Stock
market terms you must know
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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), ONGC,
Reliance (oil & gas), ITC, HLL (fast moving consumer goods) etc.
List of
30 Sensex stocks
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.
Weights
assigned to Sensex stocks
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.
The Nifty
50 or the S&P CNX Nifty as the index is officially called has all
the 30 Sensex stocks.
List of
Nifty 50 stocks
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.
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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.
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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.
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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).
Like bonus
shares, dividend amount also comes from a company's free cash reserves.
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
