Previously we have learned after an IPO, the stocks are traded over the exchanges among investors and traders. In this section, we will discuss some common terminologies related to the stock exchanges. But before we start, let us first understand the concept of stock exchanges.
What is a Stock Exchange?
The stock exchange is a trading platform where buyers & sellers meet to complete the purchase/sale of financial securities such as stocks, bonds, currencies, etc. Stock exchanges act as a forum for price discovery. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two major electronic exchanges in India.
Let’s learn some terminologies that are related to stock exchanges:
Index: An index can be thought of as a collective report card. In an army of more than 5,000 listed stocks on the exchange, it becomes impossible to track each and every stock to decide if the market is up or down for the day. An index simplifies this by bringing together a selected group of stocks to gauge the performance of the market. Indexes can be classified in terms of market capitalization, sectors, momentum, or any other suitable criteria.
The S&P BSE Sensex or Sensitive Index is a market-capitalization-weighted index representing a basket of thirty most active, liquid & representative stocks on the Indian bourses. It was first compiled in 1986 with a base value of 100.
The other widely tracked bellwether, The S&P CNX Nifty 50 Index is also a market capitalization-weighted index of the fifty largest & the most-liquid blue-chip Indian securities listed on the NSE. It was first compiled in 1996 with a base value of 1,000.
Bull & Bear market: In a bull market, mostly all stock prices continue to rise over time; on the other hand, in a bear market, prices continue to decline over time.
The market rise or fall can be attributed to several factors such as a positive economic outlook, strong corporate earnings, etc., and vice versa in the case of a declining market.
Dematerialization: When the Bombay Stock Exchange (BSE) was established in 1875, stocks were in physical form called ‘Share certificates’. These were regarded as proof of ownership.
Nonetheless, this process led to a great amount of paperwork, and the settlement of trades took weeks. The risk of theft, damage, or loss of certificates came with this process. The trading process was completely digitized in 1996 & along with it came mandatory dematerialization of securities.
Dematerialization is the process by which security held by an investor in physical form is converted into electronic securities and credited into an investor’s Demat account.
This was earmarked as a revolutionary step since real-time trading greatly reduced transaction costs & brought about complete transparency in the trading process.
Market capitalization is the market value of the company. It is calculated by multiplying a company's outstanding shares with the current share price of a stock (CMP). Outstanding shares are the total shares of the firm. It includes those shares also which are not freely traded on the stock exchange.
For example – HDFC Bank Ltd. Has approximately 554 Crores shares issued. The current market price of the stock as of date 26Th October 2021 is ₹1653. Hence the approx. Market cap of the stock is 1653 * 554 Crores which equals 915692 Crores.
Based on their size, companies are further classified into:
Large Cap - Companies with a market capitalization of more than 4000 crores, are included in this group. These are well-established companies in the market with a stable business structure, like Kotak Mahindra Bank, TCS, Reliance Industries, and many more big companies you probably may hear the name of.
Medium Cap or Midcap – Companies are mid-sized companies with a market cap of more than 250 crores and less than 4000 cr. These companies are at the stage of growth and development. Investors usually prefer to buy mid-cap stocks for their potential growth.
Small Cap - These companies have a market cap of less than 250 crores. These companies have an emerging business. Investors who prefer high risk and high return invest in small-cap stocks.