Stock market analysis- by Arian Bader
Stock market in general refers to several exchanges in which the
shares of publicly held companies are bought and sold.
These markets allow for price discovery for shares of corporations
and serve as a barometer for the overall economy. Buyers and sellers
are assured of a fair price, high degree of liquidity, and transparency
as market participants compete in the open market.
How the stock market works in India
Stock market investing is one such lucrative option that rewards
investors with high returns over the years. But to make this kind of
return, it is important to understand how the stock market works.
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 1875.3 The NSE, on the other hand, was founded in 1992 and
started trading in 1994.4 However, both exchanges follow the same
trading mechanism.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty.
Sensex is the oldest market index for equities; it includes shares of 30
firms listed on the BSE. It was created in 1986 and provides time
series data from April 1979, onward.
Another index is the Nifty, which includes 50 shares listed on the
NSE. It was created in 1996 and provides time series data from July
1990, onward.
The stock market allows the investors to trade in shares bonds and
derivatives which is facilitated by stick exchanges. It acts as a
platform and that connects buyers and sellers and involves four key
participants:
Securities and Exchange Board of India (SEBI):
The overall responsibility of development, regulation, and
supervision of the stock market rests with the Securities and
Exchange Board of India (SEBI). Its primary job is to ensure the Indian
stock market functions smoothly with transparency, so that general
investors can invest without worries. It also protects the interests of
all the participants and ensures that no one gets any undue
advantages. The companies (listing their shares), must register with
SEBI and The Bombay Stock Exchange, The National Stock Exchange,
or regional exchanges before trading. Exchanges, companies,
brokerages, and all other participants must abide by the guidelines
laid down by SEBI as it enjoys vast powers of imposing penalties on
market participants in case of a breach.
Stockbrokers:
Stockbrokers are the members of exchanges who are the
intermediaries and execute the buy and sell instructions from
investors in exchange for fees. In the Indian setup, investors need to
trade through broking houses/brokers, who act as facilitators.
There two types of brokers:
Full-service brokers – These are the traditional brokers who provide
a wide variety of services ranging from buying and selling of shares,
investment advice, financial planning, portfolio updates, share
market research and analysis, retirement and tax planning, and
more. These brokers will offer you personalised investment services
with individualised recommendations to suit your needs and
financial goals.
Discount brokers – These are online brokers who offer no-frill
stockbroking accounts. They are known for providing the necessary
trading facility at the least possible cost but no personalised services.
Investors and traders:
The remaining two participants are investors and traders. Investors
buy company shares to hold them for the long-run and generate a
source of income from it. Traders are the opposite of investors and
get involved in buying and selling of equities.
Investors are motivated by company performance, long-term growth
opportunities, dividend payouts, and other such factors.
Traders, in contrast, are influenced by price movement and demand
and supply factors.
To further understand how the share market works, the next thing is
to learn about primary and secondary markets.
Primary markets:
The primary market is where securities are created. It's in this market
that firms sell new stocks and bonds to the public for the first time.
An initial public offering, or IPO, is an example of a primary market.
These trades provide an opportunity for investors to buy securities
from the bank that did the initial underwriting for a particular stock.
An IPO occurs when a private company issues stock to the public for
the first time.
An IPO opens for a particular period, within this window investors
can bid for the shares and buy them at issue price listed by the
company.
Once the subscription period is over, the shares are then allotted to
the bidders. The companies are then called public because they have
given out their shares to the public.
For this the companies need to pay a fee to the stock exchanges and
are required to provide all importin details about the company’s
financial information such as annual reports, balance sheets, etc.
Secondary markets:
The last step involves listing the company in the stock market, which
means that the stock issued during the IPO can now freely be bought
and sold. The secondary market is where the shares of a company
are traded after being initially offered to the public in the primary
market.
Once listed in the stock exchanges, the stocks issued by companies
can be traded in the secondary markets. This buying and selling of
stocks listed on the exchanges is done buy stockbrokers of brokerage
firms. Your broker passes on your buying request to the stock
exchange, which then compares it with a seller. Once the trade is
fixed and the price agreed, the exchange informs the broker about it,
and the transaction takes place. Meanwhile, the bourse confirms
information regarding the buyer and the seller so that parties don’t
default. The actual transfer of stocks then takes place to complete
trading.
The Bottom Line
Emerging markets like India are fast becoming engines for future
growth. Currently, only a very low percentage of the household
savings of Indians are invested in the domestic stock market, but
with gross domestic product (GDP) growing at 7% to 8% annually for
the last few years, though in the 6% range for 2018 and 2019, and a
stable financial market, we might see more money joining the race.
Maybe it's the right time for outside investors to seriously think
about joining the India bandwagon.