INTRODUCTION

The capital market is a sub-set of the financial system that serves as engine of growth in modern economies. It is that section of the financial system that is involved in providing long-term funds for productive use. The capital market therefore provides an option for governments and companies to raise investment capital for the construction of waterworks, bridges, schools and factories and purchase of vehicles, facilities and equipment using such financial instruments such as equities and bonds. The capital market can also be used as a vehicle to acquire other companies. This compares with the money market, which represents the short-end of the financial system that provides facilities for claims and obligations whose maturity vary from one day to one year. The capital market is a network of institutions and mechanisms through which medium and long-term funds are made available to businesses and governments and instruments outstanding are transferred among investors.

• It establishes rules for fair trading practices and regulates the trading activities of its members according to those rules.• Stock Exchanges provide a market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities.• Globally, stock exchanges were established for the purpose of facilitating, regulating and controlling the business of buying and selling securities.• Also it provides facility for buying and selling securities that have been listed for trading on that exchange.

Market SegmentsSecurities markets provide a channel for allocation of savings to those who have a productive need for them. The securities market has two interdependent and inseparable segments: (i) primary market and (ii) secondary market.

Primary MarketPrimary market provides an opportunity to the issuers of securities, both Government and corporations, to raise resources to meet their requirements of investment. Securities, in the form of equity or debt, can be issued in domestic /international markets at face value, discount or premium.

The primary market issuance is done either through public issues or private placement. Under Companies Act, 1956, an issue is referred as public if it results in allotment of securities to 50 investors or more. However, when the issuer makes an issue of securities to a select group of persons not exceeding 49 and which is neither a rights issue nor a public issue it is called a private placement.

Secondary Market

Secondary market refers to a market where securities are traded after being offered to the public in the primary market or listed on the Stock Exchange. Secondary market comprises of equity, derivatives and the debt markets. The secondary market is operated through two mediums, namely, the Over-the-Counter (OTC) market and the Exchange-Traded market. OTC markets are informal markets where trades are negotiated.

Differences between NIM and SEs

It can be on the basis of-

Types of securities dealt-The NIM deals with new securities, securities that were not previously available and are, therefore, offered to the investing public for the first time. The market, therefore, derives its name from the fact that it makes available a new block of securities for public subscription.

The secondary market on the other hand , is a market for old securities, which may be defined as securities that have been issued already and granted stock exchange quotation. The SEs, therefore, provide a regular and continuous market for buying and selling of securities.

Nature of financing-The primary market is concerned with new securities, it provides additional funds to the issuing companies either for starting a new enterprise or for the expension or diversification of the existing one and therefore, its contribution to company financing is direct.

In contrast, the secondary markets can in no circumstance supply additional funds since the company is not involved in the transaction. This, however, does not mean that the stock markets have no relevance in the process of transfer of resources from savers to investors. Their role in the supply of capital is indirect.

Organization-The two parts of the capital/securities market have organizational difference also. The SEs have physical existence and are located in a particular geographical area. The NIM is not rooted in any particular spot and has no geographical existence. The NIM has neither any tangible form/any administrative for the consummation of its business.it is recongnised only by the service that it renders to the lenders and borrowers of capital funds at the time of any particular operation.

SIMILARITIES BETWEEN NIM AND SES

It can be on the basis of-

Stock exchange listing-The securities issued in the NIM are invariably listed on a recognized stock exchange.

Control-Stock exchange exercise considerable control over the organization of new issues. In terms of regulatory framework related to dealings in securities, which seek stock quotation/listing, have to comply with statutory rules as well as regulations framed by the stock exchanges with the object of ensuring fair dealings in them. If the issues do not conform to the prescribed stipulations, the stock exchange could refuse listing facilities to them. This requirement obviously enables the stock exchanges to exercise considerable control over the new issues market and is indicative of the close relationship between the two.

Economic interdependence- Markets for new and old securities are, from economic point of view, an integral part of a single market-the industrial securities market. Their mutual interdependence, from the economic point of view, has two dimensions. One, the behaviour of the SEs has a significant bearing on the level of the activity in the NIM and, therefore, its response to capital issues: activity in the new issues market and the movement in the prices of stock exchange securities are broadly related-new issues increase when share values are rising and vice versa.

This is because the two parts of the industrial securities/capital market are susceptible to common influences and they act and react upon each other. Stock exchanges are usually the first to feel a change in the economic outlook and the effect is quickly transmitted to the new issue section of the market.

Functions of Stock / Secondary markets / Exchanges

Stock exchange discharge three vital functions in the orderly growth of capital formation-

Nexus between saving and investment

The savings of the community are mobilised and channelled by stock exchanges for investment into those sectors and units that are favoured by the community at large on the basis of such criteria as good return, appreciation of capital etc.

Market place

Exchanges provide a market place for the purchase and sale of securities, thereby enabling their free transferability through several successive stages.

From the original subscriber to the never- ending stream of buyers, who may be buying them today to sell them at a later date for a variety of consideration like meeting their own needs of liquidity, shuffling their investment portfolios to gear up for the ever-changing market situation and so on.

Continuous price formation

The collective judgement of many people operating simultaneously in the market, resulting in the emergence of a large number of buyer and sellers at any point of time, has the effect of bringing about changes in the levels of security prices, in small graduation, there by evening out wide swings in prices.

Functions of NIM / Primary market

Origination-The term originating refers to the work of investigation and analysis and processing of new proposals. These two functions are performed by the specialist agencies that act as the sponsors of issues.

Underwriting-The origination, howsoever thoroughly done, will not, by itself, guarantee the success of an issue. To ensure success of an issue, therefore, the second specialist service-underwriting-provided by the institutional set up of the NIM takes the form of a guarantee that the issues would be sold by eliminating the risk arising from uncertainity of public response. That adequate institutional arrangement for the provision of the underwriting of the crucial significance, both to the issuing companies as well as the investing public cannot be overstressed.

Distribution- Underwriting, however, is only a stopgap arrangement to the guarantee the success of an issue. The success of an issue, in the ultimate analysis, depends on the issue being acquired by the investing public. The sale of securities to the ultimate investors is referred to as distribution. It is a specialist job, which can best be performed by brokers and dealers in securities, who maintain regular and direct contact with the ultimate investors.

New issue mechanism

1. Public issue through prospectus

2. Tender / book building

3. Offer for sale

4. Placement

5. Right issue

FRAMEWORK OF OPERATION OF NIM

The legal and procedural requirements of the SEBI guidelines pertaining to capital issue activities can be discussed under-

Eligibility norms Pricing of issues Promoters contribution and lock in requirement Contents of offer documents Issue advertisement Issue of debt instruments, Book building Initial public offer through stock exchange online system Issue of capital by designated financial institution Preferential issues OTCEI issues

Products and Participants

Participants

The securities market has essentially three categories of participants (i) The investors,(ii) The issuers, (iii) The intermediaries

These participants are regulated by the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA) and the Department of Economic Affairs (DEA) of the Ministry of Finance.

Products

Financial markets facilitate reallocation of savings from savers to entrepreneurs. Savings are linked to investments by a variety of intermediaries through a range of complex financial products called “securities”. Under the Securities Contracts (Regulation) Act [SC(R)A], 1956, “securities” include (i) shares, bonds, scrips, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, (ii) government securities, (iii) derivatives of securities, (iv) units of collective investment scheme, (v) interest and rights in securities, and security receipt or any other instruments so declared by the central government. Broadly, securities can be of three types - equities, debt securities and derivatives.

CAPITAL MARKET INSTRUMENTS

VARIABLE INCOME SECURITIES

Equity / ordinary shares Preference shares

FIXED INCOME SECURITIES

Debenture Bonds Notes Innovative debt instruments / securities Forward contracts

DERIVATIVES

Futures / future contracts Options / options contracts

EQUITY / ORDINARY SHARES

Types-

Authorized equity / share capital-It represents the maximum amount that a company can raise from the ordinary shareholders. It can be changed in the prescribed manner.

Issued / subscribed / paid up capital-The portion of the authorized capital offered by the company to the investors is the issued capital. Subscribed share capital is that part of the issued capital which has been accepted/ subscribed by the investors. The actual amount paid by the shareholders is the paid up capital. The issued, subscribed and paid-up capitals are generally the same.

Features

Residual claim to income-the equity shareholders have a residual claim to the income of the company. They are entitled to the remaining income/profits of the company after all outside claims are met.

Residual claim on assets- The ordinary shareholders, claim in the assets of the company is also residual. In that their claim would rank after the claims of the creditors and preference shareholders in the event of liquidation. If the liquidation value of assets is insufficient, their claims may remain unpaid.

Right to control-As owners of the company , equity-holders have the right to control the operations of , participate in the management of, the company. Their control is however, indirect. The major policies/decisions are approved by the board of directors and the board appointed management carries out the day to day operations

Merits of equity shares

Permanent source of funds without any repayment liability It does not involve obligatory dividend payment It forms the basis of further long term financing in the form of borrowing related to

its credit worthiness Advantage for shareholder is that with the limited liability they exercise control and

share other ownership rights in the income / asset of the firm

Demerits of equity shares

High cost of funds reflecting the high required rate of return of investors, as a compensation for higher risk, as also the fact that equity dividends are not tax deductible payments.

High flotation cost in terms of underwriting, brokerage and other issue expenses compared to other securities.

Dilution of control of existing shareholders on sale of new shares to outsiders/public.

Disadvantages of equity capital for shareholders

Equity capital is in reality risk capital as it ranks last as a claimant to income as well as the assets of the company.

Scattered and unorganized shareholders are unable to exercise effective and real control over the company.

Shareholders cannot claim dividend as a matter of right. There is wide fluctuation in share prices, with attendant risk for the investors.

PREFERENCE SHARES

Features

Prior claim on assets- preference share has a prior claim/preference over equity share /capital both on the income and assets of the company.

Cumulative dividends-The preference share is cumulative, in the sense that all unpaid dividends are carried forward and payable before any ordinary dividend is paid.

Redeemability-The preference share has a limited life /specific/fixed maturity (typically 7 years) after which it must be retired. However, there are no serious penalties for breach of redemption stipulation.

Fixed dividend-Preference share dividends are fixed and expressed as a percentage of par value. It is not a legal obligation.

Convertibility-Preference share may sometime be convertible partly/fully into equity share/debenture at a certain ratio during a specified period.

Voting rights- A preference share does not carry voting rights. Participation features-the preference share may be participating or entitling

participation in surplus profits, if any, that is, profits after payment of preference dividend, at a certain specified rate. Similarly, it may be entitled to participate in the residual assets after the payment of their normal claim, according to a specified formula, in the event of liquidation of the company.

Merits

The assurance of a stable dividend. The exemption to corporate investors on preference income to the extent of

dividend paid out No legal obligation to pay preference dividend and skipping of dividend without

significant penalties As a part of net worth, it improves the creditworthiness/borrowing capacity No dilution of control

Demerits

Vulnerability to arbitrary managerial action, as they cannot enforce their right to dividend/right to payment in case of redemption

Modest dividend in the context of the associated risk. For the company, the preference capital is an expensive source of finance due to

non tax deductibility of preference dividend.

DEBENTURE/BONDS/NOTES

ATTRIBUTES

Trust Indenture/Deed-When a debenture is sold to the investing public , a trustee is appointed through an indenture/trust deed. It is a legal agreement between the issuing company and the trustee, who is usually a financial institution/bank/insurance company/firm of attorneys.

Interest-Debentures carry a fixed (coupon) rate of interest, the payment of which is legally binding/enforceable.

Maturity-It indicates the length of time for redemption of par value. A company can choose the maturity period, though the redemption period for nonconvertible debentures is typically 7-10 years. The redemption of debentures can be accompanied by either:1- the debentures redemption reserve (sinking fund) or 2- the call and put (buy back) provision.

Security- Debenture are generally secured by a charge on the present and future immovable assets of the company by way of an equitable mortgage.

Convertibility- Apart from pure non-convertible debentures (NCDs), debentures can also be converted into equity shares at the option of the debenture holders. The conversion ratio and the period during which conversion can be affected are specified at the time of the issue of the debenture itself.

Credit rating- To ensure timely payment of interest and redemption of principal by a borrower, all debentures must be compulsorily rated by one or more of the four credit rating agencies, namely, CRISIL, ICRA, CARE and FITCH India.

Claim on income and assets- The payment of interest and repayment of principal is a contractual obligation enforceable by law. Failure/default would lead to bankruptcy of the company. The claim of debenture-holders on income and assets ranks pari passu with other secured debt and higher than that of shareholders-preference as well.

Debenture redemption reserve- A DRR has to be created for the redemption of all debentures with a maturity period exceeding 18 months, equivalent to atleast 50 percent of the amount of issue/redemption, before commencement of redemption.

Call and put provision- The call/buy-back provision provides an option to the issuing company to redeem the debentures at a specified price before maturity. The call price may be more than the par/face value, usually by 5 percent, the difference being the call premium. The put option is a right of the debenture-holder to seek redemption at the specified time, at predetermined prices.

FEATURES OF BONDS

PAR VALUE:-It is the amount paid to the stockholder on maturity of the bond.it can be discount or premium.

COUPON INTEREST:-Annual/Semi-annual Naira interest paid to the bondholder. MATURITY DATE:-The date on which the issuer is obligated to pay the bondholder SINKING FUND:- Periodical application of money towards redemption of the Bonds

before maturity.

TYPES OF BONDS

Corporate bonds-A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond is less than five years; intermediate is five to 12 years, and long term is over 12 years.

Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives.

Other variations on corporate bonds include convertible bonds, which the holder can convert into stock, and callable bonds, which allow the company to redeem an issue prior to maturity.

Debenture: an obligation secured by the general credit or earnings capacity of the issuer rather than being backed by a specific lien or property.

Mortgage Bonds/Notes: secured by a lien on property, equipment or other real assets

Mini-Coupon and Zero-Coupon Bonds- ZIBs do not carry any explicit/coupon rate of interest. They are sold at a discount from their maturity value. The difference between the face value of the bond and the acquisition cost is the gain/return to the investors. The implicit rate of return/interest on such bonds can be computed by the equation-

Acquisition price = Maturity (face) value / (1+I)n

Callable/Non-Callable Bonds-A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately.The call price will usually exceed the par or issue price. In certain cases, mainly in the high-yield debt market, there can be a substantial call premium.

Bearer Bonds-A bearer bond is similar to a bearer share in that the ownership is based upon who has the physical possession of the paper. Bearer shares represent ownership in a corporation while bearer bonds represent ownership of debt from the bond issuer. Both are considered negotiable instruments.Who Issued Bearer Bonds? – Bearer bonds were made illegal to issue in the USA by the USA in 1982. There are still some older bearer bonds in circulation issued before 1982. Governments and private corporations issued bearer bonds.

Book-Entry/Bonds-Securities that are recorded in electronic records called book entries rather than as paper certificates. Also referred to as "book-entry receipt."

General Obligation Bonds-A general obligation bond is a common type of municipal bond that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders.

Most general obligation pledges at the local government level include a pledge to levy a property tax to meet debt service requirements, in which case holders of general obligation bonds have a right to compel the borrowing government to levy that tax to satisfy the local government's obligation. Because property owners are usually reluctant to risk losing their holding due to unpaid property tax bills, credit rating agencies often consider a general obligation pledge to have very strong credit quality and frequently assign them investment grade ratings. If local property owners do not pay their property taxes on time in any given year, a government entity is required to increase its property tax rate by as much as is legally allowable in a following year to make up for any delinquencies. In the interim between the taxpayer delinquency and the higher property tax rate in the following year, the general obligation pledge requires the local government to pay debt service coming due with its available resources.

Revenue Bonds- A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general obligation bonds, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds; other revenues (notably tax revenues) and the general credit of the issuing agency are not so encumbered. Because the pledge of security is not as great as that of general obligation bonds, revenue bonds may carry a slightly higher interest rate than G.O. bonds; however, they are usually considered the second-most secure type of municipal bonds.

Why would Investment in Bonds be Appropriate?

Investors seeking steady cash flow Investors who do not have an immediate need for the sum invested Bonds are excellent vehicle applicable in portfolio diversification

Attraction of Bonds over Equities

They are loans repayable over a relatively long period of time, hence frees the issuer from short term funding problems thereby permitting long term capital investment

INNOVATIVE DEBT INSTRUMENTS

For improving the attractiveness of fixed income securities, namely, bonds and debentures, some new features have been added.

Convertible debentures/bonds- The convertible debenture give the holders the right (option) to convert them into equity shares on certain terms. They are entitled to a fixed income till the conversion option is exercised and would share the benefits associated with equity shares after the conversion.

Optionally convertible debentures- The value of a debenture depends upon three factors:

Straight debenture value-it equals the discounted value of the receivable interest and principle repayment, if retained as a straight debt instrument. The discounted factor would depend upon the credit rating of the debenture.

Conversion value- If the holders opt for conversion, conversion value is equal to the share price multiplied by the conversion ratio that is the number of equity shares

offered for each debenture. If the price of share is Rs 50 and one debenture is convertible into 5 shares (conversion ratio=5). The CV = Rs 250The value of a convertible debenture cannot be less than the SDV and CV, which in a sense, represents its two floor values. In other words the value of convertible debenture would be higher of the SDV and CV.

Option value-The investors have an option, that is, they may not exercise the right/exercise the right at a time of their choosing and select the most profitable alternatives. Thus the option has the value in the sense that the value of the debenture will be higher than the floor values. Therefore the value of the convertible debentures = Max [SDV, CV] + OV.

Callable/ puttable bonds/debentures/bond refunding- Beginning from 1992, when the IDBI issued bonds with call features, several callable/puttable bonds have emerged in the country in the recent years. Call provision provide flexibility to the company to redeem them prematurely. Generally, firms issue bonds at a presumably lower rate of interest when market conditions are favourable to redeem such bonds. In other words the firm refunds its debt.

Warrants- A warrant entitles its holders to subscribe to the equity capital of a company during a specified period at a stated/particular/certain price. The holder acquires only the right (option) but he has no obligation to acquire the equity shares. Warrants are generally issued in conjunction with/tied to other instrument, for example- attatched to 1. Secured premium notes and 2. Debentures. They can be issued independently also.

Zero interest bonds/debentures- ZIBs do not carry any explicit/coupon rate of interest. They are sold at a discount from their maturity value. The difference between the face value of the bond and the acquisition cost is the gain/return to the investors.

Floating rate bonds- The interest rate on such bonds is not fixed. It is floated and is linked to a benchmark rate such as interest on treasury bills bank rate, maximum rate on term deposits. It is typically a certain percentage point higher than the benchmark rate. The price of FRBs tend to be fairly stable and close to par value in comparision with fixed interest bonds. They provide protection against inflation risk to investors. Particularly banks and financial institution.

FORWARD CONTRACTS

Features

They are bilateral contracts and, hence, exposed to counterparty risk.

Each contract is customer designed, and ,hence is unique in terms of contract size, expiration date and the asset type and quality.

The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the assets. If a party wishes to reverse the contract, it has to compulsorily go to the same

counterparty ,which often results in a high price being charged. Forward contracts are very useful in hedging and speculation.

FUTURES / FUTURE CONTRACTS

Future markets are designed to solve the problems that exist in forward markets. A future contract is an agreement between two parties to buy or sell an asset at a certain time in future, at a certain price. But unlike forward contracts, future contracts are standardize and stock exchange traded. To facilitate liquidity in the future in the future contracts, the exchange specifies certain standard features for the contract.

It is a standardize contract with a standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purpose in settlement. A future contract may be offset prior to maturity by entering into an equal and opposite transaction.

The standardized items in a future contracts are-

Quantity of the underlying Quality of underlying The date/month of delivery The units of price quotation and minimum price change Location of settlement

Distinction between futures and forwards

FUTURES FORWARDS

1.Traded on an organised stock exchange 1.Over the counter in nature

2.Standardized contract terms , hence, more liquid

2.Customised contract terms, hence, less liquid

3. Requires margin payments 3.No margin payment

4.Follows daily settlement 4.Settlement happens at the end of the period

Options / Options contracts

Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to necessarily exercise this right. In contrast a forward or futures contract, the two parties have committed themselves to

doing something. It costs nothing to enter in to a future contract, the purchase of an option requires an up

front payment.

Distinction between Futures and Options

FUTURES OPTIONS

1.Exchange traded, with novation 1.Same as futures

2.Exchange defines the product 2.Same as futures

3.Price is zero, strike price moves 3.Strike price is fixed, price moves

4.Price is zero 4.Price is always positive

5.Linear payoff 5.Nonlinear payoff

6.Both long and short at risk 6.Only short at risk

MUTUAL FUNDS

A mutual fund is a type of professionally-managed type collective investment scheme that pools money from many investors. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment schemes that are regulated, available to the general public and open-ended in nature. Hedge funds are not considered a type of mutual fund.

There are 3 types of mutual funds: open-end, unit investment trust and closed-end. The most common type, the open-end mutual fund, must be willing to buy back its shares from its

investors at the end of every business day. Exchange-traded funds are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity.

THE WINNERS

BEST MUTUAL FUNDS EQUITY (Aggressive Growth)

Magnum Emerging Businesses

EQUITY (Long-term Growth)

UTI Opportunities

HYBRID (Conservative Growth)

HDFC Balanced

DEBT (Bond)

Birla Sun Life GSF Long-Term

DEBT (Liquid)

Birla Sun Life Floating Rate LT RET

BEST FUND MANAGERS

EQUITY

R. Srinivasan, SBI Mutual Fund

DEBT

Anil Bamboli, HDFC Mutual Fund

BEST FUND HOUSE

HDFC Mutual FundSource-Business Today Edition: Apr 1, 2012

INDIAN STOCK MARKETS

The Stock Exchange

The Stock Exchange is a place where debt and equity securities of varying types are traded transparently.It is a market that facilitates capital mobilization and allocation, as both governments and companies can raise funds through the market on long and most prudent terms through the offer of shares (by companies) and bonds (by companies and governments).

The facility, which the stock exchange provides for trading in existing securities, removes the restriction that would have prevented individuals from investing their savings in securities.The opportunity it offers for subsequent trading in existing securities has made it a decisive factor in the success or otherwise of many corporate issues

The availability of a secondary market – that is, daily trading of securities on the stock exchange - engenders capital formation and socio-economic development.

OTHER FUNCTIONS OF THE STOCK EXCHANGE

Sets Rules and Regulations for Dealing Members Licenses Dealing members Listing Requirements for issuers of securities Facilitates the secondary trading of securities Mechanism for dispute resolution

TYPES OF STOCK EXCHANGE

The list maintained by the Securities and Exchange Board of India (SEBI) is not current as of 2010.

1. Bombay Stock Exchange (BSE)

2. National Stock Exchange of India (NSE)

3. United Stock Exchange of India (USE)

4. Multi Commodity Exchange (MCX)

5. MCX Stock Exchange (MCX-SX)

6. Over the Counter Exchange of India (OTCEI)

7. Inter-connected Stock Exchange of India (ISE)

8. Madras Stock Exchange (MSE)

9. Ahmedabad Stock Exchange (ASE)

10. Bhubaneshwar Stock Exchange (BhSE)

11. Cochin Stock Exchange (CSE)

12. Hyderabad Stock Exchange (HSE)

13. Calcutta Stock Exchange (CSE)

14. Delhi Stock Exchange (DSE)

15. Bangalore Stock Exchange

16. Madhya Pradesh Stock Exchange, Indore

17. Jaipur Stock Exchange (JSE)

18. Magadh Stock Exchange, Patna

19. UP Stock Exchange(UPSE)

20. Vadodara Stock Exchange,Vadodara (VSE)

Commodity Exchange

21. Multi Commodity Exchange of India Limited (MCX)

22. National Commodity & Derivatives Exchange Limited (NCDEX)

23. Indian National Multi-Commodity Exchange (NMCE)

24. Commodity Exchange Limited ICEX.

THE STOCK INDEX

An Index is a numerical value used to measure changes in a variable or group of variables.The Index is set at a hypothetical numerical level on the base period or starting point against which a percentage change can be compared to at any particular point of time.The Stock Market Index is a specialized tool used essentially to capture the overall performance of the stock market.

An index can also be employed to measure how well a given equity or bond portfolio is performing.If an investor owns more than one stock, it is cumbersome to follow each stock

individually to determine the composite performance of the portfolio.Hence, to supply investors with a composite report on market performance, some investment firms (such as Arbitrage, Vetiva, Afrinvest, Dynamic Portfolios to mention just a few) have developed stock market indexes. Indexes generally enhance and support the business of stockbrokers,investment banks, analysts and the financial press.

The stock index will reveal the overall trend in the equity market. In other words, how in general the market is performing? It is a comprehensive measure of market trends indicating the general stock market price movements. Thus, the index will be the investor’s yardstick for the level of the whole stock market, or a certain group of stocks, against which the performance of individual stocks/portfolio can be measured or judged.Indices are global instruments used by investors in developed as well as developing markets.

Usually, indexes are constructed with a particular objective in mind and they differ with respect to the stocks included in the basket, method of weighting and the procedure for computation. Equity and bond indexes are also there. The index measures the moves up or down of stocks or bonds or funds etc reflecting market price and market direction.

IMPORTANCE OF STOCK INDEX

The Index Summarizes the Entire Market: The market capitalization figures runs into trillions, while index figures are shorter.

To Measure Market Performance: A primary application is to obtain total returns for the entire market or some component of it over specified time period and apply the rates of return computed as a benchmark to judge the performance of individual portfolio managers.

For Performance Benchmarking: It is now a normal practice for fund managers to use indexes as benchmarks for evaluating their portfolio.

To Develop Indexed Portfolio: In active and developed stock markets, it is usually difficult for fund managers to consistently outperform specified market indices. As an alternative, fund managers invest in a portfolio that will emulate this market portfolio. The obvious alternative is to invest in a portfolio that would emulate the market portfolio.

This led to the creation of index funds whose purpose is to track the performance of the specified index over time and derive similar rates of return Marketing Instruments: International investors can compare the performance of the

country’s index to other indices around the world.

To Forecast: This is based on the belief that past price changes can be used to predict future price movements. Prices of companies represented in the index are equivalent to the present value of future cash flows. If future cash flows are expected to change (increase or decrease), the index will reflect these expectations.

For Inter-Country Comparisons: Indexes are used to analyze events and returns in the stock and bond markets of different countries.

Allows for Self-Regulating Markets: With indices, arbitrageurs can easily identify discrepancies in the market and correct the market to ensure that prices are accurate.

TYPES OF INDEX

SENSEX

Sensex stands for “sensitive index”, it represents BSE (Bombay Stock Exchange). Sensex indicates all major companies of BSE. Sensex is calculated using share prices of 30 major companies which are listed in BSE. If the Sensex goes up it means that share values of most of the major companies have gone up and vice versa.

NIFTY

Nifty indicates NSE; it is the leading index for large companies in the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy. NIFTY represents approximately 47% of the traded value of all stocks on the National Stock Exchange. It is calculated using base year 1995 and base index value 1000.

Calculation of SENSEX and NIFTY

Sensex calculation is practiced since 1986. Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since from 2003.

Hence these days Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100 (1978-79).

SENSEX is calculated for every 15 seconds. Free float factor = No of shares available for trading in the open market / Total No of

outstanding shares of the company. SENSEX = (sum of free float market cap of 30 major companies of BSE) X Index value in

1978-79 / Market cap value in 1978-79.

NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) X Index value in 1995 /market cap value in 1995.

MARKET CAPITALISATION

Market capitalization is the total worth of all outstanding (issued) shares of a company. It represents the total worth of a company.

Market capitalization= No of shares outstanding x market price of share Free Float Market Capitalization

Free float concept is an index construction methodology which makes use of free float shares in the market.

Free float market capitalization is the total worth of all shares of a company which are available for trading in the open market.

These shares are called free float shares and are available for trading by anyone.

WHAT IS A CENTRAL DEPOSITORY?

It is a facility (or an institution) for holding securities, which enables securities transactions to be processed by book entry.Physical securities may be immobilized by the Depository or securities may be dematerialized (i.e. so that they exist only as electronic records).In addition to safekeeping, a CSD may incorporate custodian, clearing and settlement functions.A Depository (CSCS) is an organization like a Central Bank where the securities of a shareholder are held in electronic form through the medium of a Stock broking firm/Depository Participant.It is a centralized bank for shares.

HOW THE DEPOSITORY WORKS?

The Depository System functions very much like the banking system. A bank holds funds in accounts whereas a Depository holds securities in accounts for its

clients. A Bank transfers funds between accounts whereas a Depository transfers securities between accounts.

In both systems, the transfer of funds or securities happens without the actual handling of funds or securities.

Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively.

BENEFITS OF THE CENTRAL DEPOSITORY

Short stock transaction cycle (T+3 days) Transparent stock transaction Guaranteed delivery and payment for shares. Ability to use shares in the CSCS as collateral to obtain loan facility Ease of monitoring and updating stock holdings. Centralized registry thus reduces cost of portfolio management Ability of tracking down history of transactions

TRADING

1. TRADITIONAL OUTCRY SYSTEMUnder the system, brokers assemble at a central location usually the exchange trading ring, and trade with each other. This was time consuming, inefficient and imposed limits on trading volumes and trading hours.

2. SCREEN BASED TRADING SYSTEM (SBTS)In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line, fully-automated screen based trading system (SBTS). Under this system a trading member can punch into the computer, the number of securities and the prices at which he would like to transact. The transactions is executed as soon as it finds a matching sell or buy order from a counter party. This system was readily accepted by market participants and in the very first year of its operation, NSE became the leading stock exchange in the country.

ADVANTAGES OF THE SCREEN-BASED TRADING SYSTEM (SBTS) It electronically matches orders on a strict price/time priority and hence cuts down on

time, cost and risk of error, as well as on fraud resulting in improved operational efficiency.

It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets.

It enables market participants, irrespective of their geographical locations to trade with one another simultaneously, improving the depth and liquidity of the market.

It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody.

It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety.

NEAT SYSTEMNSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an in memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second. The NEAT system supports an order driven market, wherein orders match on the basis of time and price priority. All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded is notified by the Exchange from time to time.

MARKET TYPESThe Capital Market system has four types of market:

(i) Normal Market: Normal market consists of various book types in which ordersare segregated as Regular Lot Orders, Special Term Orders, and Stop Loss Ordersdepending on the order attributes.

(ii) Auction Market: In the auction market, auctions are initiated by the exchangeon behalf of trading members for settlement related reasons. The main features ofthis market are detailed in a separate section (3.13) on auction.

(iii) Odd Lot Market: The odd lot market facility is used for the Limited PhysicalMarket and for the Block Trades Session. The main features of the Limited PhysicalMarkets are detailed in a separate section (3.14). The main features of the BlockTrades Session are detailed in a separate section (3.15).

(iv) Retail Debt Market: The RETDEBT market facility on the NEAT system ofcapital market segment is used for transactions in Retail Debt Market session.Trading in Retail Debt Market takes place in the same manner as in equities (capitalmarket) segment. The main features of this market are detailed in a separate section(3.16) on RETDEBT market.

MARKET PHASES

The trading system is normally made available for trading on all days except Saturdays, Sundays and other holidays. Holidays are declared by the Exchange from time to time. A trading day typically consists of a number of discrete stages as below:

1. Opening: The trading memb er can carry out the following activities after login to the NEAT system and before the market opens for trading:

(a) Set up Market Watch (the securities which the user would like to view on the screen)(b) View Inquiry screensAt the point of time when the market is opening for trading, the trading membercannot login to the system. A message ‘Market status is changing. Cannot logon forsometime’ is displayed. If the member is already logged in, he cannot performtrading activities till market is opened.

2. Pre-open: The pre-open session is for a duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-open session is comprised of Order collection period and order matching period. The order collection period of 8* minutes shall be provided for order entry, modification and cancellation. (* - System driven random closure between 7th and 8th minute). During this period orders can be entered, modified and cancelled.

The information like Indicative equilibrium / opening price of scrip, total buy and seli quantity of the scrip is disseminated on the NEAT Terminal to the members on realtime basis. Indicative NIFTY Index value & % change of indicative equilibrium price to previous close price are computed based on the orders in order book and are disseminated during pre-open session.

Order matching period starts immediately after completion of order collection period. Orders are matched at a single (equilibrium) price which will be open price. The order matching happens in the following sequence:

Eligible limit orders are matched with eligible limit orders Residual eligible limit orders are matched with market orders Market orders are matched with market orders

3. Normal Market Open Phase: The open period indicates the commencement of trading activity. To signify the start of trading, a message is sent to all the trader workstations. The market open time for different markets is notified by the Exchange to all the trading members. Order entry is allowed when all the securities have been opened. During this phase, orders are matched on a continuous basis. Trading in all the 46 instruments is allowed unless they are specifically prohibited by the Exchange.The activities that are allowed at this stage are Inquiry, Order Entry, Order Modification, Order Cancellation (including quick order cancellation), Order Matching and Trade Cancellation.

4. Market Close: When the market closes, trading in all instruments for that market comes to an end. A message to this effect is sent to all trading members. No further orders are accepted, but the user is permitted to perform activities like inquiries and trade cancellation.

5. Post-Close Market: This closing session is available only in Normal Market Segment. Its timings are from 3.50 PM to 4.00 PM. Only market price orders are allowed. Special Terms, Stop Loss and Disclosed Quantity Orders, Index Orders are not allowed. The trades are considered as Normal Market trades. Securities not traded in the normal market session are not allowed to participate in the Closing Session.

6. Surcon: Surveillance and Control (SURCON) is that period after market close during which, the users have inquiry access only. After the end of SURCON period, the system processes the data for making the system available for the next trading day. When the system starts processing data, the interactive connection with the NEAT system is lost and the message to that effect is displayed at the trader workstation.

LEGAL FRAMEWORK

Various activities in the securities market in India are regulated in a coordinated manner by four regulators namely Department of Economic Affairs (DEA) of the Ministry of Finance, Ministry of Company Affairs, Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).

The regulatory and the supervisory framework of the securities market in India has been progressively strengthened through various legislative and administrative measures and is consistent with the best international benchmarks, such as , standards prescribed by the International Organization of Securities Commissions (IOSCO).

REGULATORS

The regulators ensure that the market participants behave in a desired manner so that the securities market continues to be a major source of finance for corporate and government and the interest of investors are protected.

As noted earlier, the responsibility for regulating the securities market is shared by DEA, Ministry of Corporate Affairs, SEBI and RBI.

I. SEBI (Intermediaries) Regulations, 2008

II. SEBI (Prohibition of Insider Trading) Regulations, 1992

III. SEBI (Prohibition of fraudulent and Unfair Trade Practices relating to securities market) Regulations, 2003

IV. The Depositories Act, 1996

V. Indian Contract Act, 1872

VI. Income Tax Act, 1961

SEBI (Intermediaries) Regulations, 2008

SEBI had issued regulations governing the registration and regulatory framework for each of these intermediaries. However, given the fact that many requirements and obligations of most intermediaries are common, SEBI has recently consolidated these requirements and issued the SEBI (Intermediaries) Regulations, 2008.

These regulations were notified on May 26, 2009. These regulations apply to all the intermediaries mentioned above, except foreign

institutional investors, foreign venture capital investors, mutual funds, collective investment schemes and venture capital funds.

RULES AND REGULATIONS The Government has framed rules under the Securities Contract (Regulation) Act

SC(R)A, SEBI Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for

registration and regulation of all market intermediaries, for prevention of unfair trade practic es, insider trading, etc.

Under these Acts, Government and SEBI issue notifications, guidelines, and circulars, which need to be complied by the market participants.

The self-regulatory organizations (SROs) like stock exchanges have also laid down their rules and regulations for market participants.

MARKET EFFICIENCY

Efficiency implies that all resources are being used to the potential.Information Efficiency implies the Price of a Security reflects ALL information relevant to pricing the Security.

A pricing efficient market implies efficiency in the processing of information i.e. the prices of capital assets at all times are based on correct evaluation of all available information allocation Efficiency relates to the ability of the market to direct capital to the projects with the highest risk-adjusted returns.

Operational Efficiency is achieved when transactions completed on a timely basis, accurately and at low cost

EFFICIENT CAPITAL MARKETS

Efficient Capital Markets are markets in which the security prices fully reflect all relevant information that is available about the fundamental value of the securities.

Fundamental Value is the Present Value of the Future Cash Flows that the owner of the security expects to receive.

The anticipated cash flows for stocks consist of the Stream of expected dividends plus the expected price of the stock when sold.

New information about the fundamental value of the securities will be reflected in price through competitive trading.

The Search for mispriced stocks by Analysts and their subsequent trading make the market efficient and make prices reflect fundamental values.

EFFICIENT MARKET HYPOTHESIS (EMH)

EMH is about the way the market process information and how the information influences security prices.

EMH postulates that it is impossible to “beat the market” because existing share prices always incorporate and reflect ALL relevant information.

All historical information on prices and volumes are already reflected in current market prices.

Therefore past performance has no influence on future performance or market values.

Hence, it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

A stock’s price is equal to its investment value

EMH Classifies Efficiency into three levels: WEAK, SEMISTRONG AND STRONG FORMS.

These are distinguished by the degree of information reflected insecurity prices

Weak Form of Efficiency

EMH in its weak variant implies that successive stock prices are mostly unrelated and that prices tend to move in a random manner or walk

Randomness being confirmed by analysis of successive price changes indicating low serial correlation coefficient

It is impossible to make consistently superior profits by studying past prices.

Semi-Strong Form of Efficiency Security prices reflect past prices and all publicly available information Only traders with access to non-public information can earn excess profits.

Strong Form of Efficiency

Prices reflect all the information that can be acquired by painstaking analysis of the company and the economy.

We would observe lucky and unlucky investors in the market. No investor can consistently beat the market.

MONEY MARKET ORGANIZATION

It is a market for overnight to short term funds, and for the short term money and financial assets that are close substitute for money. ‘Short term’ in the Indian context, generally means a period up to one year. ‘Close substitute’ denotes any financial asset that can be quickly converted into money with minimum transaction cost and without loss in value.

OBJECTIVES OF MONEY MARKET

The broad objectives of the money market is to provide-

1. An equilibrating mechanism for evening out short-term surpluses and deficiencies

2. A focal point of central bank intervention for influencing liquidity in the economy

3. A reasonable access to the users of short-term funds to meet their requirements at realistic/ reasonable price/cost

PRE-1987 SCENARIO

Before 1987, the money market consisted of the following segments/components-

1. The call money market

2. The inter bank term deposits/loan market

3. The participation certificates market

4. The commercial bill market

5. The treasury bills market

6. The inter corporate market

POST-1987 SCENARIO

1.Institutional development

2. Steps to activate the existing instruments/markets

3. Introduction of new instruments

IMPORTANT CONCEPTS

BULL:-

An adjective to describe an upward price stock movement. A person who believes that security price will rise and who buys on that assumption. Bulls are market optimists and take a favorable or constructive view of business

conditions. One may be a bull on a particular security without being bullish on the entire market. The successful trader is neither going to be a bull or a bear but one who adjusts his

attitude to fundamental conditions.

BEAR

A person who believes that security price will decline It is more particularly applied to a market in which the downward tendency has been

prolonged or is expected to be prolonged, with minor upward interruptions, over an extended period such a year or more

If allowed by regulation, a bear can profit from a declining stock market by selling a stock short

BELOW PAR-A price quoted below the face value of a security.

STAG- A Speculator who buys and sells stocks rapidly for fast profits.

SPREAD- The difference between the bid and offer prices of a security. This difference maybe narrow or wide depending upon the demand and supply of the particular issue and the activity of its market

STOCK DIVIDEND-The payment of dividend in the form of shares rather than cash

DEMATERIALIZATION- In finance and financial law, dematerialization refers to the substitution of paper-form securities by book-entry securities. This phenomena is ancient, since in many small firms that cannot afford printing secured paper-form securities, the securities are often held in a book-entry form, under the control of an attorney who acts as a notary to certify the existence of the securities, as well as their authenticity. Today, dematerialization concerns more and more listed companies in the US (where the process has begun in the sixties) and now in the European Union, where

dematerialized securities represent often more than 99% of the securities listed on regulated markets.

However, this recent phenomena of dematerialization of securities issued by large firms is mostly undertaken via Central Securities Depository, a national or regional institution holding the notary function, such as the DTC in the US, which itself entrusts banks and investment firms to act as intermediaries between issuers and investors for the custody of these securities. Therefore, dematerialized securities are often referred as intermediated securities, in particular by the Unidroit convention on substantive rules for intermediated securities.

REMATERIALIZATION- Rematerialization or remat is a compiler optimization which saves time by recomputing a value instead of loading it from memory. It is typically tightly integrated with register allocation, where it is used as an alternative to spilling registers to memory. It was conceived by Preston Briggs, Keith D. Cooper, and Linda Torczon in 1992.

Traditional optimizations such as common subexpression elimination and loop invariant hoisting often focus on eliminating redundant computation. Since computation requires CPU cycles, this is usually a good thing, but it has the potentially devastating side effect that it can increase the live ranges of variables and create many new variables, resulting in spills during register allocation. Rematerialization is nearly the opposite: it decreases register pressure by increasing the amount of CPU computation. To avoid adding more computation time than necessary, rematerialization is done only when the compiler can be confident that it will be of benefit — that is, when a register spill to memory would otherwise occur.

Rematerialization works by keeping track of the expression used to compute each variable, using the concept of available expressions. Sometimes the variables used to compute a value are modified, and so can no longer be used to rematerialize that value. The expression is then said to no longer be available. Other criteria must also be fulfilled, for example a maximum complexity on the expression used to rematerialize the value; it would do no good to rematerialize a value using a complex computation that takes more time than a load. Usually the expression must also have no side effects.

HEDGING-Hedging is an investment technique designed to offset a potential loss on one investment by purchasing a second investment that you expect to perform in the opposite way.

For example, you might sell short one stock, expecting its price to drop. At the same time, you might buy a call option on the same stock as insurance against a large increase in value.

SPECULATIONS- The terms of a written contract are called stipulations.