Finance & Economics Made Easy

SEBI

2009-05-11T08:25:00.000-07:00

We have till now seen three categories of market players.

1. The guys who issue securities (companies)

2. The guys who invest in these securities (both retail and institutional investors)

3. The guys who facilitate the trade (brokers)

SEBI or Securities and Exchange Board of India is the market regulator who defines the rules of the game. It first drafts policies and procedures, then monitors the actions of the market participants and then passes rulings and judgments.

Over the past few years, SEBI has played an active role in responding to the needs of the markets and pushing in a lot of regulatory improvements. Nevertheless, not all people share this view..

Brokers

2009-05-10T07:42:00.000-07:00

Both BSE and NSE have an elaborate eligibility criteria for persons who are desirous of becoming members of the stock exchanges. Apart from basic educational qualifications, the members need to fulfil minimum networth criteria and need to pay applicable fees each year.

On obtaining memberships from the stock exchanges, these guys become eligible to take and execute orders from individuals and institutions. The world of stock-broking has seen a sea change over the past few years. Historically known for its non-transparent methods and gross inefficiencies, stock broking today is a lot better. Almost all trading today happens over the net and the broking charges have dropped significantly.

Brokers continue to play an important role in the capital markets as order aggregators and franchisees who help individuals like you and me to participate in this game.

Retail investors

2009-05-09T21:46:00.000-07:00

Having seen different categories of institutional investors, lets shift focus to retail investors now.

Retail investors are guys like you and me. We buy and sell securities in much smaller quantities than the institutional guys. Our pockets restrict us..

While we are pretty helpless individually in influencing markets; We are a significant force together. Typically, institutional investors are much more sophisticated when it comes to investing. They research more, have access to more information, have access to high-quality analysts and probably are better placed to feel the pulse of the market.

Given these structural disadvantages, retail investors are the guys who typically lose out when it comes to timing the market. We buy high and sell low. To avoid this, we are better off catching the trend rather than trying to time our entry/ exit into the market. Buy, if you think a stock will go up in the long term and sell if you think a stock will go down in the long term.

Don't put all your eggs in the same basket*

2009-05-08T09:31:00.000-07:00

One of most common methods to attain the benefits of diversification in portfolios is to invest in "Indexes" rather than in individual stocks. OEX is one such index. Its a subset of the S&P 500 index and consists of the top 100 blue-chip stocks from diverse industry groups. OEX is the ticker symbol for S&P 100 index.

While most sites give you information just on what to trade, www.oexoptions.com also strives to teach you how to trade. It provides a number of useful resources to traders such as pre-market alerts, signals on possible market movements for the day, charting indicators, investments lessons, day trading tips and even mentoring support.

If you are looking for some fundas on option trading, trend projections, understanding resistance and supports better.. do check out www.oexoptions.com. Before making a full time commitment, you could try the 15 day free trial provided by www.oexoptions.com

Funds

2009-04-27T07:56:00.000-07:00

This is probably the last category we would see under the "investor" category.

Funds are basically pooled vehicles. They are collective investment outfits. They collect cash from individual investors, pool them and then use it to make further investments in stocks, bonds and other financial instruments. Given their quantum of operations they enjoy economies of scale. So they would be in a position to afford quality personnel to manage the funds, able to extract better terms on transaction costs, able to better diversify etc.

There are various types of funds:
Mutual funds - Collecting cash from individual investors for onward investments

Pension funds - The pension contributed by millions of individuals forms the corpus for this fund. The fund managers then use this cash for making investments.

Hedge funds - In simple terms this is like a mutual fund for really large and wealthy investors. These guys cough up the cash and regulatoryly the hedge fund has more flexibility with respect to choosing its investment vehicles

Sovereign fund - This is a fund which is owned by government or a state owned entity. They may choose to invest in specific sectors or be sector agnostic.

Private Equity fund/ Venture capital fund - A team of investors join to create this fund. The fund then looks for various investment opportunities with respect to start up companies/ unlisted companies or even listed entities.

There may be a thousand other types of funds. Don't get bogged down by the jargon. They all do the same things - collect cash from willing investors and invest in appropriate opportunities. Who gives the cash and where they invest, define their personalities.

The institutional investors

2009-04-23T18:31:00.000-07:00

These are typically organizations which have access to large pool of cash. These guys use the money to invest in stock markets/ companies.

Given the sheer volumes they deal with, they have the ability to move the markets. For example, if LIC (Life Insurance Corporation) purchases 10 lakh shares of Tata Motors in the market, the price of Tata Motors tends to move up (the economics funda of demand being greater than supply).

Apart from mere volumes, the one other reason why they generally influence markets is because of "signalling" effect. These guys are sophisticated investors (at least they are supposed to be). So, their actions are very closely watched and interpreted by almost all the market participants and thus serves as a signal (either positive or negative).

Institutional investors include - Banks, insurance companies, pension funds, hedge funds, mutual funds, sovereign funds etc...

Investment Banker

2009-04-21T09:14:00.000-07:00

Here comes the next breed. The one who has drawn so much flak in the recent past. Anyways, what do these guys do?

Simply put, an investment banker is your best friend when it comes to dealing with capital markets. He helps you raise cash from the capital markets... (hmmm here comes a new term.. what is it?)

A vegetable market is a place wherein vegetables are traded. Similarly, a capital market is a place wherein instruments which helps you raise capital are traded. So capital markets include stock (equity) and bond markets (debt).

ok.. lets come back to our Investment Banker.

When a company wants to raise cash in the capital markets, either debt or equity, the I-Banker (as he is fondly called) comes to your rescue. He helps you manage the whole process. Not just that, he does a whole lot of other things too... He is often called the corporate broker. So he deals with corporate marriages (mergers), divorces (sell offs) or dating (Joint ventures). Many a times he also keeps track of players in the capital markets and gives his expert opinions on them to willing listeners.

The corporate banker

2009-04-20T09:38:00.000-07:00

Simply put, a retail banker deals with individuals and a corporate banker deals with corporates. He is also called a commercial banker or even a wholesale banker.

A corporate banker too plays a vital role in the markets. He is the guy who provides the much needed finance to the corporates to run their business. Apart from traditional financing, corporate banking today offers a whole bouquet of services to the corporates including trade, treasury and number of other fee based services.

Typically banks have internal classifications within corporate banking. This is often based on the turnover of the corporates. So one section of the corporate banking could deal with the smaller corporate or SMEs and the other section could deal with large corporates.

Payment processing services*

2009-04-20T09:32:00.000-07:00

If you are an online sales company, you would need to work out a way through which you will be able to receive payments from your customers. That's where payment processing companies come to your rescue. http://www.fivestarpayments.com is one such firm which offers you this service.

The site (http://www.fivestarpayments.com) is quite well documented and helps the user navigate easily through the various controls. Apart from highlighting the various features of the product/ service, the site has a FAQ tab which answers basic queries for availing the benefits. Additionally it also provides some general info about accepting credit cards for online transactions.

http://www.fivestarpayments.com features some aggressive claims of lower card fees and approval of services even for difficult credit cases. If you are interested in exploring further, do check out.

*BROUGHT TO ME BY MY FRIENDS AT FIVESTARPAYMENTS

Player 1 - The Banker

2009-04-18T07:21:00.000-07:00

Why do I start with Banker being the player number 1? Probably because I am myself one :-)

Anyways, a Banker is probably one of the most important player in the market. There are different kinds of Bankers who are trying to do different things in the market.

1. Retail Banker - These are the guys who service individual clients like you and me. Apart from providing us loans and coming out with various deposit schemes they also provide few services like "Demat" accounts, which are critical for the market to function well.

What's "Demat"? Demat stands for "De-materialized" shares. Until few years ago shares were available only in the physical form. Which means when you buy the shares of a company, you will get them in the form of physical certificates. You can well imagine the pains of handling physical share certificates. They get stolen, its difficult to transfer them, they get soiled....

That's when the concept of "Demat" originated. A Demat account is very much like a normal bank account, the only difference being it has shares instead of cash. So if you buy shares your Demat account gets credited with those shares and if you sell them, it gets debited from your account.

Of course, we have other kinds of bankers.. Will cover them in the next post

The Players

2009-04-17T07:32:00.000-07:00

Over the last few posts I had written stuff on the Market. What does it mean? Why is it needed? etc...

In the next few posts, I will cover material on the "Players". The guys who participate in this game.. the guys who drive it, the guys who have made millions and lost millions, the guys who help the players make decisions, the guys who define the rules of the game etc...

Watch this space for the updates

Sensex & Nifty

2009-04-14T09:26:00.000-07:00

There are thousands of companies listed on both NSE and BSE. So if someone asks you, how did the stock markets fare today, what would be your response?

Thats were "Indexes" come to your rescue. Sensex or Sensitivity Index is nothing but a value weighted index. It comprises of 30 stocks which are most actively traded in the BSE. Similarly, Nifty comprises of 50 actively traded stocks on the NSE.

The guys managing NSE and BSE make sure that the stocks which are selected for these indexes represent all the major sectors of the economy. They also review these stocks at periodic intervals and make changes if necessary. So if a new stock is traded very actively then it gets to replace one of the less actively traded stock in the index. Thats what happened when DLF replaced Dr Reddy's. Similarly, if a stock loses flavour then it is removed out of the index (Satyam was thrown out of index when the fraud came to light and its now replaced by Sun Pharma).

The final thing about the index is that they have something called a base year. The base year for Sensex is 1979, at which time the value of Sensex was 100. Today the Sensex is around 11,000. So in simple terms it means that the value of stock markets have increased by roughly 110 times over the last 30 years. Isn't it too much?

Hmmm.. not exactly. We have seen greater heights. We were at around 21000 during our peak in the beginning of 2008.

BSE or NSE?

2009-04-13T05:57:00.000-07:00

I had written in my earlier post that these two exchanges pretty much make up for all securities trades in India. One of the queries I had received was, what's really different between the two exchanges? Why should a company choose either BSE or NSE or both?

Here you go..

A stock exchange is what brings the willing buyers and sellers together. The act of "listing" is like a formal admission of a security to be traded on an exchange. Each of these exchanges have their own listing requirements. For example, NSE stipulates things like minimum paid up capital, minimum number of shares that needs to be held with public, company's track record etc. A stock can be "admitted" into NSE only if it fulfills these criteria. Similarly BSE has its own set of criteria and so do the bunch of regional stock exchanges in India.

Now, a company looks at various aspects before it makes its listing decision on a particular stock exchange. Does this exchange have enough trading platforms across the country? How much trading volumes happen in the exchange? What is the technical capability of the exchange? What MIS support does it offer? Remember, a company evaluates these aspects primarily to ensure liquidity of its shares and to provide ease of transacting for its investors. Without these elements, an investor might not be willing to invest in the company, despite the company's solid credentials.

Once the decision is made, the company pays the listing fees and gets itself listed on these exchanges. Almost all major companies are listed both on the NSE and the BSE.

Stock Exchanges of India

2009-04-11T21:07:00.000-07:00

A stock exchange is something which its name implies. Its a place where buyers and sellers get together to exchange/ trade their stocks. Without a stock exchange it would have been difficult for companies to raise cash through issuing shares to the public.

Stock exchanges have greatly evolved over the centuries. Until a few decades ago, stock exchanges were almost synonymous with confusion and chaos. Brokers and traders actually got into a physical trading ring, madly screamed at each other, took physical note of concluded trades and took another few months to actually complete the transaction. But now stock exchanges run on sophisticated electronic networks. Trillions of dollars worth of trade takes place each day and transactions are netted out smoothly in minutes.

The two most significant stock exchanges in India are the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). While there are many other regional stock exchanges in India, these two exchanges pretty much cover the breadth of all trades in India.

What is a stock market?

2009-04-10T20:27:00.000-07:00

When you want to start a business, you need cash - To buy equipments, purchase land, construct building, pay out salaries etc. There are primarily two ways to raise this cash.

1. Debt - Taking loans from others, which you will undertake to repay (along with interest) after an agreed period of time and

2. Equity - You can invite someone to become a co-owner/ partner of your business. For becoming a partner, he would of course need to contribute his share of the capital (i.e cash) needed for the business. Unlike a loan there is no fixed repayment for equity. The partner instead has a share of the business and gets his returns in terms of the profits made.

You can raise this equity from people whom you know or from others whom you do not know. Typically its difficult to raise a large amount of cash from your own network of friends/ family. So promoters often come out with something called an IPO - Initial Public Offering. During an IPO, the promoters invite general public to purchase shares of the company.

Thus if Reliance is coming out with an IPO of 1000 shares and you decide to buy 100 shares of Rs. 10 each, then by investing Rs. 1000 (Rs. 10 x 100 shares), you become a part owner of Reliance (you will own a 10% stake i.e 100 shares/ 1000 shares).

What will you do with the shares you own? You can decide to keep it with yourself. As long as you keep it with yourself, you will receive 10% share of the profits, Reliance decides to distribute. You can later decide to sell these shares to some other willing buyer. If things turn good, may be you will be able to sell these shares at Rs. 15 each, thus pocketing a profit of Rs. 5 per share.

How will you know who is a willing buyer? That's where Stock Markets come to the rescue. Stock Markets are like any other markets which bring the buyers and sellers together. Here the commodity traded is shares of companies.

Unravelling the mysteries of the market

2009-04-09T21:16:00.000-07:00

Making informed financial decisions has never been more important. Volatile markets and vanishing banks can have a deep and ruthless impact in fundamentally changing our lifestyles.

This blog is an attempt to provide an impartial view (in plain English) on things that help us unravel the mysteries of the market. I will cover topics largely in the markets and personal finance space.

I would love to make this blog useful and relevant for its readers. So if you want me to cover any specific topic do let me know.... either through comments or through an email to me.