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Stock Market Investing

New speculators making their first strides towards taking in the fundamentals of stock exchanging ought to have admittance to numerous wellsprings of value training. Much the same as riding a bicycle, experimentation combined with the capacity to continue squeezing forward will in the end prompt to achievement.

One incredible preferred standpoint of stock exchanging lies in the way that the diversion itself endures forever. Financial specialists have years to create and sharpen their aptitudes. Systems utilized a quarter century are still used today. The diversion is dependably in full compel.

So for new financial specialists needing to make their first strides, I offer 10 awesome responses to the basic question, “How would I begin?”

1. Investing in Stocks Is Just Like Gambling.
This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle and they forget that stock represents the ownership of a company.
Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don’t confuse investing and creating wealth with gambling’s zero-sum game.

2. The Stock Market Is an Exclusive Club For Brokers and Rich People.
Many market advisers claim to be able to call the markets’ every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now therefore individuals to use.

3. Fallen Angels Will Go Back up, Eventually.
Whatever the reason for this myth’s appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, “Those who try to catch a falling knife only get hurt.”

Suppose you are looking at two stocks:

X made an all-time high last year around $50 but has since fallen to $10 per share.
Y is a smaller company but has recently gone from $5 to $10 per share.
Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing!

4. Stocks That Go up Must Come Down.
We’re not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won’t keep on going up.

5. A Little Knowledge Is Better Than None
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. Investors who really do their homework are the ones that succeed.

If you don’t have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

Stock Market Investing Tips
1. Set Long-Term Goals
2. Understand Your Risk Tolerance
3. Control Your Emotions
4. Handle Basics First
5. Diversify Your Investments
6. Avoid Leverage

Equity investments historically have enjoyed a return significantly above other types investments while also proving easy liquidity, total visibility, and active regulation to ensure a level playing field for all. Investing in the stock market is a great opportunity to build large asset value for those who are willing to be consistent savers, make the necessary investment in time and energy to gain experience, appropriately manage their risk, and are patient, allowing the magic of compounding to work for them. The younger you begin your investing avocation, the greater the final results – just remember to walk before you begin to run.
Contact Khodal Advisory for best Stock Market Advice our experts advisers will give you guidance.

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Financial Market Introduction

Markets and Financial Instruments

 TYPES OF MARKET

Efficient transfer of resources from those having idle resources to others who have a pressing need for them is achieved through financial markets. Stated formally, financial markets provide channels for allocation of savings to investment. These provide a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment. The savers and investors are constrained not by their individual abilities, but by the economy’s ability, to invest and save respectively. The financial markets, thus, contribute to economic development to the extent that the latter depends on the rates of savings and investment.

The financial markets have two major components:

  • Money market
  • Capital market.

The Money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability.

The Capital market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The Capital Market comprises the complex of institutions and mechanisms through which intermediate term funds and long-term funds are pooled and made available to business, government and individuals. The Capital Market also encompasses the process by which securities already outstanding are transferred.

COMMODITIES MARKET

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is only in the last decade that commodity future exchanges have been actively encouraged. However, the markets have been thin with poor liquidity and have not grown to any significant level. Let’s look at how commodity derivatives differ from financial derivatives.

Difference between Commodity and Financial Derivatives: The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlying is concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. We have a brief look at these issues.

TYPES OF INVESTMENT AVENUES

Before starting with the deep discussion on financial markets, we must know in a broad sense about the types of investment avenues available in these markets. In other words knowing the alternative financial instruments that are bought and sold in these markets. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The investor who is having extra cash could invest it in assets like stock or gold or real estate or could simply deposit it in his bank account. All of these activities in a broader sense mean investment. Now, lets define investment.

HOW DO YOU DEFINE INVESTMENT?

We can define investment as the process of, “sacrificing something now for the prospect of gaining something later”. So, the definition implies that we have four dimensions to an investment – time, today’s sacrifice and prospective gain. Can we think of Some Transactions, which will qualify as “Investments” as per Our Definition!

  • In order to settle down, a young couple buys a house for Rs.3 lakhs in Bangalore.
  • A wealthy farmer pays Rs.1 lakh for a piece of land in his village.
  • A cricket fan bets Rs.100 on the outcome of a test match in England.
  • A government officer buys ‘units’ of Unit Trust of India worth Rs 4,000.
  • A college professor buys, in anticipation of good return, 100 shares of Reliance Industries Ltd.
  • A lady clerk deposits Rs.5, 000 in a Post Office Savings Account.
  • Based on the rumor that it would be a hot issue in the market in no distant future, our friend John invests all his savings in the newly floated share issue of Fraternity Electronics Ltd., a company intending to manufacture audio and video magnetic tapes to start with, and cine sound tapes at a later stage.

Introduction to Commodity Market

What is Commodity Futures?

A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange.

The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons:

Consumer Preferences: –

In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.

Changes in supply: –

They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.

commodity-market-trading-in-india

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly.

  • Price Discovery
  • Price Risk Management
  • Import- Export competitiveness
  • Predictable Pricing
  • Benefits for farmers/Agriculturalists
  • Credit accessibility
  • Improved product quality

History of Commodity Market in India :

The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).

The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures’ trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say.

In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There are other regional commodity exchanges situated in different parts of India.

How To Predict Forex?

The major concept in the capitalism world is how to predict the future of world money! Forex is the world money market that always moves. Presently, the foreign exchange market is one of the largest and most liquid financial markets in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow.

Of the $3.98 trillion daily global turnover, trading in London accounted for around

$1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to “traditional” turnover, $2.1 trillion was traded in derivatives.

Of course, the main concept is that Forex is driven by planets! How it works?

equityresearch

FOREX TRADING STRATEGIES

There are so many Forex trading strategies out there that it’s not surprising so many people don’t know where to start. But actually, all of those strategies are some combination of two different techniques: Fundamental and Technical analysis.

A fundamental analyst looks at a nation’s entire financial picture to guide the trades, studying international macroeconomics and the forces that drive the supply of and demand for a currency. There are five of these factors:

  • Is the country’s government in good financial shape or in the red, and what is their financial policy (pro-business, labor, etc.)
  • The balance of imports versus exports, which directly affects a nation’s money supply
  • The growth of that country’s real gross domestic product (GDP); in other words, that nation’s purchasing power
  • Interest rate levels
  • Inflation level; in other words, how high are prices

The fundamental analyst looks at all these factors and balances them against each other to determine whether a nation’s currency will appreciate or depreciate. Of course, as the Forex market trades the currency of one nation against that of another, the fundamental analyst cannot simply study the economic picture of one country; she must study both of them, and then compare them to determine which paints a more compelling financial picture.

The technical analyst, on the other hand, looks only at the charts. He looks at the price of a currency pair (or any other commodity, such as oil prices or stocks) and sees how it has varied through time, examining the patterns it has drawn with an eye to predicting what it might do in the future.

The most successful traders use a combination of these two techniques, combining chart analysis with the timing provided by economic announcements to get the best of both worlds.

Benefits of Commodity Markets

The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly.

Price Discovery :

Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

Price Risk Management :

Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

Import- Export competitiveness :

The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

Predictable Pricing :

The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.

Benefits for farmers/Agriculturalists :

Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.

Credit accessibility :

The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.

Improved product quality :

The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

MCX-Multi Commodity Exchange

Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutualized exchange with permanent reorganization from Government of India, having Headquarter in Mumbai. Key shareholders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country.

MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana.

MCX deals with about 100 commodities.

 mcx-multi-commodity-exchange

Commodities Traded at MCX :-

Bullion:-
Gold, Silver, Silver Coins,

Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead

Oil and Oil seeds:-
Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil,

Pulses:-
Chana, Masur, Tur, Urad, Yellow peas

Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,

Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
Ginger,

Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
Coffee,

Fiber and others:-
Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
Sacking,

Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC)
Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world.

Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures’ trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect international scenario.

Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations.

Commodity Market

Introduction to Commodity Market

What is “Commodity”?

Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange?

A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse. But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading : – At this stage the following is the system implemented-
– Order receiving
– Execution
– Matching
– Reporting
– Surveillance
– Price limits
– Position limits

II. Clearing : – This stage has following system in place-
– Matching
– Registration
– Clearing
– Clearing limits
– Notation
– Margining
– Price limits
– Position limits
– Clearing house.

III. Settlement : – This stage has following system followed as follows-
– Marking to market
– Receipts and payments
– Reporting
– Delivery upon expiration or maturity.

Qualitative Analysis

Investment preferences: –

Most of the investors prefer least risky investment which gives higher returns. That is why majority (70% of sample) of people interested in investments other than Share and commodity market.

Very less number of people (only 7%) showed their interest in investment in commodity market. Main reason for this is lack of awareness and complete information about commodity market.

Commodity Exchanges: –

People who are interested in commodity investment showed more concern towards NCDEX; for its brand name and people think there might be surety of transaction at NCDEX.

Commodities: –

Bullion is most preferred commodity for investment. Because one can expect maximum returns from such investment due to rapidly increasing prices of bullion in market.

Advertisements: –

Commodity market Advertisements should be more informative. And it is the failure of commodity market’s advertisement campaign to attract people’s attention; as majority of people are not aware about commodity market.

Stock Market Economy

The Economics of the Stock Market

Stock Market Economy : Business firms can be classified in many ways. One common classification is to group business firms according to the way they are owned. The most common form of business firm is the sole proprietorship, representing nearly 75% of all business firms. A sole proprietorship is owned by one person. Another type of business firm is the partnership. This type is similar to a sole proprietorship except that two or more people are the owners. Partnerships allow the business to become larger because more than one person finances the business. But partnerships have a big disadvantage: each owner has unlimited liability for all of the debts of the business. This means that, if one owner gets the business into so much debt that it cannot pay and then leaves the area, the other owners are liable for the entire debt. An owner can lose a home, car, savings account indeed, all that he or she has accumulated based on the undesirable actions of another owner. The largest businesses are corporations. A corporation is a legal person separated from its owners. It can be sued separately and pays taxes separately. Its owners are called shareholders or stockholders. One advantage of the corporation is that the owners have limited liability. This means that owners can lose only the amount invested in the business. Because an owner only risks a fixed amount of money, the owner does not care who the other owners are. This feature allows easy transfer-ability of ownership shares. If I have invested $10,000 in Company X, this is the most I can lose. If another owner, Peter, sells his ownership share to Mary, I do not care. I do not need to know anything about Mary because no decision of Mary can cause me to lose more than $10,000. Easy transfer-ability of ownership shares allows corporations to raise large amounts of money. As a result, corporations tend to be large. Indeed, nearly all of the large businesses are corporations.

Corporations are categorized as public or private. A corporation is public if the shares are sold on an open market and are available to be bought by anyone who might wish to do so. Most of the very large companies are public corporations. A corporation is private if the shares are held by a specific group of people who will not sell them to outsiders. Many private corporations are owned within a family. Often corporations start as private corporations. When they need to grow, they “go public”. This means that they sell shares of ownership to anyone willing to buy them. Selling shares to the general public for the first time is called an Initial Public Offering (IPO).

Shares of stock of public corporations are traded. In most cases, they are traded on organized exchanges, such as the Indian Stock Exchange. Buyers come to these exchanges, usually through brokers, to buy shares of stock (that is, shares of ownership) in particular companies. Sellers also come to these exchanges, again usually through brokers, to sell the shares of stock that they own. Let us begin with the buyers. Why would a person wish to buy stock at all? And why would that person then buy the stock of a particular company?

As we saw earlier, there are seven factors that affect demand for any product. Of those seven, four will be particularly important in affecting the demand for stocks. One is income. Buying stock is a form of saving for people. As we shall see later, the higher one’s income, the more one is likely to save. So, as incomes rise (fall), people are likely to buy more (fewer) stocks. This is a reason that stock prices tend to rise when the economy is doing well (i.e., people’s incomes are rising) and tend to fall when the economy is doing poorly (people’s incomes are falling). The second important factor in affecting demand is the prices of the stocks themselves. The third important factor is the prices of substitutes to buying stocks. And the final important factor in affecting demand is expectations.

Investing Strategies

The demand for any of the forms of saving depends on these factors : expected return, risk, tax advantages, and liquidity. Generally, there are trade-offs between these. So, forms of saving that have low risk, tax advantages, or high liquidity usually have a low return. And conversely, risky forms of savings, forms of savings that have tax disadvantages, or forms of savings that are illiquid tend to have higher returns.

In stock markets, information about expected returns, risks, tax advantages, and liquidity is widely available. Because information is so widely available, it is not possible to systematically “beat the market”. Suppose that you know that a stock of a given company will give you a return of 10% while the stocks of other companies will give a return of only 5% . Of course, you will want to buy that stock. But many other people will also know this and they too will want to buy it. When they buy the stock, the price will rise. At a higher price, the return will fall, until it is no greater than that of the other stocks. There are only two ways you can “beat the market”: you can be lucky enough to buy a stock that turns out to be more successful that most people expected or you can have information about the company that is not available to others. And acting on “inside information” is severely restricted by law. Studies have been done comparing people who were “experts” in stock market investing with people throwing darts at the financial pages to decide what to do. The dart throwers tended to do just as well over the long term! Do not expect to be a millionaire at age 30 by playing the stock market.

In deciding what you should do, you need to know the attributes of each type of saving and you need to relate these attributes to your own personal situation. Do you need to be able to get access to the money soon? If so, you need something that is liquid and must correspondingly accept a lower return. Are you highly taxed? If so, you might need something with tax advantages and have to correspondingly accept a lower return. How do you feel about risk? The more risk you are willing to take, the greater your return could be. If you do not like risk, then you might want to diversify. Have a little of this and a little of that. It is unlikely that all types of saving will be hurt at the same time. It is usually a good idea to buy stock in a company because you like the business of that company and believe it can be successful over a long time. If you do this, the best advice is just to hold on to that stock and not worry when its price falls. Over the long term, you will probably so OK. But do not expect to get rich by “beating the market”.

Stock Market Indices of India

Investigating Stock Market Indices of India

Introduction

Charles Dow is credited to have conceived the idea of the first stock index i.e. Dow Jones Industrial Average in 1896. Since then, all stock exchanges across the globe have built their own indexes. While they are widely used by the investors to know overall daily market performance, fund managers use them as a benchmark in evaluating their periodical performance. Studies have found that mutual fund managers fail to beat their respective benchmark index. These findings encourage the passive mode of investment through index funds, where money is invested in the same proportion among the securities representing the underlying index. He popularized the index funds as a better instrument for the long term investment over traditional mutual funds owing to lower management costs and their perpetual growth with economy.

At the end of September 2014, there were 43 index funds and 38 exchange-traded funds (ETFs) in India (listed on the National Stock Exchange and the Bombay Stock Exchange), of which 24 were index-based ETFs and 14 were gold-based ETFs (ISMR, 2014). Given the variety of indexes and index funds in India, there are numerous queries in the mind of a passive investor like how the indexes have performed  in the past and which index is the most profitable to invest with.

The present study aims at examining the long run performance of all the broad market stock indexes operational at NSE (National Stock Exchange, India) and evaluating the best performing index amongst them which could be recommended to the passive investor to invest with over a long term.

The paper is organized in the following manner: Section II briefly explains about various broad market indexes at national stock exchange, India followed by the discussion on the previous literature in Section III, then, Section IV explains the data analyzed and the methodology adopted. Section V deals with the discussion of the observed results and finally, Section VI concludes this paper.

  1. About the indexes at NSE, India.

Among the recognized stock exchanges in India, NSE (National Stock Exchange) is the largest stock exchange with maximum daily turnover in cash and derivatives segment followed by BSE (Bombay Stock Exchange) (ISMR, 2014). As on 30 June 2014, there are 36 indexes at NSE, maintained and managed by IISL (India Index Service Ltd, a subsidiary of NSE). They are broadly classified by NSE into four categories, namely Broad market, Sectoral, Thematic and Strategy indexes. This paper focuses solely on the Broad market indexes consisting of the large, liquid stocks listed on the exchange. They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments. Stocks are broadly classified into large cap, mid cap and small cap categories based on their market capitalization. Based on this classification, there are five large cap indexes (CNX Nifty, CNX Nifty Junior, CNX 100, CNX 200 and CNX 500), two mid cap indexes (CNX Midcap 50 and CNX Midcap) and one small cap index (CNX Small cap) as listed in appendix I.

  1. Findings and Conclusion

The study examines the long run performance of all the broad market stock indexes, currently operational at NSE (National Stock Exchange, India) from 1st January 2004 till 31st March 2014.It is found that CNX Nifty, the flagship index of NSE, along with all other broad market indexes, is successful in generating superior return over risk free rate proving that Indian equity markets tend to generate better returns as compared to 91-day treasury bills of Government of India. On using CAPM, none of them were able to generate statistically superior risk adjusted excess return over CNX Nifty. However, on considering economic significance, only three indexes yielded positive Jensen Alpha, namely CNX Midcap, CNX Smallcap and CNX Nifty Junior. Thus, CNX Midcap proves to be the best performer among all broad stock indexes after adjusting for risk. So, a passive investor, planning to invest in broad based indexes, should consider CNX Midcap index for investment. But the alpha (Jensen alpha) of these broad market indexes turns negative (Cahart alpha) on being exposed to additional factors i.e. size, value and momentum in Cahart four factor model. This shows that the excess returns evidenced by positive Jensen alpha were attributed to these factors and not due to superior index composition criteria. Moreover, the results of the test of joint hypothesis using CAPM revealed that CNX Nifty cannot be used to replicate most of the other broad market indexes namely CNX 200, CNX 500, CNX Midcap, CNX Small cap and CNX 100 Equal Weight.

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