Stock market investing basics

Shares

What is a share?
A share is nothing but a part of ownership of the company. Of all capital invested at the beginning or in case of expansion, the amount invested in the company will be divided into parts and allocated to the public in the form shares. If you have more number of shares in the company then you have more ownership stake.

What is the face value of a share?
It is the nominal value of the share at the time of issuing by the company to the public or original cost of the stock shown on the certificate. Simply to say “par value”. The face value of the share will be ₹ 1, ₹ 2, ₹ 5 and ₹ 10 in India.

What is the book value of a share?
The value of the share will be decided by the company based on the net worth of the company. Simply, amount getting by the shareholder after selling assets and paying off liabilities per share.

What is the market value of a share?
The price which is quoted on an exchange to trade is called market value. It can change time to time based on transaction, events happening around the globe and show the worth of the company, it’s nothing but share price.

What are the factors being influence the stock markets?
The following factors are influence the stock markets:

  • GDP growth rate
  • Interest rate decisions by RBI and other central banks
  • Inflation and deflation
  • Fiscal deficit
  • Exports and imports
  • Consumer price index
  • Index of industrial production
  • Purchasing manager index
  • Government policies and procedures
  • Sectorial effects
  • Size of the company
  • Promoters of the company
  • Board of directors
  • Valuation of the stock
  • Financial history
  • Current Financials
  • Future projections
  • Technical analysis – Demand and supply
  • Corporate actions like stock split, buyback etc.,

Additional factors:

  • Market capitalization
  • Goodwill
  • Earnings per share (EPS)
  • Subsidiary companies
  • Holding company
  • Growth ratios
  • Order book
  • Competitors
  • Dividend yield
  • Price volatility
  • Reserves and surplus
  • Legal issues
  • Technology
  • Frauds and claims
  • Mergers & Acquisitions
  • Amalgamations
  • Absorptions
  • Re-constructions
  • Product and services of the company
  • Seasonal factors…etc.,

Features of a share:

  • One can get ownership rights after purchase
  • Can earn potential profits when the company declared as dividends and some time may be interim dividend also.
  • Can get share for no cost as bonus shares when the company declares.
  • Can get rights for discount.
  • Price are fluctuated subject to market risks
  • Voting rights
  • Can participate in company general meetings

Bull Market:
There is no formal qualification to the term “bull market”. The term most commonly used to refer to the rise in stock markets. In most of the scenarios which are most commonly accepted in bull markets is index raised by 20%, which follows previous 20% decline and followed by another 20% decline.

Features:
1. Offer strong GDP and strengthen the economy.
2. Due to rise in market capitalization, companies get good returns.
3. Rising the investor confidence levels and optimistic.
4. Bull market eventually transition to bear market.

Bear Market:
The term “Bear Market” refers the fall in stock markets. In this period there will be a steep fall in the stock prices and even most seasoned investors will also tend to lose. Investor confidence fuelling to negative to heavy volatility and market conditions. Bear markets are marketed to the 20 % down in stock price in a short span around 20 months.

Features:
1. Investors will be pessimistic.
2. The dividend yield will tends down.
3. Offer weak GDP into the economy
4. A huge sell off will be happen.
5. Bear market eventually transitions to bull market.

Index:
The term itself refers that is an indication for either it may sector/ market/ industry/ any.
While this term relating to stock market, the “Index” indicates not only exchange performance of the exchange but also company growth, industry growth, sector growth, whole economy grows, people purchasing power, cost of living, wealth of the country, revenue to the governments, etc.,
For every stock exchange, an Index will adhere to indicate.
In India, NSE and BSE are the major exchanges and the indices are NIFTY 50 and SENSEX respectively.
Apart from NIFTY and SENSEX, there will be sectorial indexed like BANK NIFTY, REAL ESTATE INDEX, etc., within the major index.

Stock Exchange:
The place where all trading is happening in a systematic manner pertaining to the rules and regulation acts as an intermediary and economic facilitator for development of securities market which is authorized by regulatory body in the country.
In India regulatory Body for the exchange is SEBI (Securities and Exchange Board of India).
NSE (National Stock Exchange) and BSE (Bombay stock Exchange) are the major stock exchanges in India.

Broker/Agent:
The term broker itself says that, they are mediators between buyers and sellers. A stock broker is a regulated body professional associated with the brokerage company to assist between the buyer and seller of the stock relating to the securities for a commission when the deal executed.

After the deal is executed the concerned broker charge commission from the buyer and seller as brokerage fee. Some brokers will charge single leg and some charge double leg basis.

Single leg: commission will be charged on either purchase or sale.
Double leg: Commission will be charged on purchase and sale.

Hedging:
Hedging is nothing but a transfer of risk, i.e., by setting off of losses arise due to fluctuation of stock and currency deviations. To control losses, by taking equal and opposite position in the markets. For instance, if you take long position with an assumed market will rise, but all of a sudden due to bad news markets took a downturn. To compensate this loss, taking short positions in the markets or vice-versa.
There are many strategies to hedge the risk like:

Straddles – Long straddle and Short Straddle
Strangles – long strangle and short strangle

Spread — Bull spread, bear spread, butterfly spread
Swaps — Interest rate SWAP between currencies etc.,

Volume:
In the context of stock markets, “Volume” refers to the number of shares is traded in a day.
There are two types of volumes, i.e., high volume and low volume. Generally, the volume which are traded on a given day less than 10000 shares are low traded volume, which are harder to buy and sell at the market price.
Volume is a very good technical market indicator for trend or trend reversal and gives an idea to invest about market price and momentum.

Yield:
It is a financial ratio of the investment that, how much amount of return one will get relative to the price of the share. Dividend yield means dividend paid given per share.

Volatility:
In the market trade, if the share price is fluctuating heavily like increased in one day and take downturn in very next few days and again rose and took down turns again. This kind of movement in the price considered are heavy volatile stocks i.e., the profits or loss for this stock are high.

Rally:
“Rally” is happening under both bull and bear markets. It is the period of continuous increases or continuous decrease in the prices of stocks, bonds or indices.

Portfolio:
Portfolio is a combination of financial assets viz. commodities, currencies, stocks, bonds and cash equivalents as well as their fund counterparts, including mutual, exchange-traded, closed funds also consist of non-publicly tradeable securities like real estate and private investments.

Margin:
Margins are computed and collected online, real time on a portfolio basis at the client level. Members are required to collect the margin upfront from the client & report the same to the Exchange.

Moving Average:
It is an indicator shows that an average moving of security prices over a period or at a predetermined time. Generally, analysis will be considered as follows:
For short term analysis – 15 days moving average
For medium term analysis – 50 days moving average
For long term analysis – 200 days moving average

TYPES OF MOVING AVERAGES:

1. Simple Moving Average:
An arithmetic moving average calculated by adding the closing price of the security for a number of time periods and divided by the total number of time periods.
SMA gives more weight to beginning data.

2. Weighted Moving Average:
To calculate this average, closing prices will be multiplied with its associated weights and totalling the values and divided by the sum of total weights associated.
WMA = (Recent Price X weight) + (next recent price X weight -1) …. / Total weights
WMA gives more weight to recent data

3. Exponential Moving Average:
The EMA is a weighted average of the last n prices, where the weighting decreases exponentially with each previous price/period.
EMA balances both beginning and recent data.
[Close – previous EMA] x (2 / n+1) + previous EMA.

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