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), ONGCReliance
(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.
Having said that one must
remember that the Sensex is the benchmark that represents
Indian equity markets globally.
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).
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)
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.
This just sums up a few terms
used by stock market participants. We shall see some more
next week.
