STOCK MARKET

(Dedicated to Moitrayee, for her inspiration and inquisition to know about this, which made me right it, and with Thanks to V Pattabhi Ram Sir, for his book on MAFA, and helping me know all this.) As is said, where to invest depends on whether you want to eat well or sleep well. And if you are not afraid to take the risk, what better place to venture than the stock market….Have sharp focus on this market and you can get richer over night. Today the wealth creators of India, like Ratan Tata, Narayan Murthy, Ambanis, Azim Premji, Kiran Majumdar, Kumaramangalam Birla, have made us proud that we are Indians. To run business you need money. Not only to run business, even to leave today, we need money, as we do not follow the barter system anymore. And with the advent of company form of organization there is divergence of ownership from management and the promoters. So far as some companies are concerned you can identify each of them. If somebody ask you, can you name the Owner/Manager/Promoter of L & T? Difficult, right? To run big businesses you need big money, in business terms called the Capital. There are people who have money and would like to invest it somewhere. That part of the capital of the company to which each member/investor is entitled is called his share in the company. And the salient feature of most company form of organization is that the liability of the members are limited to the extend of the unpaid amount of capital. Market is a place where goods are brought and sold. Security market also known as the bull and bear market is a market dealing in equity and equity linked securities. Share culture was introduced and familiarized in India by Dirubhai Ambani, with the introduction of various stock trading instruments. Having invested in the shares of the company, the return I get can be by way of Dividend. Appreciation in the value of shares. Look at it this way. If a company retains earnings instead of giving it out as dividend, the shareholder enjoys capital appreciation equal to the amount of earnings retained. If the company distributes earnings by way of dividends instead of retaining it, the shareholder enjoys dividends equal to the amount by which his capital would have appreciated had the company chosen to retain its earnings. Hence, the division of earnings between dividends and retained earnings is irrelevant from the point of view of the shareholders. But some go by the old adage: A bird in the hand is worth two in the busy. Here immediate dividend is bird in the hand, and distant dividend is two in the bush. As per the news in Economic Times: ‘Quarterly dividends turn the vogue in India….’ Earlier dividend used to be restricted to annual and interim dividends. Among the companies, which have recently declared quarterly dividends are Marico, Godrej Consumer Products and Reliance Energy. ……..A company official says that though there is no official dividend policy it would not wish to keep excess cash on its books. Since the company uses Economic Value Added (EVA) extensively for internal decision-making such excess cash could have an impact on that figures. Is it true that companies which don’t distribute dividends would not command a good price? Microsoft, the worlds most happening software company, has not declared a penny of dividend till date. Yet Microsoft is the darling of Wall street. Dividend is what the company pays. You make use of the stock market, to buy/sell these securities. The players here are: · FUND SEEKERS: (Need to keep funds for long capital investments) There are more than 20,000 listed companies doing good. · FUND PROVIDERS: (Based on ability to retrieve their savings in time) Ø 50 million individual investors. Ø Bankers and financial institutions. Ø Mutual Funds. Ø Foreign instutional investors (around 450) INTERMEDIARIES: Ø Merchant Bankers (around 200 nos) Ø Registrar to an issue. Ø Brokers. Ø Portfolio Managers. Ø Underwriters. Ø Credit Rating Agencies. Ø Depository participants. INSTRUMENTS: Ø Shares, Stocks (consolidated shares), Bonds (Desi version of debentures), debentures, etc. Ø Derivatives. Ø Units or other instruments issued by collective investment scheme to investors (like Mutual funds) Ø GDRs, ADRs etc. REGULATIONS: Ø Quantitative aspects : ROC, statutory bodies like RBI, IT etc. Ø Qualitative aspects: SEBI, SCRA etc. These regulatory bodies are in order to ensure and to strive the objective of: ‘Let us make this world a better place to live in’. In the 90’s there were lot of issues, and consequently suicides and deaths in the stock market, due to failure of issues. The reason was that the companies raised huge amount of capital from the market at a fantastic premium for projects, which were not taken over by companies. There was no proper monitoring, rules and regulations. Also huge amount was eaten up by middlemen like brokers, merchant bankers etc. The tip of the iceberg as is known is the Natwar Sing scam and the Harshad Mehta scams. With effect from 20th Seot. 95, the Depository system was introduced to ensure and safeguard the interest of investors. Depository is an organization where the securities are held in electronic form through the medium of depository participants and which provide various other services. Eg. National Security Depository Limited. (NSDL) The financial market can be classified into/based on: ü Nature of claim: Debt market & Equity Market. ü Maturity of claim: Money Market & Capital Market. ü Seasoning of claim: Primary Market & Secondary Market. ü Timing of delivery: Cash or spot Market & Forward or future Market. ü Organizational Structure: Exchange traded market & Over the counter market. Planning the stock market game: How does any one decide whether to buy or sell a security? Does the movement of share price give any indication over time?? There are two schools of thoughts: 1. No: Random Walk Theory: As the name suggests, you can compare the behavioural patter of prices like how drunken man walks in a blind lane. Prices in stock market can never be predicted. Note: Beware of funds with recent hot records. In a rising market any one can make money. In a falling market too it is possible to make money. The toughest ones are the markets that move sideways. The following story, not apocryphal that happened in the US proves this point. At the height of the market boon nine mutual fund managers with impeccable record were asked to participate in a game whose rule was simple. Each was given a notional capital of 10 million dollars to invest. At the end of each day for a 6 month period each would make his buy-sell-hold decision in respect of his portfolio. The one with the highest portfolio value at the end of the 6-month period was to be declared the winner. Also participating in the game was a monkey which would make its choice by throwing a dart on a board that had buys stocks on the left and sell stocks on the right and the selection would be made based on where the dart fell. At the end of the 6-month period the monkeys portfolio finished second. A mutual fund manager had managed to save the face of the industry. 2. Yes: Careful Fundamental Analysis (FA) and Technical Analysis (TA) needed. In Fundamental analysis, you need to look into Macro Economic Factors, Industry Specific Factors and Company Specific Factors. Technical Analysis rests on the premises that price movement do not have direct co relation with intrinsic value of shares. While FA 90% logical and 10% psychological. TA 10% logical and 90% psychological. Technical analysis employ a variety of tools and techniques to evaluate the movement of share prices like Dow Jones Theory. Other factor determining the price of shares is the attitude of the investors. They can be classifed into: 1. Bear: An investor or trader who takes the view that prices are likely to fall and accordingly sells securities or goes short, thereby anticipating a profit by buying them back at a lower price. A bear tend is one where prices are falling. So a bear market, is a market perceived to be on a trend of falling prices. 2. Bull: An investor or trader who takes the view that prices are likely to rise and buys securities hoping to make a profit by subsequently selling at a higher price. A bull trend is a series of generally increasing prices, also called a bull run. So a bull market is perceived to be on a trend of rising prices and generally optimistic. So ready to buy stock: Do consider the business, company, promoters, finances, risk, price and the objective of the issue. In short look before you leap. You can watch NDTV profit, CNN and many other channels to know more about this. Also in orkut there is a community for stock exchange. Would like to take up professional qualification in this? You can go for NCFM (NSE certification in financial Market) which conducts online tests. Online registration fee is Rs. 1,000/- So interested in Stock Markets!! Best wishes!! Be careful!! Trick of the trade is no doubt what our grandparents said: Don’t put all your eggs in one basket.