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MARKETING OFFINANCIAL SERVICES
Module VIIntroduction to Stock
& Commodity Markets
Ramesh Bagla
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Stock MarketStock market refers to a market placewhere investors can buy and sell stocks.
The price at which each buying and sellingtransaction takes is determined by themarket forces (i.e. demand and supply for
a particular stock).
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Stock Exchange In earlier times, buyers and sellers used toassemble at stock exchanges to make atransaction but now with the dawn of IT,
most of the operations are doneelectronically and the stock markets havebecome almost paperless.
Now investors don't have to gather at theExchanges, and can trade freely from theirhome or office over the phone or through
Internet.
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Major Functions of Stock Exchange
Provides liquidity
Determines economic value of securities
Provides marketability of stocks Provides safety and transparency in dealings
Promotes savings by providing opportunities
for investment in the stocks. Plays the role of a barometer of the health of
a nations economy
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Listing of Securities Listing of securities is the admission of
securities to trading privileges on the stock
exchange The listing agreement is an agreement
between a company and the stock exchange
containing terms and conditions of listing
including obligations and restrictions on the
company as a result of listing
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Advantages of Listing
Provides liquidity
Provides free negotiability
Enhances image of the company
Full disclosure of information on thecompany
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Type of Securities
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Type of Transactions
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Brokers Indian stock exchanges allow a member
broker to perform following activities:
Act as an agent,
Buy and sell securities for his clients andcharge commission for the same,
Act as a trader or dealer as a principal,
Buy and sell securities on his own accountand risk.
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Bombay Stock Exchange (BSE)
BSE is the oldest stock exchange in Asia.
Listing of securities: BSE has a separate listing
department to grant approval of listing ofsecurities of public limited companies, central orstate government securities.
Companies have been classified as large cap
companies mid cap and small cap companiesfor listing purposes.
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Main BSE Indices
BSE Sensitive Index (BSE-Sensex)
BSE National Index (later renamed as
BSE-100 index) BSE-200
DOLLEX 200
BSE-500
BSE-PSU index
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SENSEX Sensex is calculated using a market
capitalization weighted methodology.
As per this methodology, the level of index at
any point of time reflect the total market valueof 30 component stocks relative to a baseperiod.
The market capitalization of a company isdetermined by multiplying the price of its stockby the number of shares issued by thecompany
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BSE Online Trading System (BOLT)
The BSE provides an efficient and
transparent market for trading in equity
shares, debt instruments and derivatives.
The online trading system of the BSE,
Bombay Online Trading (BOLT) system, is a
proprietary system and BS 7799-2-2002
certified
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BSE Basket Trading System (BTS)
In BTS, investors can buy or sell all 30scrips of the Sensex in one transaction inthe proportion of their respective weightsin the Sensex
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Over The Counter Exchange of
India (OTCEI)
Traditionally, trading in Stock Exchanges inIndia followed a conventional style wherepeople used to gather at the Exchange andbids and offers were made by open outcry.
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OTCEI This age-old trading mechanism in the Indian stock markets used to
create many functional inefficiencies like:
Lack of liquidity and transparency,
Long settlement periods and
Benami transactions In order to overcome these inefficiencies, OTCEI was incorporated
in 1990 under the Companies Act 1956.
OTCEI is the first screen based nationwide stock exchange in India
created by Unit Trust of India, Industrial Credit and Investment
Corporation of India, Industrial Development Bank of India, SBICapital Markets, Industrial Finance Corporation of India, General
Insurance Corporation and its subsidiaries and CanBank Financial
Services.
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Futures
Futures contracts are contracts to deliver aspecific amount of a commodity or financialinstrument on a specific future date.
The buyer of the contract has the right to receivethe underlying instrument and locks in the price onthe purchase date.
The seller of a futures contract must deliver on thecontract date.
Futures contracts are controlled by buyers andsellers with a margin deposit that is 5 to 10percent of the value of the contract.
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Options Options are contracts that give the option
holder the right to buy---call options---orsell---put options---the underlying security
at a set price until a specific expirationdate.
Option buyers pay a premium for the right
and option sellers receive the premiumand have the obligation to sell or buy theunderlying security
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Futures vs. Options1. A future is a contract which is governed by apre-determined price for selling and buying at afuture period. In options, there is the right to sell or
purchase of underlying assets without anyobligation.2. A future trading has open risk. The risk in optionis limited.
3. The size of the underlying stock is usually hugein future trading. Option trading is of normal size.4. Futures need no advance payment. Optionshave the advance payment system of premiums.
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National Securities Clearing
Corporation Ltd (NSCCL) National Securities Clearing Corporation Ltd
(NSCCL), a wholly owned subsidiary of the
National Stock Exchange, was established inAugust 1995 with following objectives:
To bring and sustain confidence in clearingand settlement of trading
To provide counter party guarantee againstrisk
To operate a tight risk-containment system
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Commodity Markets
A commodity is any homogenous item whichmay be freely bought and sold. The termtypically refers to products such as coffee,
cocoa and soyabeans (soft commodities) orgold, aluminium and platinum (hardcommodities).
Commodities typically are bought and sold in
commodity markets where producerscombine with manufacturers and speculatorsto create a smoothly functioning market.
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Commodity Markets Commodities are traded on regulated
commodity exchanges, in which they arebought and sold in standardised contracts. Itis similar to an equity market, but instead of
buying or selling shares one buys or sellscommodities. The commodities markets are one of the
oldest prevailing markets in the humanhistory. In fact, derivatives trading started offin commodities with the earliest records beingtraced back to the 17th century when ricefutures were traded in Japan.
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Global Classification of Commodities
Precious Metals: Gold, Silver, Platinum, etc. Other Metals: Nickel, Aluminum, Copper,
Zinc, etc.
Agro-Based Commodities: Wheat, Rice,Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar, etc. Petrochemicals: Crude Oil, High Density
Polyethylene, Polypropylene. Live-Stock: Live Cattle, Pork Bellies, etc. Energy: Crude Oil, Natural Gas, Gasoline,
etc.
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Indian Commodity Market Commodity exchanges are regulated by the
Forward Markets Commission. Unlike the equitymarkets, brokers don't need to register themselveswith the regulator.
The FMC deals with exchange administration andwill seek to inspect the books of brokers only if foulpractices are suspected or if the exchangesthemselves fail to take action.
Thus commodity exchanges are more self-regulating than stock exchanges. But this couldchange if retail participation in commodities growssubstantially.
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Indian Commodity Market13.The East India Cotton Association, Mumbai14. The Central India Commercial Exchange Ltd., Gwalior15. The East India Jute & Hessian Exchange Ltd.16. First Commodity Exchange of India Ltd, Kochi
17. Bikaner Commodity Exchange Ltd., Bikaner18. The Coffee Futures Exchange India Ltd, Bangalore19. Esugarindia Limited20. National Multi Commodity Exchange of India Limited21. Surendranagar Cotton oil & Oilseeds Association Ltd
22. Multi Commodity Exchange of India Ltd23. National Commodity & Derivatives Exchange Ltd
24. Haryana Commodities Ltd., Hissar25. e-Commodities Ltd
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Indian Commodity Market MCX, NCDEX and NMCEIL are the major Commodity
Exchanges Multi commodity exchange of India Ltd (MCX) is an
independent exchange based in Mumbai. Establishedon 10th November, 2003, it is the third largest bullionexchange and fourth largest energy exchange in theworld. Recognized by the Government of India it dealsin numerous commodities and carries out onlinetrading, clearing and settlement processes forcommodities future market countrywide
MCX COMDEX is India's foremost and sole compositecommodity futures price index
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Indian Commodity Market National Multi-Commodity Exchange of India Limited (NMCEIL)
is an online exchange dealing in numerous commodities.
Incorporated on 20th December 2001, it is promoted and run by:
Central Warehousing Corporation
National Agricultural Cooperative Marketing Federation of IndiaLimited
Gujarat Agro Industries Corporation Limited
National Institute of Agricultural Marketing
Gujarat State Agricultural Marketing Board
Neptune Overseas Limited
The Commodity Exchanges with their extensive reach embrace new
participants, resulting in a powerful price discovery process.
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Segments in Commodities Market
Over the Counter (OTC) Market /Spot Market
- Here the participation is restricted to peoplewho are involved with that commodity say the
farmer, processor, wholesaler etc
Exchange Based Market.
- Here derivative trading takes place through
exchange-based markets with standardizedcontracts, settlements etc
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Derivatives A commodity futures contract is a type of derivative, or financial
contract, in which two parties agree to transact a set offinancial instruments or physical commodities for delivery at aparticular price at a later date.
If you buy a commodity contract, you are basically agreeing to
buy something, for a set price, that a seller has not yetproduced. But participating in the commodity market does not necessarily
mean that you will be responsible for receiving or deliveringlarge inventories of physical commodities,
Buyers and sellers in the futures market primarily enter into
futures contracts to hedge risk or speculate rather than delivery(which is the primary activity of the cash/spot market). That iswhy Commodities are used as financial instruments by not onlyproducers and consumers but also speculators.
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Players Involved in Commodities Trading
There are three different types of players in the commodity markets:
Commercials: The entities involved in the production, processing or
merchandising of a commodity. For example, both the corn farmer
and Kelloggs are commercials. Commercials account for most of
the trading in commodity markets. Large Speculators: A group of investors that pool their money
together to reduce risk and increase gain. Like mutual funds in the
stock market, large speculators have money managers that make
investment decisions for the investors as a whole.
Small Speculators: Individual commodity traders who trade on theirown accounts or through a commodity broker. Both small and largespeculators are known for their ability to shake up the commodities
market.
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Speculation & Arbitrage Speculation: Speculators are people who are
prepared to bear risks in anticipation ofearning profits. Markets are granted liquidityby speculators and it is hard to conceive of a
futures market devoid of speculators. Arbitrage: Arbitrage involves buying a
commodity at a low price and instantly sellingit for a higher price in another market. Thus,
traders can profit from arbitrage opportunitiesoccurring due to price differences betweentwo exchanges.
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