Financial Market

Its a place that allows people and entities to buy and sell financial securities of value at low transaction costs. It consists of individual investors, financial institutions and other intermediaries who are linked by a formal trading rules and communication network for trading the various financial assets Securities include Shares, Bonds, Currencies and other fungible items.

Classification of Financial Markets

1. Capital Market 2. Money Market 3. FOREX 4. Commodities Market 5. Derivatives Market

CAPITAL MARKET The Capital Market refers to all institutions and procedures that provide for transactions in long-term financial instruments. Long Term means having maturity periods that extend beyond one year. In other words the Capital market is a market for financial investments that are direct or indirect claims to capital. Structure of Capital Market PRIMARY MARKET : It is a place where the investors have the first opportunity to subscribe to newly issued securities. Companies sell their new stocks or bonds for the first time to the public in this market. The most important feature about the primary market is that public buys securities directly form the issuing company. SECONDARY MARKET : The Secondary market deals in securities previously issued. The secondary market enables those who hold securities to adjust their holdings in response to charges in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The secondary market operates through the medium of stock exchanges which regulate the trading activities.

STOCK EXCHANGES If you dont follow the stock market you are missing some amazing drama - Mark Cuban

It is a organized market for the purchase and sale of financial security. It is a place where trading in securities are conducted in systematic manner, i.e., as per certain rules and regulations. It can operate only if it is recognized by the Government under the Securities Contracts (Regulation) Act, 1956. The recognition is granted under Section 3 of the Act by the Central Government, Ministry of Finance. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). Roles: 1.Financial Barometer Indicator of trend in economy, 2.Corporate Governance 3.Facilitates company growth 4.Market for securities

STOCK EXCHANGES IN INDIA There are twenty one recognized stock exchanges in India which does not include the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). The first organized stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). The most popular Stock Exchanges in India are BSE: Bombay Stock Exchange Established in the year 1875 as The Native Share and Stockbrokers' Association, and is the oldest Stock Exchange in Asia. NSE: National Stock Exchange NSE was established in 1992 and was recognized as stock exchange in 1993.

Both the Markets open at 9.55 hours closes at 15.30 hours.

STOCK PRICE INDICES An Index is used to give information about the price movements. Indices are basic tools to help and analyze the movements of prices of various stocks listed on stock exchanges and are useful indicators of a countrys economic health. Composition of BSE Index : BSE started publishing index (SENSEX) from Jan, 1986 onwards. Consists of 30 companies which are representative of various industrial sectors of the Indian economy. Computation : The financial year 1978-79 was chosen as the base year. Index for a day is calculated as the % of the aggregate market value of the equity shares of all the companies in the sample on that day to the average market value of the equity shares of the same companies during the base period. Market capitalization of index constituents/ Base Market capitalization * Base Index Value Composition of NSE Index: Nifty: comprise top 50 stocks listed on the National Stock Exchange (NSE), representing 24 different sectors of the economy. 1995 is chosen as the base year and base index value is 1000.

Example: Suppose the Index consists of only 2 stocks: Stock A and Stock B Stock A has 1000 shares out of which 200 are held by the promoters and only 800 shares are available for trading to the general public. These 800 shares are the so-called freefloating shares.

Similarly, Stock B has 2,000 shares out of which 1000 are held by promoters and 1000 are available for trading (free-floating).
Assume price of Stock A is Rs.100. The total market capitalisation of Stock A is Rs 1,00,000 (1,000 x 100) and its free-float market capitalisation is Rs 80,000 (800 x 100).

Assume price of Stock B is Rs.200. The total market capitalisation of Stock B is Rs 4,00,000 (2,000 x 200) and its free-float market capitalisation is Rs 2,00,000 (1000 x 200).
Then sum of free float market cap of these 2 companies (A & B) = (800*100+1000*200) = 80000+200000 = Rs. 280000

Assume Market Cap during the year 1978-79 was Rs.50,000

Then SENSEX = 280000*100/50,000 = 560.

Trading and Settlement

The screen-based electronic trading systems being used in our stock exchanges are order-driven, in which the order matching is done by a computer. An orderdriven system is one in which all buy and sell orders are entered into a trading system, which finally chooses the best buy orders and the best sell orders. The best buy order is the highest bid price for buying a security. The best sell order is the lowest asking price at which someone is willing to sell. In this kind of a system, orders of buyers and sellers ultimately drive the market.

When we place orders, we can set certain conditions to suit our requirements. We can specify the time, price and or quantity. Day order. This is valid for a day it is entered and if not matched during the day, would get cancelled at the end of the trading day.
Good Till Cancelled (GTC) order. This remains valid until it is matched or cancelled by broker. Good Till Days (GTD) order that permits to specify the days up to which our order should stay in the system. At the end of this period the order is flushed out from the system.

Immediate or Cancel Order (IOC) to buy or sell. As soon as an IOC order is released into the market, it is either executed if a match occurs or else the order will be removed from the market.
We can also define the price conditions. If you place a Stop Loss (SL) order, it gets activated only when the market price of the relevant security reaches or crosses a threshold price known as the trigger price. Until then the order does not enter the market.