Stock and derivatives market in india
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  • Source: Wikipedia
  • Total world derivatives from 1998 to 2007 compared to total world wealth in the year 2000
  • Source: Wikipedia

Stock and derivatives market in india Stock and derivatives market in india Presentation Transcript

  • Presented by: RAJESH KUMAR MBA(Finance), ACS, AIII
  •  STOCK MARKET:  A stock market or equity market is a public entity for the trading of company stock (shares) and derivatives at an agreed price.  These are securities listed on a stock exchanges as well as those only traded privately.  The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization.  The size of the world stock market was estimated at about $36.6 trillion at the beginning of October 2008.
  • WHAT ARE STOCKS? At some point, just about every company needs to raise money In each case, they have two choices: Borrow the money, or Raise it from investors by selling them a stake (issuing shares of stock) in the company
  • When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings. Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done. Nevertheless, it's that ownership structure that gives a stock its value.
  • STOCK EXCHANGE:  A market in which securities are bought and sold: "the company was floated on the Stock Exchange".  The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.  A stock exchange is often the most important component of a stock market.  Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.
  • ROLE OF STOCK EXCHANGE  Raising capital for business:- common forms of raising capital-  Mobilizing savings for investments.  Creating investment opportunities for small companies.  Government capital rising for development projects.  Facilitates company growth. Going to public Limited partnership Venture capital Corporate companies
  • SOME INDIAN STOCK EXCHANGES EXCHANGE BOMBAY STOCK EXCHANGE NATIONAL STOCK EXCHANGE JAIPUR STOCK EXCHANGE UP STOCK EXCHANGE ASSOCIATION MADRAS STOCK EXCHANGE COCHIN STOCK EXCHANGE BANGLORE STOCK EXCHANGE GAUHATI STOCK EXCHANGE LUDHIANA STOCK EXCHANGE CALCUTTA STOCK EXCHANGE LOCATION MUMBAI MUMBAI JAIPUR KANPUR CHENNAI COCHIN BENGULURU GAUHATHI LUDHIANA KOLKATA NSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.
  • OTHER STOCK EXCHANGES ECONOMY STOCK EXCHANGE US & EUROPE NYSE US & EUROPE (NORTH) NASDAQ JAPAN TOKYO STOCK EXCHANGE UNITED KINGDOM LONDON STOCK EXCHANGE EUROPE EURONEXT CHINA SHANGHAI STOCK EXCHANGE HONG KONG HONGKONG STOCK EXCHANGE CANADA TORONTO STOCK EXCHANGE BRAZIL BM&F BOVESPA
  • ECONOMY STOCK EXCHANGE AUSTRALIA AUSTRALIAN SECURITIES EXCHANGE GERMANY DEUTSCHE BORSE SWITZERLAND SIX SWISS EXCHANGE CHINA SHENZHEN STOCK EXCHANGE SPAIN BME SPANISH EXCHANGES INDIA BOMBAY STOCK EXCHANGE SOUTH KOREA KOREA EXCHANGE INDIA NATIONAL STOCK EXCHNGE RUSSIA MICEX – RTS SOUTH AFRICA JSE LIMITED
  • BSE BUILDING; BSE DISPLAYS SENSEX ; PEOPLE TRADING AT THE BOMBAY STOCK EXCHANGE
  • BOMBAY STOCK EXCHANGE Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange. BSE Limited formerly known as Bombay Stock Exchange (BSE) , is the oldest stock exchange in Asia. It is a stock exchange located on Dalal Street, Mumbai. The equity market capitalization of the companies listed on the BSE was US$1 trillion (or Re :5526,99,93,920.3007) as of December 2011. It the 6th largest stock exchange in Asia and the 14th largest in the world.
  • The BSE has the largest number of listed companies in the world. As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scrip's on the stock exchange, the Bombay Stock Exchange has a significant trading volume.  The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India. While both have similar total market capitalization (about USD 1.6 trillion), share volume in NSE is typically two times that of BSE.
  • NATIONAL STOCK EXCHANGE  The National Stock Exchange (NSE) is stock exchange located at Mumbai, India.  It is the 16th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.  NSE has a market capitalization of around US 985 billion and over 1,646 listings as of December 2011.  NSE and BSE are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions.
  •  The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalisation.  NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities.  There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE.  In 2011, NSE was the third largest stock exchange in the world in terms of the number of contracts (1221 million) traded in equity derivatives.  It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.
  • Stock trading Stock trading is not just buying and selling stocks at the stock market, there are so many other factors that need to be taken care of for successful stock trading. Anyone who invests in the stock market wishes to make profit from the investments. To ensure that you get significant return from your investment you have to pick up the right stocks at the right time. If you have decided to trade in stocks the first thing that you need to decide is the stock market where you will trade.
  • There are mainly two major stock exchanges in India The Bombay Stock Exchange or BSE The National Stock Exchange or NSE. BSE is the largest stock exchange in the country and it is the biggest in world in terms of number of listed companies. The NSE is the virtual exchange where you can only trade online. Both these exchanges have their benefits and limitations.
  • List of stock market crashes
  • Stock brokers  An agent that charges a fee or commission for executing buy and sell orders submitted by an investor. (OR)  The firm that acts as an agent for a customer, charging the customer a commission for its services. You can either opt for a conventional broker or you can choose to trade online. If you are trading online you can get the broking service from the banking or non banking organisations offering online trading facilities who will provide you with the DP account and act as your broker.
  •  DEMAT Account A demat account is opened on the same lines as that of a Bank Account. Prescribed Account opening forms are available with the DP, needs to be filled in. Standard Agreements are to be signed by the Client and the DP. In case of Corporate clients, additional attachments required are - true copy of the resolution for Demat a/c opening along with signatories to operate the account and true copy of the Memorandum and Articles of Association is to be attached
  • Derivatives Market in India  The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.  The market can be divided into two, that for exchange- traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.
  • Why Do We Call Them Derivatives? • They owe their existence to the presence of a market for an underlying asset or portfolio of assets, which may be considered as primary securities. • Consequently such contracts are derived from these underlying assets, and hence the name. • Thus if there were to be no market for the underlying assets, there would be no derivatives
  • Size of Derivatives Market  The total world derivatives market has been estimated at about $791 trillion face or nominal value,11 times the size of the entire world economy.  The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value.  Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring).  Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
  • Valuation
  • Broad Categories of Derivatives Forward Contracts Futures Contracts Options Contracts Swaps
  • Forward Contract  A forward contract is an agreement between two parties that calls for the delivery of an asset on a specified future date at a price that is negotiated at the time of entering into the contract.  Every forward contract has a buyer and a seller.  The buyer has an obligation to pay cash and take delivery on the future date.  The seller has an obligation to take the cash and make delivery on the future date
  • Futures Contract • A futures contract too is a contract that calls for the delivery of an asset on a specified future date at a price that is fixed at the outset. • It too imposes an obligation on the buyer to take delivery and on the seller to make delivery. • Thus it is essentially similar to a forward contract.
  • Forward Contracts v/s Futures Contracts Forward Futures Private contract between two parties Traded on an exchange Not standardized Standardized Usually one specified delivery date Range of delivery dates Settled at end of contract Settled daily Delivery or final settlement usual Usually closed out prior to maturity Some credit risk Virtually no credit risk 2.28
  • Options  An options contract gives the buyer the right to transact on or before a future date at a price that is fixed at the outset.  It imposes an obligation on the seller of the contract to transact as per the agreed upon terms, if the buyer of the contract were to exercise his right.  We have said that an option holder acquires a right to transact.  There are two possible transactions from an investor’s standpoint – purchases and sales.  Consequently there are two types of options – Calls and Puts.
  • …..Continue  A Call Option gives the holder the right to acquire the asset.  A Put Option gives the holder the right to sell the asset.  If a call holder were to exercise his right, the seller of the call would have to make delivery of the asset.  If the holder of a put were to exercise his right, the seller of the put would have to accept delivery.  We have said that an option holder has the right to transact on or before a certain specified date.
  • ……Continue  Certain options permit the holder to exercise his right only on a future date. These are known as European Options.  Other types of options permit the holder to exercise his right at any point in time on or before a specified future date.  These are known as American Options.
  • Rights  What is the difference between a Right and an Obligation.  An Obligation is a binding commitment to perform.  A Right however, gives the freedom to perform if desired.  It need be exercised only if the holder wishes to do so.  In a transaction to trade an asset at a future date, both parties cannot be given rights.  For, if it is in the interest of one party to go through with the transaction when the time comes, it obviously will not be in the interest of the other.
  • …….Continue  Consequently while obligations can be imposed on both the parties to the contract, like in the case of a forward or a futures contract, a right can be given to only one of the two parties.  Hence, while a buyer of an option acquires a right, the seller has an obligation to perform imposed on him.
  • •Longs & Shorts  The buyer of a forward, futures, or options contract is known as the Long.  He is said to have taken a Long Position.  The seller of a forward, futures, or options contract, is known as the Short.  He is said to have taken a Short Position.  In the case of options, a Short is also known as the option Writer.
  • Comparison of Futures/Forwards versus Options Instrument Nature of Long’s Commitment Nature of Short’s Commitment Forward/Futures Contract Obligation to buy Obligation to sell Call Options Right to buy Obligation to sell Put Options Right to sell Obligation to buy
  • Swaps  A swap is a contractual agreement between two parties to exchange specified cash flows at pre- defined points in time.  There are two broad categories of swaps – Interest Rate Swaps Currency Swaps
  • •Interest Rate Swaps  In the case of these contracts, the cash flows being exchanged, represent interest payments on a specified principal, which are computed using two different parameters.  For instance one interest payment may be computed using a fixed rate of interest, while the other may be based on a variable rate such as LIBOR.  There are also swaps where both the interest payments are computed using two different variable rates – For instance one may be based on the LIBOR and the other on the Prime Rate of a country.  Obviously a fixed-fixed swap will not make sense.
  • ……..Continue  Since both the interest payments are denominated in the same currency, the actual principal is not exchanged.  Consequently the principal is known as a notional principal.  Also, once the interest due from one party to the other is calculated, only the difference or the net amount is exchanged.
  • •Currency Swaps  These are also known as cross-currency swaps.  In this case the two parties first exchange principal amounts denominated in two different currencies.  Each party will then compute interest on the amount received by it as per a pre-defined yardstick, and exchange it periodically.  At the termination of the swap the principal amounts will be swapped back.  In this case, since the payments being exchanged are denominated in two different currencies, we can have fixed- floating, floating-floating, as well as fixed-fixed swaps.
  • Assets Underlying Futures Contracts  Till about two decades ago most of the action was in futures contracts on commodities.  But nowadays most of the action is in financial futures.  Among commodities, we have contracts on agricultural commodities, livestock and meat, food and fibre, metals, lumber, and petroleum products.  Historically most of the action has been in stock options.  Commodity options do exist but do not trade in the same volumes as commodity futures.  Options on foreign currencies, stock indices, and interest rates are also available.
  • •Mechanics of Future  A future contract is a contract for delivery of a standard package of a standard commodity or financial instrument at a specific date and place in future but at a price that is agreed when the contract is taken out.  The future price = Spot price + cost carrying  Cost of carrying includes: Storage Insurance Transport cost Finance cost
  • Price Earning Ratio as a Predictor of 20 Years Return
  • Premium in Stock Option
  • ….Continue
  • Margin:  A margin is cash or marketable securities deposited by an investor with his or her broker.  The balance in the margin account is adjusted to reflect daily settlement.  Margins minimize the possibility of a loss through a default on a contract.
  • Example of a Futures Trade  An investor takes a long position in 2nd December gold futures contracts on June 5th  contract size is 100 oz.  futures price is US$400  margin requirement is US $2,000/contract (US$4,000 in total)  maintenance margin is US $1,500/contract (US$3,000 in total) 2 . 4 7
  • A Possible Outcome 2 . 4 8 Daily Cumulative Margin Futures Gain Gain Account Margin Price (Loss) (Loss) Balance Call Day (US$) (US$) (US$) (US$) (US$) 400.00 4,000 5-Jun 397.00 (600) (600) 3,400 0 . . . . . . . . . . . . . . . . . . 13-Jun 393.30 (740) (1,340) 2,660 1,340 . . . . . . . . . . . . . . . . . 19-Jun 387.00 (1,260) (2,600) 2,740 1,260 . . . . . . . . . . . . . . . . . . 26-Jun 392.30 1,060 (1,540) 5,060 0 + = 4,000 3,000 + = 4,000 <
  • Other Key Points About Futures They are settled daily. Closing out a futures position involves entering into an offsetting trade. Most contracts are closed out before maturity. 2.49
  • Collateralization in OTC Markets  It is becoming increasingly common for contracts to be collateralized in OTC markets  They are then similar to futures contracts in that they are settled regularly (e.g. every day or every week) 2. 50
  • •Delivery  If a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses.  A few contracts (for example, those on stock indices and Eurodollars) are settled in cash . 2. 51
  • Some Important Terminology  Open interest: the total number of contracts outstanding equal to number of long positions or number of short positions.  Settlement price: the price just before the final bell each day used for the daily settlement process.  Volume of trading: the number of trades in 1 day 2 . 5 2
  • Convergence of Futures to Spot 2 . 5 3 Time Time (a) (b) Futures Price Futures Price Spot Price Spot Price
  • Regulation of Futures  Regulation is designed to protect the public interest.  Regulators try to prevent questionable trading practices by either individuals on the floor of the exchange or outside groups. 2 . 5 4
  • •Accounting & Tax  It is logical to recognize hedging profits (losses) at the same time as the losses (profits) on the item being hedged.  It is logical to recognize profits and losses from speculation on a mark to market basis.  Roughly speaking, this is what the accounting and tax treatment of futures in the U.S. and many other countries attempts to achieve. 55
  • Forward Contract  A forward contract is an OTC agreement to buy or sell an asset at a certain time in the future for a certain price  There is no daily settlement (unless a collateralization agreement requires it). At the end of the life of the contract one party buys the asset for the agreed price from the other party 6
  • Profit from a Long Forward or Futures Position 2.57 Profit Price of Underlying at Maturity
  • Profit from a Short Forward or Futures Position 2.58 Profit Price of Underlying at Maturity
  • Risk- Return Trade Off
  • The Risk-Return Trade off 60 2% 4% 6% 8% 10% 12% 14% 16% 18% 0% 5% 10% 15% 20% 25% 30% 35% Annual Return Standard Deviation AnnualReturnAverage T-Bonds T-Bills Large-Company Stocks Small-Company Stocks
  • Rates of Return (1926-2012) 61 -60 -40 -20 0 20 40 60 26 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Common Stocks Long T-Bonds T-Bills Source: © Stocks, Bonds, Bills, and Inflation 2012 Yearbook
  • India- Young and Restless
  • Figure 12.4 3
  • Average Returns Investment Average Return Large stocks 12.4% Small Stocks 17.5% Long-term Corporate Bonds 6.2% Long-term Government Bonds 5.8% Treasury Bills 3.8% 1 2 - 6
  • Average Annual Returns and Risk Premium Investment Average Return Risk Premium Large stocks 12.4% 8.6% Small Stocks 17.5% 13.7% Long-term Corporate Bonds 6.2% 2.4% Long-term Government Bonds 5.8% 2.0% Treasury Bills 3.8% 0.0% 5
  • Regulatory Framework  Securities Contracts (Regulation) Act, 1956  Securities and Exchange Board of India Act, 1992  SEBI (Intermediaries) Regulations Act, 2008  SEBI (Prohibition of Insider Trading) Regulations Act, 1992  SEBI (Prohibition of fraudulent and Unfair Trade Practices relating to securities market) Regulations Act, 2003  The Depositories Act, 1996  Indian Contract Act, 1872  Income Tax Act, 1961  The Prevention of Money Laundering Act, 2002
  • Conclusion  Stock Market and Derivative Market is an important topic in the world of Finance. While most financiers believe the markets are neither 100% efficient, nor 100% inefficient, many disagree where on the efficiency line the world's markets fall.  It can be concluded that in reality a financial market can’t be considered to be extremely efficient, or completely inefficient.  The financial markets are a mixture of both, sometimes the market will provide fair returns on the investment for everyone, while at other times certain investors will generate above average returns on their investment.
  • ……Continue  Derivatives are among the forefront of the innovations in the financial markets and aim to increase returns and reduce risk.  They provide an outlet for investors to protect themselves from the unpredictable occurrence of the financial markets.  These instruments are very popular with investors not only in India, but in all over the world.
  • Question?