The Secondary market enables investors/traders to trade an already issued securities. Transactions in the secondary market are not new issues and do not affect the capital of the company. It facilitates trading of securities that were introduced in the primary market.
Secondary Market Role and Functions
Liquidity: Secondary markets provide liquidity to investors enabling, thereby enabling entry/exit from investment of any listed security. Equity shares are not redeemed by company but secondary markets allows sellers to sell them to interested buyers.
Price discovery: Secondary markets enable price discovery of traded securities. Every transaction between buyer and seller is recorded by stock exchange and on basis of numerous such transactions the security’s worth can be assessed. Different Buyers and Sellers quote different prices in the market for a company’s share. These quotes are collectively displayed in the real time trading information provided by the stock exchange. The continuous flow of price data allows investors to identify the market price of equity shares. If a company is doing well, more investors will be willing to buy its shares, which will increase the demand for its shares further increasing the share prices (more buyers than sellers for shares). Whereas if company is making losses, there will be more sellers ready to sell shares leading to fall in share prices due to lesser demand.
Information dissemination: Market prices provide instant information about issuing companies to all investors. Issuing companies are constantly being monitored it ensures their efforts towards increased profitability and performance of the company. Secondary market consists of large number of investors that are constantly buying selling shares leading to price movements which in turn incorporate all relevant information into the price.
Secondary Market Structure and Participants
Stock Exchange: The stock exchange provides a platform for investors to buy and sell securities from each other in an organised and regulated manner. The three national level stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) and the Metropolitan Stock Exchange of India Ltd (MSEI) (commenced operation in 2013).
Trading, Clearing and Settlement: Secondary market transactions have three distinct phases: trading, clearing and settlement. To trade in shares is to buy and sell them through the stock exchanges in an electronic order-matching system that facilities efficient and speedy execution. Clearing includes identifying what is owed to buyer and seller. Settlement includes settling what is owed of both the parties. Settlement takes two days, i.e if trade takes place today(T), it will take two business day to settle (T+2).
Clearing Corporations: To facilitate smooth transaction, clearing corporations become the buyer to every seller and the seller to every buyer. All buyers pay funds to the clearing house / clearing corporation, and all sellers deliver securities to the clearing house / clearing corporation. Thus, clearing house / clearing corporation completes the settlement by paying the respective funds they had received to sellers and delivering securities that was given by sellers to the respective buyers. The National Securities Clearing Corporation Ltd. (NSCCL) is the clearing corporation for trades done on the NSE; the Indian Clearing Corporation Ltd. (ICCL) is the clearinghouse for BSE and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL) is the clearing corporation for MSEI.
Risk Management: In order to insure against any default in payment by members of stock exchange and guarantee settlement of executed trade, stock exchange has strategies such as maintenance of adequate capital assets by members and regular imposition of margin payments on trades. This helps in minimizing risk to members.
Depositories and DPs: For a security to be eligible to trade in the secondary markets, it should be held in electronic or dematerialised form with depositories. Depositories is an institution that holds and maintains a record of securities on the behalf of investors. National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are the two depositories in India. Investors need to open Demat accounts with depository participants (DPs), who are banks, brokers or other institutional providers of this service to be able to trade. Demat account is similar to bank accounts for your securities where all entries and share certificates are electronically stored. Transfer of shares can be easily carried out by instructing the DPs, who in turn notifies the depositories of the change in ownership of the securities.
Custodians: Custodians are institutional intermediaries, who are authorised to hold funds and securities on behalf of large institutional investors such as banks, insurance companies, mutual funds, and foreign portfolio investors (FPIs). They settle the secondary market trades for institutional investors.
Broker and stock brokers: A broker is a member of a recognised stock exchange who is registered with SEBI and permitted to trade on the screen-based trading system of stock exchanges. A sub-broker is not a member of any recognised stock exchange but is registered with SEBI through a registered stock broker and works under him by letting investors trade in securities through the main broker. Both brokers and sub-brokers can be individuals, partnership firms, private or public limited companies, including subsidiaries of banks and financial institutions. Registered members of the stock exchange are required to display their membership details at their front offices so that investors can verify that they are dealing with a registered entity. Trading takes place through trading terminals of only registered brokers of a stock exchange, which is then accepted and executed by the system. Brokers buy and sell securities on behalf of investors, for which they receive a commission , known as brokerage. Maximum brokerage chargeable is fixed by individual stock exchanges. SEBI registration to a broker is granted based on factors such as the broker’s eligibility to be a member of a stock exchange; availability of adequate office space, equipment and manpower to effectively carry out his activities; past experience in securities trading etc.
3 in 1 accounts: The 3 in 1 account allows an investor to merge the savings bank, demat and trading account. Banks that can also act as DPs provide these services to clients. Brokers can also offer these services wherein the demat and trading is handled by the broking agency and only the bank account is held with a bank. 3-in1 accounts helps investors carry out seamless online transactions. An investor can open all the three accounts with the same bank or broker using a single account opening form. Funds can be easily transferred from the bank account to the trading account in case of purchase of securities and back to the bank account whenever the securities are sold or redeemed. This feature allows the demat and savings account to function only for trading purposes that takes place in the linked trading account. It enables efficient trading as the trading platform is linked through the broker’s terminals to the live market, enabling access to real-time information on prices and market activity.
Power of attorney: The power of attorney is a voluntary agreement between investor and broker/DPs. It facilitates delivery and receipt of shares and funds to settle the trade transactions on behalf of investor. Though PoA is not mandatory for opening a trading account with a broker, it is required when an online 3-in-1 account is opened. PoA is needed for automatic debit from the client’s bank account upon purchase of shares and automatic debit from the client’s demat account upon sale of shares. SEBI has issued detailed guidelines for execution of PoA, they are as follows: Brokers must provide a duplicate or a certified true copy of the PoA to the client after execution. PoA must be executed in the name of the broker organisation and not in the name of an employee of the organisation. POA must mention details of the bank and the demat account of the client. PoAs must be limited to transferring funds to settle trading obligations with the stock exchanges and for recovering amount due to the DP or broker for their services.
Trade execution: Buyers and sellers can execute their trade using the electronic trading platform. Trades can be put through by brokers on behalf of their client.
Trading System: Stock exchanges offer two types of trading systems: open outcry and online trading. Under the open outcry system traders gather physically on trading floor and shout or signal their bid and offer prices. Online systems allow traders to trade electronically by connecting to the system without being physically located at the exchange. The fully automated computerised mode of trading on BSE is known as BOLT (BSE On Line Trading) and on NSE is called NEAT (National Exchange Automated Trading) System and on MSEI it is called TWS (Trader Work Station). Buy and sell orders placed by investors are routed to the trading system to be executed through electronic matching. The sequence of trade execution is as follows:
- Placing of an order to buy or sell with the broker
- Routing of order by broker to trading system
- Display of order on the trading screen
- Matching of order electronically
- Confirmation of trade
- Generation of contract note
Orders: An order is an instruction to buy or sell a specific quantity of shares in the stock market. For example Buy 2000 shares of Reliance Industries Ltd. Sell 4000 shares of Aditya Birla Nuvo Ltd.
An order must include the following:
Correctly indicate the name of the listed company, whether to buy or sell, and number of shares.
Order must be clearly communicated to and confirmed by broker
Brokers do not accept unknown investor order – one should be a registered sub-broker or a customer of the broker or sub-broker
Each security listed on an exchange has a securities symbol and a unique International Securities Identification Number (ISIN).The symbol is usually an abbreviation of the issuing company name. The ISIN is a unique 12-digit number that identifies a security in the depository system. For example, the equity shares of Hindalco Industries Ltd. have the security symbol HINDALCO and the ISIN code INE038A01020.
- While placing an order the investor must verify the security symbol and ISIN.
Types of Orders
Limit Order: The buyer or seller specifies the price and trade will get executed only if the specified prices becomes available in the market otherwise the order lapses by end of the day. This way the trade will only execute at a price the investor wants it to be executed. e.g. Buy order with limit price
- Buy 1000 shares of State Bank of India at Rs.2500.
- The current price of the stock is Rs.2600.
- Since the order specifies the price, it is a limit order.
- Investor is willing to buy the stock, only if the price reaches Rs. 2500 or lower.
- The order will get executed at a price of Rs.2500 or lower until the order quantity of 1000 shares is fulfilled.
Sell order with limit price
- Sell 1000 shares of State Bank of India at Rs.2500
- The current price of the stock is Rs.2600
- Since the order specifies the price, it is a limit order.
- Investor is willing to sell the stock, only if the price is Rs. 2500 or higher.
- The order will get executed at a price of Rs.2500 or higher until the order quantity of 1000 shares is fulfilled.
- Market Orders: Market orders are placed when investor does not specify a certain price and willingly accepts the current market price in order to sell or buy stocks on immediate basis. Since order is executed at market price, theses type of orders do not lapse by the end and mostly get executed.
- Immediate or Cancel order: An immediate or cancel order (IOC) is an order to buy or sell a security that must be executed immediately, and any portion of the order that cannot be immediately filled is cancelled.
- Stop-Loss Order: When you are holding a particular stock, you fear the losses that can happen when the price starts moving against you. If you place an order to limit such a loss it is called as a Stop Loss order. So for example, if you have bought a stock at Rs 100 and you want to limit the loss at 95, you can place an order in the system to sell the stock as soon as the stock comes to 95. Such an order is called as a Stop Loss, as you are placing it to stop a loss which could be more than what you are ready to risk. In this way even if the prices go further down to Rs 90 your loss will be limited to Rs 5 (100-95) and not Rs10.
Example: Buy with stop-loss
- A trader places a limit order for buying 1000 shares of Reliance Industries at Rs 1000.
- He places a stop-loss sell order at a trigger price of Rs 990.
- If the stock reaches 1000, the buy order will be executed.
- After the buy order, during the trading day, if the price falls to Rs.990, the sell order is triggered to close the position and limits the losses.
Example: Sell with stop-loss
- A trader places a limit order for selling 1000 shares of Reliance Industries at Rs 1000.
- He places a stop-loss buy order at a trigger price of Rs1010.
- If the stock reaches 1000, the sell order will be executed. A sellers motive is to buy back the shares he sold for low cost i.e rs 1000. If the prices go below 1000 say 990 he can buy the shares and save Rs 10. But if the prices go in the opposite direction say Rs 1015 he will have to buy the shares at a loss of Rs 15 (1000-1015).Therefore he places a stop loss at 1010 and after the sell order, during the trading day, if the price rises to Rs.1010, the buy order is triggered to close the position and save his losses from Rs 15 to Rs10.
- Disclosed Quantity Order: A large institutional investor may not want the market to know that they are placing orders to buy or sell a large quantity of shares as such large and bulk quantities can lead to increase/decrease in average price of shares in market. To avoid this , institutional investor may indicate the total quantity to the broker, and ask to disclose the quantity in phases so as to not let other market participants know the actual number of shares they intend to buy or sell. Only the broker knows the break-up between the total and disclosed quantity.
- Day orders and GTC orders: A day order is valid only until the end of the trading day on which it is placed. A good till cancelled (GTC) order remains in the system until it is executed. Indian exchanges do not permit GTC orders therefore all pending orders of any type at the end of a trading day are cancelled and have to be re-entered on the next trading day. However Brokers may offer their large customers a GTC facility with clear instructions and the facility to modify limit prices on the next trading day.
- Modification of orders: Orders once placed in the system can be modified or cancelled only until they don’t get matched.The screen available to a trading member displays icons that represent functions such as order modification and order cancellation. Brokers can modify or cancel orders according to the instructions of the client. However, no modification or cancellation can be done once the order is matched.
Electronic trading and order execution
Trading on stock exchanges is conducted from Monday to Friday, from 9.15 a.m. to 3.30 p.m. Different timings may be adopted for non-equity segments. For example, trading on the Wholesale Debt Market segment on NSE starts at 10 a.m. and closes between 3 p.m. and 5.45.p.m. depending on the type of debt security. There are no trades on Saturdays, Sundays and public holidays.
A pre-open session is held generally 15 minutes before trading starts for the day. The first 7 or 8 minutes are for order placing, modification or cancellation. The next four minutes are for order matching and trade confirmation. The last three minutes of buffer time are used to transition to the regular trading session. This session determines the opening price and also reduces the rush otherwise present in the normal trading session
When an investor places an order to buy a share, it is called a bid. When a sell order is placed, it is known as ask. The electronic system matches bid and ask prices in such a way that a buyer gets a price equal to or less than his bid price, and a seller gets a price equal to or more than his asking price. If such a match is not possible, the transaction does not take place.
Features of electronic trading system are
The system is order-driven and hence there are no intermediaries.
Buyers/sellers, the price and quantity of orders are matched by the computer.
Transparent system – All bid and ask prices (called quotations in the market) can be seen on the screen.
Anonymous trading – bids and asks are accepted without revealing the identity of the investor.
All orders are arranged in order of highest to lowest prices, and orders placed at the same price are arranged by time. For example, suppose two buyers are bidding to buy shares of company at prices of Rs.280 and Rs.285 respectively, The higher price (Rs.285) will get the first priority to be matched with a seller. If both buyers had bid the same price of Rs.280, then the order that came in earlier into the system would get priority over the later.
Each order placed in the system is given a unique order number, This allows the exchange to track the order and determine how the transaction was carried out which is very useful for resolving disputes.
The box below is a snapshot of the market for Hindalco on April 3, 2012 extracted from www.nseindia.com.
|Buy Quantity||Buy Price||Sell Price||Sell Quantity|
The first column shows the quantity at which investors want to buy shares and the next column is the price quoted(one share).The highest price as you can see is at the top and will be bought first as it is most attractive.
The first two columns also known as bidding schedule show the bids of quantity ranging from 4 shares at 131.95 to qt 9201 at 131.75.
The sellers column contain the sell price and respective quantity that they are ready to sell at that price. As you can see the ask price ranges from 132.05 to 132.25 which is higher than the bid prices of buyers. Hence no orders have been matched because neither the buyer nor the seller is ready to negotiate the prices.
However an investor can modify his existing bid/ask for an order to be matched. For example, if the investor is a buyer and offers 131, or is a seller and offers 132, his order is unlikely to be matched but if the buyer modifies his bid and is ready to pay 132 the order can be executed. Another scenario could be if the seller modifies his ask price to 131 and is ready to sell at little lower the order can be executed because the prevailing buy price in the market is 131 as well.
After an order is placed on the system, it searches for a matching order. If no matches are found, the order stays in the system until the end of the trading day, or until it is cancelled. When an order is executed, a trade confirmation slip is generated. This gives details of the trade number, the price and quantity at which the trade was carried out, the time of trade, and the unique order number corresponding to the trade. The slip enables investors to confirm that the trade has taken place, and ensure that the price and quantity correspond to their instructions.
A contract note is a confirmation of trades in equity shares completed on a particular day for and on behalf of a client by a broker.The broker has to issue a contract note in the prescribed format that contains details of the trade, settlement, brokerage, securities transaction tax and service tax information.
The contract note is a proof of transaction and is referred to in case of dispute over the transaction.
A trading member has to ensure that contract notes are issued within 24 hours of execution of trades on the exchange.
Two copies of the contract note are generated: one each for the broker and the client.
Electronic Contract Notes (ECNs) may be sent to a client by email only on the consent of the client.
ECNs are required to be digitally signed, tamper-proof and password protected. They are simultaneously published on the website of trading member and clients are given secured access to the same by way of client specific login and password. Contract notes have to be carefully verified by the client. Details in the note should match the trade details in the trade confirmation slip.
The client should report any differences to the trading member.
Cost of Trading
User charges: Investors pay user charges for using the infrastructure of brokers, stock exchanges, and depositories. The commission charged by brokers is known as brokerage. Stock exchanges take exchange transaction charges from investors. Depositories charge DPs, who in turn charge investors for the demat transactions. There is a wide range of brokerage rates in the market. Clients who trade for large amounts may be able to negotiate lower rates than the prevailing market rate.
Statutory Charges: The statutory charges imposed on trading are securities transaction tax (STT), service tax, stamp duty and SEBI’s turnover tax. Stamp duty is levied by state governments, so the actual rate depends on the state in which the transaction takes place. STT is presently levied at 0.1% for delivery-based transactions (for both seller and buyer), and 0.025% for non-delivery based transactions (for seller only).Service tax is charged at 14% on brokerage. Both STT and service tax go to the Central government.
Stamp duties differ across states. The rates of stamp duty differ in case of proprietary trades, delivery based client trades and non-delivery based client trades. In addition, SEBI imposes a turnover tax at the rate of 0.0002% of turnover.
Bid- Ask Spread: This is not a cost directly imposed on investor but rather takes place due to differences in the prices of shares during buying and selling or a lack of liquidity in the market. The investor pays higher price for buying and receives a lower price on selling due to these costs.
Example:If an investor wants to buy 1000 shares and sell immediately after, the best price at which shares are sold is 4.00 which is at the top hence investor will buy shares at 4.00. When he tries to sell the same shares in the market, the best price available by buyers is 3.50. Thus he will occur a loss of 0.50 when he sells the shares. This kind of cost is called as Bid ask spread cost.
Impact Cost: Impact cost is a measure of the cost incurred due to the bid-ask spread. It helps determine the “ideal” price which can then be compared to the price in the market to get a fair idea about actual costs incurred due to the bid-ask spread. Calculation of impact cost: Impact cost is calculated by taking the average of best buy and sell price. In the above example, the best price to buy shares is Rs. 4 and the best price you can sell those shares for is Rs. 3.50. Average or “ideal” price = (3.50+4 / 2)= 3.75. Thus 3.75 is the ideal price to buy or sell shares in this example. The buy price in the market i.e Rs 4 is 0.25 times higher than the ideal price (4- 3.75). and the sell price i.e 3.50 is 0.25 times lower than the ideal price. If this is converted into percentage for we can say that impact cost of buying shares is 6.67%.( 0.25 / 37.5 * 100).
Settlement of trades
Delivery and squaring off: A trade can be settled in two ways: Inter-day and Intra-day
When trades are settled on the second day after the trading day it is called as inter-day trading. Trade taking place today known as “t“ will be settled two days after (t+2).This is also called a rolling settlement and the trades settled in this manner are called trades for delivery. Traders can also buy or sell a share on a trading day and reverse their trade on the same day before the market closes. This is called squaring off a trade or Intra-day trading. For example, an investor buys 100 shares of Infosys at 11.30 a.m. on September 24, 2014 and sells it off at 2.30 a.m. on the same day. The investor is said to have squared off his buy position. If an investor sells 100 shares of Infosys in the morning, and buys it back before the close of market trading on the same day, he is said to have squared off his sell position. Unlike Inter day trading there is no outstanding delivery because delivery takes place on the same day itself. Intra traders rely on small movements in prices to make profits. Brokerage charges and statutory levies are lower on day trading transactions.
Approximately 70% or more of turnover on the equity exchanges is squared off (intra day) within the trading day; less than a third of total turnover of equity trades is settled by delivery.(inter day)
Settlement obligation: Trades on Indian exchanges are cleared and settled under a T+2 rolling settlement. The period from day T to the completion of all settlement obligation is called a settlement cycle. Each settlement cycle has a specific settlement number.The trade settlement involves netting off transactions. example of netting:An investor has made the following transactions in a settlement cycle:
- Bought 100 HUL
- Sold 50 HUL
- Bought 100 Infosys
- Bought 50 Gujarat Ambuja
- Sold 150 Gujarat Ambuja
At the end of the settlement cycle, the investor will pay for and receive delivery of 50 shares of HUL (100-50) and 100 shares of Infosys and delivery securities and receive funds for selling a net 100 shares of Gujarat Ambuja. (150-50). The trades have been “netted” to arrive at the outstanding position. Not all trades are settled (that is called gross settlement) only net positions are settled (net settlement).
Pay-in and Pay-out: In a rolling settlement cycle running from day T when the trade was executed to the day T+2 when payout is normally completed, the three broad steps are:
- Identification and communication of settlement obligation
Net outstanding obligations of clearing members is first determined and communicated to them by the clearing corporation. Members then confirm their obligations.
Pay-in of securities: Shares that the client wants to sell are picked up from their Demat account and transferred to the broker’s account. All these shares are then delivered to the clearing corporation.
Pay-in of funds: The process of transfer of funds to the clearing corporation to pay for purchase transactions.
Pay-out of securities: Shares that the client wants to buy are received from the clearing corporation and then transferred to the broker’s account. This in turn is made to reflect in the client’s demat account.
Pay-out of funds: The process of transfer of funds from the clearing corporation to complete the funds settlement of a sale transaction.
Margins: A margin is the amount of funds that one has to deposit with the clearing corporation in order to cover the risk of non-payment of dues by buyer or non-delivery of securities by seller. Suppose an investor purchases 100 shares of Company X at Rs. 100 each on September 22,2014. He has to pay in Rs. 10,000 by September 24, 2014.The risks in this transaction are that:
- The buyer may not be able to bring in the required funds by the due date.
- The seller may not be able to deliver securities at the due date.
Thus in order to minimise the above risk both buyer and seller have to pay a percentage of the amount upfront at the time of placing the order. For example, if the margin is set at 17%, the buyer would pay Rs.1700 in advance. Margins are collected by brokers when the order is placed. Stock exchanges collect margins from brokers when the order is executed. The margin rate differs with every security due to its volatility. Volatility in shares basically means frequency at which prices go both up and down. A share with less up and down movement in its prices are less volatile and their margin rates are low as well because the risk for non payment is low. Volatility creates default risk because of the probability that share prices may decline between the period of purchase of shares and payment for purchase.In the above example, assume that the price of the share falls to Rs. 80 on September 23, 2014. Then the investor has incurred a notional loss of Rs. 2000 on his purchase. He may be less inclined to pay Rs. 10,000 on September 24th, 2014. Alternately, if prices go up, the seller may not want to give delivery at the lower price he had traded earlier at. Therefore such highly volatile shares with greater price fluctuation can lead to non-payment and to avoid this risk an initial margin amount is collected from buyers and sellers.
The margin on equity shares traded on an exchange is imposed on a daily basis, and is the sum of these three margins
- Value At Risk Margin (var): VaR is measured by assessing the amount of potential loss in a share, the probability of occurrence for the amount of loss and the time frame. VaR margin is defined as a multiple of volatility and expressed as a percentage of the stock price. VaR margin rates are updated five times each trading day, to give market participants better information about volatility and risk management.
- Extreme Loss Margin: The extreme loss margin aims at covering the losses that could occur outside the coverage of VaR margins. This rate is fixed at the beginning of each month on the basis of prices of the last six months.
- Mark to Market Margin: Mark to market margin is computed at the end of each trading day by comparing transaction price (price at which order was placed) with the closing price(price at end of the day of the share). It is payable at the start of the next trading day.
Record Date: The record date is the date on which all those who are on record as shareholders of a company get the benefit of corporate actions of that company. The benefits distributed by companies in the form of corporate actions are of two types1. cash benefits 2. non cash benefits. cash benefits are bonus, dividend etc and non cash benefits include, bonus shares, rights issue etc. eg. If you buy shares of Microsoft (MSFT) on Monday, June 5, 2017, while your broker would debit your account for the total cost of the investment immediately your order is filled, your status as a shareholder of Microsoft will not be settled in the company’s record books until Thursday, June 8th. (t+2) Here t=Monday, 2 days i.e Tuesday and Wednesday is for settlement and June 8th, Thursday is the Record date. Therefore, the date on which settlement is completed and you are recorded as the shareholder of the company is called as the “record date”, here it is June 8th Thursday.
Cum basis and Ex basis: When a security is traded on cum basis, it means that it incorporates the benefit of the above corporate action in its price. Once it goes ex-basis, the buyer no longer has the benefit of the corporate action. This means all shares that are purchased before the record date receive benefits on cum basis. In the above example if company issues bonus shares on June 6th Tuesday, this date becomes the ex date and no bonus shares will be received for shares purchased after the ex date. However shares with record date before the ex date receive benefits on cum basis. This means shares have been traded on cum basis. Cum basis here means with benefits and ex means without benefits.
Market Capitalisation: Market capitalisation (or market cap) of a company is the number of shares outstanding multiplied by the market price per share. For instance, a company has 20 million outstanding shares and the current market price of each share is Rs100. Market capitalisation of this company will be 200,00,000 x 100=Rs 200 crore. The market cap of a company measures the market value of its share capital. Stocks can be categorized or distinguished by using market cap. The three categories are:
- Blue-chip stocks represent the largest companies by market cap that also enjoy a high level of liquidity. These are also called large cap stocks.
- Mid cap stocks refer to those companies which enjoy a good level of liquidity but are medium in terms of market cap.
- Small cap stocks are those stocks that are smaller in market cap and therefore do not enjoy much liquidity.
Market cap is a number that is influenced by the market price of shares, a dynamically changing number. Large cap or blue chip stock companies are very stable and dominate their industry, which is why the prices are less volatile compared to mid cap and small cap stock prices.This means risk associated with increase or decrease in prices is lower with blue chip stocks. It is therefore common to consider the top 50 stocks on stock exchange by market capitalisation as large cap, the next 200 as mid cap, and the next 500 as small cap stocks.
Market Turnover: Market turnover of a stock indicates how much trading activity took place in it on a given business day. Turnover can be represented in rupees or in number of trades. Higher the turnover in a stock, better the liquidity. This essentially indicates that more buyers and sellers are engaging in these stocks (i.e increased trading activity) and hence liquidity in market in high, leading to a greater market turnover. Trading activity is measured in two ways-traded values in rupees and traded volume in number of trades. It is usual for large cap stocks to have a high traded value; high volume of trades can occur across stocks.
Market Indices: A market index tracks the market movement by using the prices of a small number of shares chosen as a representative sample. This basically means that share prices of a select set of highly performing companies are tracked and weighted average of these prices defines the overall market performance. The companies included in stock index act as a representative of the market as their prices are most influential and likely to control overall market movements. The most widely tracked indices in India are the BSE Sensitive Index (Sensex) and the CNX Nifty (Nifty). The Sensex has been computed since January 1986 and is India’s oldest stock index.. It is the market cap weighted index of 30 chosen stocks to track the market movement of the most liquid stocks. The CNX Nifty is composed of 50 most representative stocks listed on the National Stock Exchange. The base period for CNX Nifty is November 3, 1995, and the base value of the index has been set at 1000.The shares included in Nifty are chosen on the basis of factors such as liquidity, availability of floating stock and size of market capitalization.
Since it is not possible to track the prices of each stock listed on stock exchange, stock market indices such as as BSE Sensex, CNX Nifty etc are used to estimate the trends in the stock market. The composition of stocks in the index is reviewed and modified from time to time to keep the index representative of the underlying market. If a stock of company is underperforming it is likely to be replaced by another stock this makes the stock indices more reliable and a true representative of the market.These indices are used as a benchmark for estimating returns from investing in equity.Some of the other common indices in India are listed below:
- CNX Nifty Junior
- CNX 100
- CNX 500
- BSE-Small Cap
- MSEI 40 Index
There are also sector indices for banking, information technology, pharmaceuticals, fast-moving consumer goods and such other sectors, created by the exchanges to enable tracking specific sectors. Uses of market indices are:
Understand trends in the market
Used as a benchmark for evaluating your own investments. The returns earned by equity funds or other investment vehicles are often compared with the returns on the market
Helps investors allocate their funds rationally among various stocks.
- Helps estimate the future movements in the stock market.
Reading Market Prices: When the market is live, prices of traded stocks and updated value of indices run as a ticker tape. This tape shows the last traded price and the change in price in comparison with the previous day’s closing price. A green upward arrow shows that the stock price has moved up compared to previous day’s closing; a red downward arrow shows that the price has fallen compared to previous day’s closing. The ticker tapes can be seen on television channels, billboards, websites or any other media that subscribe to this information from the exchange. During market hours, a live snapshot of trading activity is available for listed stocks, which shows the summary of market activity. Before making a decision to buy or sell a share, investors may like to look up this information to get more detail about the stock they like to transact in