Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It’s difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a “bear” and said to have a “bearish outlook”.
WHAT IS LONG / SHORT?
A long (or long position) is the buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.
Buying a stock (or an option) is straightforward. It’s the resulting position which might not be obvious, Stock exchange market is a unique place where one can sell things which is already not owned.
For example, if Mr A buys 100 shares of Infosys Limited. Then he decides to exit his position. So he sells his 100 shares. Mr A was long 100 shares, and then he closed his long position, getting rid of his shares.
“Long” not only conveys the action taken, but also current ownership, and therefore, it is much more descriptive than “buy”.
A short position is the sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.
For example, Mr X is short by 100 shares of Ajantha Pharma Limited and then he buys 100 shares of the same stock. In effect, the two transactions balance each other out. After he puts buy order, his short position is covered. In this case a buy order did not result in a position in Mr X’s account.The same distinctions as
Long and Buy can apply to “selling” versus “short”. “Sell” refers to selling something which is owned. “Short” conveys selling something one does not own at present, such as when selling a stock or option short. The term “short” also implies a liability exists.
CAN ANYONE MAKE MONEY IN BEARISH MARKET?
A bearish market is traditionally defined as a period of negative returns in the broader market to the magnitude of between 15-20% or more. During this type of market, most stocks see their share prices fall, often substantially. There are several strategies that are used when investors believe that this market is about to occur or is occurring, which depend on the investor’s risk tolerance, investment time horizon and objectives.
It’s dangerous to catch the falling knife!! Similarly do not make the effort to buy stock when prices are falling as no one knows the bottom of the pit!!
To avoid huge losses during bearish market the following safest and extreme strategy can be followed:
- Sell all investments
- Hold Cash or invest in more stable financial instruments, such as short-term government bonds.
Investors take up defensive strategy like:
Investing in larger companies with strong balance sheets and a long operational history because the stable companies are not easily affected by the overall downturn in the economy or stock market, making their share prices less susceptible to a larger fall.
Ways to make Profit in Bear Markets
One can definitely make large amounts of profits in bear market. There is an old saying that “when prices go up gradually, it takes Stairs, but when prices falls down it comes down quickly by elevator”
Some methods to make profit in bear market:
- Short Positions: Taking a short position, also called short selling, occurs when one sells shares that one does not own, in anticipation that the stock will fall in the future For example, if Mr X is short by ACC stock at Rs50 per share and the stock falls to Rs20, Mr X can buy the shares back at Rs20 to close out the short position. His overall profit would be Rs30 per share.
- Put Options: A put option is the right to sell a stock at a particular strike price until a certain date in the future, called the expiration date. The money paid for the option is called a premium. As the stock price falls, no one can either exercise the right to sell the stock at the higher strike price or sell the put option, which increases in value as the stock falls, for a profit (provided the stock moves below the strike price).
WHAT ARE THE KEY POINTS TO BECOME A SUCCESSFUL TRADER?
Five key points to a great success that one can follow easily:
- NEVER PREJUDGE – A good trader always follows the rules of trading and his decisions are based on the Trading Analysis by using tools and techniques. If anyone anticipates the prices of stock without any base, it will result in sheer Gambling and will tend to loose heavily in the share market.
- AVOID BIG LOSSES – If one masters the technique of avoiding big losses then easily one can make money in the share market. Its similar to swimming against the tides of the Ocean, once you master to drift over every tide then you are a perfect swimmer!
- OPPORTUNITY – Never miss the big opportunity, for this one has to keep an eye on the market always. Any right opportunity, rightly executed will result in Gold!! Practice everyday as per tools the Right Entry and Right Exit for a stock trading.
- PATIENCE – To be a successful trader one has to develop the habit of patience. Stock market is so dynamic that the prices of stocks keep changing every fraction of a second. One has to keep the ‘Monkey Mind’ under control at all times. Stock Market is a good entertainer but to make money one has to be patient.
- FIT & ALERT – A healthy body and a healthy mind is a must to become a good trader. Keep yourself fit, do Pranayama, Yoga. Join Gym or go for a walk. Ensure good amount of sleep and rest to the body to have an alert mind during market hours.
WHAT ARE THE DO’S AND DONT’S IN STOCK MARKET?
Below are some of the Do’s and Don’t of Stock Market, though they are not exhastive
- Follow tools and techniques.
- Slow, steady and boring wins the race
- Try to do a lot of research- try to find an edge for yourself which clicks
- Diversify your investments
- Pay close attention to brokerage fee
- Always put Stop losses- manage risk involved in each trade
- Maintain cash savings
- Believe in yourself
- Stick to your strategy
- Always deal with the market intermediaries registered with SEBI / stock exchanges.
- Do not give weightage to market forecasts
- Do not invest according to emotions
- Don’t Panic
- Don’t make huge investments
- Don’t chase performance- Make choice of Long / Short before you invest.
- Don’t deal with unregistered brokers / sub – brokers, or other unregistered intermediaries.
WHAT ARE RBI BANK RATES?
In our Country Reserve Bank of India ( RBI) is the Central Bank and is called the ‘Banker of Banks’, it controls the monetary policy of the Indian Rupee.
RBI was established on 1st April 1935 and its present Governor is RaghuramRajan.
Some of the RBI Bank rates are stated as below:
Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it others (people, companies etc) which is always risky.
CRR – Cash Reserve Ratio – Banks in India are required to hold a certain proportion of their deposits in the form of cash. However Banks don’t hold these as cash with themselves, they deposit such cash(aka currency chests) with Reserve Bank of India , which is considered as equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.
When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.
SLR – Statutory Liquidity Ratio – Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.
Net Demand Liabilities – Bank accounts from which you can withdraw your money at any time like your savings accounts and current account.
Time Liabilities – Bank accounts where you cannot immediately withdraw your money but have to wait for certain period. e.g. Fixed deposit accounts.
Call Rate- Inter bank borrowing rate – Interest Rate paid by the banks for lending and borrowing funds with maturity period ranging from one day to 14 days. Call money market deals with extremely short term lending between banks themselves. After Lehman Brothers went bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending to other banks.
MSF- Marginal Standing facility – It is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher then Repo rate. Current MSF Rate: 7%
Bank Rate- This is the long term rate(Repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management now. It is now same as the MSF rate. Current bank rate is 7%.