Stocks – Lesson 2

As we saw in Lesson No. 1, shares that are initially launched as IPOs eventually find their way to the secondary market (the BSE or the NSE). It is like an auction place for the shares, those who have the shares tell an ‘ask’ price at which they will sell the share and those who want it will have a ‘bid’ price at which they would like to buy the share.

If you had happened to see some news clips, you can find the BSE something like a local fish market with everyone yelling and running around. Why can’t they all sit in their places while the buy/sell takes place. It is because of the bid and ask differences. Why is there so much noise in a fish market? Because there is some bargaining and profits to be had. That is why the sellers shout their prices to attract the prospective buyers and the buyers bargain with more than one seller. Almost the same happens at the stock market. There are ‘ask’ers shouting their price and ‘bid’ders shouting theirs. For example a broker there might shout “I will sell 100 Infosys at Rs 1000” or something like that. Since huge money is involved you can see people running and shouting like maniacs in the BSE located at Dallal Street, Mumbai.

What would happen if we all were to go to BSE to shout our way to wealth. Not likely Right? and it would be a hell of a lot of work to do understanding a lot of rules and regulations along the way. So SEBI (Security and Exchange Board of India) have laid some rules governing all this and there are special tests to be passed to become a broker at BSE/NSE. These brokers will act on behalf of us and sell/buy whatever we tell them, Of course for a small comission. If you find this too a tedious process, you can go for an online broker like ICICIDirect, ShareKhan, Kotakstreet, Indiabulls etc. Then you can trade from the convenience of your home with a computer hooked to internet. We will see this in detail in later lessons.

Fine, so that is how there came to be so many shares of companies being traded everyday at both BSE and NSE. And you can buy any number of shares (on the bid price) of any company listed in the BSE or NSE, provided you have the money and the same holds for selling (on the ask price). Now let us come to a few terms that have pestered our minds for long.

‘Sensex’ – The whole concept lies behind the buy and sell in the BSE. Say we need to track whether there were more ‘buy’s or more ‘sells’ on a particular day. Again there might be 100 ‘buy’s of Rs 10 each and 1 buy of Rs 1000. So the point is to consider the actual price movement alone, i.e if ROHG was at 75 the previous day and is now at 78, it is +2 and the same goes for other companies. Finally Sum of all price action will give you a  +n (n points more) or a  -n (n points below) for the market as a whole on the day (compared to the previous day). But instead of considering all the companies whose shares make the BSE, SEBI considers only 30 stocks whose price action is alone considered in calculating sensex. So in rough terms Sensex = Previous day Sensex + Sum of the price difference of the 30 stocks compared to their previous day. But beware this is a very generic and simplified explanation. So when we say that Sensex is up 100 points, it means that there were more buys that day and that the stock prices have increased on a whole that day.

‘Nifty’ – A benchmark for NSE considering 50 stocks trading at NSE (Same function as that of Sensex for BSE).

‘Stocks and Shares’ – Stock usually refers to a collection of shares. So you can say “I was given a stock option of Infosys consisting of 100 shares”. My portfolio has stocks of IBM, Infosys and TCS.

‘Bull Market’ – When the Sensex (or Nifty) rises consistently for a prolonged period of time, the phase is said to be the ‘Bull Market’. There are huge ‘buy’s and people are happy with the prices raising. Bulls are those who expect the market to be bullish.

‘Bear Market’ – When the Sensex falls and stays at the same level for an extended period of time, the market is said to be bearish. Bears are those who are always negative about the market and expect it to fall down. Whenever there is an economic crisis (Political reasons too like NDA Govt’s failure), the market crashes (Sensex falls heavily) and it enters the bear market.

‘Correction’ – When the market is on a bull run, there is a phase when some of the traders (some of us), decide to sell our shares and make a profit. This causes a slight dent in the bull run and is known as the correction, but then usually the bull run continues again.

‘Porfolio’ – A collection of Stock (shares of many companies). For eg if I have 100 shares of Infosys, 50 shares of Wipro and 120 shares of ITC, then my portfolio would look like
Infosys – 100 shares – Net profit/loss at current price = 12000 Rs
Wipro – 50 shares –  Net profit/loss at current price = 5600 Rs
ITC – 120 shares –  Net profit/loss at current price = -7520 Rs

‘Paper Gain/Loss’ – The gain or loss of our stocks/portfolio if we sell the stock/entire portfolio at the current market price. It is the difference between the purchase and current market price. When we say that our paper gain in Infosys is 12000, it means that if we sell now we will gain 12000 from the trade (buy/sell) and the same is true when we say that we have a paper loss of 7520 in ITC.

‘Actual Gain/Loss’ – When we actually sell the shares/stocks in portfolio the loss or gain that we get is termed as actual loss/gain unlike the paper loss/gain which is just notianal. So if we have a paper gain and we don’t sell but keep it till the price falls below the purchase price, we have a paper loss and if we sell then we will get the actual loss.

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