2 Security Market Session Ii & IiiPresentation Transcript
• Structure of the Securities Market
• Participants in the Securities Market
• Primary Equity Market
• Public Issue
• Secondary Equity Market (Stock Market)
• Trading and Settlement
• Buying and Selling Shares
• Stock Market Abroad
• Should Trading be Regulated
STRUCTURE OF THE SECURITIES MARKET
Equity Debt Derivatives
Market Market Market
Securities Debt Money Options Futures
Market Market Market Market Market
PARTICIPANTS IN THE SECURITIES MARKET
CLB, RBI, SEBI,
Merchant Bankers or Investment Bankers
Bankers to an issue
Venture capital funds.
Credit rating agencies
How Equity Capital is Raised in
• Public Issue: Selling the Securities for the
• Right Issue: Issuing Rights to the Existing
• Private Placement: Sale of Securities to
Selected Financial Institutions, Mutual Funds
• Preferential Allotment: It is for the selective
investors and from listed companies. Value is
generally higher than IPOs.
How Private Placement is Different
From Preferential Allotment?
• Private placements refer to sale of equity or
equity related instruments of an unlisted
company or sale of debentures of a listed or
• Preferential allotments refer to sale of equity
or equity related instruments of an listed
PUBLIC ISSUES IN THE U.S
In the U.S., public offerings of both stocks and bonds are
typically marketed by investment bankers who perform
the role of underwriters. Generally, the lead investment
banker forms an underwriting syndicate with other
investment bankers to share the responsibility of the issue.
Book building is a method of offering shares to investors in
which the issue price is not fixed in advance (as is done in a
fixed price offer) but is determined through a bidding
STOCK MARKET IN INDIA
As of January 2005 there were 23 stock exchanges
recognised by the central government.
The most important development in the Indian stock
market was the establishment of the National Stock
Exchange (NSE) in 1994.
Within a short period it emerged as the largest stock
exchange surging ahead of the Bombay Stock
NATIONAL STOCK EXCHANGE (NSE)
The NSE is a ringless, national, computerised exchange.
The NSE has two segments: The Capital Market
Segment and the Wholesale Debt Market Segment.
Trading members in the Capital Market Segment are
through VSATs. The trading members in the Wholesale
Debt Market are linked through leased lines.
The NSE has opted for an order-driven system.
All trades on NSE are guaranteed by the National
Securities Clearing Corporation.
BOMBAY STOCK EXCHANGE (BSE)
The BSE switched from the open outcry system to the
screen-based system in 1995.
Jobbers play an important role on the BSE. A jobber is
a broker who offers a two-way quote or a bid-ask quote.
Since both jobbers and brokers feed their orders, the
BSE has adopted a ‘quote-driven’ system and an ‘order-
• Started in November 4,1994 in India
• The Features are:
– Buyers and sellers place their orders on the
computer. They can be limit order or best
market price order
– The computer constantly tries to match
mutually compatible orders on price and time
– The limit order book or the list of unmatched
limit orders is displayed on the screen
• Increases efficiency
• Increases confidence in the market
• Traditional Way: Physical Delivery: Seller-
Seller’s Broker --- Buyer’s Broker ----
• Modern: Electronic Delivery: It is
facilitated by Depositories which is an
institution which dematerializes physical
certificates and effects transfer of ownership
by electronic book entries
• Example: National Securities Depository
Limited (NSDL), Central Securities
Depositories Limited (CSDL)
• Weekly Settlement
• Carry forward system (badla and
• Rolling Settlement (T+1)
Badla and Undha badla
• When a bull buys in the anticipation of an
immediate rise in price, but finds at the
end of the accounting period that the price
has not risen, he may either pay for the
shares and take delivery, or he may carry
over his transaction to the next accounting
period by paying carry over charges or
Seedha badla to the seller.
Badla and Undha badla
• When a bear sells in anticipation of a fall in
prices in the immediate future (so that he
can pick up shares later for delivery and
make a profit), but the fall does not
happen within the accounting period, he
has the option to borrow or buy the shares
for delivery, or have his sales carried over
to the next accounting period on payment
of Undha badla or backwardation charges
to the buyer.
Types of Transactions
• Spot Delivery
– Delivery and Payment are made on the same
day of contract or on next day
• Hand Delivery
– Delivery and payment are made when
• Special Delivery
– Beyond 14 days with the permission of stock
• This is the part of a transaction value
that a customer has equity in the
• Use of Margin
– To buy more
– To borrow money
Concepts associated with
• Initial margin: Amount Investor Puts up / value
of transaction or It is the part of transaction’s value
the customer must pay to initiate the transaction with
other part being borrowed from the broker.
• Maintenance Margin: The percentage of a
security’s value that must be on hand as equity.
• Margin Call: Demand from the broker for
additional cash or securities as a result of the actual
margin declining below the maintenance margin
• In a normal transaction a security is
bought and owned because the investor
believes the price is likely to rise.
Eventually the security is sold and the
position is closed out. First you buy then
• A short-sell involves selling a security
because of belief that the price will decline
and buying back the security later to close
the position. First you sell and then buy.
Actual Selling and Buying
• Procedure for Buying - Locating the broker--
---Placement of order (De-mat account in a
depository) ------execution of order (Contract
note for tax and other legal purposes). Order
may be Limit Order (upper limit of the price
has been given by the investor) or Market
Order (to prevail the best market price).
• Procedure for selling- Placement of order---
----sale order-------execution of order (same
SCREEN BASED SYSTEM
The kind of screen based system adopted in India is referred to as
the open electronic order (ELOB) market system.
• Buyers and sellers place their orders on the computer
Limit order … Market order
• Computer instantly tries to match mutually compatible orders
on a price time priority
• The limit order book, the list of unmatched limit orders is
displayed on the screen
NEW YORK STOCK EXCHANGE
Trading through a system of brokers and specialists
Brokers … link … investors … market
Specialists … dual role
a. Match buy and sell orders when the prevailing prices
permit them to do so
b. Buy and sell on their own account when they cannot
match customer orders.
Unlike the NYSE, Nasdaq does not have a specific location.
It is a fully computerized market consisting of many market
makers competing on an electronic network of terminals rather
than on the floor of the exchange
Each Nasdaq company has a number of competing market
makers, or dealers, who make a market in the stock.
Dealers post their bid and ask prices on the Nasdaq system.
Brokers choose among market makers to handle their trades
SHOULD TRADING BE
KEYNES - TOBIN - BUFFETT
KEYNES … ‘INDUSTRY’… ‘FINANCE’
TOBIN … TAX ON FINANCIAL TRANSACTIONS
BUFFETT . . A CARD
1. RESTR’N OF FREEDOM
2. ADMINISTRATIVELY IMPRACTICAL
3. IMPAIRS .. PRICE DISCOVERY
4. SPECUL’N … LIQUIDITY
SPECUL’N LIQUID’Y LOWER HIGHER GROWTH
Important Abbreviations used in
Stock Exchange Quotations
• Xd- ex (excluding) dividend
• Cd- cum (with) dividend
• Xr- ex(excluding) right
• Xb- ex (excluding) bonus
• Cb- cum (with) bonus