What is SENSEX or NIFTY or Index?

This is perhaps the most confusion part of investing in Stock Market.

Lets take the example of the Bombay Stock Exchange. If we are to say whether the market has gone up or down how can we do this?

The ideal way is to analyse all the stocks listed in the BSE and then do a weighted average to find the right results.

Unfortunately this method was too time consuming so what was decided was the instead of doing this for all listed companies, each exchange decided to select certain companies from different sectors and try to represent the market as a whole. This lead to the formation of the Index.

BSE named its index as SENSEX which consists of 30 Stocks. The list keeps changing and can be found here http://www.bseindia.com/SensexView/SensexView.htm.  Each of the stocks would have the weighted average that they hold on the Index.

The NSE took a different approach and named its index as NIFTY which consists of 50 Stocks. The list can be found here http://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm?cat=N

By now it should be clear that just because an Index goes up that doesn't mean your stock would have gone up.The stocks in the index too would differ like few would have gone up and a few would have gone down but the overall index would have gone up. So index is just a bench mark and doesn't really say anything about your stock.

How do I buy / sell shares of companies?

Unlike the popular belief, a common investor can't  buy or sell shares of listed public companies from a Stock Exchange. You can only go through a broker who is acting on behalf of the stock exchange.

In order to trade in stocks the following is required.
1. Bank Account - This is where you would like to keep your funds for buying of shares or when you sell shares the amount to be credited.
2. Trading Account - This is an account provided by the Broker for us to trade in the stocks on behalf of an exchange.
3. Demat Account - This is an account where we keep our shares in a digital format. Previous to this we had to physically store these shares in paper formats which was a big hassle.

For each of these services the providers would charge a fee for the same. As a value investor its better to find a provider that gives an integrated account that gives all the three services. One should also keep note of the cost associated and compare the different providers before choosing one. One should also bargain with them to reduce the fees.

The other requirement for trading in Indian context is that you need to have a Permanent Account Number (PAN) from the Income Tax department.

Most major banks like SBI, ICICI etc provide these integrated services. Others provide only the Trading account while the other service accounts are shared.

What is a Scrip or Stock or Share or Equity?

When someone or group of persons start a company they decide how to own this company either among himself/herself or among the group. The owning unit should be equal in all aspects just like we have money which is equal in all aspects. Like if we have Rs 100 then this is the same Rs 100 that any one else in the country has.

One could come up with a random number on the number of Shares their company would have to start with. Lets say that one started a company with 1000 shares. If they spent around 1 lakh rupees to start this company then the value of their shares would be 1 lakh / 1000 share = Rs 100 per share.

So if anyone wants to buy the company all they have to do was to buy all their shares namely 1000 of them.

A share is also known as an equity which is like saying, I would like to own this company by owning its shares. So when you buy a share, you are infact owning a piece of the company.

The Stock is refered to as the name of the company itself. This is also known as a Scrip. There are public stocks and private stocks.

The public stocks are traded in Stock Exchanges like NSE or BSE.

In order to identify the Stock in an Exchange, each exchange gives a unique name to it. BSE calls it as Scrip Id, while NSE calls it as Symbol.

The same stock can be traded in two exchanges with stock exchange specific names. You could also buy stock in one exchange and sell the same stock in another exchange if this stock is traded in both exchanges.In order to stop this confusion the International Securities Identification Number (ISIN)  was given to them to uniquely identify the stock across exchanges. More information can be had from www.isin.org

Major Stock Exchanges In India

In India we have the following Major Stock Exchanges

BSE - Bombay Stock Exchange www.bseindia.com
NSE - National Stock Exchange  www.nseindia.com
MCX - Multi Commodity Exchange www.mcxindia.com

We also have many regional exchanges like Bangalore Stock Exchange, Madras Stock Exchange and so on but these are not so popular as these three exchanges.

Note that one of the exchange namely MCX is a commodity exchange which has recently got permission to trade stocks.