Lecture on Sensex

Share represents the smallest recognized fraction of ownership in a publically

held business and can be further traded in the market. And is represented in the
form of a certificate; known share certificate.
Stock Exchange
Where buying and selling of shares take place.
For the purpose of small savings to be converted into investment opportunity and
to find easily the buyers of running business, ownership of business is broken up
into a large number of small units so that each unit may be independently and
easily bought or sold without hampering the regular business activity.
Security
It is an investment instrument issued by a government or a company
indicating the evidence of either ownership (Shares) or creditor ship (Bonds,
Debentures) which can be further traded in the market. Securities market is the
market in which securities are bought and sold. However this is not related to a
physical location.
Capital Market and Money Market
Capital market refers to a market for long- term financial instruments of
ownership such as bonds and debentures. The money market deals with short-
term financial instruments, typically those having a maturity of less than one year.
Financial system converts savings into investments through the route of
financial institutions with the help of financial instruments.
Primary and Secondary Capital Markets
The primary market is where a company in search of capital makes its first
contact with the general public. The secondary market comprises buyers and
sellers of shares and debentures subsequent to the original issue. Stock
exchanges are an important constituent of the capital market.
Stocks and Securities
These are generic terms for instruments of ownership such as shares and
for instruments of lending like bonds/ debentures which are issued publically. Just
as shares represent the smallest unit of ownership, a debenture or a bond
represents the smallest unit of lending.
Ordinary and Preference Share
An ordinary share represents the form of fractional ownership in which a
shareholder (one who holds ordinary share), as a fractional owner undertakes the
usual entrepreneurial risk associated with a business venture. During the life as
well as closure of a business, the ordinary shareholders are the last to receive
their claims. They are exposed to highest risk but this risk entitles them to a
voting right in proportion to the number of shares held by them.
Preference shareholder gets preference over the ordinary shareholder and
receives his dues first. They assume lower risk and in the long run they should
normally expect to earn less than ordinary shareholders.
If preference shares can be converted into ordinary shares at a future date on
terms and conditions that are specified in advance, then such shares are called
Convertible Preference Shares.
Par and Premium Values of Shares
Par value is the notional face value of a share that a company issues to its
investors. Companies are free to decide on any par value as long as the value is an
integer. A company may issue shares above the par value, if it meets certain
profitability criteria laid down by SEBI.
In India no company is allowed to issue shares at a discount. Also company
law in India requires companies to declare dividends on the face value of their
share, even if the share is issued at a premium.
Eainings Pei Shaie
Net Pioit
Total Numbei of shaies issueu

Naiket CapitalizationNo of shaies issueu on the uate X Closing piice of the uay
Stock Index and their Measurement
Sensex and Nifty are calculated using market capitalization weighted
method. Base date for Sensex is 1
st
April 1979 and for Nifty it is 1
st
April 1995.
Sensex and Nifty were assumed to be 100 on these respective base dates. Sensex
actually came into existence on 1/1/1986 when the index was computed at
598.53.
Company No. of Shares Price Market
Capitalization
%age Share
A 100 10 1000

B 90 9 810
C 80 8 640
D 70 7 490
E 60 6 360
: 3300

nuex value nuex on Pievious uay
Total Naiket foi Cuiient uay
Total Naiket Capitalization of Pievious uay

Free Float of Shares is calculated by excluding promoters holding, government or
financial institutions holding or other locked- in shares which are not available
normally for trading in the market.
Sensex represents the market as a whole even though it consists of only 30
stocks.
I.P.O.
The first time issue of a security in the primary market is called initial public
offering. In an I.P.O. a company may price its shares using either the fixed price or
the book building method.
Book Building/ Fixed Price I.P.Os
Bid Price No. of Shares Bid Cumulative Shares
501 100 100
400 150 250
250 200 450
200 250 700
150 300 1000
140 350 1350
135 400 1750
130 500 2250
125 600 2850
120 800 3650
110 1000 4650
Suppose the company wants to sell 2000 shares and it wants to price its shares
through book building method then all the 2000 shares are sold at Rs 130. Hence
this is the issue price.
g- Securities and T- Bills
Long dated papers (maturity of 1-20 years) and short dated papers (14- 364
days duration) are called g- securities and T- Bills. These are two sets of securities
by which GOI borrows money from the market.
Bonds and Debentures
A bond is more or less same as debenture. Both represent the smallest unit
of borrowings and can be traded. Debentures are issued by private companies
while Bonds are issued by GOI, state governments or public sector undertakings.
Mutual Funds
A mutual fund is a common pool or fund of capital mobilized from a large
number of investors and invested on their behalf in several securities in the
market. Thus the risk becomes diversified. For a small investor it is difficult to
diversify the investment over 30 or 50 different securities. Depending upon the
asset class, mutual funds can be Equity Funds, Debt Funds, Money Market Funds,
Gift Funds and Real Estate Funds. Depending upon the extent of combination of
different asset classes funds can be growth funds, Income funds and balanced
funds. Mutual funds can also be industry specific or sectoral funds like
Information technology, Bio technology, Pharmaceuticals, Banking, Emerging
stocks, Infrastructure etc.
Index Fund
An index fund is also a mutual fund except that it only invests in securities
of companies underlying a major market index. This fund invests in underlying
securities in the same proportion as they are represented in the index.
There are Index funds that invest in companies belonging to specific indices
such as Sensex or Nifty.
Net Assett Value (NAV)
NAV of a fund is the amount that all the unit holders will receive after
paying all its liabilities. NAV of a unit or per unit on any given day is NAV of the
fund divided by the number of outstanding units of the scheme on that day.
Bulls, Bears and Stags
Those who buy shares in anticipation of increase in prices are referred as
Bulls. Those who sell shares anticipating a fall in prices are referred to as Bears.
Stags do the investments in the primary market.
How does the Market Price the Share
Pricing of shares is really a compound entity consisting of millions of retail
investors, mutual funds and institutional investors both domestic and foreign.
Hence it is difficult to say what process the market goes through to fix a price. But
generally it is perceived that the share price is the present value of future benefit
in terms of dividend declared by the company, discounted at a rate which
investors expect to earn on the equity of the firm.
The market treats a piece of information or news with a degree of
importance depending upon its perceived impact on the financial performance of
a firm. This is only in principle. In realty, markets generally overestimate the
importance of any news so market price over reacts upwards or downwards
following a good or bad news and then taking some time to come back to
equilibrium. New information may have an effect at three different levels, at the
level of the whole economy, at the level of given industry and for the specific
firm. The share price is a barometer of a companys performance. The public
cannot see the operations of a business but they can certainly see the barometer
reading in the capital markets.
P/E Ratio

Piice
Eainings pei Shaie

Fundamental Analysis v/s Technical Analysis
If for a given level of current earnings per share, the P/E ratio of one
company is higher than that of another, it generally implies that the market
expects the future earning potential of the former to be superior to that of the
latter. There are experts who believe that by identifying and processing relevant
information correctly and quickly (as compared to the market as a whole), they
can predict the share price movements faster than the market and can thus
outperform the market. Such experts are known as fundamental analysis.
Technical Analyst on the other hand believe that by knowing the past prices
of securities they can predict the future prices.
Portfolio
The set of all securities held by an investor is called portfolio.
Beta ()
There are two types of risks in the share market. Diversifiable risks can be
reduced by diversification of portfolio to more and more extent. But even well
diversified risk will still have a risk which is market risk or systemic risk. This is
called non- diversifiable risk. This riskiness of a security is defined as
vulnerability to market risk and is measured by the sensitivity of the return of the
security vis--vis the market return. A of 2 implies that if the market return
increases or decreases by 10 percent over a period the security return increases
or decreases by 20 percent. A beta of zero is a risk free security such as
government bond.