SECURITIES MARKET

OUTLINE

� Structure of the Securities Market� Participants in the Securities Market� Primary Equity Market� Public Issue� Secondary Equity Market (Stock Market)� Trading and Settlement� Buying and Selling Shares� Stock Market Abroad� Should Trading be Regulated

STRUCTURE OF THE SECURITIES MARKET

Securities Market

Equity Market

Debt Market

Derivatives Market

Government Securities

Market

Corporate Debt

Market

Money Market

Options Market

Futures Market

PARTICIPANTS IN THE SECURITIES MARKET

RegulatorsCLB, RBI, SEBI,DEA, DCASEC, FRB

Stock Exchanges Listed Securities Depositories Brokers FIIs Merchant Bankers or Investment Bankers Mutual Funds Custodians Registrars Underwriters Bankers to an issue Debenture trustees Venture capital funds. Credit rating agencies

How Equity Capital is Raised in Primary Market

� Public Issue: Selling the Securities for the First Time

� Right Issue: Issuing Rights to the Existing Shareholders

� Private Placement: Sale of Securities to Selected Financial Institutions, Mutual Funds etc.

� Preferential Allotment: It is for the selective investors and from listed companies. Value is generally higher than IPOs.

How Private Placement is Different From Preferential Allotment?

� Private placements refer to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company.

� Preferential allotments refer to sale of equity or equity related instruments of an listed company.

PUBLIC ISSUES IN THE U.S

In the U.S., public offerings of both stocks and bonds are

typically marketed by investment bankers who perform

the role of underwriters. Generally, the lead investment

banker forms an underwriting syndicate with other

investment bankers to share the responsibility of the issue.

BOOK BUILDING

Book building is a method of offering shares to investors in

which the issue price is not fixed in advance (as is done in a

fixed price offer) but is determined through a bidding

process.

STOCK MARKET IN INDIA

As of January 2005 there were 23 stock exchanges

recognised by the central government.

The most important development in the Indian stock

market was the establishment of the National Stock

Exchange (NSE) in 1994.

Within a short period it emerged as the largest stock

exchange surging ahead of the Bombay Stock

Exchange (BSE)

NATIONAL STOCK EXCHANGE (NSE)

The NSE is a ringless, national, computerised exchange.

The NSE has two segments: The Capital Market Segment and the Wholesale Debt Market Segment.

Trading members in the Capital Market Segment are through VSATs. The trading members in the Wholesale Debt Market are linked through leased lines.

The NSE has opted for an order-driven system.

All trades on NSE are guaranteed by the National Securities Clearing Corporation.

BOMBAY STOCK EXCHANGE (BSE)

The BSE switched from the open outcry system to the screen-based system in 1995.

Jobbers play an important role on the BSE. A jobber is a broker who offers a two-way quote or a bid-ask quote.

Since both jobbers and brokers feed their orders, the BSE has adopted a �quote-driven� system and an �order-driven� system.

Screen-based System

� Started in November 4,1994 in India� The Features are:� Buyers and sellers place their orders on the

computer. They can be limit order or best market price order

� The computer constantly tries to match mutually compatible orders on price and time priority

� The limit order book or the list of unmatched limit orders is displayed on the screen

Screen-based SystemCont�

� Increases efficiency� Increases confidence in the market� Transparent

Settling� Traditional Way: Physical Delivery: Seller-

Seller�s Broker --- Buyer�s Broker ----Buyer

� Modern: Electronic Delivery: It is facilitated by Depositories which is an institution which dematerializes physical certificates and effects transfer of ownership by electronic book entries

� Example: National Securities Depository Limited (NSDL), Central Securities Depositories Limited (CSDL)

Settlement Procedure

� Weekly Settlement� Carry forward system (badla and

undha badla)� Rolling Settlement (T+1)

Badla and Undha badla

� When a bull buys in the anticipation of an immediate rise in price, but finds at the end of the accounting period that the price has not risen, he may either pay for the shares and take delivery, or he may carry over his transaction to the next accounting period by paying carry over charges or Seedha badla to the seller.

Badla and Undha badla

� When a bear sells in anticipation of a fall in prices in the immediate future (so that he can pick up shares later for delivery and make a profit), but the fall does not happen within the accounting period, he has the option to borrow or buy the shares for delivery, or have his sales carried over to the next accounting period on payment of Undha badla or backwardation charges to the buyer.

Types of Transactions

� Spot Delivery� Delivery and Payment are made on the same

day of contract or on next day

� Hand Delivery� Delivery and payment are made when

stipulated

� Special Delivery� Beyond 14 days with the permission of stock

exchange

Margin Trading

� This is the part of a transaction value that a customer has equity in the transaction

� Use of Margin� To buy more� To borrow money

Concepts associated with margin

� Initial margin: Amount Investor Puts up / value of transaction or It is the part of transaction�s value the customer must pay to initiate the transaction with other part being borrowed from the broker.

� Maintenance Margin: The percentage of a security�s value that must be on hand as equity.

� Margin Call: Demand from the broker for additional cash or securities as a result of the actual margin declining below the maintenance margin

Short Selling

� In a normal transaction a security is bought and owned because the investor believes the price is likely to rise. Eventually the security is sold and the position is closed out. First you buy then you sell.

� A short-sell involves selling a security because of belief that the price will decline and buying back the security later to close the position. First you sell and then buy.

Actual Selling and Buying Procedure

� Procedure for Buying - Locating the broker-----Placement of order (De-mat account in a depository) ------execution of order (Contract note for tax and other legal purposes). Order may be Limit Order (upper limit of the price has been given by the investor) or Market Order (to prevail the best market price).

� Procedure for selling- Placement of order-------sale order-------execution of order (same as buying)

SCREEN BASED SYSTEM

The kind of screen based system adopted in India is referred to as the open electronic order (ELOB) market system.

ELOB

� Buyers and sellers place their orders on the computer

Limit order � Market order

� Computer instantly tries to match mutually compatible orders

on a price- time priority

� The limit order book, the list of unmatched limit orders is

displayed on the screen

LIMIT ORDER BOOK

Buyside Sellside

Limit Price

Shares

500 501 502 503 504 505 506 507 508 509 510 511 512

TRANSACTION COSTS

Thanks to the introduction of screen- based trading and electronic delivery transaction costs have fallen sharply in India.

MID - 1993 TODAY

TRADING 3.75% 0.40%BROKERAGE COST 3.00% 0.25%MARKET IMPACTCOST 0.75% 0.15%

CLEARING COUNTERPARTY RISK PRESENT ABSENT

SETTLEMENT 1.25% 0.10%PAPERWORK COST 0.75% 0.10%BADPAPER RISK 0.50% 0.00%

TOTAL 5.00% (+RISK) 0.50%

BUYING AND SELLING OF SHARES

� Locating a Broker

� Placement of Order

� Execution of Order

� Internet Trading

TYPES OF ORDER

� Limit Order

Those who place limit order

supply liquidity

� Market Order

Those who place market order

demand liquidity

INDIVIDUAL STOCK QUOTATIONS

Co., (Prev.Cl.), Open, High, Low,Close[Vol., Trades] P/E M Cap. 52-Wk H/L

Tata Steel (797.60), 801, 804.90, 770, 776.50[808224, 17609] 4.7 (56730) 970/470

4.7 (56719) 957/467(797.50), 800, 800, 770.50, 776.35[1899247, 35667]

THRUST OF SEBI�sREGULATION OF EQUITY

PRIMARY MARKET

ACCESS : RESTRICTED

INSTRUMENTS : MULTIPLIED

PRICING : RELAXED

DISCLOSURE NORMS : TIGHTENED

RESPONSIBILITY OF MERCHANT BANKERS : ENHANCED

FOCUS INVESTORS : SHIFTED � INST�NAL

METHOD : BOOK BUILDING

THRUST OF SEBI�sREGULATION OF EQUITY MARKET

SECONDARY MARKET

TRADING : COMPUTERISEDTRADING COSTS : LOWEREDTRANSPARENCY : ENHANCEDMARKETS : INTEGRATEDGLOBALISATION : ENCOURAGEDMANAGEMENT : STRENGTHENEDSPECULATION : HEIGHTENEDSETTLEMENT : SHIFTED TO

ELECTRONIC MODE

NEW YORK STOCK EXCHANGE

Trading through a system of brokers and specialists

Brokers � link � investors �market

Specialists � dual role

a. Match buy and sell orders when the prevailing prices

permit them to do so

b. Buy and sell on their own account when they cannot

match customer orders.

NASDAQ

Unlike the NYSE, Nasdaq does not have a specific location.

It is a fully computerized market consisting of many market

makers competing on an electronic network of terminals rather

than on the floor of the exchange

Each Nasdaq company has a number of competing market

makers, or dealers, who make a market in the stock.

Dealers post their bid and ask prices on the Nasdaq system.

Brokers choose among market makers to handle their trades

SHOULD TRADING BE

REGULATED?

KEYNES - TOBIN - BUFFETTKEYNES � �INDUSTRY�� �FINANCE�

TOBIN � TAX ON FINANCIAL TRANSACTIONSBUFFETT . . A CARD

NOT PRACTICAL1. RESTR�N OF FREEDOM2. ADMINISTRATIVELY IMPRACTICAL3. IMPAIRS .. PRICE DISCOVERY4. SPECUL�N � LIQUIDITY

SPECUL�N LIQUID�Y LOWER HIGHER GROWTHCOC INVES�T

Important Abbreviations used in Stock Exchange Quotations

� Con-Convertible� Xd- ex (excluding) dividend� Cd- cum (with) dividend� Xr- ex(excluding) right� Xb- ex (excluding) bonus� Cb- cum (with) bonus