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Showing posts with label Index Gyan. Show all posts
Showing posts with label Index Gyan. Show all posts

Friday, December 2, 2011

History of Indian Stock Market

Formation of various Stock Exchanges in India

In the year 1920, a stock exchange was established in Madras called “The Madras Stock Exchange”. “The Madras Stock Exchange Association Pvt. Ltd.” was established in the year 1941. The Lahore Stock Exchange was formed in the year 1934. However, in the year 1936, after the Punjab Stock Exchange Ltd. came into existence, the Lahore Stock Exchange merged with it.

In Calcutta, a second Stock Exchange by name “The Bengal Share & Stock Exchange Ltd.” was established in the year 1937 and likewise in the year 1938, Bombay Stock Exchange also witnessed the formation of a rival Stock Exchange in the name of “Indian Stock Exchange Ltd.”

The U.P. Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. in 1940. The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name “The Delhi Stock & Share Brokers Association Ltd.” and “The Delhi Stocks & Shares Exchange Association Ltd.” were amalgamated into “The Delhi Stock Exchange Association Ltd.” in the year 1947.

The depression witnessed after the independence led to closure of a lot of exchanges in the country. Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act after it was enacted were Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Bangalore and Indore.

Later during 1980’s, many more stock exchanges were established such as Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990), Coimbatore Stock Exchange and Meerut Stock Exchange.

A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the multinational companies, which created a surge in retail investing. The early 1980s witnessed another surge in stock markets when companies such as Reliance, which created a new equity culture, accessed the capital markets.

Formation of Sensex (BSE)

Sensex, the 30-stock index of the Bombay Stock Exchange, was introduced in 1986 constituting stocks of large and established companies from different sectors. The base year for the index was 1978 -79.

During 1990s, India witnessed radical changes in its policies regarding Foreign Direct Investments and Foreign Institutional Investments as part of the liberalization policies. In 1990, the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 marks in 1992.

The up-beat mood of the market was suddenly vanished with Harshad Mehta scam. It came to public knowledge that Mr. Mehta, also known as the “big bull” of Indian stock market, diverted large amount of funds from banks through fraudulent means. Millions of small-scale investors became victims to the fraud as the Sensex plunged shedding 570 points.

Formation of Securities & Exchange Board of India (SEBI)

To prevent such frauds, the Government of India formed The Securities and Exchange Board of India or SEBI, through an Act in 1992. With the act, SEBI became the statutory body that controls and regulates the functioning of stock exchanges, brokers, sub-brokers, portfolio managers, investment advisors etc. The objective of SEBI is to protect the interests of the investors in securities and to promote the development of securities markets and to regulate the securities markets. The scope and functioning of SEBI has greatly expanded with the rapid growth of securities markets in India.

Formation of National Stock Exchange (NSE)

While going global, it became a necessity to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.

NSE enables fully automated screen-based trading mechanism which strictly follows the principle of an order-driven market. Trading members are linked through a communication network which allows them to execute trade from their offices. The prices at which the buyer and seller are willing to transact will appear on the screen and when the prices match the transaction will be completed. It ensures greater functional efficiency supported by totally computerized network.

Within one year of the onset of equity trading at NSE, it became India’s most liquid stock market. Further, NSE is said to have generated a dynamic process of change in the securities industry. It directly spawned new institutions like the Clearing Corporation and Depository and played a vital role in injecting new ideas into the securities markets such as derivatives trading.

Formation of BOLT System

In 1995, the BSE also replaced its open outcry trading system with totally automated trading known as the BSE Online trading, or BOLT, system. The BOLT network was expanded nationwide in 1997.

Decade in building one of the best stock market across globe

The last decade of 20th century has been exceptionally good for the stock markets in India. In the back of wide ranging reforms in regulation and market practice as well as growing participation of foreign institutional investment, stock markets in India have showed phenomenal growth in the 90’s. Investor base continued to grow from domestic and international markets.

Stock markets became intensely technology and process driven, giving little scope for manipulation. Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology. Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to trading in equities, opportunities in trading of derivatives in futures and options in index and stocks. Even modern financial instruments like ETFs are showing gradual growth.

Within five years of introduction of derivatives, Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian stock markets are transaction intensive and thus rank among the top five markets in this regard. Stock exchange reforms brought in professional management separating conflicts of interest between brokers as owners of the exchanges and traders/dealers. The demutualisation and corporatisation of all stock exchanges is nearing completion and the boards of the stock exchanges now have majority of independent directors. Foreign institutions took stake in India’s two leading domestic stock exchanges. While NYSE Group led consortium that took stake in the National Stock Exchange, Deutsche Bourse and Singapore Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

In today’s global scenario that witness the flow of capital and goods without borders, India is keen to go along with the trend with its reforms like improving the investment climate by allowing more and more foreign investors to invest in equity and debt markets, allowing Indian companies to issue ADRs and GDRs in international exchanges and enable them to raise resources through wide range of financing routes as well as permitting Indian companies and individuals to invest abroad.

Friday, August 20, 2010

The Elliott Wave Description

The following 5 waves description applies to a market moving upwards. In a down market there are generally the same types of behavior in reverse:

Wave 1: The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden feel that the previous price of the stock was cheap and therefore worth buying, causing the price to go up.

Wave 2: The stock is considered overvalued. At this point enough people who were in the original wave consider the stock overvalued and start taking profits. This causes the stock to go down.


Wave 3: This is usually the longest and strongest wave. More people have found out about the stock, more people want the stock and they buy it for a higher and higher price. This wave usually exceeds the tops created at the end of wave 1.

Wave 4: At this point people again take profits because the stock is again considered expensive.

Wave 5: This is the point that most people get on the stock, and is most driven by hysteria. People will come up with lots of reasons to buy the stock, and won't listen to reasons not to.

At this point is where the stock becomes the most overpriced. At this point the stock will move into one of two patterns, either towards a correction (a - b - c) or it will start over again with wave 1.

A correction (a - b - c) is when the stock will either go down or up in preparing for another 5 way cycle. During this time volatility is usually much less than the previous 5 wave cycle, and what is generally happening in the market is taking a pause while fundamentals catch up.

"On a moderately philosophical level, the Wave Principle suggests that the nature of mankind has within it the seeds of social change." * (*www.elliottwave.com).

Prosperity ultimately breeds reactionism, while adversity eventually breeds a desire to achieve and succeed. The social mood is always in flux at all degrees of trend, moving toward one of two polar opposites in every conceivable area, from a preference for heroic symbols to a preference for anti-heroes, from joy and love of life to cynicism, from war to peace, from love to hatred, from a desire to build and produce to a desire to destroy.

Most important to individual investors, portfolio managers and investment corporations is that the Wave Principle can sometimes indicate in advance the relative magnitude of the next period of social progress or regress.

Living in harmony with those trends can make the difference between success and failure in financial affairs.

The Elliott Wave Principle

The Elliott Wave Principle is a detailed description of how groups of people behave.

It reveals that mass psychology swings from pessimism to optimism, are creating specific and always measurable patterns.

The idea is that if you can identify repeating patterns in prices, and figure out where in those repeating patterns you are today, then you can predict where you will be going in the future.


The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott (1871 - 1948), who completed the bulk of his work in the 1930s and 1940s.

This principle interprets market actions in terms of recurrent price structures.

The wave is a movement in the market, either up or down. The size of the wave depends upon the period of time that is being analyzed.

Basically, market cycles are composed of two major types of Waves:

A. The Impulse Wave:

It is a wave that moves in the direction of the main trend of the market. Every impulse wave can be sub-divided into a 5 - wave structure (1 - 2 - 3 - 4 - 5).

B. The Corrective Wave:

It is a wave that moves counter to the direction of the main trend of the market. Every corrective wave can be sub-divided into a 3 - wave structure (a - b - c).

An important feature of the principle is that it is "Fractal" in nature. "Fractal" means market structure is built from similar patterns on a larger or smaller scales. Therefore, we can count the wave on a long-term yearly market chart as well as short-term hourly market chart.

The stock market has three attributes of the principle that make it quite applicable:

1. It is a true free market.

2. It provides consistent and regular metrics that can be measured.

3. It is manipulated by a statistically significantly large group of people.

There are also two assumptions behind the Elliott Wave Principle:

A. The market is not efficient. It is an inefficient market place that is controlled by the whims of the masses. The masses consistently overreact and will make things over and under priced consistently.

B. If the above is true, then you should be able to do a "sociological" survey of stock prices independent of other news that effects stock prices. The general explanation for this behavior is that the masses tend to listen for the news they are ready to hear, and that the movement that actually happens depends on other effects.

When doing wave studies of stocks, one of the most difficult things to overcome is the personal ability to separate your own emotions from affecting your analysis.

As an individual you have the same fear and greed internal mechanisms that affect the entire market place as a whole.

Without being able to work to dismiss those emotions you will not be able to stay in a position that will allow you to fully understand and profit from the sociological effects that you are measuring.

Thursday, August 19, 2010

Assumption of Technical Analysis

"The future influences the present just as much as the past." - Friedrich Nietzsche (1844 - 1900)

Technical Analysis is built on some fundamental assumptions in regards to the fashion in which a market operates. These assumptions are not only integral to you as an aspiring Technical Analyst, but are also central to Technical Analysis as a theory.

In summary, these assumptions include:

1. Price discounts everything.

2. Prices usually always move in trends and

3. History repeats itself over time.

A more detailed explanation of these assumptions will now be explored.

Price Discounts Everything

What exactly does this mean? In a nut shell, this first assumption seeks to incorporate all the fundamental, political, macro and micro economic data as well as the risk component of a stock into the current market price at any one period.

This infers that the market price can be heavily influenced by an investor's perception of supply and demand, as well as the general broad economic overview at the time the price is captured.

Therefore, it can be assumed that Technical Analysts believe that the current market price of a stock reflects all the relatively important information that Fundamental Analysts are seeking to provide qualitative and quantitative explanations for.

This is one of the key reasons that Technical Analysts do not focus on the underlying data behind price variation, but rather focus on what the market is valuing the stock at.

Prices usually always Move in Trends

Prices usually occur in Trends, although some theorists argue that prices are completed random. Randomness of price is specifically related to the Efficient Market Hypothesis. This theory is based on the fact that markets are "efficient" and information dissemination occurs instantaneously across the market.

In the real world however, this is never entirely achievable because of a varying number of factors and therefore complete randomness -- in its true form -- is never absolutely reflected.

Quite simply, the more efficient a market becomes, the faster information is dispersed to the market and as a consequence, the faster price changes to reflect this information.

From a charting perspective, this infers that prices follow a distinctly more "step-like-pattern" as opposed to a smooth trend for inefficient markets. In consideration of this, prices can only adjust as fast as the news spreads across the market. It is important to realize that there is a subtle difference between information being available to the market, and investors actually processing this information to act rationally upon it.

Equally, since different investors have different risk preferences it infers that their reactions to this information will vary and increase the level of randomness in the market.

Those that have had several years experience in the market will be able to differentiate between these factors and as a consequence, will know which stocks will trend in patterns and which will not.

History Repeats Itself over Time

The psychology of trading and human nature in general is based on emotional factors. Pride, greed, hope, anger, sadness and ego are all factors that affect the market place as much as they do our normal lives. Even if some investors are completely risk adverse and others are risk tolerant - these factors all have a substantial impact on the decision making process you adopt.

If you wrote down all the goals you seek to achieve in your trading strategy, you would find that the majority relate in some way to making a profit.

Is this a bad thing?

It could be argued that either side of this argument will present differing strengths and weaknesses. The most significant factor to realize is that you are not the only person motivated by profit. All traders tend to react in the same way each time they encounter a situation which is similar.

While it is true that some traders react positively from any mistakes made and learn from them, other participants decide to leave the market and therefore create a balancing pendulum of traders entering and leaving the market.

Consequently, the same oversights are made by each generation of traders in the market which infers that history tends to repeat itself as time moves forward.

Another important market factor to consider is that most people act like sheep when it comes to a trading situation - "once the flock begins to move, all the other sheep follow."

So what? You ask, How Does this Affect Me?

Quite simply, all our emotions tell us to follow what the majority of people are doing and as a result we are heavily influenced by market majority. This idea of "majority rules" negatively affects trading interpretations because it adversely influences what degree we interpret both buyers? and sellers? nature in the market and how they are reacting to a situation. This then persuades our judgment about future price direction and our independency of making market decisions.

Sunday, August 15, 2010

Advantages & Disadvantages of Buying an Index

Advantages of Buying an Index

Indexes are a nice way to gain exposure to certain markets or sectors without having to corner the market in stocks. It’s easier to buy a commodity index instead of buying barrels of oil, some cattle, and a few bags of wheat. You can gain exposure to the overall performance of a market buy buying the appropriate index basket.

Disadvantages of Buying an Index

While an index is designed to emulate a certain market, it doesn’t mean it’s 100% accurate. Just because you buy a foreign market index in a certain region doesn’t mean your basket will move exactly with the economy of that region. There are many factors that can alter the course of a market that sometimes an index can’t reflect, at least not immediately.

Filling a basket order is not always the easiest process either. While it is easier to buy an index than 4,000 industry stocks, that doesn’t mean you always get your target price. If you use market orders, you will eventually fill your basket, but you may not get the desired price. Or if you use limit orders, you may not get all the shares needed to fill the basket.

And not all indexes are liquid. Meaning it may be difficult to trade in and out of certain index positions. Then again, the same thing can be said for certain securities as well.

What is a Stock Index?

A stock index is a compilation of stocks constructed in such a manor to track a particular market, sector, commodity, currency, bond, or other asset. For example, the Sensex is an index that tracks the largest 30 companies listed on the Bombay Stock Exchange.

What is in an Index?

The stocks in and index are collected in what’s known as a basket. For example, if you wanted to invest in the Sensex, you would purchase shares of the 30 stocks in the index basket. Similarly, in case of Nifty, you would purchase shares of the 50 stocks in the index basket.  You would actually own shares of 50 different companies if invested in Sensex and shares of 30 different companies if invested in Nifty.

How Does an Index Work?

Indexes are designed to track a particular market or asset. For example, the Bank Index (BANK NIFTY) consists of companies that are in core banking space. The logic is that if you buy the stocks in the index, you will gain exposure to the banking sector without having to buy shares in every single banking company in India. The shares in the BANK NIFTY are representative of the banking industry as a whole.

What Does Index-Weighting Mean?

Index-weighting is how the shares in an index basket are allocated; basically how the index is designed. For example, a price-weighted index has different amounts of shares for each stock based on price. A stock worth Rs. 2000 would have 1 share, where a stock worth Rs. 500 would have 4 shares to make it equal to the Rs. 2000 stock.

Another type of weighting is based on market capitalization. The shares of each stock in a cap-weighted index are based on the market value of the outstanding shares. There are also revenue-weighted indexes, fundamentally-weighted indexes and even float-adjusted indexes.

Monday, June 14, 2010

Stock Market Myth

Over time, the market has averaged about a 15 % return annually.

How many times have you heard this statement or one like it to justify investing in the stock market? The statement is sometimes used to suggest that investing in the stock market will earn you a 15 % return if you leave your money in long enough.

The problem with statements like this is that they are half-truths, often used out of context with beginning investors who don’t understand the complete truths.

Problem One

The first problem is the statement suggests that you should expect a 15 % annual return from your investments in the stock market. Really? Which investments?

People unfamiliar with investing may assume that buying a few (or one) stocks will set them up for this famous 15 % return.

Problem Two

What Market?
The second problem is what do they mean by “the market?” It wasn’t the Sensex in 2008, because it didn’t return 15 %. You can buy mutual funds that track large portions of the market like the BSE 100 or S&P CNX 500, but they didn’t perform any better.

The fact is that by investing in individual stocks you are not buying “the market,” so what the market does is of little concern to you.

Your focus is on the portfolio you create and how it will perform in the future, because that’s all that matters. If you want to keep score by comparing your gains to those of some benchmark like the Sensex, Nifty or S&P CNX 500, feel free to do so.

However, keep in mind investing is not about beating a benchmark. It is about securing your financial future. If the S&P CNX 500 is up 2 % and your portfolio is up 3 %, that will be little comfort when you need real Rupees to spend in your retirement.

Being a long-term investor, you should focus on buying quality stocks that will meet your financial goals. Investments based on sound research in strong fundamental companies in the right sector tends to outperform the indices in a long run.

Friday, June 4, 2010

Market Capitalization - Small, Medium & Large Cap Companies

Story of Market Capitalisation

Market capitalisation of a company = Stock price X Number of outstanding shares.
Basically, market capitalisation (cap) is a way to classify companies in equity market according to their size. The market cap at any given point of time shows whether the company is either a large-cap or a mid-cap or a small-cap. With the rise in stock price and issue of additional shares into the market, the market capitalisation of a company goes up. As the market cap increases, the liquidity of the stock in the market also increases.

In the late 70s, Rolf Banz and Mark Reinganum, published a study that the companies with smaller capitalisation on an average gave more returns than the companies having larger capitalisation, even after adjusting for risk. This finding, also known as ‘the size effect’, has evolved into a style for managing funds.

The Bombay Stock Exchange (BSE) introduced ‘BSE Mid-Cap’ index and ‘BSE Small-Cap’ index on 11 April 2005 to represent and keep track of companies having size smaller than the 30 stocks listed on BSE Sensex. These indices denote the ups and downs in the mid-cap and small-cap sector.

                                           (Please click on the image for enlarge view)

There is no classical definition and clear differenciation of small-cap & mid-cap companies. It is based on the market capitalisation of the stock.

Large companies are fewer and bigger in India. Hence, the 50th stock and below in terms of capitalisation can be the cut-off to enter mid-cap space in the market. This is one of the definition used by most of the fund managers of various Mutual Fund houses.

The risks in terms of liquidity and impact cost increases as we move down the capitalisation curve.

Note: Apart from market capitalisation, investors need to bear in mind their individual investment goals, risk tolerance levels, financial health and their understanding of the security. Hence, to take an exposure to a small-cap or a mid-cap stock, recommendation from equity research analysts is advisable.

Wednesday, June 2, 2010

Indian Stock Market Indices - Sensex & Nifty

Sensex & Nifty are more often interpreted collectively with different market records, as both indices are the roots of the Indian stock market. Representing the BSE and NSE respectively, Sensex & Nifty mirror the value of a company in the active stock market.

A group of 30 companies marks Sensex whereas Nifty exhibits the performance of 50 companies. If you read or listen to any Sensex news, Nifty news automatically follows, as the Indian market is incomplete without the figures displayed at these two stock exchange bases. Given the high volatility of the indian stock market represented by the Sensex & Nifty, the layman may find it difficult to understand the fluctuating nature. With expertise, this drawback can be negated.

BSE Sensex puts a close attention on Indian companies and corporate conglomerates like Reliance, Tata, Bharti Airtel, DLF Limited, HDFC, Grasim Industries etc. These companies are the active part of the cluster of thirty companies which run with this index. Index weightage is derived and calculated by using "free-float market capitalization" strategy that proved to be very effective in long run.

As an investor, you can stay informed about the rise and fall of stock prices by watching either Sensex news or the Sensex index. Making intelligent assessments and acting consequently to be successful in the stock market. The BSE has over 6000 companies in its listing, the greatest number in the world. With its 134 plus years of market presence and given its breakthrough role in the formation of the Indian capital market, Sensex has come a long way and the era of the Indian stock market is calculated from the day of the founding of the BSE. Any investment involves the risk factor and the BSE is no exception. Similar is the case of NSE. Stay updated with the latest performance of the Sensex & Nifty to experience a winning rim.

Market fluctuation is obvious in the Indian stock market, and if you are finely tuned to investment strategies, you will definitely gain. Many investment and stock broking platforms like Reuters India provide effective advices and quotes including the A-Z of the performance of Indian markets and world markets. Moreover, the stock recommendations displayed at such platforms, can bring a difference in your investment approach.

Tuesday, June 1, 2010

P/E Ratio of Indian Stock Market: 1990 - 2015

P/E ratios in India during 1990 and 2005

As of December 31, 2009, there were 23 government-recognized stock exchanges in India and there were more than 9,700 companies listed on these exchanges. The Bombay Stock Exchange (BSE) lists about half of these companies (4,929).

BSE happens to be the oldest in Asia, having been established as "The Native Share & Stock Brokers Association" in 1875. As of December 31, 2009, the market capitalization of the companies listed on BSE was approximately USD 1,400 billion (approximately 1.1 times India’s annual GDP).

Since BSE has the most well-known indices within the Indian stock market, we focus on a few of these indices in this article: SENSEX (with a base of 100 in 1978-79), BSE-100, and BSE-500 (with a base of 1,000 in 1999 and comprising 500 listed companies in various Indian stock exchanges).

Ignoring dividends, both SENSEX and BSE-100 have grown by 13.4% annually in Indian Rupee terms during April 1, 1991 and March 2005. On March 31, 2005, SENSEX was valued at 6,492.82 (with a P/E ratio of 16.05) and BSE-100 was valued at 3,481.86 with a P/E ratio of 13.72. This growth rate can be partitioned into the following three components:

1. The companies comprising SENSEX and BSE-100 have individually grown at an average annual rate of 9% or more (in real terms) and 15% (in nominal terms).

2. As shown in the table 1 given below, the price-earnings ratio for companies listed in SENSEX went down from 19.68 in March 1991 to 16.05 in March 2005, i.e., an average drop of approximately 1.5% per year. Similarly, the price earnings ratio for companies listed in BSE-100 dropped by approximately 2.4% per year.



3. The difference between (1) and (2) approximates the average annual growth rate of SENSEX and BSE-100 of 13.4% as mentioned above.

Predictions regarding the Indian Stock Markets during 2005 and 2015

The following three main components are likely to result in a strong upward movement of Indian markets:

1. During April 2005 and March 2015, companies listed in SENSEX, BSE-100, and BSE-500 are expected to grow at an annual average rate of 11% (in real terms) and 17% (in nominal terms).

2. In March 31, 2005, the firms in SENSEX were trading at an average P/E ratio of 16.05 whereas they were trading at an average price earnings ratio of 22.8 during 1991 and 2005. Our analysis shows that by December 2015, these firms (that are part of SENSEX, BSE-100, and BSE-500) are likely to trade at an average P/E ratio of 22.8 also, partly because of volatility and partly because the annual growth rates of these companies is quite high when compared to their counterparts in the United States and other developed countries.

3. As a comparison, during the past fifteen years, an average firm in China’s stock market has been trading at an average price-earnings ratio of 23. Clearly, on one hand, since the stock markets in the United States are much bigger and more mature, the companies listed there likely to command a higher premium; on the other, since these earnings are computed on the “last twelve month” basis and since the companies in India (and other emerging countries) are growing more rapidly – as much as 7-8% more – than their counterparts in the United States, we believe that the SENSEX, BSE-100, and BSE-500 will trade at an average price/earnings ratio of 22.8 (during 2005 and 2015).

Suggested Reading:

Tuesday, May 4, 2010

Sensex Evolution Story: A Barometer of Indian Equity Market

Sensex has multiplied 32 times since its debut 24 years ago.

Sensex: A Barometer of Indian Equity Market

A major milestone in the Indian stock market ws the launching of the BSE Sensitive Index on the January 2, 1986. Making a humble beginning of 549 points on the first day, this 30 stock index has acquired great significance and has truly become the barometer of the Indian stock market today.

Prior to Sensex there was on benchmark to help investors track the movement of the Indian stock market. Sensex has not only helped Indian investors gauge the growth of the market, but also helped global investors to taste the flavour of the Indian growth story. Such is Sensex's hold on the investor's mind that even after establishment of NSE in 1994, it is the sensex which has a better recall value than the NSE's Nifty.

Consisting of the 30 pivotals, the Sensex has 1979 as its base year. Each of these stocks has weightage directly proportional to its free float market capitalization, which effectively means that the companies with largest free float market capitalization get higher weightage than those with the comparatively lower capitalization. However, when Sensex was launched weightage was given based on full market cap. To be a part of the Sensex, there are certain quantitative and qualitative parameters such as market cap, liquidity, frequency in trading, industry representation, listing history and track record of the company etc. Only companies which stand the test of these parameters find a place in sensex.

What is more significant about the Sensex is that it was designed in such a way that the companies represented in the index are leaders in their respective sectors. Thus while some sectors have continued to reign and are represented in the index, the benchmark has also accommodated various emerging and high growth sectors such as IT, financial services and telecom. And who would forget the entry of the real estate sector with the entry of the real estate big dady DLF in the sensex after it displaced Dr. Reddy's from the list.

But Sensex has changed over the years with just eight companies still continuing to be part of the Sensex since inception. Interestingly, there were companies to be part of the Sensex original's list., but failed to make it to the list when the Sensex debuted in January 1986. These companies were Bombay Burmah, Asian Cables, Crompton Greaves and Scindia. Also there were two companies, namely L&T and Tata Power, which made temporary exits, but made their way back into the Sensex, while others in the pack gave way to new entrants.

The Sensex is much more dynamic today than it was previously as it represents a wider spectrum of the economy. Though the market has turned more volatile on account of global factors, we feel it is these high growth companies in the pack that would help the Sensex take a giant leap in the coming years.

Sunday, February 28, 2010

Indian Equity Market Outlook - Post Budget

After the Union Budget 2010-11, the big question in the mind of many investors probably is - Will the markets correct more looking at week global cues or positions for long term can be taken at these levels considering better than expected budget?

This article looks into the probable direction of the Indian markets in the next 2-3 months. It is impossible to predict any levels for the indices. Hence, that is not something we would attempt to do. We will primarily try to figure out the probable trend for the markets based on certain factors and events.

Not surprisingly, stock markets gave a rousing welcome to the Budget and rose immediately as the FM presented his speech.


Pranab Mukherjee also sought to raise excise duty for sectors like cement, capital goods and autos, in a mild way — the 2% hike was less than the 4% as per analyst expectation.
  • The Budget was good and coming back to fiscal discipline is a good move.
  • The Budget was also growth-oriented with financing incentives for real estate, infrastructure and agriculture.
  • The Budget another key announcement was that the RBI would consider giving banking licences to non-banking financial companies (NBFCs).  
While the markets got something to cheer, after witnessing seeing consolidation in the past few weeks, weak global cues could remain the party-spoiler ahead. So even as specific sectors get a potential earnings boost, the overall global investment climate continues to remain tepid. The markets are still dependent on the global markets, commodity prices and global currencies.

 
Therefore, if you are looking to invest for a period of short to medium term, your investments should be in sector specific stocks.

Sectors to Prefer:

Infrastructure - Set to be in high growth trajectory with financing incentives from government.
Non Banking Financial Companies (NBFCs) - Entry in banking space will increase business scope and earning dimensions.

The reasons why we believe that indian stock market might correct further are discussed below.

Valuations still look expensive: 
The Indian markets are still trading at a PE of close to 21. This is higher then the average PE the Indian markets have traded in the last 10 years. Also, the Indian markets have gone up over 100% from its March 2009 lows. After such a steep rise, a correction of even 20-25% can't be ruled out. This would be healthy for the markets in terms of attractive more money as valuations again start looking fair.

China Credit Tightening:
The Central Bank in China has been making efforts to control the credit growth as there is a high probability of asset bubbles and run away inflation in China. Infact, one can say that the Chinese property market is already in a bubble stage. Therefore, there is a high probability of aggressive policy action to control credit growth and this can slow down China's growth significantly. Any such event will trigger a sharp sell off by the FII's in the emerging markets. Hence, the Indian economy might do well and the stock markets tank or correct significantly.

Plenty of problems in the Western World:
The developed world has averted a financial disaster but are surely not out of the woods. The fears of soverign debt default is a very valid one. The fear os the U.S economy slowing down again is also valid and highly probable. Therefore, there are not many positive cues which one can expect from the developed markets.
 
Inflation Concern:
There is no doubt that the Indian economy is coming back to a robust growth trajectory. At the same time, inflation is also becoming a greater concern. The food inflation has shown no signs of easing and the WPI inflation is also going up at a robust pace.

Sectors to Avoid:

Industrial Commodities - will be negatively impacted if there is a sharp slowdown in China.
Crude Oil Exploration - The China slowdown factor might impact exploration Companies as crude price corrects.

Thursday, December 31, 2009

Index Gyan (Sensex & Nifty)

Index Gyan section covers Sensex & Nifty to provides basic information of index stocks, expert views in term of nifty and sensex support and resistance levels and technical analysis of chart patterns which may guide investors about entry and exit levels for investment in indian equity market.

Below are the posts published in Index Gyan section of www.saralgyan.in

Sensex @ 1,00,000 by 2020?

In view of the fact that the BSE Sensex has yielded an internal rate of return (IRR)of 17.25 percent since its inception in 1979, the chances of it hitting the 1,00,000 level over the next decade is quite possible. Below are some facts and figures which justify such possibility and give some insight on long term sensex targets.

1. Over a period of the past 30 years i.e. 1979-2009, bhe BSE Sensex has yielded in IRR of 17.25 percent per annum. If history can form any basis for the future and if the historic average IRR of 17.25 percent per annum has to be maintained, the sensex will reach whopping high levels of 1,00,000 or more by 2020.

2. If we look at the commencement of bull phase of the indian capital markets i.e. from 2003 onwards, the BSE Sensex has yielded an IRR of 26.21 percent per annum. If such an IRR of 26.21 percent has to be maintained, the sensex has to reach a level of 2,23,000 by 2020.

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3. If we look at sensex targets by 2050 i.e. after 4 decades from now with an IRR assumption of 17.25 percent per annum, we will see sensex at 1,17,50,000 (1 Crore seventeen lakh fifty thousand)

4. If we have a bull phase for 4 decades, an IRR assumption of 26.21 percent per annum, sensex shall be at 24,05,77,897 (24 Crores plus)

We do not have any idea what is there in store for indian markets in the next decade or century. If anybody gets a feeling that the indicative sensex levels discussed here is hypothetical and out of reach, we wont complain because the indicative levels surely are sounding exaggerated. This is done assuming that all the 30 sensex companies are going to contribute to it in line with their respective weightage.

However, it leaves us wondering if equities can't even yield 17.25 percent per annum IRR in the next decade because that is the period which is widely accepted to be the "decade of India".

Friday, October 9, 2009

Sensex & Nifty Outlook - Oct 2009

Its always difficult to predict the market movement! Looking at levels of sensex & nifty, a correction is due. Levels of 14500-15200 will be good entry level for sensex stocks. But we need to keep some more patience as earning season is started and correction in market may get extended further.