When trading, people usually stick to the markets they know and hear about on the news: national and local markets and companies. Rarely do we venture outside of our comfort zone. But in the pursuit of interesting returns, it is worth looking beyond the comfortable pond everyone else is fishing in. This article will focus on the Indian Stock market; we will offer you tips and information on how to invest in this exiting, growing market and how to make sure you are trading the right assets.
THE ABC OF THE INDIAN STOCK MARKET
There are 21 exchanges in India of which two are ones of importance and interest for you as a foreign trader. The main two exchanges in India are the National Stock Exchange (NSE) of India with 1,200 listed companies and Bombay Stock Exchange (BSE) with 4,700 listed companies. The NSE is the world’s fourth largest exchange measured by equity trading volume.
The BSE is the first stock exchange to be created in Asia, and is also currently the fastest one in terms of transaction speed. The BSE is also the world’s fifth largest exchange. The two exchanges are similar in how they operate, e.g. trading hours, how settlements are done and regulatory expectations on listed companies. The most important companies in India are listed on both exchanges, and the prices of these stocks are fairly similar on both lists due to people conducting arbitrage deals.
The main market related indexes to keep track of and use as benchmarks when trading stocks listed on the Indian Stock Market are the equity index S&P BSE Sensex (also called Sensex 30) and the S&P CNX Nifty (also called Nifty 50). The Sensex index is constructed using 30 stocks while the Nifty index is constructed using 50 stocks.
The indices also differ in how the formula used to construct each index is defined and the weight assigned to each stock; this is a technicality, and the importance of it depends on your trading strategy – from a practical perspective when following the indices, the important part is looking at how they have moved historically and how they are moving today. The indices and their changes will give you a good picture of how the Indian market and economy is fairing.
HOW DO I TRADE STOCKS IN THE INDIAN STOCK MARKET?
As a small investor or trader, it might be a bit tricky to invest directly in the Indian stock market. Though regulatory changes where introduced in 2012 to allow foreign investors entry into the market, the steps needed to be taken and the restrictions on placements might be a bigger hassle then what the eventual returns may be for small investors. An example of what you need to do is to get a so called PAN number to get registered with the Indian tax authority, create a so called Demat account – and this is just the beginning. So what is a trader who does not have a huge pile of money to do? Fear not, there are still easy to access ways of investing in the Indian stock market.
Exchange Traded Funds (ETFs) are a great way to start. ETFs are traded on US exchanges and priced in US dollars – removing the currency risk of trading Indian stocks in rupees and exchanging to and from US dollars. An ETF is comprised of a basket Indian stocks, so choose one that best reflects the industries and companies in India you are most interested in.
Another way of investing directly in Indian stocks is via American Depository Receipts (ADRs). ADRs are connected to foreign companies listed on US exchanges, and of course there are Indian companies to choose to do this to attract foreign investors. ADRs are also priced in US dollars. Available ADRs are found via NYSE and NASDAQ.
If you are a trader outside of the US, check the possibilities in your market of trading via ETFs and your national equivalent of ADRs; contact the largest exchanges in your country and simply ask if you cannot find a list of ETFs and your country’s equivalent of ADRs.
The knowledge sharing website Quora has listed websites, blogs and forums that can help you keep track of issues relating to trading in the Indian stock market:
Forums: traderji.com, onlinetradersforum.com, stockaholics.net, bse2nse.com.
Blogs and websites: oldschoolvalue.com, safalniveshak.com, stocktrader.com, myinvestmentideas.com, moneycontrol.com, sowmayjain.com
Aside from forums and websites, it could of course be good to keep track of day-to-days news affecting your Indian portfolio, and we recommend looking at:
- https://in.finance.yahoo.com/ – Yahoo’s Indian Financial page
- http://zeenews.india.com/business – relevant news categorized by industry and topics
- http://www.moneycontrol.com/ – latest Indian market news
WHAT SHOULD I BE LOOKING OUT FOR THOUGH?
On both the NSE and BSE, most stocks are illiquid. The Economic Times in India has estimated that roughly 400 listed companies in India are illiquid, and they are not alone in raising this flag of warning.
Indian stocks are traded in the currency rupee; when trading Indian stocks directly you need to be aware of the currency risk associated with investing using US dollars or UK pound, and exchanging these for rupees when buying Indian stocks.
As with all trading, you need to research the companies you are interested in. The added risk level of emerging market stocks needs to be taken into account, and the fact that this is not a market that you might have greater insight into. India’s intricate and complicated regulatory systems does not make things easier, even if the country is continuously making efforts to simplify investments for foreigners.
India is and will continue to be an emerging market with interesting growth possibilities for years to come. The country is continuously reforming, making important changes in the accounting and court systems among others as pointed out by Abby Joseph Cohen from Goldman Sachs. Cohen estimates the equilibrium growth rate in the range of 7-8%, compared to its European counterpart that is in the 1% range and 2-2.5% in the US.