Summer project of IDBI


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Summer project of IDBI

  1. 1. OBJECTIVE OF STUDY: To know the basic terminology of stock market. To make the investor aware about the factors which may affect their investment?SCOPE OF STUDY: Derivatives Sebi Stock exchange Commodity market. Stock market Securities Day trading Factor affecting Indian stock market Effect on Indian economyLIMITATIONS: Limitations are the limiting lines that restrict the work in some way or other. In thisresearch study also their were some limiting factors, some of them are as under:1. Data Collection: The most important constraint in this study was data collection as Secondary datawasselected for study. Secondary data means data that are already available i.e. they refer tothe data which have already been collected and analysed by someone else.2. Time Period: Time period was one of the main factor as only one month was allotted and thetopiccovered in research has a wide scope. So, it was not possible to cover it in a short span oftime.3. Reliability: 1
  2. 2. The data collected in research work was secondary data. So, this puts a questionmark on the reliability of this data, which a very important factor of this study asconclusion has been derived from this secondary data only.4. Accuracy: The facts and findings of the data cannot be accepted as accurate to some extent asfirstly, secondary data was collected. Secondly, for doing descriptive research time neededto be more, because in short period you cannot cover each point accurately.CORE STUDY:Stock market: A stock market is a public market for the trading of company stock and derivativesat an agreed price; these are securities listed on a stock exchange as well as those onlytraded privately. The size of the world stock market was estimated at about $36.6 trillion US at thebeginning of October 2008 . 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. Thevalue of the derivatives market, because it is stated in terms of notional values, cannot bedirectly compared to a stock or a fixed income security, which traditionally refers to anactual value. Moreover, the vast majority of derivatives cancel each other out (i.e., aderivative bet on an event occurring is offset by a comparable derivative bet on the eventnot occurring.). Many such relatively illiquid securities are valued as marked to model,rather than an actual market price.) The stocks are listed and traded on stock exchanges which are entities a corporationor mutual organization specialized in the business of bringing buyers and sellers of theorganizations to alisting of stocks and securities together. The stock market in the UnitedStates includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, aswell as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examplesof stock exchanges include the London Stock Exchange, the Deutsche Borse and the ParisBourse, now part of Euronext. The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘StockExchange’as anybody of individuals, whether incorporated or not, constituted for the purpose ofassisting, regulating or controlling thebusiness of buying, selling or dealing in securities.Stock exchange could be a regional stock exchange whose area of operation/jurisdiction isspecified at the time of its recognition or national exchanges, which are permitted to havenationwide trading since inception. NSE was incorporated as a national stock exchange. 2
  3. 3. A clear starting point for any would-be trader, most people have a rough idea orpreconception of what they think a stock market is and how it works. Unfortunately, theanswer to this simple question is rather complicated, and cant readily be summed up in onesentence. Indeed, many traders may be hard pushed to articulate exactly what a stockmarket is and the purpose it serves, even after years of serious trading. In this article, weregoing to attempt to clear up the ambiguity, and offer a direct and succinct answer to thismost foundational of trading questions Most people understand that a stock market is a place where shares are bought andsold, and in essence this is true. Most people understand a stock market is dominated bytraders who speculate on the price of shares to make a profit on the difference between thebuying and selling price, and in essence this is true. But a stock is so much more in-depththan these two basic propositions would suggest, and requires some deeper analysis to getto the bottom of whats really going on A stock market is a primarily a virtual exchange of securities (that is, shares anddebentures, which companies use as a means of raising finance) and derivatives (i.e. virtualinstruments such as contracts that relate to assets and securities and can be traded). It isvirtual in the sense that the market is an intangible concept, rather than a physical place,and as a result of advancing technologies traders can now get involved with little more thana laptop or mobile phone. The market brings together a range of traders of all shapes andsizes - from small, one-man bands trading for their own personal gains through to hedgefunds managing billions in assets, and everything in between. Stock markets list the securities of publicly traded companies, identified in the UKby the appendage plc. As distinct from a regular limited company (Ltd.), plcs offer theirshares to the public at large, who are generally concerned with trading on the price point ofa given share rather than its yield. Shares can change hands several times on a daily basis,and at insignificant levels the company is unconcerned with who owns those shares. Shares themselves are intangible assets, entitling the bearer to an annual paymentknown as a dividend, paid out of distributable profits, and often corresponding votingrights in proportion to the size of the share held at the AGM, where major strategicdecisions such as electing the board are put to the vote. The bearer of a share at any givenpoint is in effect a part owner of the business to which those shares pertain, and it is thisaspect that gives a share any underlying value The price of a share at any given stage is dictated by supply and demand within themarket, and rises or falls every time a share is bought or sold. This effectively means thatshares are priced by the collective will and attitudes of the market, comprised of all thetraders and investment houses that actively trade in those securities. The price of a share at any given stage is dictated by supply and demand within themarket, announcement rises or falls every time a share is bought or sold. This effectively 3
  4. 4. means that shares are priced by the collective will and attitudes of the market, comprised ofall the traders and investment houses that actively trade in those securities. Stock markets generally trade over a set duration of hours, usually reflecting theworking day in their particular region, allowing the zealous trader to trade different marketsround the clock - from London to New York to Tokyo - while affording those companies solisted to raise capital in the form of initial share issues to the market. As a result, themarkets operate on a slick basis almost around the clock, bringing together buyers andsellers of securities and giving businesses and governments a free, unadulterated bellwetherfor the economic and commercial outlook of a given sector, industry or economy. In essence, thats the foundation of what a stock market is, and its by no means acomprehensive study. Getting to know the markets requires lengthy research and anunderstanding of business, economics, law and politics. Yet for those that do get to gripswith how the markets operate, the allure of trading profits is sufficient rewards for all theirhard work.FUNCTION AND PURPOSE: The stock market is one of the most important sources for companies to raisemoney. This allows businesses to be publicly traded, or raise additional capital forexpansion by selling shares of ownership of the company in a public market. The liquiditythat an exchange provides affords investors the ability to quickly and easily sell securities.This is an attractive feature of investing in stocks, compared to other less liquid investmentssuch as real estate.History has shown that the price of shares and other assets is an important part of thedynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up andcoming economy. In fact, the stock market is often considered the primary indicator of acountrys economic strength and development. Rising share prices, for instance, tend to beassociated with increased business investment and vice versa. Share prices also affect thewealth of households and their consumption. Therefore, central banks tend to keep an eyeon the control and behavior of the stock market and, in general, on the smooth operation offinancial system functions. Financial stability is the raison detre of central banks.Exchanges also act as the clearinghouse for each transaction, meaning that they collect anddeliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty coulddefault on the transaction. The smooth functioning of all these activities facilitateseconomic growth in that lower costs and enterprise risks promote the production of goods 4
  5. 5. and services as well as employment. In this way the financial system contributes toincreased prosperity.RELATION OF THE STOCK MARKET TO THE MODERNFINANCIAL SYSTEM: The financial system in most western countries has undergone a remarkabletransformation. One feature of this development is disintermediation. A portion of thefunds involved in saving and financing flows directly to the financial markets instead ofbeing routed via the traditional bank lending and deposit operations. The general publicsheightened interest in investing in the stock market, either directly or through mutual funds,has been an important component of this process. Statistics show that in recent decadesshares have made up an increasingly large proportion of households financial assets inmany countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with littlerisk made up almost 60 percent of households financial wealth, compared to less than 20percent in the 2000s. The major part of this adjustment in financial portfolios has gonedirectly to shares but a good deal now takes the form of various kinds of institutionalinvestment for groups of individuals, e.g., pension funds, mutual funds, hedge funds,insurance investment of premiums, etc. The trend towards forms of saving with a higherrisk has been accentuated by new rules for most funds and insurance, permitting ahigherproportion of shares to bonds. Similar tendencies are to be found in other industrializedcountries. In all developed economic systems, such as the European Union, the UnitedStates, Japan and other developed nations, the trend has been the same: saving has movedaway from traditional (government insured) bank deposits to more risky securities of onesort or another.THE STOCK MARKET, INDIVIDUAL INVESTORS, ANDFINANCIAL RISK: Riskier long-term saving requires that an individual possess the ability to managethe associated increased risks. Stock prices fluctuate widely, in marked contrast to thestability of (government insured) bank deposits or bonds. This is something that couldaffect not only the individual investor or household, but also the economy on a large scale.The following deals with some of the risks of the financial sector in general and the stockmarket in particular. This is certainly more important now that so many newcomers haveentered the stock market, or have acquired other risky investments (such as investmentproperty, i.e., real estate and collectables). With each passing year, the noise level in the stock market rises. Televisioncommentators, financial writers, analysts, and market strategists are all overtaking each 5
  6. 6. other to get investors attention. At the same time, individual investors, immersed in chatrooms and message boards, are exchanging questionable and often misleading tips. Yet,despite all this available information, investors find it increasingly difficult to profit. Stockprices skyrocket with little reason, then plummet just as quickly, and people who haveturned to investing for their childrens education and their own retirement becomefrightened. Sometimes there appears to be no rhyme or reason to the market, only folly. This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with $100, and $105,000from seven limited partners consisting of Buffetts family and friends. Over the years he hasbuilt himself a multi-billion-dollar fortune. The quote illustrates some of what has beenhappening in the stock market during the end of the 20th century and the beginning of the21st century.SECURITIES AND EXCHANGE BOARD OF INDIASEBI Bhavan, Mumbai Headquarters of SEBIORGANIZATION DETAILS:Headquarters Mumbai, Maharashtra, IndiaEstablished 1992Jurisdiction IndiaHead Chairman - U.K. SINHATerm FEBURARY 2011 – 5 YEARSOFFICIAL WEBSITE:Website SEBI is the Regulator for the Securities Market in India. Originally set up by theGovernment of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 beingpassed by the Indian Parliament.Chaired by U.K.Sinha, SEBI is headquartered in thepopular business district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern,Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.ORGANIZATION STRUCTURE: 6
  7. 7. U. K. Sinha, 1976 batch IAS officer of Bihar cadre was on 3 February 2011appointed as the eighth Chairman of the market regulator, Securities and Exchange Boardof India (SEBI). Sinha had opted for voluntary retirement from service in 2008. U. K. Sinhasucceeded outgoing chairman C. B. Bhave who retires on 17 February 2011. He has beenappointed for a period of three years with effect from the date he assumes charge of thepost on or after 18 February 2011 or till he attains the age of 65 years or until furtherorders, whichever is earlier. U. K. Sinha prior to being appointed as SEBI Chairmanworked as UTI AMC Chairman and Managing Director.FUNCTIONS AND RESPONSIBILITIES:SEBI has to be responsive to the needs of three groups, which constitute the market:· the issuers of securities· the investors· the market intermediaries. SEBI has three functions rolled into one body quasi-legislative, quasi-judicial andquasiexecutive. It drafts regulations in its legislative capacity, it conducts investigation andenforcement action in its executive function and it passes rulings and orders in its judicialcapacity. Though this makes it very powerful, there is an appeals process to createaccountability. There is a Securities Appellate Tribunal which is a three member tribunaland is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi.A second appeal lies directly to the Supreme Court. SEBI has enjoyed success as aregulator by pushing systemic reforms aggressively and successively (e.g. the quickmovement towards making the markets electronic and paperless rolling settlement on T+2basis). SEBI has been active in setting up the regulations as required under law.Market Regulators include the Securities and Exchange Board of India (SEBI), theReserve Bank of India (RBI), and the Department of Company Affairs (DCA). 7
  8. 8. Appellate Authority: The Securities Appellate Tribunal (SAT)WHAT IS AN ‘EQUITY’/SHARE? Total equity capital of a company is divided into equal units of smalldenominations, each called a share. For example, in a company the total equity capital ofRs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 iscalled a Share. Thus, the company then is 12 said to have 20,00,000 equity shares of Rs 10each. The holders of such shares are members of the company and have voting rights.WHAT IS A ‘DEBT INSTRUMENT’? Debt instrument represents a contract whereby one party lends money to another onpre-determined terms with regards to rate and periodicity of interest, repayment of principalamount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is used for debt instruments issuedby the Central and State governments and public sector organizations and the term‘debenture’ is used for instruments issued by private corporate sector.WHAT IS A DERIVATIVE? Derivative is a product whose value is derived from the value of one or more basicvariables, called underlying. The underlying asset can be equity, index, foreign exchange(forex), commodity or any other asset. 8
  9. 9. Derivative products initially emerged as hedging devices against fluctuations incommodity prices and commodity-linked derivatives remained the sole form of suchproducts for almost three hundred years. The financial derivatives came into spotlight inpost-1970 period due to growing instability in the financial markets. However, since theiremergence, these products have become very popular and by 1990s, they accounted forabout twothirds of total transactions in derivative products.WHAT IS A MUTUAL FUND? A Mutual Fund is a body corporate registered with SEBI (Securities ExchangeBoard of India) that pools money from individuals/corporate investors and invests the samein a variety of different financial instruments or securities such as equity shares,Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investmentbusiness that collect funds from the public and invest on behalf of the investors. Mutualfunds issue units to the investors. The appreciation of the portfolio or securities in whichthe mutual fund has invested the money leads to an appreciation in the value of the unitsheld by investors. The investment objectives outlined by a Mutual Fund in its prospectusare binding on the Mutual Fund scheme. The investment objectives specify the class ofsecurities a Mutual Fund can invest in. Mutual Funds invest in 13 various asset classes likeequity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equityschemes; others are a mix of equity and bonds. Investors are also given the option ofgetting dividends, which are declared periodically by the mutual fund, or to participate onlyin the capital appreciation of the scheme.WHAT IS AN INDEX? An Index shows how a specified portfolio of share prices are moving in order togive an indication of market trends. It is a basket of securities and the average pricemovement of the basket of securities indicates the index movement, whether upwards ordownwards.WHAT IS INVESTMENT? The money you earn is partly spent and the rest saved for meeting future expenses.Instead of keeping the savings idle you may like to use savings in order to get return on it inthe future. This is called Investment.WHY SHOULD ONE INVEST?One needs to invest to: 9
  10. 10.  Earn return on your idle resources. Generate a specified sum of money for a specific goal in life. Make a provision for an uncertain future One of the important reasons why one needs to invest wisely is to meet the cost ofInflation. Inflation is the rate at which the cost of living increases. The cost of living issimply what it costs to buy the goods and services you need to live. Inflation causes moneyto lose value because it will not buy the same amount of a good or a service in the future asit does now or did in the past. For example, if there was a 6% inflation rate for the next 20years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is importantto consider inflation as a factor in any long-term investment strategy.WHEN TO START INVESTING? The sooner one starts investing the better. By investing early you allow yourinvestments more time to grow, whereby the concept of compounding (as we shall seelater) increases your income, by accumulating the principal and the interest or dividendearned on it, year after year. The three golden rules for all investors are:  Invest early  Invest regularly  Invest for long term and not short termWHAT CARE SHOULD ONE TAKE WHILE INVESTING?Before making any investment, one must ensure to:1. obtain written documents explaining the investment2. read and understand such documents3. verify the legitimacy of the investment4. find out the costs and benefits associated with the investment5. assess the risk-return profile of the investment6. know the liquidity and safety aspects of the investment7. ascertain if it is appropriate for your specific goals8. compare these details with other investment opportunities available9. examine if it fits in with other investments you are considering or you have already made10. deal only through an authorised intermediary11. seek all clarifications about the intermediary and the investment12. explore the options available to you if something were to go wrong, and then, ifsatisfied, make the investment.WHAT IS THE FUNCTION OF SECURITIES MARKET? 10
  11. 11. Securities Markets is a place where buyers and sellers of securities can enter intotransactions to purchase and sell shares, bonds, debentures etc. Further, it performs animportant role of enabling corporates, entrepreneurs to raise resources for their companiesand business ventures through public issues. Transfer of resources from those having idleresources (investors) to others who have a need for them (corporates) is most efficientlyachieved through the securities market. Stated formally, securities markets providechannels for reallocation of savings to investments and entrepreneurship. Savings arelinked to investments by a variety of intermediaries, through a range of financial products,called ‘Securities’.WHICH ARE THE SECURITIES ONE CAN INVEST IN? Shares Government Securities Derivative products Units of Mutual Funds etc., are some of the securities investors in the securities market can invest in.WHO REGULATES THE SECURITIES MARKET? The responsibility for regulating the securities market is shared by Department ofEconomic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India(RBI) and Securities and Exchange Board of India (SEBI).WHAT IS SEBI AND WHAT IS ITS ROLE? The Securities and Exchange Board of India (SEBI) is the regulatory authority inIndia established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides forestablishment of Securities and Exchange Board of India (SEBI) with statutory powers for(a) protecting the interests of investors in securities (b) promoting the development of thesecurities market and (c) regulating the securities market. Its regulatory jurisdiction extendsover corporates in the issuance of capital and transfer of securities, in addition to allintermediaries and persons associated with securities market. SEBI has been obligated toperform the aforesaid functions by such measures as it thinks fit. In particular, it has powersfor:  Regulating the business in stock exchanges and any other securitiesMarkets.  Registering and regulating the working of stock brokers, sub–brokersetc.  Promoting and regulating self-regulatory organizations  Prohibiting fraudulent and unfair trade practices 11
  12. 12.  Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and other persons associated with the securities market.WHAT IS THE ROLE OF A STOCK EXCHANGE IN BUYING ANDSELLING SHARES? The stock exchanges in India, under the overall supervision of the regulatoryauthority, the Securities and Exchange Board of India (SEBI), provide a trading platform,where buyers and sellers can meet to transact in securities. The trading platform providedby NSE is an electronic one and there is no need for buyers and sellers to meet at a physicallocation to trade. They can trade through the computerized trading screens availablewith the NSE trading members or the internet based trading facility provided by the tradingmembers of NSE.WHAT IS DEMUTUALISATION OF STOCK EXCHANGES? Demutualisation refers to the legal structure of an exchange whereby the ownership,the management and the trading rights at the exchange are segregated from one another.HOW IS A DEMUTUALISED EXCHANGE DIFFERENT FROM AMUTUAL EXCHANGE? In a mutual exchange, the three functions of ownership, management and tradingare concentrated into a single Group. Here, the broker members of the exchange are boththe owners and the traders on the exchange and they further manage the exchange as well.This at times can lead to conflicts of interest in decision making. A demutualised exchange,on the other hand, has all these three functions clearly segregated, i.e. the ownership,management and trading are in separate hands.STOCK TRADING:WHAT IS SCREEN BASED TRADING? The trading on stock exchanges in India used to take place through open outcrywithout use of information technology for immediate matching or recording of trades. Thiswas time consuming and inefficient. This imposed limits on trading volumes andefficiency. In order to provide efficiency, liquidity and transparency, NSE introduced anationwide, on-line, fullyautomated screen based trading system (SBTS) where a member 12
  13. 13. can punch into the computer the quantities of a security and the price at which he wouldlike to transact, and the transaction is executed as soon as a matching sale or buy orderfrom a counter party is found.WHAT IS NEAT? NSE is the first exchange in the world to use satellite communication technology fortrading. Its trading system, called National Exchange for Automated Trading (NEAT), is astate of-the-art client server based application. At the server end all trading information isstored in an inmemory database to achieve minimum response time and maximum systemavailability for users. It has uptime record of 99.7%. For all trades entered into NEATsystem, there is uniform response time of less than one second.HOW TO PLACE ORDERS WITH THE BROKER? You may go to the broker’s office or place an order on the phone/internet or asdefined in the Model Agreement, which every client needs to enter into with his or herbroker.HOW DOES AN INVESTOR GET ACCESS TO INTERNET BASEDTRADING FACILITY? There are many brokers of the NSE who provide internet based trading facility totheir clients. Internet based trading enables an investor to buy/sell securities throughinternet which can be accessed from a computer at the investor’s residence or anywhereelse where the client can access the internet. Investors need to get in touch with an NSEbroker providing this service to avail of internet based trading facility.WHAT IS A CONTRACT NOTE? Contract Note is a confirmation of trades done on a particular day on behalf of theclient by a trading member. It imposes a legally enforceable relationship between the clientand the trading member with respect to purchase/sale and settlement of trades. It also helpsto settle disputes/claims between the investor and the trading member. It is a prerequisitefor filing a complaint or arbitration proceeding against the trading member in case of adispute. A valid contract note should be in the prescribed form, contain the details of trades,stamped with requisite value and duly signed by the authorized signatory. Contract notes 13