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Primary markets:
The primary market is that part of the capital markets that deals with the issuance
of new securities. The primary market is that part of the capital markets that
deals with the issuance of new securities. Companies, governments or public
sector institutions can obtain funding through the sale of a new stock or bond
issue. This is typically done through a syndicate of securities dealers. The
process of selling new issues to investors is called underwriting. In the case of a
new stock issue, this sale is an initial public offering (IPO)
The Primary Market is, hence, the market that provides a channel for the sale of
new securities to issuers, which may can be the Government or corporates, to
raise resources to meet their fund raising requirements. The securities may be
issued at face value, or at a discount/premium and may take a variety of forms
such as equity, debt etc. They may be issued in the domestic and/or international
market.
Capital market can be defined as a market where long-term funds can be raised.
They are a part of the broader financial markets, which include forward markets,
swap markets etc. Capital markets can be further sub-divided into equity markets
and debt markets, where equity and debt are traded respectively.
Any capital market can be either a primary market or a secondary market. Thus
we have primary and secondary markets for both debt and equity. The distinction
between primary and secondary market is that in the former, the securities are
issued by the original fund-raiser i.e. the company raising the funds, whereas in
the latter, the securities are traded among the investors/speculators.
The company issuing the securities gets the funds out of the issue.
In India, only public limited companies can issue equity through primary
markets.
The issue of securities to public through the primary market by a company is
called its Initial Public Offer (IPO).
Secondary markets provide liquidity to the investors. The market prices in the
secondary markets reflect the investor perception of a company’s performance.
India , 125 years of experience seem to be a proud milestone. A lot has changed
since 1875 when 318 persons became members of what today is called "Bombay
Stock Exchange Limited" by paying a princely amount of Re1.
Since then, the stock market in the country has passed through both good and
bad periods. The journey in the 20th century has not been an easy one. Till the
decade of eighties, there was no measure or scale that could precisely measure
the various ups and downs in the Indian stock market. Bombay Stock Exchange
Limited (BSE) in 1986 came out with a Stock Index that subsequently became
the barometer of the Indian Stock Market.
The growth of equity markets in India has been phenomenal in the decade gone
by. Right from early nineties the stock market witnessed heightened activity in
terms of various bull and bear runs. More recently, the bourses in India
witnessed a similar frenzy in the 'TMT' sectors. The SENSEX captured all these
happenings in the most judicial manner. One can identify the booms and bust of
the Indian equity market through SENSEX.
The Stock Exchange, Mumbai is now Bombay Stock Exchange Limited (BSE)
… a new name, and an entirely new perspective… a perspective born out of
corporatisation and demutualisation. As a corporate entity, our new logo reflects
our new mission… smoother, seamless, and efficient, whichever way you look at
it.
The stock market is one of the most important sources for companies to raise
money. This allows businesses to be publicly traded, or raise additional capital
for expansion by selling shares of ownership of the company in a public market.
The liquidity that an exchange provides affords investors the ability to quickly and
easily sell securities. This is an attractive feature of investing in stocks, compared
to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part
of the dynamics of economic activity, and can influence or be an indicator of
social mood. Rising share prices, for instance, tend to be associated with
increased business investment and vice versa. Share prices also affect the
wealth of households and their consumption. Therefore, central banks tend to
keep an eye on the control and behavior of the stock market and, in general, on
the smooth operation of financial system functions. Financial stability is
the raison d'être of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security.
This eliminates the risk to an individual buyer or seller that the counterparty could
default on the transaction.
The smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and services as
well as employment. In this way the financial system contributes to increased
prosperity.
What is an index?
An index is basically an indicator. It gives you a general idea about
whether most of the stocks have gone up or most of the stocks have gone
down.
If the Sensex goes up, it means that the prices of the stocks of most of the
major companies on the BSE have gone up. If the Sensex goes down,
this tells you that the stock price of most of the major stocks on the BSE
have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty
represents the top stocks of the NSE.
The BSE is situated at Bombay and the NSE is situated at Delhi. These
are the major stock exchanges in the country. There are other stock
exchanges like the Calcutta Stock Exchange etc. but they are not as
popular as the BSE and the NSE.Most of the stock trading in the country
is done though the BSE & the NSE.
Besides Sensex and the Nifty there are many other indexes. There is an
index that gives you an idea about whether the mid-cap stocks go up and
down. This is called the “BSE Mid-cap Index”. There are many other types
of indexes.
There is an index for the metal stocks. There is an index for the FMCG
stocks. There is an index for the automobile stocks and bank stocks etc.
How to calculate BSE SENSEX?
To show this accurately, the Sensex is calculated taking into consideration stock
prices of 30 different BSE listed companies. It is calculated using the “free-float
market capitalization” method. This is a world wide accepted method as one of
the best methods for calculating a stock market index.
Please note: The method used for calculating the Sensex and the 30 companies
that are taken into consideration are changed from time to time. This is done to
make the Sensex an accurate index and so that it represents the BSE stocks
properly.
If you were to buy all the shares of a particular company, what is the
amount you would have to pay ,that amount is called the “market
capitalization”. Market capitalization refers to the total worth of the
company in a market scenario where there is equal competition.
Depending on the value of the market cap, the company will either be
a “mid-cap” or“large-cap” or “small-cap” company!
Many different types of investors hold the shares of a company! The Govt.
may hold some of the shares. Some of the shares may be held by
the “founders” or “directors”of the company.
Now, only the “open market” shares that are free for trading by anyone,
are called the “free-float” shares. When we are calculating the Sensex, we
are interested in these “free-float” shares.
A particular company, may have certain shares in the open market and
certain shares that are not available for trading in the open market.
According to the BSE, any shares that DO NOT fall under the following
criteria, can be considered to be open market shares:
Second: Add all the “free-float market cap’s” of all the 30 companies!
Third: Make all this relative to the Sensex base. The value you get is the
Sensex value!
Please Note: Every time one of the 30 companies has a “stock split” or a
"bonus" etc. appropriate changes are made in the “market
cap” calculations.
The 30 companies that make up the Sensex are selected and reviewed
from time to time by an “index committee”. This “index committee” is made
up of academicians, mutual fund managers, finance journalists,
independent governing board members and other participants in the
financial markets.
Market capitalization:
The company should have a market capitalization in the Top 100 market
capitalization’s of the BSE. Also the market capitalization of each
company should be more than 0.5% of the total market capitalization of
the Index.
Trading frequency:
The company to be included should have been traded on each and every
trading day for the last one year. Exceptions can be made for extreme
reasons like share suspension etc.
Number of trades:
The scrip should be among the top 150 companies listed by average
number of trades per day for the last one year.
Industry representation:
The companies should have a listing history of at least one year on BSE.
Track record:
NIFTY
The Organisation
The National Stock Exchange of India Limited has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions
(FIs) to provide access to investors from all across the country on an equal
footing. Based on the recommendations, NSE was promoted by leading Financial
Institutions at the behest of the Government of India and was incorporated in
November 1992 as a tax-paying company unlike other stock exchanges in the
country.
Contract Specifications :
BSX
Security Symbol
SENSEX®
25
Underlying
Contract Multiplier
Contract Period 1, 2, 3 months
Tick size 0.05 index points
Price Quotation SENSEX points
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month. If it is holiday, the
Last
immediately preceding business day. Note: Business day is a
Trading/Expiration
day during which the underlying stock market is open for
Day
trading.
Cash Settlement. On the last trading day, the closing value of
Final Settlement the underlying index would be the final settlement price of the
expiring futures contract.
TYPES OF PRODUCTS
Index Futures
An index future is, as the name suggests, a future on the index i.e. the underlying
is the index itself. There is no underlying security or a stock, which is to be
delivered to fulfill the obligations as index futures are cash settled. As other
derivatives, the contract derives its value from the underlying index. The
underlying indices in this case will be the various eligible indices and as
permitted by the Regulator from time to time.
Index Options
Options contract give its holder the right, but not the obligation, to buy or sell
something on or before a specified date at a stated price. Generally index options
are European Style. European Style options are those option contracts that can
be exercised only on the expiration date. The underlying indices for index options
are the various eligible indices and as permitted by the Regulator from time to
time.
Stock Future:
Stock Options
Options on Individual Stocks are options contracts where the underlyings are
individual stocks. Based on eligibility criteria and subject to the approval from the
regulator, stocks are selected on which options are introduced. These contracts
are cash settled and are American style. American Style options are those option
contracts that can be exercised on or before the expiration date.
Weekly Options:
Equity Futures & Options were introduced in India having a maximum life of 3
months. These options expire on the last Thursday of the expiring month. There
was a need felt in the market for options of shorter maturity. To cater to this need
of the market participants BSE launched weekly options on September 13, 2004
on 4 stocks and the BSE Sensex.
Weekly options have the same characteristics as that of the Monthly Stock
Options (stocks and indices) except that these options settle on Friday of every
week. These options are introduced on Monday of every week and have a
maturity of 2 weeks, expiring on Friday of the expiring week.
CONTRACT SPECIFICATIONS
Contract Specification for Index Futures contracts
Security Symbol
Underlying
Contract Multiplier
Contract Period 1, 2, 3 months
Tick size 0.05 index points
Price Quotation index points
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month. If it is holiday, the
Last
immediately preceding business day.Note: Business day is a
Trading/Expiration
day during which the underlying stock market is open for
Day
trading.
Cash Settlement. On the last trading day, the closing value of
Final Settlement the underlying index would be the final settlement price of the
expiring futures contract.
Top
Contract Specification for Index Options contracts (Monthly &
Weekly)
Security Symbol
Underlying
Contract Multiplier
Contract Period 1, 2, 3 months & 1, 2 weeks
Exercise Style European
Settlement Style Cash
Tick size 0.05 index points
Premium
In index points
Quotation
Strike price Shall have a minimum of 3 strikes (1 in-the-money, 1 near-the-
Intervals money, 1 out-of-the-money).
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month in case of monthly & last
Last Friday of contract maturity in case of weekly options. If it is a
Trading/Expiratio holiday, then the immediately preceding business day.Note:
n Day Business day is a day during which the underlying stock
market is open for trading.
Top
Contract Specifications for Single Stock futures
Security Symbol
Underlying
Contract Multiplier
Contract Period 1, 2 & 3 months
Tick size 0.05 points i.e. 5 paisa
Price Quotation Rupees per share.
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month. If it is holiday, then the
Last
immediately preceding business day.Note: Business day is a
Trading/Expiration
day during which the underlying stock market is open for
Day
trading.
Cash Settlement. On the last trading day, the closing value of
Final Settlement the underlying stock is the final settlement price of the expiring
futures contract.
Security Symbol
Underlying
Contract Multiplier
Contract Period 1, 2, 3 months & 1, 2 weeks
Exercise Style American
Settlement Style Cash
Tick size 0.05 i.e. 5 paisa
Premium Rupees per share
Quotation
Strike price Shall have a minimum of 3 strikes (1 in-the-money, 1 near-the-
Intervals money, 1 out-of-the-money).
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month in case of monthly & last
Friday of contract maturity in case of weekly options. If it is a
Last holiday, then the immediately preceding business day during
Trading/Expiratio which the underlying stock market is open for trading.
n Day
-Note: Business day is a day during which the underlying stock
market is open for trading.
The final settlement of the expiring option contracts would be
based on the closing price of the underlying stock. The
following algorithm is used for calculating closing value of the
individual stocks in the cash segment of BSE including the
stocks constituting Sensex:
Final Settlement
-Weighted Average price of all the trades in the last thirty
minutes of the continuous trading session.
-If there are no trades during the last thirty minutes, then the
last traded price in the continuous trading session would be
taken as the official closing price.
It is a specified time (Exercise Session) everyday. All in-the-
Exercise Notice money options would be deemed to be exercised on the day of
Time expiry unless the participant communicates otherwise in the
manner specified by the Derivatives Segment.
Order Conditions
The derivatives market is order driven i.e. the traders can place only Orders in
the system. Following are the Order types allowed for the derivative products.
These order types have characteristics similar to ones in the cash market.
Limit Order: An order for buying or selling at a limit price or better, if possible.
Any unexecuted portion of the order remains as a pending order till it is matched
or its duration expires.
Market Order: An order for buying or selling at the best price prevailing in the
market at the time of submission of the order. There are two types of Market
orders:
Partial fill rest Kill (PF): execute the available quantity and kill any unexecuted
portion.
Partial fill rest Convert (PC): execute the available quantity and convert any
unexecuted portion into a limit order at the traded price.
Stop Loss: An order that becomes a limit order only when the market trades at a
specified price.
Rights Issue:
When a listed company proposes to issue fresh securities to its existing
shareholders, as on a record date, it is called as a rights issue. The rights are
normally offered in a particular ratio to the number of securities held prior to the
issue. This route is best suited for companies who would like to raise capital
without diluting stake of its existing shareholders.
A Preferential issue:
A Preferential Issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act,
1956, that is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital. The issuer company has to comply with the
Companies Act and the requirements contained in the chapter, pertaining to
preferential allotment in SEBI guidelines, which inter-alia include pricing,
disclosures in notice etc.
The Company issuing shares appoints the BRLM or the Lead Merchant Bankers.
The role of the BRLM can be divided into two parts, viz., Pre Issue and Post
Issue. The Pre Issue role includes compliance with the stipulated requirements of
the SEBI and other regulatory authorities, completion of formalities for listing on
the Stock Exchanges, appointing of various agencies such as advertising
agencies, printers, underwriters, registrars, bankers etc.
Post Issue activities include management of escrow accounts, deciding the final
issue price, final allotment, ensuring proper dispatch of refunds, allotment letters
and ensuring that each agency is carrying out their part properly.
B Bankers to the Issue:
Bankers to the issue, as the name suggests, carry out all the activities of
ensuring that the funds are collected and transferred to the Escrow accounts.
Classification of Issue
Procedure of arriving at the issue price:
Fixed Price
Book Building
Fixed Price:
Any IPO can be priced by two methods. Firstly, where the issuing company, in
consultation with the BRLM, arrives at a fixed price at which it offers the shares
to the public. In the second method, the company and the BRLM fix a floor and
cap price for the issue. This range is called the price band. Investors are free to
bid at any price in this range. The final price is determined by market forces
according to the demand for the issuing company’s shares. This is called the
Book Building Process.
Book Building:
In case of a book building IPO, the offer must be open for at least three days.
The BRLM declares the issue price before the allotment, which must be
completed within 15 days from the closure of the IPO. The shares should get
credited to the respective bidders’ de-mat account within two working days from
the date of allotment. The refund orders are also dispatched within this time.
Non-Institutional Investors:
Under this category, resident Indian individuals, HUFsS, companies, corporate
bodies, NRIs, societies and trusts whose application size in terms of value is
more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be
reserved for Non-Institutional Bidders.
Retail Investors:
Under this category, only Individuals, both Resident and NRIs along with HUFs
are allowed to bid. At least 35% of the issue has to be reserved for such
investors. The size in terms of value should not exceed Rs 1 lakh if one wants to
apply under this category.
The term ‘high net worth individual’ or HNI is used to refer to individuals
and families that are affluent in their wealth holding and consequently
have a higher risk profile. It’s a relative term and its comprehension differs
in different financial markets and regions.
Price: - The price of a stock is totally guided by the forces of demand and
supply. The share prices of liquid stocks with wide participation keep
changing throughout the trading hours They can be tracked continuously
on trading screens.
Volume: - The term volume refers to the total number of shares traded
during the day Volumes can be calculated for a particular stock, an index
or even for the entire exchange.
The lot size and margin money percentage vary for different scrips and
contracts. We took the example of Nifty, which is an index. You can take
positions in various stocks which are listed for Futures trade. On NSE, the
last Thursday of every month is the expiry date. In our example, if the Nifty
is trading at 4300 on the last Thursday of the month and the position is not
squared off then the purchaser of the Nifty futures contract at 4000 would
be a gainer by Rs.20,000 (200 × lot size100). Similarly seller of Nifty
futures contract would stand to lose Rs. 20,000.
Spot Mkt Price – It is the price at which the stock is trading in the cash
markets.
Strike Price - Specified Price at which the underlying may be purchased or
sold when the option is exercised.
Expiry Date - Last date for exercising the option by buyer--- Last Thursday
of the relevant month on NSE.
Bonds
The debt segment of secondary market which mainly comprises of bonds.
Bond: - A bond is simply a form of loan borrowed by the government, the
municipality or a company. A bond purchaser who plays the role of a
lender to such borrower institutions holds in return a negotiable certificate
that acknowledges indebtedness of the bond issuer. Such certificates are
also termed as bonds. Bonds normally are unsecured. The issuer pays the
bond holder periodic interest ranging over the life of the loan.
The secondary market for bonds in India is an over the counter market
whereas the market for equities is a system-automated market. The buy
orders and sell orders are electronically matched. We shall delve deeper
into this in the following chapters.
The difference between the issue price and redemption price represents
the return to the holder. The holder of such bonds does not enjoy periodic
interest payments.
Convertible Bond: These bonds offer the investor the option to convert the
bond into equity at a fixed conversion price
Preference shares are those shares in a company with rights in various ways
superior to those of ordinary shares; for example, priority to a fixed dividend and
priority over ordinary shares in the event of the company being wound up.
When a share is issued, the person applying for it must pay to the company, in
cash or equivalent value, the amount of its nominal value together with any
premium required by the company. Shares are fully paid when the whole amount
has been received by the company.
Shares may also be issued on the basis that only part of their price is to be paid
initially, with the remainder being required when called for by the company.
The Bombay Stock Exchange Limited, or BSE has a nation-wide reach with a
presence in 417 cities and towns of India. Its index, or market indicator is known
as the Sensex. It gives a general idea regarding the movement of the stocks;
whether they have gone up or have gone down. If the Sensex goes up, it means
that the prices of the stocks of most of the major companies on the BSE have
gone up.
The S&P CNX Nifty, or simply Nifty, is the leading index for large companies on
theNational Stock Exchange of India. It consists of 50 companies representing 24
sectors of the economy, and representing approximately 47% of the traded value
of all stocks on the National Stock Exchange of India
4. Who is a broker?
A stockbroker is person who is licensed to trade in shares. Brokers also have
direct access to the sharemarket and can act as your agent in share
transactions. For this service they charge a fee. They can also offer additional
services like advice on shares, debentures, government bonds and listed
property trusts and non-listed investment options (cash management trusts,
property and equity trusts.
In addition a stock broker can plan, implement and monitor your investment
portfolio, conduct research and help you optimize your returns.