Stock Markets Unwinded

Here comes an article which will let you know the basics of a stock market. So let’s straight away start the topic which I think is of interest to everyone in the country.

First of all for those who think that stock markets are the easiest ways to become rich, think twice as it is one of the most troublesome places. It can make one earn a crore a day and loose two the next day. So with this constraint in mind let’s try and know our markets a bit better.

Let’s start with what does bulls and bears mean. Bulls mean people who purchase stocks and bear the one who sells them. All of you must have heard of about market indices as BSE Sensex or Nifty. One see’s the value of indices jumping up and down throughout the day. What does the value mean? If we take example of BSE Sensex it is the weighted average of thirty stocks which are representative of all the sectors of the economy. Thus these indices change with the change in the underlying stock prices. The next question which must be floating in your mind is what causes the change in stock prices. Well there are several factors which can cause a change in the stock price. Some of them are:

1. Recession in the economy or industry
2. Lower than expected performance of the company
3. Getting a new contract
4. News of its merger or its acquisition

Seeing the factors listed above don’t one get a feeling that these factors are transient and one most see the long term growth prospects of the company. Well my friends the stock markets are driven by something known as “Market Sentiments”. Mostly these sentiments don’t take into account long term growth prospects of a company but are driven mostly by the things happening right know in the company or industry or economy of the country or the global economy as a whole.

Further, I would also like to add that demand and supply, which are yet again governed by the market sentiments play a huge part in deciding the price of the stock and in turn the index value.
Now as we have learnt about the stock price movements and index value movements let us move into a bit more detail to understand the kind of markets prevalent in the country. Now the place where shares do get traded are known as Capital Markets. These can further be classified into primary markets and the secondary markets. The primary market is one where the Initial public offer (IPO) of a company i.e. shares for the first time are on offer while secondary market includes the place where day to day trading happens. Now a few of you must be having doubts about how does the price of an IPO is decided as the share is still not out in the market. Well it a complex process and will discuss about it in the next article. So let’s wind up this article now and will be back with more articles related to the vibrant world of stock markets very soon.

Reliance Power IPO subscribed for more than market value of the Portuguese and Czech stock markets (Update 1)

As per Bloomberg, the bid for Reliance Power initial public offer (IPO) exceeded Portugal Market Value. The company is likely to raise more than Rs 10000 crore from this public issue excluding promoters’ contribution. This is the largest IPO in Indian market till date. The company sought to raise around 117 billion Rs ($3 billion) through 228 million shares on offer. The offer had got subscribed within 60 seconds on the day of opening and finally got oversubscribed by 73.04 times as per National Stock Exchange (NSE). The offer received an order worth more than $190 billion, which is equivalent to combined value of Portugal and Czech stock markets.

The 3’rd richest man of India, Mr. Anil Ambani will increase his wealth further with listing of this Stock. Reliance energy has got 50% stake on Reliance Power. Power stocks have driven the market well in the year 2007 and the trend is expected to continue. Reliance Energy share price increased from around 600 Rs in February, 2007 to more than 2400 Rs in January this year. The addition of Reliance Power is expected to receive a good demand in the market when it gets listed early next month.

The issue price was fixed at 450 Rs today (19'th Jan) and is expected to gain 300-400 Rs on the day of listing. With already $45 billion of wealth with him, Anil Ambani might take a leap with this addition in his asset and that could make him the richest person of the world. The next update from Forbes magazine on official ranking of richest people of the world will certainly bringing more Indians among top rankers. According to the earlier update from Forbes, the wealth of Ambani brothers together with L. N. Mittal and K. P. Singh is more than the 40 richest Chinese. This IPO was one of the most talked and coming month might change fortunes of many.

Economic Fundae - GDP

Good Accounting turns data into information!

This article is aimed at people trying to understand the basics of national accounting.

GDP:Gross Domestic Product is the value of all the goods and services produced in the country within a given period. This includes all the goods and services produced in the geographical boundaries of the country irrespective of who produces. The other slight variant is the GNP which include receipts from abroad made as factor payments to domestically owned factor production. For example, part of India's GDP corresponds to the profits made by Hyundai Motors from its Indian operations. But these are part of the Korea's GNP because they are income of Korean-owned capital.

Although the difference is not significant in countries like U.S. it certainly is important where most of the countries labor is abroad working for a multinational company.

The fundamental national accounting equation will be as

Y= C + I + G + NX

Consumption spending by household sector, includes spending on anything under the sky. The only exception being the investment which people make in durable goods.

Then the government purchases are the government spending on the goods and services. Think of anything which government spends like laying roads, providing higher education etc. Again the only exception being the transfer payments. The transfer payments are those which does not get a service in return to government spending. This is logical as they are not a part of any of the current production.

The letter I in the equation refers to the Gross private domestic investment. In simple words, investment is associated with the business sector's adding to the physical stock of capital, which in turn will increase the economy's ability to produce output in the future.

The last term is the Net Exports, the difference between the exports and imports. They are to account for domestic spending on foreign goods and foreign spending on domestic goods. Confused, well we just finished the accounting of the entire nation. There is more than one reason to be confused, like most of our politicians.

Governments budget deficit is often a term we hear particularly in a country like India. This essentially means the difference between the government expenditures and the taxes received. Remember to include transfer payments as a part of government expenditures (which is slightly different from the government purchases)

Quick Fact:

GDP of India: (2007-08): 41,25,725 Crores of Rupees

Without further delay we will introduce you to other macroeconomic variables which are inflation, currency exchange rates, interest rates, monetary system and the business cycles.

Soaring Crude Oil price and its impact on India

With the crude oil touching $100 per barrel in the very first week of the year, it is expected to brings a bitter taste all over the world except the oil-producing countries.

But how about India? India imports around 76% of its domestic demand and the increase in oil price is always a matter of concern for the policy-makers. But this time story is not all the same, while one side the international crude oil price is at all time high, the Rupee has appreciated by more than 12% which is highest at least last 20 years. The appreciation of domestic currency has offset the impact of high price to some extent.

The last increase in the domestic oil price was there in June, 2006 and which was followed with downward revision twice. The oil price has huge impact on general pricing and hence inflation. With the moderate and negligible increase in oil price government has well maintained the inflation and common man is happy about it. But, the bigger picture is quite ominous. The major supply of oil in India comes from the PSU’s like IOCL, BPCL, and HPCL. As per MoneyControl, Petroleum has an under recovery of nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per cylinder, and kerosene Rs 21. This under recovery includes the marketing, which has to be shared equally between marketing companies (ONGC, GAIL etc) , upstream companies(IOCL, BPCL etc) and government .With crude oil price peaking all time high and subsidized petroleum price in domestic market, these companies are making huge losses. A part of loss is swallowed by the government by issuing oil bonds to these companies and rest partially compensated by the three marketing companies ONGC, Oil India, GAIL.

The political aspect of the pricing can also not be ignored. The central government coalition lost the election in Gujarat, Himachal and even in Punjab. The Lok Sabha election is going to be held in 2009 and government has to rely of appeasement approach. Left has already out its deep concern over any plan of increasing oil price.

Now, how the price moves in international market and what step government takes to tackle the situation is going to be quite interesting.

Monetary Policy

Monetary policy intends to achieve a balance between excess and shortage of money supply in the market/economy. These policies are concerned to the supply/control of money. It influences the pace and direction of economic activity, money supplies, interest rates, borrowing and price level.

In the case of shortage of money on the economy the growth gets hampered which has negative impact on the prosperity of people. On the other hand if there is excess of money in the market, the prices of goods and services goes up and severely impacts the poor. The government/RBI needs to make sure that the sufficient money is available with market for the growth without affecting the poor.

The main objectives of monetary policy are –

Maintaining the price stability

Inflation has strong negative impact on social welfare and needs to be maintained at lower level.

High and stable employment

Employment opportunities could be increased by higher investment and economic activities, which in turn requires availability of credit at reasonable interest rates.

Economic growth

Adequate credit is required for the productive activities and hence sound monetary policy is required for supporting the growth in an economy

Stability of exchange rates

Exchange rate (amount of dollars per Rupees) is a crucial factor determining a country’s position in the international trade (import and export). Increase in the exchange rate () discourages export and enhances imports and vice versa. The current increase in exchange rate(appreciation of rupees against dollars) had a negative impact on the IT industry which is mainly based on export.

Fluctuation in exchange rates makes the planning difficult for the traders and hence monetary policy should aim on preventing any sharp fluctuation in the exchange rate.

Sectoral deployment of finds

Depending upon the priorities laid down in the plans/by government, Monetary Policy (RBI) determines the allocation of funds and interest rates among different sectors. Examples: Priority sector lending; recent move to increase interest rate on housing loans.

Special Section for CAT / MBA entrance GD/PI Finance articles

This post contains the list of all the Finance articles, in this blog, that may be relevant for CAT or other MBA aspirants preparing for GD/ PI. You may send your request for any relevant article that you want on this blog.

We have two authors for this section: Saurav & Selwyn. They shall be presenting their views & relevant facts on the current topics in Finance.

So far we have these articles in this category. The list will get updated with the new posts.

List of economics articles:
Soaring crude oil prices and its impact on India
Monetary Policy
Rupee appreciation and its after-effect
Economic Fundae - GDP
Economic Fundae - Inflation
Economic Fundae - Exchange Rates
Economic Fundae - Business Cycles
Economic Fundae - Fiscal Policy
Economic Fundae - Interest Rates

List of economics articles:
Stock Markets Basics

To view all the posts with tag CAT in a single page.