An Overview of Equity & Commodity Market

By Suku Thomas Samuel

Department of Management

Objectives of a business

Capital Investment Profit

•Raise Capital

• Invest capital

•Make profit

•Distribute profit to various stake holder

What is a market?

SellerBuyer

What is Financial Market?

Institutional arrangement for dealing with financial assets

“A financial market is a market in which people and entities cantrade financial securities, commodities, and other fungible items ofvalue at low transaction costs and at prices that reflect supply anddemand. Securities include stocks and bonds, and commoditiesinclude precious metals or agricultural goods.”

Role of Financial Market

•Facilitate creation of credit

•Facilitate liquidity in the financial system

•Mobilize savings

•Help the economy grow

Types of Financial Market

Financial Market

Money Market

Capital Market

Functions of Capital Market

•Mobilize savings

•Facilitates economic growth

•Capital formation

•Availability of capital

• Investment avenue

•Financial services

Structure of Capital Market

Fund raiserE.g.: Business

Fund provider

E.g.: Investors

IntermediariesE.g.: Brokers, Merchant bankers,

transfer agents etc.

OrganizationE.g.: Stock Exchanges,

depositories

Market RegulatorsE.g.: SEBI, RBI etc.

Equity Share• Issued by companies

•Transfers ownership & privileges in exchange of capital

•Duration – perpetual until company exits

•Ownership can be transferred

• Issued in primary or secondary market

•Compensated with dividends

•More risk, higher returns

Physical Share certificate

Classification of Capital Market

Capital Market

Primary Market

Secondary Market

Primary Market•Also known as ‘New Issue Market’

•Securities are sold for first time

Issue Primary Market Secondary Market

Public Issue

• Raising capital directly from public

• Popular method

• Public issue through Red Herring Prospectus (RHP)

• IPO – Initial Public OfferFirst time issue to public

• FPO – Follow-on Public offerExisting listed company makes another issue to the public

RHP

Red herring prospectusIPO / FPO Allotment of Share

• File with SEBI

• Details of the company & issue

• Approval

Examples of Public Issues

IPO’s of 2014

Private Placements

• Direct sale by business

• Limited number of investors

• Smaller capitals for financing

• Less expensive compared to IPO

• Helps the company to choose investors

• Private Placement Memorandum (PPM) has to be prepared

Private Placements (contd.)

Secondary Market•Also known as ‘Old Securities Market’

•Place where securities are bought & sold

Issue Primary Market Secondary Market

Types of Investors

Investors

Institutional Investors Retail Investors

HNI

Types of Ownership securitiesOwnership securities transfers ownership of business from business to investor

•Ordinary shares/ Equity Shares

•Preference shares

•Sweat equity shares

Equity Share

• Issued to an investor

•Ownership is transferred

•Enjoys voting rights

•Financial compensation – dividend

•Dividend – not fixed

Preference Share

• Issued to an investor: called as preference share holder

•Ownership is transferred

•Has no voting rights

•Financial compensation – fixed dividend

•Priority for capital pay back during company wind up

Types of Preference Share

•Cumulative Preference Shares−Fixed rate of dividend is guaranteed.

−At the time of inadequate profit, they will not loss anything.

−Arrear will get in subsequent years.

•Non-Cumulative Preference Shares

−Fixed rate of dividend is guaranteed.

−At the time of inadequate profit, they will not get anything.

Types of Preference Share

•Participating Preference Shares

−Fixed rate of dividend is guaranteed.

−Entitled to share the surplus profit.

•Non-Participating Preference Shares

−Fixed rate of dividend is guaranteed.

−Does not share the surplus profit.

Types of Preference Share

•Redeemable Preference Shares–Shares which a company may repay after a fixed period of

time or earlier.

• Irredeemable Preference Shares–It do not carry the arrangement for redemption.

–Shares are repayable only at winding up.

Types of Preference Share

•Convertible Preference Shares–It can be converted into Equity shares within a certain period.

•Non-Convertible Preference Shares –It cannot be converted into Equity shares.

SEBI

• Securities and Exchange Board of India

• PREAMBLE

• The Preamble of the Securities and Exchange Board of India describes thebasic functions of the Securities and Exchange Board of India as:

"...to protect the interests of investors in securities and to promote thedevelopment of, and to regulate the securities market and for mattersconnected therewith or incidental thereto"

SEBI

• Regulator for the securities market in India

• Quasi-legislative, quasi-judicial and quasi-executive

• Established by The Government of India on 12 April 1988

• Given statutory powers on 12 April 1992 through the SEBI Act, 1992

• Headed by a chair man

• Present chairman is Upendra Kumar Sinha

Commodity•Commodity means primary agricultural products

•Basic good used in commerce

•Used as inputs in the production of other goods or services

Commodity Market•Marketplace for buying, selling and trading raw or

primary products.

•Two types – Soft commodities and hard commodities

•History dates back to 4500 BC and 4000 BC

•Physical delivery of commodity once the trade is executed

Types of commodity Market

•Precious Metals E.g. Gold, silver, copper etc.

•Agro commodities E.g. Wheat, corn, chilli, turmeric

•Energy commodities E.g. Crude oil, gas

•Soft commodities E.g. Coffee, coco

•Live stock commodities E.g. Pork, cattle

What are commodities?•Agricultural produces or raw material extracted

•Has a value

•Processed to derive products & goods

What are tradeable commodities?Commodities have to fulfill the following criteria to be traded in the commodity market:

1. Tradeable – viable to carry out exchange

2. Deliverable – physically deliverable

3. Liquidity – must have a demand & supply

Commodity Market•Marketplace for buying, selling and trading commodities

•Physical delivery of the commodity

•Helps in bringing buyer and sellers together

•Essential for other industries

Types of commodity Market

•Precious Metals E.g. Gold, silver, copper etc.

•Agro commodities E.g. Wheat, corn, chilli, turmeric

•Energy commodities E.g. Crude oil, gas

•Soft commodities E.g. Coffee, coco

•Live stock commodities E.g. Pork, cattle

Forward Markets Commission (FMC)

•Regulator of commodity futures markets

•Headquartered in Mumbai

•Was under the Ministry of Finance

•Monitors commodity trading in 22 exchanges in India

•On 28 September 2015 the FMC was merged with SEBI

Recent IPO•Multi-specialty hospital chain

•Headquartered in Bengaluru

•Founded by Dr. Devi Shetty | Price band : Rs 245 - 250