Stock Market returns
Basics of stock market
• Why invest?
• who regulates
• financial interdependence
• Stock Market returns
• Trading system
• Day end settlements
• Corporate actions
• News and Events
• Getting started
• Rights, ofs,fpo and more
5.1 Overview of stock market returns
We are now prepared to continue our investigation of the stock markets because we have a better understanding of the IPO process and what actually happens when a company moves from the primary to the secondary market.
Due to its status as a public company, the company is now required to make all information about it publicly available. On stock exchanges, shares of limited liability companies are traded every day.
Participants in the stock market trade for a limited number of reasons. This chapter will discuss these motives.
5.2 – What really is the stock market
The stock market is an electronic marketplace, as we covered in chapter 2. Buyers and sellers interact and exchange opinions.
Take At the time this essay was published, Infosys was coping with a succession problem, and the majority of its senior-level management experts were leaving the organization for internal reasons. It appears that the company’s reputation is suffering greatly due to the leadership void. The stock price consequently decreased from Rs. 3,500 to Rs. 3,000. The stock prices react whenever there are fresh reports about an Infosys management change.
Assume there are two traders – T1 and T2.
T1’s evaluation of Infosys Because it will be difficult for the business to find a new CEO, the stock price is expected to decline far more. The stock price will probably continue to fall.
If T1 trades as per his point of view, he should be a seller of the Infosys stock.
T2, however, views the same situation in a different light and therefore has a different point of view – According to him, the stock price of Infosys has overreacted to the succession issue and soon the company will find a great leader, after whose appointment the stock price will move upwards.
T2 should buy Infosys stock if the market behaves as it believes it should.
In Infosys, T1 will be a seller and T2 will be a buyer. 3, 000.
Now both T1 and T2 will place orders to sell and buy the stocks respectively through their respective stock brokers. The stock broker obviously routes it to the stock exchange.
The stock exchange must confirm that these two orders match, allowing for the execution of the trade. This is the primary job of the stock market – to create a marketplace for the buyer and seller.
5.3What affects stock price?
Let’s keep using the Infosys example to better understand how stocks fluctuate. Consider yourself a market observer keeping tabs on Infosys.
The price of Infosys is 3000 at 10:00 AM on June 11th, 2014. The management announces to the media that they have succeeded in hiring a new CEO who will lead the business to greater heights. The new CEO will exceed expectations because they trust his ability and judgment to do so.
What impact will this news have on Infosys’ stock price?
What trade would you make on Infosys, if you were to do so? Would it be a sell or a buy?
The stock price will increase, which is a straightforward response to the first query.
Infosys had a leadership problem, which the business has now resolved. Market participants frequently purchase the stock at any price when encouraging announcements are released, which results in a stock price surge.
Take note: The buyer is prepared to pay the seller’s desired prices. The share price usually increases as a result of this buyer-seller reaction.
So as you can see, the stock price jumped 16 Rupees in a matter of 5 minutes. Though this is a fictional situation, it is a very realistic, and typical behavior of stocks. The stock price tends to go up when the news is good or expected to be good.
In this particular case, the stock moves up because of two reasons. The corporation no longer has a leadership issue, and the new CEO is anticipated to take the company to new heights.
The answer to the second question is now quite straightforward; you purchase Infosys stocks taking into account the positive news that surrounds the stock.
Now, moving forward on the same day, at 12:30 PM ‘The National Association of Software & Services company, popularly abbreviated as NASSCOM makes a statement. For those who are not aware, NASSCOM is a trade association of Indian IT companies. NASSCOM is considered to be a very powerful organization and whatever they say has an impact on the IT industry.
The customer’s IT budget is anticipated to decrease by 15%, according to NASSCOM, which could have an impact on the sector going forward.
By 12:30 PM let us assume Infosys is trading at 3030. Few questions for you.
What effects might this new information have on Infosys?
What new trade would you start if you had access to this information?
What would happen to the other IT stocks in the market?
The answers to the earlier queries are fairly straightforward. Let’s examine NASSCOM’s statement in more detail before we begin to respond to these questions.
According to NASSCOM, the customer’s IT budget is expected to drop by 15%. This indicates that IT company revenues and profits are most likely to decline soon. For the IT sector, this is bad news.
Now let’s attempt to respond to the questions above.
Infosys a leading IT major in the country will react to this news. The reaction could be mixed because earlier during the day there was good news specific to Infosys. But a 15% drop in sales is a major issue, so Infosys shares are probably going to trade lower.
If a fresh trade were to be started at 3030 based on the recently disclosed information, it would be a sell on Infosys.
The data disclosed by NASSCOM is relevant to all IT stocks, not just Infosys. As a result, all IT companies will certainly experience selling pressure.
So as you notice, market participants react to news and events and their reaction translates to price movements! This is what makes the stocks move.
You might be mulling over a very practical and pertinent question at this point. What if there isn’t any news about a specific company today, you might be wondering. Will there be no change at all in the stock price?
Well, the answer is both yes and no, and it depends on the company in focus.
For example, let us assume there is no news concerning two different companies.
Reliance Industries Limited
Shree Lakshmi Sugar Mills
Reliance is one of the biggest companies in the nation, as we all know, and whether or not there is news, market participants want to buy or sell the company’s shares, causing the price to fluctuate constantly.
Due to its relative obscurity and the lack of news or events involving it, the second company might not catch market participants’ attention. In such cases, the stock price might not change at all, or if it does, it might change very little.
In conclusion, the expectation of news and events causes price movements. The news or events may have a direct bearing on the business, the sector, or the overall economy. For instance, the news of Narendra Modi’s selection as Indian Prime Minister caused the entire stock market to move.
5.4 How is the stock transacted?
You decide to purchase 200 Infosys shares at 30.30 and hold them for a full year. What is the mechanism behind it? How exactly does one go about purchasing it? What happens once you purchase it?
Thankfully, there are systems in place that are logically integrated.
You must sign into your trading account, which is provided by your stock broker, after deciding to purchase Infosys. After you submit your order, an order ticket is generated with the following information:
- The details of your trading account, through which you intend to buy Infosys shares, show your identity.
- The price at which you intend to buy Infosys
- The number of shares you intend to buy
Your broker needs to confirm you have enough cash on hand to purchase these shares before sending this order to the exchange. If so, the stock market receives this order ticket. The stock exchange searches for a seller willing to sell you 200 shares of Infosys at 3030 once the order reaches the market using its order matching algorithm.
Now, the seller could be a lone individual willing to sell all 200 shares at $30 each, ten individuals selling 20 shares each, or two individuals selling 1 and 199 shares, respectively. It doesn’t matter what combinations and permutations exist. You have already placed an order for 200 shares of Infosys at 3030, which is all you need. As long as there are sellers in the market, the stock exchange guarantees that the shares are available to you.
The shares will be electronically credited to your DEMAT account after the trade is complete. The seller’s DEMAT account will likewise be electronically debited in order to purchase the shares.
5.5 – What happens after you own stock?
After you buy the shares, they will remain in your DEMAT account. To the extent of your shareholding, you are now a shareholder in the business. To put things in perspective, 200 shares of Infosys equal 0.000035 percent ownership of the company.
You are instantly qualified for a number of corporate perks such as dividends, stock splits, bonuses, rights issues, voting rights, etc. simply by virtue of owning the shares. Later, we’ll go through each of these shareholder rights in more depth.
5.6- A note on holding period
The holding term is the length of time you intend to keep the stock. You might be surprised to learn that the holding period could last anywhere between a few minutes and “forever.” Warren Buffet, a renowned investor, actually said “forever” when asked what his preferred holding period was.
In a previous example from this chapter, we showed how 5 minutes could cause Infosys stock to go from 3000 to 3016. Well, for a holding period of only five minutes, this return is actually pretty good! You can certainly close the trade and look for another opportunity if you are happy with it.
5.7- Where do you fit in?
Every market participant approaches the market in a different, distinctive way. Their fashion changes as they advance and experience market cycles. The kind of market risk they are willing to take also determines their style. Whatever they do, they fall into one of two categories: traders or investors.
The definition of a trader is someone who recognizes an opportunity, enters the trade, and intends to profitably exit the trade as soon as possible. Typically, a trader views markets in the short term. During market hours, a trader is vigilant and constantly on the lookout for opportunities while weighing the associated risk and reward. He doesn’t care whether you go long or short. We’ll talk more specifically about going long or short later.
There are different types of traders :
Day Trader – During the day, a day trader opens and closes the position. His positions are no longer upheld. He dislikes taking overnight risks because he is risk-averse. As an illustration, he might purchase 100 shares of TCS at 2212 at 9:15 AM and sell them at 2220 at 3:20 PM, earning Rs. 800 in profit. A day trader often deals with 5–6 stocks every day.
Scalper – less time with the goal of quickly and modestly profiting. As an illustration, he might purchase 10,000 shares of TCS at 2212 at 9:15 and sell them at 2212 at 9.16. In this trade, he makes a profit of $1000. He would have made a lot of these trades in a typical day. A scalp trader is extremely risk-averse, as you may have noticed.
A swing trader – holds onto his trade for a little bit longer; the holding period can last from a few days to weeks. Usually, he is more willing to take chances. As an illustration, he might purchase 100 shares of TCS on June 12 at 2212 and sell them on June 19 at 2214.