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<ul><li>Security market </li></ul><ul><li>Arti pradhan </li></ul><ul><li>MBA -4sem </li></ul>
Topics for Discussion Primary market Secondary market Working of secondary market Stock markets in India Stock market indi...
<ul><li>Primary market or new issue market is that market where first hand securities or new securities are traded. The is...
<ul><li>Managers to the issue or Lead Managers </li></ul><ul><li>Registrar of the issue </li></ul><ul><li>Underwriters   <...
<ul><li>Responsible for most of IPO processing </li></ul><ul><li>Also known as book running lead managers or co-book runni...
<ul><li>Main function is to keep record of the issue and ownership of company shares . </li></ul><ul><li>Investors can con...
<ul><li>Commercial or investment banks responsible for underwriting IPO's   </li></ul><ul><li>work as  intermediaries for ...
<ul><li>Through prospectus   </li></ul><ul><li>Bought out deals/Offer for sale   </li></ul><ul><li>Private placement   </l...
<ul><li>Draft offer document to SEBI </li></ul><ul><li>Offer document to registrar of the issue and stock exchange </li></...
<ul><li>Issuer Company - IPO Process Initialization   </li></ul><ul><li>Lead Manager's - Pre Issue Role - Part 1   </li></...
<ul><li>Fixed Price </li></ul><ul><li>Book Building Process – floor price, cut-off price </li></ul>
<ul><li>Retail Individual Investor (RII)  (35%) </li></ul><ul><li>High Networth Individual (HNI)   </li></ul><ul><li>Non-i...
<ul><li>Promoters Credibility   </li></ul><ul><li>Efficiency of the management   </li></ul><ul><li>Project Detail   </li><...
<ul><li>permit trading in outstanding issues   </li></ul><ul><li>Proceeds of sale don’t go company but to the current owne...
<ul><li>Regulators </li></ul><ul><li>Depositories </li></ul><ul><li>Stock Exchanges </li></ul><ul><li>Custodians </li></ul...
<ul><li>Main purpose is to provide free and fair environment for trading </li></ul><ul><li>In India, the regulatory bodies...
<ul><li>Facilitates holding of securities in electronic form and along with depository participants, maintain the records....
<ul><li>stock exchanges are the place, exclusively meant for the trading of the securities   </li></ul><ul><li>In India, t...
<ul><li>Largest in terms of value of trading in equity, debt and derivatives </li></ul><ul><li>Incorporated in 1992 and re...
<ul><li>Established in 1875 under the name of  &quot;The Native Share & Stock Brokers Association&quot;  </li></ul><ul><li...
<ul><li>Started in 1992 on the models of NASDAQ and JASDAQ </li></ul><ul><li>It means trading across the counter in scrips...
<ul><li>financial institution responsible for safeguarding a firm's or individual's financial assets   </li></ul>
<ul><li>Their role is to execute the demand of their clients </li></ul>
<ul><li>Orders </li></ul><ul><li>Margins </li></ul><ul><li>Settlement </li></ul>
<ul><li>Trading in the stock exchange takes place through orders. </li></ul><ul><li>Types of Orders (in terms of price)- <...
<ul><li>Best buy (Highest Bid) order is matched with best sell (Lowest ask) order </li></ul><ul><li>An order can be execut...
<ul><li>It is the trading with borrowed funds or securities </li></ul><ul><li>Corporate brokers with Rs. 3 crore networth ...
<ul><li>Categorization of securities in groups based on liquidity and impact cost for imposition of margin. </li></ul>Grou...
<ul><li>VaR based margining system. </li></ul><ul><li>   S pecification of mark to Market margins </li></ul><ul><li>  Spec...
<ul><li>  VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of...
<ul><li>Daily margin is calculated to the gross exposure position (net of exposure on each single scrip) </li></ul><ul><li...
GE = S (| 10,00,000| + | -20,00,000| ) = 30,00,000 Security Buy Value Sell Value Buy Value – Sell Value A 20,00,000 10,00,...
<ul><li>The difference between the close price and the price at which the trade was executed (trade price) multiplied by t...
Sr. No. Security Buy Quantity Buy Price Sell Quantity Sell Price Close Price Mtm Profit/Loss Per Security 1 A 1000 50000.0...
<ul><li>VaR is calculated based on exponentially weighted moving average (EWMA) </li></ul><ul><li>Based on statistical ana...
<ul><li>For Group I shares, VaR margin = higher(3.5 times of volatility, 7.5% of value) </li></ul><ul><li>For Group II sha...
<ul><li>It is 5% or 1.5 times the standard deviation of daily logarithmic returns of the scrip price for last 6 months </l...
<ul><li>Fixed Settlement </li></ul><ul><li>Rolling Settlement </li></ul>
<ul><li>Before 2002 this system was prevalent </li></ul><ul><li>BSE had settlement cycle from Monday to Friday </li></ul><...
<ul><li>Rolling settlement makes shares closer to money   </li></ul><ul><li>Rolling settlement makes the equity market mor...
<ul><li>Measures the average performance of group of stocks </li></ul>Source: bseindia.com
Source: nse-india.com
<ul><li>Helps to recognize the broad trends in market </li></ul><ul><li>Can act as an benchmark for performance </li></ul>...
<ul><li>main factors that differentiate one index from the other are </li></ul><ul><li>1.   The number of the component st...
<ul><li>For example, there are three scrips A,B and C at period N </li></ul><ul><li>  </li></ul>Let Index at period N= 100...
<ul><li>Started in 1986 </li></ul><ul><li>Earlier calculated on “Market capitalization –Weight methodology </li></ul><ul><...
<ul><li>Selection criteria –  </li></ul><ul><li>Listed history – atleast 3 months </li></ul><ul><li>Trading frequency- eac...
 
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Chapter iii

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Chapter iii

  1. 1. <ul><li>Security market </li></ul><ul><li>Arti pradhan </li></ul><ul><li>MBA -4sem </li></ul>
  2. 2. Topics for Discussion Primary market Secondary market Working of secondary market Stock markets in India Stock market indices
  3. 3. <ul><li>Primary market or new issue market is that market where first hand securities or new securities are traded. The issuer may be new company or existing company. </li></ul>
  4. 4. <ul><li>Managers to the issue or Lead Managers </li></ul><ul><li>Registrar of the issue </li></ul><ul><li>Underwriters </li></ul><ul><li>Bankers to the issue </li></ul><ul><li>Advertising agencies </li></ul><ul><li>The Financial Institutions </li></ul><ul><li>Government and statutory agencies </li></ul><ul><li>Collection centers </li></ul>
  5. 5. <ul><li>Responsible for most of IPO processing </li></ul><ul><li>Also known as book running lead managers or co-book running lead managers </li></ul><ul><li>Example-DSP Merrill Lynch Ltd, ICICI Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd </li></ul>
  6. 6. <ul><li>Main function is to keep record of the issue and ownership of company shares . </li></ul><ul><li>Investors can contact the Registrar to the Issue in case of any pre-Issue or post-Issue related problems </li></ul><ul><li>Enam Securities Private Limited </li></ul><ul><li>Karvy Computershare Private Limited </li></ul>
  7. 7. <ul><li>Commercial or investment banks responsible for underwriting IPO's </li></ul><ul><li>work as intermediaries for Issuer Company and the buyers </li></ul><ul><li>Members of Syndicate deposit all the money received from investors to the Escrow Account opened by the Issuer Company. </li></ul><ul><li>The Bid cum Application Form along with other supporting documents are then send to the registrar of the issue for further processing. </li></ul>
  8. 8. <ul><li>Through prospectus </li></ul><ul><li>Bought out deals/Offer for sale </li></ul><ul><li>Private placement </li></ul><ul><li>Right issue </li></ul><ul><li>Book Building </li></ul>
  9. 9. <ul><li>Draft offer document to SEBI </li></ul><ul><li>Offer document to registrar of the issue and stock exchange </li></ul><ul><li>Red Herring Prospectus </li></ul>
  10. 10. <ul><li>Issuer Company - IPO Process Initialization </li></ul><ul><li>Lead Manager's - Pre Issue Role - Part 1 </li></ul><ul><li>SEBI – Prospectus Review </li></ul><ul><li>Lead Manager - Pre Issue Role - Part 2 </li></ul><ul><li>Investor – Bidding for the public issue </li></ul><ul><li>Lead Manager – Price Fixing </li></ul><ul><li>Registrar - Processing IPO Applications </li></ul><ul><li>Lead manager – Stock Listing </li></ul>
  11. 11. <ul><li>Fixed Price </li></ul><ul><li>Book Building Process – floor price, cut-off price </li></ul>
  12. 12. <ul><li>Retail Individual Investor (RII) (35%) </li></ul><ul><li>High Networth Individual (HNI) </li></ul><ul><li>Non-institutional bidders (15%) </li></ul><ul><li>Qualified Institutional Bidders (QIB's) (50%) </li></ul>
  13. 13. <ul><li>Promoters Credibility </li></ul><ul><li>Efficiency of the management </li></ul><ul><li>Project Detail </li></ul><ul><li>Product </li></ul><ul><li>Financial data </li></ul><ul><li>Pending litigation </li></ul><ul><li>Risk factors </li></ul><ul><li>Auditor’s Report </li></ul><ul><li>Statutory Clearance </li></ul>
  14. 14. <ul><li>permit trading in outstanding issues </li></ul><ul><li>Proceeds of sale don’t go company but to the current owner </li></ul>
  15. 15. <ul><li>Regulators </li></ul><ul><li>Depositories </li></ul><ul><li>Stock Exchanges </li></ul><ul><li>Custodians </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Brokers and sub brokers </li></ul>
  16. 16. <ul><li>Main purpose is to provide free and fair environment for trading </li></ul><ul><li>In India, the regulatory bodies are </li></ul><ul><li>Ministry of Finance – recognition to stock exchanges, regulation of operations </li></ul><ul><li>SEBI- statutory status in 1992, main functions are to protect the interest of investors, development and regulate security markets </li></ul><ul><li>Governing Board- elected members, govt. nominees, public representatives, main function is to orderly function of security market </li></ul>
  17. 17. <ul><li>Facilitates holding of securities in electronic form and along with depository participants, maintain the records. </li></ul><ul><li>Beneficiary owner opens an demat account with DP and operates through it. </li></ul><ul><li>2 depositories and 390 DP registered with SEBI </li></ul><ul><li>National Securities depository Limited (NSE) </li></ul><ul><li>Central Depository Services (I) Limited (BSE) </li></ul>
  18. 18. <ul><li>stock exchanges are the place, exclusively meant for the trading of the securities </li></ul><ul><li>In India, these are broadly divided into three categories, </li></ul><ul><li>National Level – NSE, BSE </li></ul><ul><li>Regional Stock Exchanges </li></ul><ul><li>OTCEI </li></ul>
  19. 19. <ul><li>Largest in terms of value of trading in equity, debt and derivatives </li></ul><ul><li>Incorporated in 1992 and recognized in April 1993 </li></ul><ul><li>NEAT system </li></ul><ul><li>Trading in all the three segments- equity, wholesale debt and F&O </li></ul>
  20. 20. <ul><li>Established in 1875 under the name of &quot;The Native Share & Stock Brokers Association&quot; </li></ul><ul><li>1956, became recognized exchange under Securities Contracts (Regulation) Act, 1956 </li></ul><ul><li>Earlier it was Association of persons and now demutualised in 2005 under BSE (Corporatisation and Demutualisation) Scheme, 2005 </li></ul>
  21. 21. <ul><li>Started in 1992 on the models of NASDAQ and JASDAQ </li></ul><ul><li>It means trading across the counter in scrips </li></ul>
  22. 22. <ul><li>financial institution responsible for safeguarding a firm's or individual's financial assets </li></ul>
  23. 23. <ul><li>Their role is to execute the demand of their clients </li></ul>
  24. 24. <ul><li>Orders </li></ul><ul><li>Margins </li></ul><ul><li>Settlement </li></ul>
  25. 25. <ul><li>Trading in the stock exchange takes place through orders. </li></ul><ul><li>Types of Orders (in terms of price)- </li></ul><ul><li>Limit order- maximum price in case of purchase and minimum price in case of sale </li></ul><ul><li>Market order </li></ul><ul><li>Stop Loss order </li></ul><ul><li>In terms of time- </li></ul><ul><li>Day order – valid for a day. </li></ul><ul><li>Immediate or cancel order (ICO) </li></ul>
  26. 26. <ul><li>Best buy (Highest Bid) order is matched with best sell (Lowest ask) order </li></ul><ul><li>An order can be executed against multiple pending orders (an order can create multiple trades) </li></ul><ul><li>The matching of the orders is generally done on the price-time priority basis in the sequence of best price and then, within the price, by time priority basis. </li></ul><ul><li>Unmatched orders are known as “passive orders” and matched ones are known as “active orders” </li></ul><ul><li>First market orders are executed and then the limit orders, which remain in the list till that market rate is achieved. </li></ul><ul><li>Limit orders remain in “Limit Order Book” </li></ul>
  27. 27. <ul><li>It is the trading with borrowed funds or securities </li></ul><ul><li>Corporate brokers with Rs. 3 crore networth are eligible for margin trading (by SEBI) </li></ul><ul><li>Brokers further provide this to clients but a client can have this facility from one broker at a time </li></ul><ul><li>Single client can not have more than 10% of gross exposure of a broker </li></ul><ul><li>Initial margin is 50% and maintenance margin is 40% </li></ul><ul><li>Broker has to maintain scrip wise record for each client in case of margin trading </li></ul>
  28. 28. <ul><li>Categorization of securities in groups based on liquidity and impact cost for imposition of margin. </li></ul>Group I Group II Group III Liquidity Trading 80% of time in last 6 months Trading 80% of time in last 6 months Rest Others Impact cost <1% >1%
  29. 29. <ul><li>VaR based margining system. </li></ul><ul><li>   S pecification of mark to Market margins </li></ul><ul><li>  Specification of Intra-day trading limits and Gross Exposure Limits </li></ul><ul><li>Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges </li></ul><ul><li>Specification of time limits of payment of margins </li></ul><ul><li>  C ollection of margins on upfront basis </li></ul><ul><li>  Index based market wide circuit breakers </li></ul><ul><li>A utomatic de-activation of trading terminals in case of breach of exposure limits </li></ul>contd..
  30. 30. <ul><li>  VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market. </li></ul><ul><li>A dditional margins have also been specified to address the balance 1% cases. </li></ul><ul><li>Collection of margins from institutional clients on T+1 basis </li></ul>
  31. 31. <ul><li>Daily margin is calculated to the gross exposure position (net of exposure on each single scrip) </li></ul><ul><li>If net of any single scrip is zero and difference of buy and sell price is taken into consideration </li></ul><ul><li>Daily margin is based on three types of margins: </li></ul><ul><li>Value at Risk Margin (VaR) </li></ul><ul><li>Mark to Market Margin (MTM) </li></ul><ul><li>Extreme Loss Margin (ELM) </li></ul>
  32. 32. GE = S (| 10,00,000| + | -20,00,000| ) = 30,00,000 Security Buy Value Sell Value Buy Value – Sell Value A 20,00,000 10,00,000 +10,00,000 B 10,00,000 30,00,000 -20,00,000
  33. 33. <ul><li>The difference between the close price and the price at which the trade was executed (trade price) multiplied by the cumulative buy and sell open position in each security gives the Mark to Market Profit/loss in each security. </li></ul><ul><li>Mark to market profit/loss can be calculated using the formula given below: </li></ul><ul><li>MTM Profit/Loss = [(Total Buy Qty * Close price) – Total Buy Value] + [Total Sell Value – (Total Sell Qty * Close price)] </li></ul>
  34. 34. Sr. No. Security Buy Quantity Buy Price Sell Quantity Sell Price Close Price Mtm Profit/Loss Per Security 1 A 1000 50000.00 2000 90000.00 56.00 -16000 2 B 1600 64000.00 1800 73800.00 36.00 2600 3 C 600 3000.00 300 1500.00 5.00 0 4 D 0 0.00 2000 30000.00 14.00 2000 5 E 1000 6300.00 0 u0.00 5.00 -1300 6 F 800 32000.00 500 19250.00 35.00 -2250
  35. 35. <ul><li>VaR is calculated based on exponentially weighted moving average (EWMA) </li></ul><ul><li>Based on statistical analysis, 94% weight is assigned to volatility on T-1 day and 6% weight is given to T day returns </li></ul><ul><li>For example, XYZ share has volatility of 0.0314 on T-1 day and the closing price be Rs 360 and on T day it is Rs. 330 </li></ul><ul><li>Volatility on day T= ln(closing price on t-1day/CP on T day) </li></ul><ul><li>Volatility=sqrt(0.94*0.0314*0.0314+0.06*0.0807*0.0807) </li></ul><ul><li>=3.7% </li></ul>
  36. 36. <ul><li>For Group I shares, VaR margin = higher(3.5 times of volatility, 7.5% of value) </li></ul><ul><li>For Group II shares, VaR margin = higher(3.5 times of volatility, 3.0 times volatility of index) </li></ul><ul><li>The number obtained above is multiplied by sqrt(3) </li></ul><ul><li>For group III shares, it is always 5 times the volatility of index multiplied by sqrt(3) </li></ul>
  37. 37. <ul><li>It is 5% or 1.5 times the standard deviation of daily logarithmic returns of the scrip price for last 6 months </li></ul>
  38. 38. <ul><li>Fixed Settlement </li></ul><ul><li>Rolling Settlement </li></ul>
  39. 39. <ul><li>Before 2002 this system was prevalent </li></ul><ul><li>BSE had settlement cycle from Monday to Friday </li></ul><ul><li>NSE had settlement cycle from Wednesday to Tuesday </li></ul><ul><li>Rolling Settlement </li></ul><ul><li>Settlement on T+X days where T is the trade day and X is day after the trade day </li></ul><ul><li>In India, T+2 cycle is prevalent </li></ul>
  40. 40. <ul><li>Rolling settlement makes shares closer to money </li></ul><ul><li>Rolling settlement makes the equity market more robust </li></ul><ul><li>Rolling settlement yields cleaner prices </li></ul>
  41. 41. <ul><li>Measures the average performance of group of stocks </li></ul>Source: bseindia.com
  42. 42. Source: nse-india.com
  43. 43. <ul><li>Helps to recognize the broad trends in market </li></ul><ul><li>Can act as an benchmark for performance </li></ul><ul><li>Reflect the market and economic sentiment </li></ul><ul><li>Used by technical analysts to predict the future movement of the market </li></ul>
  44. 44. <ul><li>main factors that differentiate one index from the other are </li></ul><ul><li>1.   The number of the component stocks </li></ul><ul><li>2.   The composition of the stocks </li></ul><ul><li>3. The weights </li></ul><ul><li>4. Base Year </li></ul>
  45. 45. <ul><li>For example, there are three scrips A,B and C at period N </li></ul><ul><li>  </li></ul>Let Index at period N= 100 (Base Year) Index at period N+1 = 24250 * 100 /18000 = 134.72
  46. 46. <ul><li>Started in 1986 </li></ul><ul><li>Earlier calculated on “Market capitalization –Weight methodology </li></ul><ul><li>30 companies in the index </li></ul><ul><li>Base year is 1978-79 </li></ul><ul><li>Since 1 st sept 2003, sensex is being calculated on free float market capitalization methodology (this is taking into consideration only those shares issued by the company that are readily available for trading in the market) </li></ul>
  47. 47. <ul><li>Selection criteria – </li></ul><ul><li>Listed history – atleast 3 months </li></ul><ul><li>Trading frequency- each and every day in last 3 months </li></ul><ul><li>Final rank-should figure in top 100 companies where in 75% weight age is given to last 3 months average full market capitalization and 25% weight age is given to liquidity rank based on daily turn over and impact cost </li></ul><ul><li>Industry/sector representation </li></ul><ul><li>Track record </li></ul>

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