Stock market dynamics-B.V.Raghunandan


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A ppt prepared for a presentation that was cancelled-Deals with intricacies of stock market both at the fundamental level and at the elementary derivatives level prepared by B.V.Raghunandan

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Stock market dynamics-B.V.Raghunandan

  1. 1. CANARA FIRST GRADE COLLEGE, MANGALORE SEPTEMBER 21, 2011 Stock Market Dynamics -B.V.Raghunandan, SVS College, Bantwal
  2. 2. Meaning & Definition <ul><li>Stock Exchange is, </li></ul><ul><li>” an organised market for second-hand corporate and government securities” </li></ul>
  3. 3. A More Inclusive Definition <ul><li>Stock Exchange is a regulated market for second-hand corporate securities, government securities, commodities, and foreign exchange </li></ul>
  4. 4. Characteristics of Stock Exchange <ul><li>Organised Market </li></ul><ul><li>Securities Market </li></ul><ul><li>Secondary market </li></ul><ul><li>Part of Capital Market </li></ul><ul><li>Listed Securities </li></ul><ul><li>Restricted Membership </li></ul><ul><li>Dealing only by Members </li></ul><ul><li>Standardised Practices </li></ul><ul><li>Facilitator </li></ul><ul><li>Speculation </li></ul>
  5. 5. Role and Functions of a Stock Exchange <ul><li>Ready Market </li></ul><ul><li>Liquidity for Securities </li></ul><ul><li>Evaluation </li></ul><ul><li>Price Stability </li></ul><ul><li>Capital Formation </li></ul><ul><li>Promoting Saving Habits </li></ul><ul><li>Investor Protection </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Public Finance </li></ul><ul><li>Growth of Joint Stock Companies </li></ul><ul><li>Enabling Book-Building Route </li></ul><ul><li>Capital Mobility </li></ul><ul><li>Foreign Funds </li></ul><ul><li>Technical Analysis </li></ul><ul><li>Economic Development </li></ul>
  6. 6. Members of a Stock Exchange: Jobber & His Characteristics <ul><li>Dealer </li></ul><ul><li>Specialist </li></ul><ul><li>Stability in the Market </li></ul><ul><li>Dealing with Brokers </li></ul><ul><li>Jobber’s Profit </li></ul><ul><li>Equalising Quantity </li></ul><ul><li>Speculation </li></ul><ul><li>Two-way Quotes </li></ul><ul><li>Matching Demand and Supply </li></ul><ul><li>Company Sponsorship </li></ul>
  7. 7. Brokers & Their Characteristics <ul><li>Agent </li></ul><ul><li>Generalist </li></ul><ul><li>Conduit between Jobber and the Public </li></ul><ul><li>Income in the form of Commission </li></ul>
  8. 8. Derivatives: Meaning <ul><li>” a financial asset that derives its value from an underlying security”-used extensively for risk management attributed to holding and trading in securities” </li></ul>
  9. 9. Instruments of Financial Derivatives <ul><li>Stock Derivative </li></ul><ul><li>Index Derivative </li></ul><ul><li>Interest Derivative </li></ul><ul><li>Foreign Currency Derivative </li></ul>
  10. 10. Types of Dealings in a Stock Exchange <ul><li>Dealings in Cash Market </li></ul><ul><li>Dealings in Futures & Options Market </li></ul>
  11. 11. Cash Market <ul><li>Rolling Settlement </li></ul><ul><li>T+2 Settlement </li></ul><ul><li>Trading Day </li></ul><ul><li>Pay-In Day </li></ul><ul><li>Pay-Out Day </li></ul>
  12. 12. Futures & Options Market <ul><li>Meant for Risk Management Arising Out of Dealings in Cash Market </li></ul><ul><li>Exchange Traded </li></ul><ul><li>Big Investors and Institutions Take Positions </li></ul><ul><li>For Protecting the Value of Holding </li></ul><ul><li>Providing for the Risks Arising Out of Trading </li></ul>
  13. 13. Futures: Characteristics <ul><li>Standardised Features </li></ul><ul><li>Counter-Party is the Clearing House </li></ul><ul><li>Margin Requirement </li></ul><ul><li>Time Spread </li></ul><ul><li>Three Contracts for Settlement </li></ul>
  14. 14. Futures: Trading Mechanism <ul><li>Trading Strategies </li></ul><ul><li>Uses: </li></ul><ul><li>-Hedging </li></ul><ul><li>-Speculation </li></ul><ul><li>-Arbitrage </li></ul><ul><li>Types of Futures: Stock Future and Index Future </li></ul>
  15. 15. Hedging <ul><li>A transaction in the cash market is accompanied by a contra transaction in the futures market </li></ul><ul><li>Buyer in cash market protects against subsequent fall in the price through sale in the futures market </li></ul><ul><li>A seller in the cash market protects against subsequent increase through buying in the futures market </li></ul><ul><li>Objective is to maintain asset purchased at the latest value </li></ul>
  16. 16. Buyer in the Cash Market <ul><li>Buys 1000 shares of L&T in cash market @ Rs.1,500 </li></ul><ul><li>He can protect against fall in price upto three months </li></ul><ul><li>If he chooses protection for one month, he sells 1000 shares of L&T in September future. (Protection for two months, sell October future-for three months, sell November future) </li></ul><ul><li>Settlement of September future on the last Thursday of September i.e 29-09-2011 </li></ul><ul><li>Around 27 th , the price in the cash market is Rs.1400. He buys 1000 shares in the cash market and settles the September future sale at Rs. 1,500, making a profit of Rs. 100 </li></ul>
  17. 17. Position of the Buyer on September 29th <ul><li>Value of original purchase = Rs 1, 40,000 </li></ul><ul><li>Cost of original purchase = Rs.1,50,000 </li></ul><ul><li>Sale of September Future = Rs. 1, 50,000 </li></ul><ul><li>Purchase to settle = Rs. 1, 40,000 </li></ul><ul><li>-------------------------------------------------------------- </li></ul><ul><li>Value of Holding on September 29 th = 1, 40,000 </li></ul><ul><li>Cash at Bank (Profit) = 10,000 </li></ul><ul><li>--------------- </li></ul><ul><li>1,50,000 </li></ul><ul><li>-------------- </li></ul>
  18. 18. Where the Price goes up to Rs. 1, 600 <ul><li>At any time before 29 th September, Price of L&T goes upto Rs.1600 </li></ul><ul><li>Cost of His original Purchase= 1500 x 100 = 1, 50,000 </li></ul><ul><li>Value of the original Purchase=1,600 x 100 = 1,60,000 </li></ul><ul><li>Sale of September Future = 1, 50,000 </li></ul><ul><li>Purchase for Sept Future = 1, 60, 000 </li></ul><ul><li>Loss on the Future Sale = 10,000 </li></ul><ul><li>--------------------------------------------------------------------- </li></ul><ul><li>Value of Holding on 29 th = 1, 60,000 </li></ul><ul><li>(-) Loss on September Future = (10,000) </li></ul><ul><li>Net Value in Hand = 1,50,000 </li></ul>
  19. 19. Speculation <ul><li>Original purchase will not be there in the cash market </li></ul><ul><li>A bull buys the September future </li></ul><ul><li>A bear sells the September future </li></ul><ul><li>Profit made the bull when the price goes up or loss is incurred when the price comes down </li></ul><ul><li>Profit made by bear when the price comes down and vice versa </li></ul>
  20. 20. Arbitrage <ul><li>Buying in low priced market and selling in high-priced market </li></ul><ul><li>Between one stock exchange to another </li></ul><ul><li>Between cash market and futures market </li></ul><ul><li>Between future of one month and other months </li></ul><ul><li>Between future market and a call market </li></ul>
  21. 21. Option <ul><li>A contract to buy or sell without an obligation </li></ul><ul><li>European Option and American Option </li></ul><ul><li>Call Option and Put Option </li></ul><ul><li>Uses of Options: </li></ul><ul><li>-Hedging </li></ul><ul><li>-Speculation </li></ul><ul><li>-Arbitrage </li></ul>
  22. 22. Advantages of Option <ul><li>No Big Investment </li></ul><ul><li>No Margin as in Futures </li></ul><ul><li>No Obligation </li></ul><ul><li>No Marked-to-Market </li></ul><ul><li>More Gain than Risk </li></ul><ul><li>Premium paid alone is the Disadvantage </li></ul>
  23. 23. Listing of Shares: : Procedure Initial Public Offer Size of Public Offer: Not Less than 25% of Issued Capital & Post Issue Paid Up Capital is not less than Rs.10 Crore Filing Application: MA, AA, Prospectus, Directors Report, Specimen Copies of Share Certificates and Debenture Certificates -Wide Distribution of Shares: 5 for Each Rs.1 Lakh cap -Dividend & Bonus in the Past 10 years -Brief History of the Company -Management Pattern
  24. 24. Listing Procedure ….Continued <ul><li>Payment of Listing Fees </li></ul><ul><li>Signing Listing Agreement </li></ul><ul><li>Screening the Application </li></ul><ul><li>Listing the Shares </li></ul>
  25. 25. THANK YOU