Basics of stocks & shares

Hello CEans!

Not many of us are aware of how the share market works. This thread specifically focuses the basics of stocks & shares. Ask questions, post useful information and answer other's questions on stocks & shares in this thread.

Let us limit this thread to the discussions on 'basics' of stocks & shares.

-The Big K-


  • pradypop
    There's a certain value(worth) of a company. Generally this value is ascertained by taking many things into consideration viz;
    1. Assets
    2. Liquid cash
    3. Brand value
    4. Future prospects
    5. Stability of organization...and few more.

    Organizations look to raize capital for futute investments by selling part of stakes to others. They do it by creating shares out of company's nett worth. Lets say a company's nett worth is a billion rupees and company decides to sell 10% of its worth. It creates 100million shares of Re 1/- each(generally) and make an offer to investors at say a range of 450-550/- as an IPO(initial public offer). Now investors may see a good future for the company and may purchase each share at 500/- per unit. Now the company raises huge funds in the deal. The investor gets the share of company's profit proportional to his stakes in the company.

    By stock market we mean stocks of shares. The performance of a stock is measured by average gain or loss of the stock. The performance of the market itself is measured by performance of sensex.

    The sensex is weighted average of major stocks listed in the market. Weighted because 5% fall in a big company affects market more than a 5% fall in a small company. Sensex generally gives you a very good idea of how markets are moving.

    That was a very brief over-view. We can get into specifics at later stages.
  • pradypop
    ๐Ÿ˜ ๐Ÿ˜ ๐Ÿ˜

    Last one was my 50th post. It also provides me with messaging facility I believe!!!
  • Kaustubh Katdare
    Kaustubh Katdare
    way to go, looking forward to 100th post

    ๐Ÿ˜ ๐Ÿ˜ ๐Ÿ˜

    Last one was my 50th post. It also provides me with messaging facility I believe!!!
    Prady, you already have a special status over here. So the messaging facility was enabled by default. Congratulations for your 50th post ๐Ÿ˜ !

    Prady, do pump in more about stocks & shares if possible. I'm searching for the finance people to write for us in this thread. Let us keep the fingers crossed.

    Everyone, feel free to ask questions and post information in this thread / section. Do not forget to title your thread appropriately.

    -The Big K-
  • aashima
    good one

    Thanks for the information pradypop. I knew very little about the stocks and share that too due to my subjects related to economics and like that. I would really like to know a good deal of it. Looking forward to some more useful information on the same.
  • Neha
    This question was in my mind since a longtime...Nice information to share,pradypop..Looking for more.
  • pradypop
    Well, I would like to address the issue of investing and how it is done.

    To invest into stock market you need to hold an account with banks or agents called "D-MAT" account. You can put all your money in your account and then can go shopping around the stock market.

    The selling or buying of shares happen in two ways; by you placing a bid on "X" company's share at some price and anyone willing to sell at that price would pass his shares on to you in exchange of money, which gets debited onto his account from yours automatically. This is generally when a share is on rise. The seller would make an offer to sell his shares at some price and if you are intrested you can purchase it. This happens generally when share is on a fall. The price of share is the price at which last transaction happened. Everything happens online and the process is very easy.

    You can set trigger points in your software i.e. to sell or purchase automatically when the value of the share reaches the value set by you. You need not even be present at the place for transaction.

    Had you purchased 1 share of coca-cola in 1929, you would have been richest person in the world today. Had you invested Re 1/- in Infosys in 1992, you would be making Rs 22000/- out of it by now. Happy Investing!!!
  • pradypop
    There are two types of investors, retail and institutional. We all fall into category of retail investors and we genarally invest on small number of shares.

    Thers are organizations which invest large sums into stocks of companies and these are called institutional investors. There are foreign as well as domestic institutional investors. FII means "Foreign Institutional Investment" which is one of the means for our foreign currency reserves. But FIIs are not very good because they come only for profit booking(purchasing and selling shares to make quick money). Infact this is one of the major source of instability in markets. Its FDI(Foreign Direct Investment) which we look for to achieve a sustained growth. FDI is investment made for equities(partnerships) in companies. This money once it comes doesn't go back.

    Banks are generally Institutional investors. They run schemes called "mutual funds". They take money from investors and invest in various shares of various companies. The value of the mutual fund itself is the weighted average of all shares. Some may fall and some may rise but there generally is some average positive growth in mutual funds. But growths will never be extravagant. This also depends on how well banker is managing investments. On weather he's investing in right companies.

    Its in association of one such banker running US-64 mutual fund, Ketan parekh made lots of money and a scandal. KP invested his money in 10 low priced shares and got US-64 to invest huge amounts into these stocks. This made the prices of these companies soar. Then he sold of his shares to make 300 crores in a month or so. These shares since have become famous as K10. Harshad did opposite to make money-by pulling markets down to invest and allowing for correction.

    SEBI is incharge of stock markets.
  • Rocker
    Hey Pradypop! thanks for the information. Big K! thanks for this thread!
    Can you write about the basics of IPO?
  • Kaustubh Katdare
    Kaustubh Katdare
    Hey Pradypop! thanks for the information. Big K! thanks for this thread!
    Can you write about the basics of IPO?
    Thanks a ton, Rocker! I can write something, but I'm trying to get people who are really 'into' finance.

    This thread will be more interesting if we can have question/answer type posts. What say?

    -The Big K-
  • crook
    Pradypop!! Thanks for the information!! Looking for more ! ๐Ÿ˜
  • integratdbrains
    A little to add.

    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.
  • Mayur Pathak
    Mayur Pathak
    Some more information

    What is Investment?โ€‹
    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.โ€‹

    Why should one invest?โ€‹
    One needs to invest to:โ€‹
    • โ€‹
    • โ€‹
    • earn return on your idle resourcesโ€‹

      generate a specified sum of money for a specific goal in lifeโ€‹

      make a provision for an uncertain futureโ€‹

    One of the important reasons why one needs to invest wisely is to meet the
    cost of โ€‹
    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?
  • Mayur Pathak
    Mayur Pathak

    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

    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!
  • Kaustubh Katdare
    Kaustubh Katdare
    Good job integratdbrains, mayurpathak & pradypop!

    Let us have questions flood in ๐Ÿ˜€ . 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....
  • Kaustubh Katdare
    Kaustubh Katdare
    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 ๐Ÿ˜€

    HaPPy Money Making ๐Ÿ˜

    -The Big K-

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