Stock Exchange in India

Prepared by Dipesh N Mehta

Introduction

• Stock

An instrument that signifies an ownership position (called Equity) in a corporation, and represents a claim on its proportional share in the corporation’s assests and profits.

• Stock Exchange

The SEBI Act, 1956 defined Stock Exchange as ‘an association, organisation or a individual which is established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.’

• Organised Market
• Members gather to Trade
• Members may act as agents or as principals
• Securities include shares, unit trust, pooled investments product’s and bonds
• Company has to be listed

History of Stock Exchange In India

It all started in 1875, when 318 persons came together to  form “Native Shares and Brokers Association” and the membership fee was INR  1.00. This association is known as Bombay Stock Exchange (BSE) and in 1965  it was given permanent recognition by the Government of India. National Stock Exchange (NSE) is the second popular stock market  in India. Sensex was first complied in 1986. Nifty Stock is the sensitive index for NSE.

There are more than 23 Recognized Stock Exchanges in India.

National Stock Exchange Limited

• The NSE (Rastriya Share Bazar), established in 1994 as a Tax company, is stock exchange located in Mumbai, India, covering 370 cities and towns in the company. It is the top 20 largest stock exchanges in the world by market capitalization and largest in India by daily turnover and number of trades, for equity trading.
• NSE has a market  capitalization of around US $1  Trillion and over 2,113 listings.
• The NSE’s key index is the S&P CNX Nifty, known as the NSE Nifty (National Stock Exchange Fifty)
• NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other  financial intermediaries in India.

Bombay Stock Exchange Limited

• Commonly referred to as BSE (Bombay Share Bazar) is the oldest and first Stock exchange of India established it the year 1875. It was First started under Banyan Tree opposite to town hall of Bombay over 22 stockbrokers.
• It is the first Stock exchange in the country which obtained permanent recognition (1956) from the GOI under the Securities Contracts (Regulation) Act (SCRA), 1956.
• Market Index – BSE SENSEX, also called as BSE 30.
• BSE has the largest number of listed companies in the world

 Powers of SEBI

• SEBI has the authority to search any premises or place where it believes any books of accounts, documents, vouchers, computer discs or storage devices used in connection with the securities market are maintained and to confiscate them, if necessary, under Section 10.
• SEBI has the power to arrest without a warrant anyone who has committed an offence punishable under the Act, according to Section 12. Any officer of SEBI or any other police officer not lower in rank than an Assistant Superintendent of Police may arrest without a warrant anyone who has committed an offence punishable under the Act.
• Power of service or attachment: SEBI, or any officer authorised by it in this capacity, has the authority to serve a copy of any order made by it on the concerned person through its officers, as well as attach their property pending the outcome of any proceedings under the Act.
• Appointment of officials and others: Under Section 19, SEBI may appoint its officers, employees, and others as necessary to carry out the Act’s functions. It can also appoint any government or law enforcement personnel as a SEBI officer.

Stock Market Effects on The Economy

• The activities of the stock market influence the country’s apex bank’s monetary policies and expansion of the country’s Gross Domestic Product (GDP). A stock market that has been by and large bullish in its activities will generally influence economic policy makers to raise interest rates.
• Investors can buy and sell investments on the stock market, most frequently stocks, which are ownership shares in public companies. When discussing the stock market, people frequently use one of the important indexes, such as the Nifty 50.
• High expectations that are already reflected in stock prices before they have any effect on the economy are another factor that can cause discrepancy in the markets and economy.
• When the overall economy grows, the markets do not soar because stock prices already consider investor sentiment.
• The economy may not necessarily be affected by geopolitics, natural disasters, interest rates, or tax rates, but they all influence stock prices.

Stocks and Mutual Funds

Parameters	Stocks	Mutual Funds
Definition	They represent the ownership of companies	Investors are like shareholders who owns funds or stocks and earn profits  on them
Denomination	Different Stocks can have the same or equal value	Essentially it is  a pool of money collected from investors.
Numerical  Value	Stocks have a definite numerical  value	Mutual funds have net asset values
Risk Level	They come with a higher risk level	The risk factor is comparatively low
Diversification	Diversification is only possible if the stocks allow it	Mutual Funds offer more opportunities for Diversification.
Return Potential	They offer relatively higher returns	Depending on the scheme,  it provides high to moderate returns
Tax Benefits	Investors must pay a tax while selling their stock	Several mutual funds schemes offer tax saving benefits to  investors
Investment  Horizon	Investments in stock can either be for long term or short term	Most Mutual Funds reflect better results when kept invested for  the long run

Why Do We Invest 

Investment is necessary to support our financial needs.

1. By investing a portion of your income, you allow money to grow and work for you.
2. 3 parameters to assess suitability of any investment avenue are –
   1. Return potential
   2. Safety
   3. Liquidity
3. Various avenues where money can be invested, are broadly classified into some groups, known as ‘Asset Class’. Stocks or Equity shares are most popular class of assets.

What is meant by Stock Selection

Stock selection is the selection of one or more stock (or shares) based on certain set of criteria in order to maximize the probability of meeting the trading or investment objective.

• There are more than 5000 stocks available for trading or investment. None can trade or invest in all at the same time.
• Hence, one needs to select a manageable number of stocks.
• Fundamental and Technical Analysis are the two most preferred tools for stock selection.

Types of Analysis

• Economic
• Fundamental
  • Quantitative
  • Qualitative
• Technical

Fundamental Analysis

Fundamental analysis is a method used to identify the true value of a stock.

• The current price of a stock may not reflect the actual value of the stock. The stock may be overvalued or undervalued in the market.
• Fundamental analysis helps investors to study the health of the company, and thus leading to the actual value of the stock.
• This is done by using various qualitative and quantitative factors.
• The main purpose of this method is to identify companies that that are fundamentally strong in order to invest in them for the long term.

Economic Analysis

• It involves assessing or examining topics or issues from an economist’s perspective.
• This allows investors to analyze the market from the big picture to all the way down to individual stocks.
• By examining the economic numbers one can determine the current market strength and have a better idea of what the future holds.
• Key Economic indicators, investors must incorporate while selecting stocks:
  • Indices (e.g., Nifty, Sensex)
  • Gross Domestic Product (GDP)
  • Unemployment rate
  • Inflation rate
  • Consumer Confidence
  • Purchase Managers’ Index

Price Charts

Technical analysts use a variety of charts based on the information they seek. However, there are three types of charts that are most commonly used. They are: Line, Bar and Candlestick

Line Chart

1. It plots the closing price of a share for each trading day over a period.
2. The line formed by joining the dots plotted on the graph shows the movements in stock price during the period.

Bar Chart

1. It plots the intra-day high and low prices of a stock using a bar for each trading day for a specified time period.
2. The top of the bar corresponds to the day’s high and the bottom, day’s low.
3. Two additional horizontal lines indicate the opening and closing price. The length of the bar is proportional to the volatility in a stock.
4. Colored coded – If the share price closes above the open price it is colored green, and if the close is below the open the bar is colored red.

Candlestick chart

1. It displays the relationship between the high & low and opening & closing prices of a stock.
2. The body of the candle represents the opening and closing prices during the period.
3. Above and below the body are vertical lines called wicks or shadows that show the lows and highs of the traded prices.
4. While an individual candle provides sufficient information, patterns can be determined only by comparing one candle with its preceding and next candles.

Difference between Fundamental & Technical Analysis –

Fundamental analysis	Technical analysis
Analyses stock value based on economic and financial factors	Analyses historical stock movement to predict the future price of a stock
Long-term approach	Short-term approach
Uses financial statements for analysis	Uses price movement charts for analysis
Incorporates new market information	Focuses mainly on past performance