It has been quite a few days that I am fascinated by the word Sensex. After all what is this Sensex all about?? Who drives the market?? How does the market actually works?? Who are FIIs and what role do they play??Why does Sensex fluctuates...and what impact does it have?? What is the bulls and bears???..and so on. All these questions have been hovering over me over the past few days..rather weeks. Actually Sensex is an index, which consists of the 30 major companies in the market. It's name Sensex means Sensitivity Index. According to Wikipedia Sensex is a value-weighted index composed of 30 stocks. It consists of the 30 largest and most actively traded stocks, representative of various sectors on Bombay Stock Exchange.
The whole point in blogging about Sensex is to have some knowledge for the beginners, and to consolidate the facts about Indian economy . This post might look foolish to economists, but it's just an attempt to increase knowledge about Indian stock market.
Well, I am just a beginner in this field, but it has really driven me crazy. It has been said that there are so many factors, upon which the markets work, which decides whether the Sensex would go up or down. But in a layman's term it's just a gamble of buying and selling the stocks in the market. The simple logic which I understood is that when one buys a stock, it would go up, and when one sells it off and it would certainly go down. This might seem a little overstatement, but consider a hypothetical case where there are only 10 traders in a market, then if all the 10 traders start buying a particular scrip, it's value would go up, and if they all sell if off, it's value goes down. But since the market being such a huge place and there are lakhs of traders around there, add the foreign institutional investors and domestic investors to it, the market strength becomes such a big place that no one can really predict that whether it would go up or down.
Here we come across one interesting chunk of the market players....FII. FII stands for Foreign Institutional Investors. Our market is mostly driven by FIIs. The FII invest in a large quantity, typically milllions of dollars in Indian economy and hence the volumes traded by these FIIs are bound to be very high. Now since these volumes constitute a major part of the volumes traded, these are market players who can really drive our Indian market. There has been many criticism for these FIIs, but it is because of these FIIs that the Indian market was touching new highs. Now when they sold off, the market was bound to fall and this is what happened when the BSE and NSE touched Lower Cercuits i.e the Sensex fallled 10% from it's previous close. One should be aware of all these facts before investing in the market, and one should do a complete research on a scrip before actually putting the money in that scrip. Now there are so many things which has to be studied before investing..... The first factor on my list is a Price to Earnings ratio. This ratio actually determines the actual market value of the scrip, and where this scrip is actually trading. Price to earnings ratio is actually dividing the current market price by the actual price, which is calculated based upon the results of a company. Typically this price to earnings ratio would be somewhere in between 5-50. A P/E ratio of about 5 means the market price of the scrip is 5 times than the actual earnings of the company. This is how valuations come into play. If P/E ratio of a scrip is about 5 then it is considered to be fairly valued, and it is suggested to pick up that stock, though there is no golden rule like that. A P/E ratio of 100 means the stock is already trading at 100 times its earnings and it isn't suggested to go for this stock. One can argue that how does this P/E ratio matters at all, because it's all about whether the market players buy or sell, and this is what which would decide it's price. Certainly, this is 100% true that the value is just determined on buying/selling of a particular stock, but in the long run the stock whose P/E ratio looks good would eventually outperform the other stocks. The other side of the coin is that one can't completely rely on this P/E ratio also, because everything in market is about expectations. Now if market players think that the company earnings are bound to grow, then they would start picking up that stock, no matter what it's current P/E is. So this is just one factor which would give a fair idea about where the stock is currently trading, but surely you just can't rely on this completely.
The other thing which you should look at before investing is the simple moving average of a scrip. It's name itself tells that it gives the cumulative value of the scrip over a period of time. Say a simple moving average over 30 days of a scrip is 150, which means that we take the average value of the stock over last 30 days, it would come out to be 150. So if the simple moving average of a scrip over 100 days is greater than the value at which the stock is currently trading, then that scrip seems to be attractive. This scene generally happens when the market crashes suddenly and the stock value plunges by a big margin. Some other things are Quarterly results of the company, it's net profit, the industry of the company, company's value, company's genuineness, Earnings per share, whether it's increasing or decreasing.
These all are just some factors which one should look at before putting money in market. No one can guarantee that if there is a scrip which scores best in all these factors then it would go up, it's just that there is much higher probability that this stock would go up. After all it's all buying and selling which decides.
Some important links for stock market research:
http://bseindia.com
http://nseindia.com
http://moneycontrol.com
http://economictimes.indiatimes.com
http://www.business-standard.com
http://in.finance.yahoo.com
http://money.rediff.com
Comments Welcomed!
