Stock Market index ? - Printable Version

Stock Market index ? - Printable Version

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Stock Market index ? - muqtader - 02-10-2005

hi there... its been heard and listened by all that the stock market is currently standing at 7000 points plus. I wanted to know what exactly does this index mean... what can we conclude about the stock market given any index. to make it further clear this index respresents the state of the market but what can an investor perceive from such statistics?
thanks. )

Muqtader Abbas Shah

- derivativetrader - 02-10-2005

What stock market index are you referring here - KSE?

1. what exactly does this index mean?
Ans. Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock marketâ and by proxy, reflects investor sentiment on the state of the economy.

2. what can we conclude about the stock market given any index?
Ans. If the index is reallying we are in the 'bull' market - on average the share price of the stocks that make up the index are 'on average' going up, and vice versa. I used the word 'on average' deliberately because just the index is rising, as is the case at most indexes presently, it doesn't mean that an investment in equities or shares will be successful. The index represent an average view and therefore there will be some sectors who are in red and others in the blue.

3. to make it further clear this index respresents the state of the market but what can an investor perceive from such statistics?
And. If the index is going up it is precieved that the stock market is doing well and trending higher - again 'on average'. Reverse is the case if the index is falling - as was the case for most of past 5 years.

BTW are you thinking to involve in the stock market? Why KSE is that's the case. KSE hasn't got much volatility and if you are an equities or for that matter any asset class trader, you want volatility in the market to gain 'significant' returns.

Never put any money on financial markets if you can't afford to lose 100% of it. And for that matter there are other hybrid securities where the downward loss is infinite if your position isn't hedged.

Feel free to post any further queries.

DT

- muqtader - 02-11-2005

hello there DT
well from ur reply it made me quiet clear about the index thing but what raised concern is that i was planning to invest in KSE lately but from ur reply i found some discouraging signs. So would you guide me in that regard ?
thanks [o)]

Muqtader Abbas Shah

- Desert Sleet - 02-11-2005

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by muqtader
 hi there... its been heard and listened by all that the stock market is currently standing at 7000 points plus. I wanted to know what exactly does this index mean... what can we conclude about the stock market given any index. to make it further clear this index respresents the state of the market but what can an investor perceive from such statistics?
thanks. )

Muqtader Abbas Shah

<hr height="1" noshade id="quote"></blockquote id="quote">
Our trusty Investopedia dictionary tells us that an index is "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market."

It would be too difficult to track every single security trading in the country. To get around this, we take a smaller sample of the market that is representative of the whole. Thus, just as pollsters use political surveys to gauge the sentiment of the population, investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index would represent an exactly proportional change in the stocks included in the index.

Today, the stock market uses a slightly complex methodology, called price-based weighting. In this system, the weight of each security is the stock's price relative to the sum of all the stock prices. The problem with price-based weighting is that a stock split changes the weight of a company in the index, even though there is no fundamental change in the business. For this reason, not too many indexes are weighted on price.

Most indexes weight companies based on market capitalization. If a company's market cap is $1,000,000 and the value of all stocks in the index is $100,000,000, then the company would be worth 1% of the index. These types of systems are made possible by computers--most are calculated by the minute and so are very accurate reflections of the market.

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If I could... Then I would... Turn back time!!

- derivativetrader - 02-11-2005

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by muqtader
 hello there DT
well from ur reply it made me quiet clear about the index thing but what raised concern is that i was planning to invest in KSE lately but from ur reply i found some discouraging signs. So would you guide me in that regard ?
thanks [o)]

Muqtader Abbas Shah

<hr height="1" noshade id="quote"></blockquote id="quote">

I mean what is your motivation of trade(s)? Are you punting on the index to gain market insight or is this to generate income stream and/or capital gain?

Until unless I don't have answers to these questions I can't really comment on KSE as being a good market.

On the other hand, I don;t know whether any broker would allow you to trade on NYSE or LSE. But I think US and UK markets are but more mature and yeah both are going up lately. The January effect on FTSE (if I'm not wrong) has been UP, so if this theory has come credibility they saw the market would be up for the rest of the year. However, the election is coming up and there are other theories that suggest the market may not rally for long.

Of course, all this will have impact on emerging markets. How much? I don't know but I would think bit siggnificant this time considering alot of correlation and FX volatility.

Simple answer - I haven't trade on KSE therefore, can't guide you much. However, my experience of emerging market is tht there is sometime alot of 'random walk' as fundamentals aren't usually the drivers.

DT

- Ice_Blue - 02-12-2005

a/c to random walk theory whether one takes advice from a pro or makes all the decisions himself, the probability of having a gain is the same.
so why so much fuss over which market to choose and which securities to invest in.

moreover, KSE has an attraction that due to privatization there is a regular stream of IPOs. KAPCO, Attock petroleum ....so on

some of these may even provide an opportunity of making a sweep-stakes gain.( remember OGDC)

(this info has been given in good faith and may be incorrect. the writer does not bear any claim/liability whatsoever in any case [D])

Ice Blue

- Azeem Shah Khan - 02-12-2005

Hi DT

was reading an article in Sunday Times on KSE, dont know if you had a chance to look at it. There was something i couldnot understand and i wonder if you can explain it to me. it is the Demutulisation of Stock Exchange, what is the meaning of this term? how is it done? what are the benefits of it?

thanks

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."

- Desert Sleet - 02-13-2005

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Azeem Shah Khan
 Hi DT

was reading an article in Sunday Times on KSE, dont know if you had a chance to look at it. There was something i couldnot understand and i wonder if you can explain it to me. it is the Demutulisation of Stock Exchange, what is the meaning of this term? how is it done? what are the benefits of it?

thanks

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."
<hr height="1" noshade id="quote"></blockquote id="quote">
Historically, stock exchanges were mutual organisations managed by the members located in a single city with huge dealer population. They were more like âclubsâ where the dealers transacted through the open outcry system.
With the twin forces of globalisation and technological advancement, the world order is changing. The stock markets worldwide are experiencing a churning, resulting in increasing competition. Unification is happening right before our eyes and the day is not far when there will be a single, unified âworld stock marketâ.

âDemutualisationâ is seen as the driving force behind this revolution. A stock exchange, if it has to stay relevant, needs to innovate consistently in the contemporary arena. As such, product and segment innovation is critical. âTechnologyâ and âCost of Transactionâ are the two main facets of Demutualisation. Recently, several stock exchanges like Bombay Stock Exchange, The London Stock Exchange, New York Stock Exchange and Nasdaq, have announced plans to demutualise.

What is Demutualisation? 

Demutualisation refers to the conversion of a ânot for-profitâ organisation into a âfor profitâ company. It refers to the transition from âmutually-ownedâ association to a company âowned by shareholdersâ. Further, the company may choose to be a listed or an unlisted, closely held public company. The concept of Demutualisation can be applied to any ânon-profit âorganisation or association.

How is an exchange Demutualised? 

The exchange values all its assets including the value of seats (membership licence) and arrives at a total value. This value is divided into shares and offered to the public. Later, the shares are listed on the stock exchange itself, and the funds got by selling the shares will be distributed among the members of the exchange as payment for their seats. If the company is not being listed, the shares may be offered to its members.

Why do exchanges demutualise? 

âCorporate structureâ is the goal of Demutualisation and provides management more flexibility. A company is better equipped to respond to changes when compared to a closely held mutually owned organisation. Further, a company can spin-off its subsidiaries, get into mergers and acquisitions, raise funds et al.

National Stock Exchange (NSE) for example, has spun off its wholly owned subsidiaries like National Securities Clearing Corp. and more recently NSE.IT into a dedicated info-tech company. BSE, on the other hand, is a mutually owned association with less transparency, hence seems to be an ideal candidate for Demutualisation.

The following are arguments in favour of Demutualisation 

Beyond selfish motives Exchanges owned by members, tend to work towards the interest of members alone. Division of ownership between members and outsiders can lead to a balanced approach, taking into consideration the interest of other players.

Cope with competition Alternate Trading Systems (ATS) and Electronic Communication Networks (ECN) provide cheap and efficient access to quoted stocks unlike traditional stock exchanges. To cope with competition, exchanges require funds. While member-owned exchanges have limitations in raising funds, publicly-owned exchanges can tap capital markets.

Professionalism Publicly owned exchanges are more professional when compared to member-owned organisations. Further, this results in transparency in dealings, accountability and market discipline.

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If I could... Then I would... Turn back time!!

- Azeem Shah Khan - 02-13-2005

Thanks alot for a comprehensive and very well presented answer.

Best regards

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."

- derivativetrader - 02-13-2005

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Azeem Shah Khan
 Thanks alot for a comprehensive and very well presented answer.

Best regards

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."
<hr height="1" noshade id="quote"></blockquote id="quote">

Hi Azeem,I think DS has already answered your question.

Please liaise with Zubair about the email I sent you both.

DT

- MALIK FARRUKH - 02-13-2005

i want to invest in karachi stock exchange but doesn;t know how to do it can some buddy help me

mfarrukh.

- derivativetrader - 02-13-2005

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by MALIK FARRUKH
 i want to invest in karachi stock exchange but doesn;t know how to do it can some buddy help me

mfarrukh.
<hr height="1" noshade id="quote"></blockquote id="quote">

Sorry buddy, I'm not in the position to guide individuals.

DT

- Azeem Shah Khan - 02-13-2005

Thanks DT

I spoke to zubair a couple of days back and due to multiple factors i proposed to delay it till the mid of March 2005. I shall send you a detailed reply shortly.

Please let me konw if it is OK with you.

Kind regards

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."

- AvgJoe - 02-15-2005

Hi,

hmm its interesting to see a bit of buzz about the stock market here. The stock marktet Index (7300 points for example) you are talking about, basically tells u how the stock "market" is generally performing at any given time relative to a base "year" or time. So for example, lets say we start a stock market today (14th Feb), we will start it at 100 index points. Now tommorow if all the stocks in my stock exchange went up by 5% my index will go up to 105. If all stocks go down, it will go to 95. Thus basically, this index tells u how the market is performing RIGHT NOW relative to a certain base "time". Thus, an index number of 7300 shows that there is a lot of buzzing going around in the stock market. BUT BEWARE this is a VERY VERY simplified version of all this.

What u gotta understand is that this INDEX is quite MISLEADING in the case of KSE. Firstly, the weightage system of this INDEX has became outdated. So for example, if PTCL, OGDC etc went up & ALL OTHER STOCKS went down, the INDEX will still show a positive gain becoz of their higher weightage.

Secondly, the current stock drive is pure SPECULATION driven by utter madness !!!!! Your economy doesnt improve JUST OVERNIGHT & the increases in the stock market are completely ubsurd. To put it simply, the media creates a lot of hype, the rulers enjoy some publicity, the commom man comes under the impression that its the perfect time to invest. So he invests. In the end, the stock market CRASHES one day (when all the old boys have made their money). So, I will advise u to be cautious when entering the current stock market because its all driven by speculation & SATTA.

- derivativetrader - 02-15-2005

One can certainly beat the stock market, infact any market. If one look at the graphs etc. there are clear signs of repitition from what has happened in the past.

More formal name to this tech. is called Technical Analysis. These chart trends do make alot of sense if you just trade purely on their basis.

DT