Sunday, December 5, 2010
Part II : Asset Building Through Equity
CHAPTER 7: Who are the fellow players?
The prudent act after weighing the strength a deed demands,
One's own strength and the strengths of allies and opposition.
Thirukkural Verse 471
When you play a game it is important to know the fellow players and their strategies. In stock market the price of a stock will never move on its own. Stock prices are manipulated often by those having vested interests. This manipulation results in wild gyrations in the market. It is essential to know about people who are interested in pushing the stock price up and down.
The stock market is comprised of people. People who run the stock exchanges, people who serve as market makers, people who run stock brokerages and, of course, people who buy and sell stocks. Let us discuss about them one by one.
A broker is a person who mediates between a buyer and a seller. Stockbrokers also sometimes or exclusively trade on their own behalf, speculating that a share or other financial instrument will increase or decline in price. In such cases the term broker makes little sense and the individuals or firms trading in principal capacity sometimes call themselves dealers, stock traders or simply traders.
2. Retail Investors
A retail investor is an individual investor possessing shares of a given security. A Registered Shareholder is a retail investor who holds shares that are acquired either directly through the issuer or its transfer agent. Many registered shareholders have physical copies of their stock certificates.
These are the brokers who buy shares on their own account and not for the customers. So they have vested interest in maintaining or pushing up or down the stock prices.
Promoters of a company are much interested in their share price in the market. They try to maintain higher share price whenever they come out for public issues.
Usually the senior officers in a company, who have access to vital information about the company, have vested interest in their company’s stock price. The inside information affords them to cash in before others come to know of it.( Such trading is not ethical and is considered illegal).
6. Syndicated Investor Groups
Big investors and syndicated groups of medium sized investors are immensely interested in stock prices. Their operation can influence the market considerably.
7. Investment Advisors
Large-scale investment advisers who operate with a wide circle of clientele can influence the stock price considerably.
8. Indian Financial Institutions
An institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund that is financially sophisticated and makes large investments, often held in very large portfolios of investments. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. Today’s influential market participants are mainly institutional investors. These include asset management and equity market-making firms. Most institutional players manage, control and/or trade large amounts of investment capital on a daily basis. Their impact on share prices can be significant.
The Government at times have vested interest in the stock market.
10. Foreign Institutional Investors (FII’s)
Fairly a recent entrant in our Indian Stock Market. A large percentage of foreign institutional investors are asset managers involved in managing “long-only” portfolios of equity securities held in pension funds, retirement plans, mutual funds, charitable foundations, endowments, etc. Other asset managers, like hedge fund managers, deploy alternative investment strategies utilizing the equity and other markets to accomplish their goals. Hedge funds control vast amounts of investment capital, and assets under their management have a serious impact on the direction of the equity markets.
Most of their operations are based on international developments. Small investors should take enough care in investing in stocks which have great exposure to these funds.
11. Day Traders
Fairly a new breed in Indian Stock Market, trying to make quick money every day by indulging in day trading in stocks. A day trader is a trader who buys and sells financial instruments (e.g. stocks, options, futures, derivatives, currencies) within the same trading day such that all positions will usually be closed before the market close for that trading day. This trading style is called day trading. Majority of this group end up in losing money.
Besides the actions of the above group of people, natural calamities such as earthquake, fire, flood, famine, war etc., will also have sudden impact in the price movement.
Successful stock market trading requires experience, discipline and technical knowledge. Traders must learn how stock prices behave and how they are influenced by key market participants. Knowledge and insight into the behavior of the key market players will greatly enhance the trader's ability to anticipate and recognize their operations, forecast the future direction of prices and position themselves accordingly. While no trader is successful 100% of the time, the successful trader should strive to be right most of the time. Being right often means making money.
Stock Market Jargon:
Companies, governments and other groups obtain financing through debt or equity based securities. All new IPOs(Initial Public Offers) issued will be considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank.
A Primary market usually refers to new securities that are issued on an exchange. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. Also known as "new issue market" (NIM). Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred.
A market where investors purchase securities or assets from other investors, rather than from issuing companies. The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organised market place for the investors to trade in the securities. The national exchanges NSE and Bombay Stock Exchange BSE are secondary markets.
Secondary markets exist for other securities as well. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.
Traders who take advantage of any price difference that exists for a particular share at a particular time between two stock exchanges (Between BSE and NSE) .They buy at the stock exchange where the price is low and sell at the stock exchange where the price is high.
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