Professional Documents
Culture Documents
Module 1
Introduction to Financial Markets
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Instruments
SOURCES
APPLICATION
Fixed Assets Current Assets Loans Investments Project
All about Assets
ASSETS
Accounting Equation
Funds Funds
Securities
Securities
Financial Markets
Money Market
Capital Market
Introduction to Financial Markets
• What are Financial Transactions and Financial
Markets?
“Markets in which spending units trade financial claims”
Direct Finance(Stock Market, Bond Market)
Vs
Indirect Finance (Banks and Credit Unions)
• Functions of Financial Markets
• facilitates price discovery
• provide liquidity
• reduces the cost of transacting - search costs &
information costs
Classification of Financial Markets
• By Nature of Claims
• Debt Market
• Equity Market
• By Maturity of Claims
• Money market - short term claims
• Capital Market - long term claims
• By Seasoning of Claims
• Primary market - New claims
• Secondary market - Outstanding claims
• By Timing of Delivery
• Cash / Spot Market
• Forward / Futures Market
• By Organisation Structure
• Exchange Traded
• Over the counter
• What are Third and Fourth Markets?
Classification of Financial Markets
Money Debt Equity
0 1
High
Risk
Medium
Low
0
Low (0-5) Return High(15- )
Medium (5-10)
Beginning of Share & Securities
• What is a Share ?
• A share is exactly what it says it is
• A share of business
• Share is a share in share capital of a company
• What is a Security?
• Securities cover wider range of instruments and
includes share, debentures, bonds
• Security - different meanings - physical, financial,
data …etc.
• What is Stock? Is share a stock ?
• Why are Stock Exchanges not called Securities
exchanges ?
Essentials of Equity
• Issued at Par or Premium or Discount
• Face Value is Value written on Share Certificate
• NO OBLIGATION TO RETURN THE ISSUE PRICE - Long Term
• NO OBLIGATION TO PAY ANY DIVIDEND - Is it Free ?
• LEAST PRIORITY TO SHAREHOLDER IN CASE OF WINDING UP
• RISKIEST INVESTMENT PROPOSITION
• Preference Equity carries Dividends, and can be Redeemable
• Further equity expanded through Bonus / Rights /Stock Split
• Returns available only through trading on bourses in case of listing
• Exchanged during Mergers / Acquisitions
• Equity Base of a company is a MAJOR indicator of its size &
operations
• A large equity base facilitates raising further debt
• Foreign Equity : Participation in Equity Capital by Foreign Investors
Essentials of Debt
• Is it a dirty word?
• Debt has well defined obligation to return the Principal as well as
• the Interest amount. Default attract legal action
• Interest may be Fixed rate / Floating rate
• Debt may be secured or unsecured with additional assets
• Less riskier than equity
• Available in a wide range of options
Maturity / Interest Rate / Taxability
• Available from a variety of sources
Govt. / Pvt. / Individuals
• A large debt restricts prospects of raising further debt
• Convertible into Equity
• Secured Debt has highest priority in case of winding up
• May be listed or unlisted
• Debentures/Bonds/Project Loans/Lease/HP/Bills/CP/CD are all debts
• Interest Repayments on debt attract tax rebate
Types of financial instruments
Several categories of instruments are dealt in the
market place.
A share, or a bond, or a debenture issued by a
company is an an acknowledgement of sums
received from the investors
Bonds or
Share
Debentures
Other Instruments
Other instruments that may be defined as securities are:
- Commercial papers issued by reputed companies
- Certificates of Deposit and Inter Corporate Deposits
- Treasury Bills and Bonds issued by Government bodies
What is a derivative ?
• Derivative is a financial contract the value of which depends on
the value of one or more underlying security, rates or indices.
• The product is derived from a simple transaction in a spot
market.
• Product whose price is derived from the price of underlying
asset. For Example: Commodity, Currency, Interest Rates,
Equity, Indices.
• A sophisticated financial product such as swaps, warrants,
futures, options (calls and puts).
Why Derivatives?
•Rationale : Hedging of Risk
For Example: Index Futures for Portfolio risk
Types of Derivative Contracts
Futures
Futures are like forward contracts, but contracts are
standardised and trading is centralised and hence
liquid contracts.
Options
Options are contracts which provides the holder the
right with out an obligation. Option buyer pays to the
Option writer the price called premium. Options have
an exercise price at which the holder can exercise his
right at the expiration date.
Types of Derivative Contracts
Warrants
Warrants are contracts entitling the holder to purchase
additional shares at a specified price before a expiration
date.Warrants are long term options that allows the
purchase (sale)of common stocks, stock indices,
bonds or foreign currencies.
Swaps
Exchange of debt obligations between two parties for
exchange of currencies of fixed to floating rate
(vice versa)and some time both. This is in order to
take advantage of conditions in different financial
market.Transactors exchange between themselves
streams of cash flows.
Types of Financial Markets
• It is a wholesale market.
• What is a Market?
• What is Securitisation?
The corporate entity that issues securities, which are traded on the stock
exchange e.g. Reliance Industries Ltd.., Proctor & Gamble, IBM.
One company may have its securities listed on many exchanges
Investor
An individual or a company which buys and sells securities with an
investment objective. An individual , a company, a corporate entity, or a
group of individuals who buy and sell securities. An individual investor
could be a retail client, and institutional investors could be an Investment
Manager, Mutual Fund, Bank, Companies, that invest in securities either
on behalf of their clients or on their own account e.g. UTI (mutual fund),
Axa Investment Managers (Investment Manager).
Key Players
Exchanges
•A platform for the buyer and the seller to trade in the securities e.g.
• New York Stock Exchange formed in 1792
London Stock Exchange, NASDAQ, Chicago Mercantile Exchange,
Chicago Board Of Trade. In India - NSE, BSE
•Performs various roles such as:
• Admission of securities for trading - listing
• Admission of members who can trade in the securities
• Defining market segments like Equity / Debt / Derivative Market
segment
• Defining market indices like Sensex, Dow Jones, Nifty
• Defining price range for trading
• Monitoring the trading activities - surveillance on day to day basis.
• Regulating the activities of the members of the exchange.
Key Players
Investment Manager
The agency which acts on behalf of its clients, and buys or sells securities
through brokers, on various stock exchanges e.g. Alliance Capital
Management. Also provides value added services like portfolio
management to its clients May operate in various instruments, markets
regions of the world May have an identified set of brokers and custodians
through which it deals.
Brokers / Dealers
A member of a given stock exchange, authorised to trade only on that
exchange. Can be a member of multiple exchanges at a time. Can trade on
multiple exchanges at a time. Can be an individual or a corporate entity
like Merrill Lynch, MSDW. Only members can trade on the exchange -
investors cannot trade directly If a member gives both buy and sell quotes
for a given security, he is called a market maker in that security. If he
deals on his own account, he is called dealers Has final obligation to
honour the trades done by him on the exchange
Key Players
Custodian
Clearing Corporation
The agency which keeps track of buy and sell trades done by the members
e.g. National Securities Clearing Corporation (NSCCL)
It calculates the obligations for the member, for a given trading period
May also impose and collect margins on behalf of the exchange on
outstanding positions of the members
Ensures the settlement of the trades done on the stock exchange
May act as a clearing and settlement body for one or more stock
exchanges like NSCCL in USA.
May also act as Central Counterparties in case obligations are netted.
Key Players
Depository
The agency which provides services like holding of electronic shareholding
against immobilisation / dematerialisation of securities, rematerialisation
of securities, lending and pledging of electronic shares e.g. National
Securities Depository Ltd (NSDL), SIS Sega Intersettle
Depository Participant
The intermediary registered with a depository, which acts as a channel for
investors for opening accounts, maintaining electronic holdings and
carrying out transactions with the depository e.g. Credit Lyonnais,
HDFC Bank
Keeps the electronic holdings on behalf of the investor
An investor may keep holdings with one or more DPs
Offers services like dematerialisation, rematerialisation, execution of client
instructions for debit / credit of securities from their accounts
Players in the Game of Investments
•Market Place
•Stock Exchanges, Derivative Exchanges etc
•Alternate Trading Systems (ATS)
•Electronic Communications Networks (ECN)
•Market Utilities
•Clearing and Settlement Organisations and Central
Counterparties (CCPs)
•Central Securities Depositories (CSDs)
•Matching Utilities or ETCs
•Market Data Providers
•Service Providers
•Credit Rating Institutions
•Market analysts, Investment Advisers
Players in the Game of Investments
•Regulatory Bodies
•Retail Vs Institutional investors.
•Institutional Investors -
•Hedge Funds
•Pension Funds
•Insurance Funds
•Investment Companies & Mutual Funds,
•Corporate Entities - Public Ltd, Private Ltd, LLPs,
Corporations, Societies, Trusts
•Financial Institutions - State level, Central level, Foreign
•Government Bodies - State, Municipal and Central level
•Banks - Private, Public, Cooperative,
•Wholesale Vs Retail
•Universal Banks performing various roles
Players in the Game of Investments
•Intermediaries
• Investment Bankers
•Merchant Bankers, Lead Managers, Underwriters
• Registrars and Transfer Agents
• Custodians. - Global & Sub Custodians
• Asset Management Companies - Investment Managers,
Asset Managers
• Brokers/Security Dealers - servicing retail / institutional
clients.
•What is difference between Brokers and Dealers ?
•Discount Brokers Vs Full Service Firms, Online Brokers
•Correspondents
•Registered Representatives / Sub-Brokers.
IN THE GAME OF INVESTMENTS
•INSTRUMENTS
•GAMES
•PLAYERS
•REFEREES
•RULES
•??
What is an Index?
•STOCK INDICES ARE BARO METERS OF THE ECONOMY !
• Index is a statistical yardstick expressed in terms of percentages of a
base year or years. For instance, the NYSE Composite Index of all NYSE
common stocks is based on year-end 1965 as 50. Index compares the
current price with price of the base year of the shares of the companies
comprised in the index. Such comparison of prices is through market
capitalization of the company.
• Market Capitalisation of the company = Number of shares * Price of the
share.
• Popular Indices
• Dow Jones Industrial Average, S & P 500, NASDAQ Composite
Hang Seng in Hongkong
• FTSE in London
• NIKKEI in Japan
• SENSEX of Bombay Stock Exchange in India
• NSE NIFTY of National Stock Exchange of India.
Security / Party Identification Standard
• What is a Security/Asset Symbol ?
• What is an ISIN?
• What is a CUSIP?
• What is a SEDOL?
• What is a BIC?
Standards
Registrar of
SEBI RBI
Companies
Registrar &
Broker Merchant Depository Primary
Transfer
Dealers Bankers Participants Dealers
Agents
Regulation and Legal Aspects
• Companies Act, 1956
•company registration and management
• Securities Contract Regulation Act,1957
• stock exchange registration & management, securities contracts etc
• Foreign Exchange Management Act
•regulation of foreign currency transactions, regulation of
dealers
• Banking Regulation Act
•registrations and regulation of banks
• Sebi Act, 1992
•establishment of Sebi and its powers and regulations of
market intermediaries (Capital Issues Control Act Repealed)
• Every Act has a set of rules made thereunder
• Regulations for various Intermediaries
Ownership Structure
Indian Capital Market institutions
Broker
Banks and Financial Institutions Members
NSE BSE
BSE
NSCCL NSDL CDSL
Clearing Corp
Overview of the Indian Stock Market
• The first Indian Stock Exchange is formed in 1875 in Bombay
under a Banyan Tree situated at what is today called DALAL
STREET. It is now called The Stock Exchange, Mumbai or
popularly as BSE.
• 22 Stock Exchanges exist in India. Major Centers are Calcutta,
Delhi, Ahmedabad, Chennai, Bangalore, Kanpur, Pune,
Ludhiana.
• OTCEI - Over The Counter Exchange of India is established in
1992 to meet the needs of smaller companies.Is the first Screen
Based Trading System in India.
• NSE - National Stock Exchange of India is established in 1994
which popularised the Screen Based Trading through V Sat
based Network of Computer Terminals.
• NSE and BSE contribute more than 70% business in the Indian
Market.
• National Securities Depository Limited (NSDL) and Central
Depository for Securities Limited (CDSL) are two Depositories.
Overview of the World Markets
•Worlds Biggest Markets
•USA - EQUITY MARKETS
NYSE, NASDAQ-AMEX, MID-WEST, PACIFIC
•USA- FUTURES MARKETS
CBOT, CBOE, CME
•EUROPE - LONDON , FRANKFURT, SWISS,PARIS
LIFEE, EUREX
•Tokyo, Taiwan, HongKong, Singapore, Australia
SEC
Stock
NASD MSRB
Exchanges
Broker State
Dealers Securities
Commissions
Registered
Representatives
Keynes and the Market
JOHN MAYNAR KEYNES - writes in 1935
• There are only two emotions in Wall Street - fear and greed.
-- William M. LeFevre, Jr.
•The safest way to double your money is to fold it over and put it
in your pocket. -- Frank McKinney Hubbard