The capital market apart from the primary market also includes the secondary market where the existing issues are traded.
These are also known as Stock Market .
They enable shareholders to sell their holdings readily , thereby ensuring liquidity.
The investors can also continuously re-arrange their assets.
The stock exchanges provide a market where such mutually satisfactory prices may be determined.
An active secondary market in fact promotes the growth of the primary market and helps in capital formation.
GROWTH OF STOCK EXCHANGES
Bombay SE : 1875
Calcutta & Chennai : 1908
Delhi SE : 1947
In Total 23 Stock Exchanges :
15 are public ltd companies ;
5 are limited by guarantee ;
3 are voluntary non –profit organizations .
The stock exchanges are managed by a governing body
which consists of :
A Vice President,
An Executive Director,
Public representatives and
Nominees of the Govt.
The governing body is responsible for :
policy making and
the smooth functioning of the exchange .
The executive functions are discharged by the Executive
Directors or the Secretary.
FUNCTIONS OF STOCK EXCHANGES
The stock exchanges (SE) provide an organized market place for the investors to buy and sell securities freely.
the market for these securities is an almost perfectly competitive one because a large number of seller and buyers participate.
the SE provides an auction market in which members of the SE participate to ensure continuity of price and liquidity to investors.
An active and healthy secondary market in existing securities, lead to better psychology of expectations ,
Considerable broadening of investment enquiries render the task of raising resources by entrepreneurs easier.
Creation of a continuous market for the securities
Measure the liquidity in the market
Help in fair price determination
Eliminate dishonest practices
TRADING IN STOCK EXCHANGES
Auction System on a trading floor , which is Order Driven or Customer Driven . Orders from all over the country are entered into an electronic system and matched directly and continuously without the involvement of a market maker.
Broker dealer market , which is Quote Driven or Dealer Driven . there are market makers who continuously offer two way quotes – buy and sell quotes - and are willing to buy and sell any quantity.
A Hybrid system
In India generally we have order driven auction market
NSE: order driven
BSE : hybrid market , auction system but quote driven .
Trading NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerized trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest.
The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system
NSE and OTCEI : screen based trading
8,000 terminals spread across the country.
Benefits of Electronic Trading System :
Helps to view full market during real time
Smooth flow of information
Better price discovery
Results in operational efficiency – less time ; less cost ; less fraud
Improves the depth and liquidity of the market
Enables large number of participants all over the country to trade simultaneously in full anonymity
Provides a single trading platform
Sebi has permitted setting up of terminals abroad
The National Securities Clearing Corporation Ltd .
(NSCCL), a wholly owned subsidiary of NSE, was
incorporated in August 1995 .
It was set up to :
bring and sustain confidence in clearing and settlement of securities;
to promote and maintain, short and consistent settlement cycles;
to provide counter-party risk guarantee, and
to operate a tight risk containment system.
NSCCL commenced clearing operations in April 1996.
Intra day Trading Limits
It means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement.
The prime objective of admission to dealings on the Exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective management of trading .
Benefits of Listing
Listing provides an opportunity to the corporates / entrepreneurs to raise capital to fund new projects/undertake expansions/diversifications and for acquisitions.
Listing also provides an exit route to private equity investors as well as liquidity to the ESOP-holding employees.
Listing also helps generate an independent valuation of the company by the market .
Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media . A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.
An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs / GDRs / FCCBs , and in the process attract a wide and varied body of institutional and professional investors.
Listing leads to better and timely disclosures and thus also protects the interest of the investors.
It is the sale or purchase of securities by persons who possess price sensitive information about the company , on account of their fiduciary capacity involving confidence or trust.
It is the postponement of delivery of or payment for the purchase of securities from one settlement period to another.
To contain excessive volatility in prices , the Sebi introduced , in 1995 , scrip wise daily circuit breakers / price-bands.
The circuit breakers bring about a halt / suspension in trading automatically for a specified period if the market prices vary unusually on either side i.e. move out of a pre-specified band .
SEs impose different types of margins on brokers for individuals stocks depending on the exposures taken by these brokers in these stocks , both on proprietary basis and on behalf of clients , vis-à-vis the overall market in the scrips.
Several of these margins are paid upfront by brokers.
These margins are collected to prevent operators from taking market positions in excess of their buying capacities and are used to settle dues to the exchanges / clearing corporations / traders in the event of any fund shortage faced by the brokers.
The margins vary from operators to operator depending on the size of the position taken in the market.
Stock Index captures the behavior of the overall equity market. Movements of the index should represent the returns obtained by "typical" portfolios in the country.
NSE Indices : S&P CNX Nifty , CNX Nifty Junior-100 second rung of growth stocks , CNX MidCap , CNX IT Sector Index , CNX PSE Index -20 PSE stocks , CNX MNC Index -15 listed companies
SENSEX is calculated using the "Free-float Market Capitalization" methodology
takes into consideration only those shares issued by the company that are readily available for trading in the market, wherein, the
level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period.
the base period of SENSEX is 1978-79 and the base value is 100 index points.
during market hours, prices of the index scrips , at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds.
Ups and Downs of an Index
They reflect the changing expectations of the stock market about future dividends of India's corporate sector.
When the index goes up , it is because the stock market thinks that the prospective dividends in the future will be better than previously thought.
When prospects of dividends in the future become pessimistic , the index drops . The ideal index gives us instant-to-instant readings about how the stock market perceives the future of India's corporate sector.
Guidelines for selection of constituents in SENSEX are as follows:
Market Capitalization Weightage
Industry / Sector Representation
Large Cap Stocks - Companies with large capitalization . Traditionally, the safest stocks, but also the least rewarding in return.
Mid Cap Stocks - Bigger than small caps, smaller than large caps, they are also in the middle of the road in terms of risk and reward.
India-bulls Securities Ltd. ; Thomas Cook ( India ) Ltd. ; Century Plyboards ( India ) Ltd. ; Jet Airways( India ) Ltd. ; Parshavnath Developers Ltd. ; Nicholas Piramal India Ltd.
Small Cap Stocks - Smaller companies that usually grow faster, giving a better return, but are riskier because they have less protection against going out of business due to their small size.
Kajaria Ceramics Ltd. ; Kohinoor Foods Ltd. ; Bata India Ltd. ; Arvind Mills Ltd. ; J.K. Cement Ltd.
Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the investor's account with his / her DP.
Constituents of Depository System
Depository Participants (DPs)
Share Registrar / Issuers
Clearing Corporation / Member
Benefits of Dematerialization
A safe and convenient way to hold securities;
Immediate transfer of securities;
No stamp duty on transfer of securities;
Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.;
Reduction in paperwork involved in transfer of securities;
Reduction in transaction cost;
No odd lot problem, even one share can be sold;
Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;
Transmission of securities is done by DP eliminating correspondence with companies;
Automatic credit into demat account of shares, arising out of bonus / split / consolidation / merger etc.
Holding investments in equity and debt instruments in a single account.