Basics of stocks & shares

[crook]

Pradypop!! Thanks for the information!! Looking for more !

[integratdbrains]

Introduction
The Stock Exchange, Mumbai which was established in 1875 as "The Native Share and Stockbrokers Association" (a voluntary non-profit making association), has evolved over the years into its present status as the premier Stock Exchange in the country. It may be noted that the Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.
What is a Stock Market Index? How does it work?
Think of a stock market index as a good thermometer which accurately captures the overall changes in the stock market. Movements of the index should represent the returns obtained by typical share portfolios in the country.
What do the ups and downs of an index mean?
They reflect the changing expectations of the stock market about future dividends of the country's corporate sector. When an index goes up, it is because the stock market thinks that the prospective dividends will be higher than previously thought. When prospects of dividends in the future become pessimistic, the index drops. An ideal index gives instant-to-instant readings about how the stock market perceives the future of the corporate sector.
What is the basic idea in an index?
Every stock price moves for two possible reasons: news about the company (e.g a product launch, or the closure of a factory, etc) or news about the country (e.g: a budget announcement). An index captures the second part- the movements of the stock market as a whole coming from news about the country.
This is done by averaging as each stock contains a mixture of these two elements, stock news and index news. When we consider many stocks, the individual stock news tends to cancel out. Each stock is given a weight proportional to its market capitalisation, which is the share price multiplied by the number of shares making up its equity capital.
Why is an index important?
An index has traditionally been used as an information source: by looking at it you know how the market is faring. But in recent years, indices find direct applications in finance, in the form of index funds and derivatives. For instance, both the National and the Bombay Stock Exchanges propose to launch index futures on the S&P CNX Nifty and Sensex. These applications are now a multi-trillion dollar industry worldwide. Indices also serve as a benchmark for measuring the performance of fund managers.
What is the portfolio interpretation of index movements?
Suppose one wants to create a portfolio that gets the same returns as the index - that is, if the index goes up 4 per cent, the portfolio goes up 4 per cent. If an index is made up of two stocks, one with a market cap of Rs 1,000 crore and another with a market cap of Rs 3,000 crore, then the index portfolio will assign a weight of 25% to the first and 75% weight to the second. If we form a portfolio of the two stocks with a weight of 25 % on the first and 75 % on the second, the portfolio returns will equal the index returns. So if you want to buy Rs one lakh of this two-stock index, you would buy Rs 25,000 of the first and Rs 75,000 of the second; this portfolio will exactly mimic the two-stock index..
How does manipulation of an index take place, and how could an index be made less vulnerable to manipulation?
Being a benchmark comprising several stocks, an index is harder to manipulate than individual stocks. Obviously, larger (broadbased) indices are harder to manipulate than smaller ones. The weak links in an index are the large, illiquid stocks. These allow a manipulator to obtain maximum impact upon the index at minimum cost. This is one reason why illiquid stocks should be excluded from a market index; indeed the liquidity of a stock in an index should be proportional to its market capitalisation.
When a stock goes out and a new stock comes in, doesn't that make index levels non-comparable?
No. There are mathematical formulae which ensure that yesterday's value and today's are comparable, even if a change in composition takes place in between. Think of an index as a portfolio. The composition of the portfolio changes, but it is still meaningful to keep measuring the overnight returns on the portfolio from day to day. These returns, cumulated up, are the index level.

[aashima]

Well Namrata that wasn't "a little"!!! Nice information anywayz.

[mayurpathak]

What is Investment?

The money you earn is partly spent and the rest saved for meeting future
expenses. Instead of keeping the savings idle you may like to use savings in
order to get return on it in the future. This is called Investment.

Why should one invest?

One needs to invest to:

• earn return on your idle resources
  
  
• generate a specified sum of money for a specific goal in life
  
  
• make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the
cost of

Inflation. Inflation is the rate at which the cost of living increases.
The cost of living is simply what it costs to buy the goods and services you
need to live. Inflation causes money to lose value because it will not buy the
same amount of a good or a service in the future as it does now or did in the
past. For example, if there was a 6% inflation rate for the next 20 years, a
Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is
important to consider inflation as a factor in any long-term investment
strategy. Remember to look at an investment's 'real' rate of return, which is
the return after inflation.

The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.

For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.

[Jerry]

Great posts by Pradypop, Integratdbrains & mayurpathak. I suggest a new thread for each topic.

Biggie can you do that?

[mayurpathak]

Definations:
Here is one that is most commonly used by people working in SME operations in banks, assessing Credit ratings and investment risks.

Acid-Test Ratio
A stringent test that indicates if a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.

Calculated by:

[cash + a/c recbl + st investments]/current liabilities

Notes:
Companies with ratios less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.

The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid, so if upon submersion in acid the nugget didn't dissolve it passed the acid test. If a company's financial statements pass the figurative acid test, you can think of it as an indication that there isn't any accounting gimmickry going on, and that its bank account actually does contain gold!

[The_Big_K]

Good job integratdbrains, mayurpathak & pradypop!

Let us have questions flood in . Do we need a single thread for this or it makes more sense to have a new thread for each new discussion?

-The Big K-

[Mahesh]

HI CEans,

Great job guys.My question is "What is SENSEX? and How it reflects the economic growth of the country? "

[srams]

A Big thanks to Big_K, Pradypop,IntegratedBrains,Mayu Pathak for enlighting me about the basics of the share market....
Now I get the concept how it works.... For example... The share value of SunTV was on a rise when Maran was in power but when he suddenly resigned the share value of the SunTV falled. Hope this is how it works.. Am i right?

Even I hope get into this share markets. I jus want to know what are the constraints that must be taken into mind before investing in share... Can people post their experience how they started investing in share...coz i need to know how decisions should be made... What is the amount needed to get into this . Is there any registration needed to get into this...

Awaiting your reply....

[The_Big_K]

We have CEan - KGV who's with us to talk about topics related to finance. Feel free to ask questions in CE Finance section and we'll have engineers who are finance wizards to answer your queries

HaPPy Money Making

-The Big K-