How Is Sensex Calculated?

The Sensex was initially calculated based on the “Full Market Capitalization” methodology but was shifted to the “Free-float methodology” with effect from September 1, 2003.

As per the Free-float Market Capitalization methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.

The calculation of Sensex involves the following steps broadly:

1. Calculate the market capitalization of each of the 30 companies in the index by multiplying their stock price by the number of shares issued by that company.

2. Multiply the market capitalization by the free-float factor to determine the free-float market capitalization.

Free-float factor of a company is a multiple with which the total market capitalization of that company is adjusted to arrive at its Free-float market capitalization. It is determined by BSE based on the information submitted by the companies. The value of Free-float factor lies between 0.05 and 1.00. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation

.

3.  Divide the free-float market capitalization of the Index constituents by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.

The base period of Sensex is 1978-79 and the base value is 100 index points.

An Example

Suppose the Index consists of only 2 stocks: Stock X and Stock Y. Then, the table below shows the SENSEX calculation:

Understanding the result:

Step 1 and Step 2 are self-explanatory. Lets understand the Step 3.

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that if at that time the market capitalization of the stocks that comprised the index was 60,000, then the index-value at that time would be 100. So, using simple unitary method, we can find the corresponding present value of the SENSEX.

The factor 100/60000 is called the index divisor.

What are the 30-benchmark stocks?

The 30-benchmark stocks are given below, along with their Free-float factor:

Note : This above list keeps on changing from time to time, based on the various guidelines that BSE follows for the selection of benchmark stocks.

ROE (Return On Equity)

A small try on a vital aspect of finance not only for the shareholders but also for the students as well i.e. Return on Equity (ROE) which is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. 

ROE is calculated as:

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: 

Return on common equity (ROCE) = 

Net income - preferred dividends / Common equity

Advanced Trailing Stop Loss Methods

In this article we will look at taking this one step further and using stop losses not just to limit risk and lock in profits but also to enable you to produce even more profit but increasing the level of risk you are in the trade at the appropriate time. This does not mean that you trade at a more risky level – remember this is a cardinal sin for traders. It does mean, however, that you take on more risk at a time in a trade that is already in profit. This way, you can be assured that the trade will never lose you money but you will be able to give it more freedom to develop without being stopped out too early!

Non-fixed Average True Range (ATR) Based Stop Losses

The average true range is an indicator that takes into account the volatility of a stock. The more volatile a stock, the more room is required for a stop to prevent the trade from being stopped out too early intraday. ATR takes into account the volatility of a stock unlike other more basic forms of stop loss such as a trailing percentage or point stop loss. For a more detailed discussion of ATR (and other indicators)

As an example, it is possible for you to set your initial stop loss to 2*ATR below the low of the day and then increase the stop loss to, for example, 3*ATR once the stock is in profit. This will allow your trade a little more room to breathe with very little chance of losing any money.

The chart below demonstrates this principle: 

The red line is the stop loss that is not based on the traditional approach of trailing behind a fixed ATR while the blue line is a stop loss that is based on a fixed ATR. The trade was entered on the 19th September and it can be seen that, in this case, the blue stop loss is activated much quicker than the red stop loss. In other words, in this case, a non-fixed ATR produced much more profit than the fixed ATR based stop loss.

Mixed Stop Loss Methods

It is also perfectly possible for you to mix the initial stop loss method with a totally different method of stop loss calculation later on. For example, the initial stop loss can be based on a 2*ATR and then be trailed based on the low of the past “X” number of days. So, if we take X to be 40 days, then as soon as the low of the past 40 days is greater than the initial stop loss, the stop loss is trailed to the newly calculated method and so on.

Summary

The above state two methods of advanced stop loss calculation. There are a number of different other methods and you will need to find a method that is suitable for you. Remember, there is no method that is ideal in all situations and you may find that one method may be better in one stock and not another. It is therefore important that you back test your method on different stocks to ensure that the method, in general, works. Above all, keep it simple and manageable. Without sounding too harsh remember the following pneumonic - KISS – Keep It Simple Stupid!

Intra-Day Trading v/s Delivery Based Trading

While doing stock market investment you can trade in two different ways. You can either do intraday trading or can opt for delivery based investment. Intraday trading is typically completed within a day that means you have sell the stocks that you have purchased that day before the closing of the exchange. Even if you do not sell the stocks by yourself, they will automatically square off before the closing of the exchange. In case of delivery based investment or long term investment, you can sell the stocks as and when you wish to sell or buy them. Both these types of stock trading have its pros and cons.

Advantages of Intra-Day Trading

• In day trading you can buy stocks without paying for the full price of the stocks. The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less.
• In day trading you can always short sell the stocks that mean you can always sell the stocks before buying them and then buy the stocks before the closing of the market. This is one benefit that can give you profit even when the price of the stock is sure to fall.
• The brokerage of the intraday trading is always lower than the delivery trading.
• In day trading you are getting the profit on the very day. So, you investment is for a few hours only. Therefore, even if the stock price rises, a little your profit percentage is significant.
• You get back the money each day after the market closes and hence you can always start afresh the next morning.

Disadvantages of Intra-Day Trading

•  The biggest disadvantage of intraday trading is the time frame. You have to sell the stocks within a day. So, if the stock loses price you are sure to lose money

Advantages of Delivery Based Trading

•  With delivery based trading, you can always hold a stock till it reaches the expected price.
•  The long term investment can always get you dividend.
•  You can also benefit from split shares, bonus stocks and other benefits that the company announces.

Disadvantage of Delivery Based Trading

•  In delivery trading you pay higher brokerage.
•  Your investment is always susceptible to market crashes, business cycles and other factors.
•  Whatever it is, as an investor, you should know which stock is for intra-day trading and which one is to hold as long term investment.

What is the opening price of a stock? Is it same with the closing price of the previous day????????

That’s like asking how long a piece of string is. The answer is as Chandu Sir says ‘it depends.’

Once a stock moves out of the IPO stage and into the open market, there are a number of factors that go into setting the price.


Opening Price

For example, Infosys closes on Tuesday at 2776.80; what will it open at on Wednesday morning?

The answer is : 
who knows. Most likely, it will open somewhere around 2776.80; but as you can see over here the current day opening price is 2765.00 which is less than 11.80 from the previous day closing price. Any number of things might cause it to open higher or lower. Before the market opens on Wednesday:

• FDI in retail Sector
• Budget of 2012-13
• Monetary policy set by RBI

All of these circumstances and many others could influence the price up or down. In the end, it remains a question of what a buyer is willing to pay and a seller is willing to take.

The swirl of market, political, and industry news influences whether there are more buyers or sellers for a particular stock in the market at any one time.

Have Some Fun!

Murphy's Laws:

What do both stock markets and women have in common?
They both go Up and Down...

Stock Market Day Trader:


The Pessimist sees the glass as half empty.
The Optimist sees the glass half full.
The Stock Market Day Trader JUST ADDS WHISKEY ...

A Stockbroker:


There was a tremendous turnaround in the market today:
A stockbrocker who jumped out of a window on the twelfth floor, saw a computer screen on the seventh floor and did a U-turn.

Stockbroker eligibility:


QUESTION: When does a person decide to become a stockbroker?
ANSWER: When he realizes he doesn't have the charisma to succeed as an undertaker.

The Difference Between Trading Stocks And Stock Options

In the stock market industry, the trade for stocks and stock options are often interchanged and many may be confused between the concepts behind these types of trades. However, what you should know is that these two have very different characteristics from each other, and using them interchangeably can be very lethal if you want to engage in the stock trading game.

Knowing the difference between these two would not only save you on making serious trading mistakes, but perhaps, you can be guided on making a smart business decision on which particular trade you would actually want to make your investments.

Stocks Versus Stock Options

By definition, stocks are actually shares of a particular company that can be traded through the act of buying or selling by an investor. If you happen to own a particular stock from a company, you are entitled to certain rights, which may include a profit share from earnings. You may also have the liberty to sell your share of stock if you no longer desire it.

A stock option on the other hand, is not the stock or share of the company itself, but it is actually the rights for a certain stock. It actually allows you to buy and sell company stock at a set price in a certain time period. However, you do not gain the profits from the company itself.

Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.

Comparing The Benefits

In comparing the benefits of trading stocks and stock options, many experts would claim that stock options might be a promising gamble for companies and individuals, especially if you have adequate experience in the trading game and can substantially use very good strategies to survive. However, the same results might not be expected if you are only a beginner.

What makes a lot of experts prefer options trading is usually because in this particular trade, no matter what would happen to the underlying security, an option buyer cannot lose to more than that of the initial price paid for the rights. Therefore in trading options, there are fewer risks involved on the part of the buyer, especially when it comes to the possibility of losing a lot of money. And it may even give promises of profitable gains.

But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock option’s original price.

And so, if you are not well skilled and knowledgeable about how you can prevent severe losses, then the best way for you to play the stocks trading game is to stick with the more traditional trading of stocks as this can be easier.

However, if you do believe that you can manage then options trading may give you many promising positive results. Just make sure that you take the time to understand concepts and strategies behind stock options before you actually start trading.

Familiarizing Commonly Used Stock Market Terminologies

The stock market is a great arena for people to make a lot of money, however, for many beginners, all the hustle and bustle of stock trading may cause a lot of confusion, especially if you are not familiar with the many terms and tactics used for negotiations.

If you are a beginner in the stocks game, make sure that you familiarize and educate yourself well on stock trading knowledge. You can of course, start off by widening your vocabulary. Here are a few terms that you may need to familiarize:

Stocks

Stocks are probably the most important and common items traded in the stock market. These are actually shares of certain companies, which are publicly sold and traded.

Whenever people buy a portion of stock in a particular company, this means that they acquire a share of ownership and investing in that specific business. Through this, a stockholder is given certain rights towards the company such as a vote in stockholder meetings as well as his or her financial share from the company’s earnings.

Broker

A stockbroker is the person who handles the actual trading of stocks. He or she does the negotiations to buy and sell the stocks in behalf of the investors and the companies involved. The many various types of brokers may include full-service, online, auto-trade and discount brokers.

Bull Market

A bull market is a market that manifests a continuous increase in the value of its stocks as well as a steady growth. Generally, with this type of market, investors gain an optimistic attitude and may want to buy more rather than sell stocks.

Bear Market

Bear markets mainly characterize significant losses and declines in a particular market. With this type of behavior among stocks, most investors would generally want to sell more of their stocks and may be pessimistic about investing.

Dividends

Dividends are added or bonus payments given to stockholders after a profitable quarter. With this sum of money, many people may often reinvest on more shares of stock, which allows individuals to earn so much.

Futures

Futures, just like stocks, are also traded in the market. However, these are purchased against future costs of commodities. You can earn from these, if in time, the actual price of commodities become higher than what you paid for the futures. On the other hand, you can also lose money if the price becomes lower that what you paid for.

Day Trader

A day trader is the person who buys and sells stocks aggressively in one day. Usually, he or she does this for several times each day in order to make quite a few small profits within the day.

Trading on Margin

Trading on margin may be similar to trading stocks with the use of borrowed money. Through this, you can purchase shares of stock for only a portion of the actual price. The remainder of the cost can be paid upon the actual sale of the particular stock, or on a later date.

These terms are only a few of the most commonly used language in stock trading. And upon encountering them, you may certainly have the impression of how intimidating the stock market can get. With the many complicated terminologies and tactics, you may easily get backtracked if you do not know enough about what you are dealing with.

Remember that if you are new at doing business in this arena, make sure that you take the extra mile to learn more about more terms as well as strategies on how you can best maximize profit. A little hard work will certainly get you far, and one of these days you will realize how all of this can pay off.

What You Need To Know About Day Trading

One of the fast growing trends in the stock trading arena these days is day trading. Today, more and more people are getting into this drift due to the many promises of making fast and easy money on their minds. However, what a lot of people fail to realize is that the buy fast and sell fast strategy of day trading may not always turn out as a very wise tactic to adopt in the stocks game.
Day trading can be a bit of a gamble and traders remain divided on the issue on whether or not this serves much purpose to the stock exchange industry.
Still, what most people could agree on is the fact that day trading is certainly not for everyone, and that it can involve huge risks. And so, before you immerse yourself in day trading, be sure that you get your facts straightened out.

What Is Day Trading?


Day trading is the buying and selling of securities for a certain stock within a single day. The main goal of those who practice this type of trade is basically to be able to profit from the difference between prices for buying and selling.
This type of trading serves two very critical functions in the industry. First, it keeps the markets efficiently running because of arbitrage as stock exchange basically thrives on buy and sell activities. Another function for this is that it usually provides so much liquidity in the stock market.

What Makes Day Trading Risky?


Although day trading may sound quite appealing at first, be warned that up to this day, the profit potential of this type of trading is still under debate among investors and brokers. And if you are new to the trading game, it is not advisable for you to gamble your investment as you may end up losing substantial amounts of money.
Although day trading is not necessarily illegal nor is it unethical, most would agree that it is risky because principles of this trade are based on the “fast and easy money” mentality, and therefore, day traders rely on making profit by rapidly buying and selling stocks in a single day as their stocks continue to rise and fall in value.
Of course, the chances relied upon are not quite dependable and choosing to do business this way seems more of a gamble than a sure way to gain money. Most financial advisors may discourage people from entering this type of trading, with the argument that most of the time, rewards do not justify the risks involved.
Apart from this, many parties capitalize on much of the confusion behind the controversies on day trading and create multiple Internet scams. And since most investors in these type of trades do not actually have a lot of money and may use borrowed money to buy stocks, this can be very dangerous.
The bottom line is, most financial experts would argue that most successful companies have grown not because of day trading, but through more traditional means.
If you were currently not very familiar with the stock market game, then it would be wise for you to stay away from day trading. Take in mind that the best way to earn profit may be through the long process and hard work, and taking shortcuts may certainly involve much more risks than you may want to bargain with.

Exchange Traded Funds (ETF)

                                                              It is time for young managers to move strategically to shake the globe.  Courageous decision making in the turbulent financial world is the order of the day. Innovation of new products more so financial products would make them stay in the market.  The Indian finance market does not provide many innovative opportunities for investors to invest unlike U.S. markets, nevertheless, ETFS (Exchange traded funds) are available in Indian markets like US markets.   Most of us are familiar with mutual funds, a portfolio of different equity and debt in which one can trade easily.  But many of us are not familiar with Exchange Traded funds (ETFS).  By buying and owning an ETF, one can achieve successfully the strategy of diversification with lower investments of funds and increased return. It has the feature of diversification of index fund, the ability to sell short and also buy on margin.  It is a good product for day trading also but that may not be the right strategy for accomplishment of long- term financial goals and objectives.   I personally, may not prefer day trading of ETFs but it is a hot cake in the market for day traders.

                                                  The strength of passive ETFS is something so strong to build portfolio due to the basic feature of its expense ratios, which are lower than those of the average mutual fund.  In the world the most widely known ETF is the SPDR, which is popularly pronounced as SPIDER.  This ETF is superb to buy as it is a darling in any street- whether wall or dallal- wherever it moves. Anyhow there is no such product in Indian market.    Passive funds generally do not protect investors and the asset class depreciates in a down market, for example if Sensex falls by 10% passive ETFs also fall by 10%  but  it is not so with dynamic ETFS, such lefts now exist and are quite interesting products.

                                               ETF industry is growing rapidly in the recent past. AUM under ETF   has touched 1trillion dollars in 2011.  There are more than 1,000 ETFs available in US market and many more added daily.  In India few ETFs are available and efforts are on to improve ETFs trading in India but as of date the market is not very active.  ETFs generally compete with long term mutual funds.  It has a market share of 10% in the total 11 trillion dollars market of US.  Black Rock, Vanguard, Wisdom tree etc., are creators of ETFs.  Look into the average return of these funds for the past three years and ascertain the tradeoff between the risk and the return of ETFs, one can find 9 out of 10 funds outperforming the benchmark return.  Domestic ETFs have performed better than International ETFs even though international ETFs have diversified risk better, but failed on the risk return trade off.  Young Managers have to move strategically to ensure they stay in the market and change the whole scenario in the market with global outlook.

Difference between Accounting & Finance

Accounting: Accountant’s (sometimes called: Controller) primary function is to develop and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. The accountant is responsible for preparing financial statements such as the income statement, balance sheets, and cash flows. It is normally passive work, in the sense that, the work has a very independent nature to it such as preparing forms and financial statements. It is a good job for people who want to work independently and are very organized (this is only a very brief description, if you are interested in accounting; consult your accounting instructor for more information).

Finance: The financial manager or consultant places primary emphasis on decision making. It uses the financial statements prepared by accountants to make decisions about the firm’s financial condition and to advise others about possible losses and profits. In some cases, finance is more a type of leadership position. A financial manager has to deal not only with finance, but also with economics, accounting, statistics, math, and management. For example, people working with stocks and bonds have to understand and analyze how the underlying companies are performing. How a given company is going to perform during recession?  Should they sell or buy stocks or bonds. How a decrease in the interest rate in England may affect the projects a company has in that country. Finance also deals a lot with risk. Derivative securities (options, futures, swaps, etc) are used to hedge against possible increase in risk. Risk managers are in great demand everywhere. Most finance majors find jobs in banks and other financial institutions, government, real estate, consultant companies, insurance, investment companies, stock market exchanges, fundraising, and any firm that needs someone to make financial decisions.

What Is The True Meaning Of "FINANCE"

The definition of FINANCE is the provision of funds or loan supplied to an individual or company. Often this term is used for the study of economics and how money is controlled. It can be also defined as the management of funds and capital required by a business and private activities. Management of finance has also developed into a specialized branch within the financial sector and is carried out by finance managers.


Managing this involves dealing with the optimization and allocation of funds to various areas either by borrowing or by using those available from internal resources. The word Optimizing may sound strange but it refers to taking measures that minimize the cost of financing while simultaneously attempting to maximize the profits out of the employed finance. Bad debts are poor finance management where rules have not been followed; the result of this is depressed markets, low production and a cash crisis. It is for this very reason that finance managers are very careful with finance they agree too and where it is funded from.


It is not uncommon to hear finance managers referred to as bean counters as they are looking at immediate returns and initial costs against the potential at a later stage. Finance managers are the pessimists whereas sales managers are the optimists who look to the future and not to the past! Often though, problems occur with small businesses who fail to see the distinction between a business loan and a personal one. Most lenders will cancel the loan if they feel they have been deceived this way because they are unsure what the money is to be invested in.


Hopefully by educating the small (and large) business owners of their fiscal responsibilities they may build the basis of an improved company in the future. Small businesses can be very flexible, however, and call upon friends, other businesses, family members, even their own bank for finance.


Finance managers can help improve their company's profits by using external sources which also lessens the risk on them at the same time. The famous comedian Bob Hope best summed up the subject when he 
once said; a bank is a place that will lend you money but only if you can prove that you don't need it.