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role of it in stock markets

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role of it in stock markets

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role of it in stock markets

  1. 1. 1 CHAPTER 1 INTRODUCTION The Financial system constitutes of the money market and capital market. The capital market facilitates the transfer of small and scattered savings of the household sector into productive investment. It helps in financing the activities of corporate entities. Government and Public Sector organization. The capital market provides liquidity, marketability and the safety of investments to the investors. Properly organized and regulated capital market provides scope for substantial development for an economy, through the availability of long term funds, in exchange of financial securities. Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and
  2. 2. 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 a market is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation). Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investor’s don’t have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities. A stock exchange is also known as the share market or the bourse is mutual organization or a corporation which mainly provides facilities for stock brokers and for various traders. A stock exchange helps traders or members to trade 2
  3. 3. company stocks and various other securities. Stock exchange also provides various facilities for the issue and redemption of different securities. Stock Exchange is a place where anyone with money in his pockets can trade for shares. The Basic way of trading on the stock exchange is to open an account with a broker who has a ticket to trade on behalf of her customers on stock exchange. You can open your account with the broker either by submitting the required amount of money or shares or stocks whatever you call it. Every broker has different requirements for opening an account with different requirements for amounts of money that can be deposited into the account. Broker trade on behalf of you by taking your orders mostly on phone for any stock you want to trade and in return charges a certain amount of commission. There are two different kinds of brokers. One who simply trade on behalf of you and others are called dealers which are also called market makers. a market maker is a person who at the end of day matches cost at which you purchased your shares and their day end prices. if day end prices are higher than the cost at which you purchased your shares, he will issue a margin call for depositing the necessary funds to level your funds with the price of your shares. A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion US at the beginning 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. 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., 3
  4. 4. 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. 4 DEFINITION According to the Securities Contracts (Regulation) Act, 1956, an exchange is defined as, “any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities”. The SCR Act stipulates that a stock exchange must be recognized by the government of India. Thus, Stock Exchanges are a structured market place for the proper conduct of trading in company stocks and other securities. The stock exchanges provide services to the investors and facilitate the issue and redemption of securities and other financial instruments.
  5. 5. 5 CHAPTER 2 HISTORY HISTORY OF STOCK MARKET IN THE WORLD In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelieve is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred; the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first share on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.
  6. 6. The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them". There are now stock markets in virtually every developed and most developing economy, with the world's biggest markets being in the United States, UK, Japan, China, and Germany. 6 History & Growth of Stock Exchange in India: In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India began when the American Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers increased to 250. At the end of the war in 1874, the market found a place in a street (now called Dalal Street). In 1887, "Native Share and Stock Brokers' Association" was established. In 1895, the exchange acquired a premise in the street which was inaugurated in 1899. The working of stock exchanges in India started in 1875. BSE is the oldest stock market in India. The history of Indian stock trading starts with 318 persons taking membership in Native Share and Stock Brokers Association, which we now know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of India. National Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselves as synonyms of Indian stock market. The history of Indian stock market is almost the same as the history of BSE.
  7. 7. The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound benchmark companies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the stock market was the liberal financial policies announced by the then financial minister Dr. Man Mohan Singh. The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came to public knowledge that Mr. Mehta, also known as the big-bull of Indian stock market diverted huge funds from banks through fraudulent means. He played with 270 million shares of about 90 companies. Millions of small-scale investors became victims to the fraud as the Sensex fell flat shedding 570 points. To prevent such frauds, the Government formed The Securities and Exchange Board of India, through an Act in 1992. SEBI is the statutory body that controls and regulates the functioning of stock exchanges, brokers, sub-brokers, portfolio manager’s investment advisors etc. SEBI oblige several rigid measures to protect the interest of investors. Now with the inception of online trading and daily settlements the chances for a fraud is nil, says top officials of SEBI. Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was crossed in June and the 8000 mark on September 8 in 2005. Many foreign institutional investors (FII) are investing in Indian stock markets on a very large scale. The liberal economic policies pursued by successive Governments attracted foreign institutional investors to a large scale. Experts now believe the sensex can soar past 14000 marks before 2010. 7
  8. 8. The unpredictable behavior of the market gave it a tag – ‘a volatile market.’ The factors that affected the market in the past were good monsoon, Bharatiya Janatha Party’s rise to power etc. The result of a cricket match between India and Pakistan also affected the movements in Indian stock market. The National Democratic Alliance led by BJP, during 2004 public elections unsuccessfully tried to ride on the market sentiments to power. NDA was voted out of power and the sensex recorded the biggest fall in a day amidst fears that the Congress-Communist coalition would stall economic reforms. Later prime minister Man Mohan Singh’s assurance of ‘reforms with a human face’ cast off the fears and market reacted sharply to touch the highest ever mark of 8500. India, after United States hosts the largest number of listed companies. Global investors now ardently seek India as their preferred location for investment. Once viewed with skepticism, stock market now appeals to middle class Indians also. Many Indians working in foreign countries now divert their savings to stocks. This recent phenomenon is the result of opening up of online trading and diminished interest rates from banks. The stockbrokers based in India are opening offices in different countries mainly to cater the needs of Non Resident Indians. The time factor also works for the NRIs. They can buy or sell stock online after returning from their work places. The recent incidents that led to growing interest among Indian middle class are the initial public offers announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and big names like that. Good monsoons always raise the market sentiments. A good monsoon means improved agricultural produce and more spending capacity among rural folk. The bullish run of the stock market can be associated with a steady growth of around 6% in GDP, the growth of Indian companies to MNCs, large potential of growth in the fields of telecommunication, 8
  9. 9. mass media, education, tourism and IT sectors backed by economic reforms ensure that Indian stock market continues its bull run. 9 Indian Stock Exchange Growth 1946 1961 1971 1975 1980 1985 1991 1995 No. of Stock Exchanges 7 7 8 8 9 14 20 22 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593 No. of Stock Issues of Listed Cos. 1506 2111 2838 3230 3697 6174 8967 11784 Capital of Listed Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 59583 Market value of Capital of Listed Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 478121 Capital per Listed Cos. (4/2) (Lakh Rs.) 24 63 113 168 175 224 514 693 Market Value of Capital per Listed Cos. 86 107 167 211 298 582 1770 5564
  10. 10. 10 (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344 80 Today, there are 23 recognized stock exchange in India including the Over the Counter Exchange of India for providing trading access to small & new
  11. 11. 11 CHAPTER 3 INFORMATION TECHNOLOGY IN INDIA Information technology in India is an industry consisting of two major components: IT Services and business process outsourcing (BPO). The sector has increased its contribution to India's GDP from 1.2% in 1998 to 7.5% in 2012. According to NASSCOM, the sector aggregated revenues of US$100 billion in 2012, where export and domestic revenue stood at US$69.1 billion and US$31.7 billion respectively, growing by over 9% Information technology is playing an important role in India today & has transformed India's image from a slow moving bureaucratic economy to a land of innovative entrepreneurs. The IT sector in India is generating 2.5 million direct employment.India is now one of the biggest IT capitals of the modern world and all the major players in the world IT sector are present in the country The major cities that account for about nearly 90% of the sector's exports are Bangalore, Chennai, Kolkata, Hyderabad, Trivandrum, Noida, Mumbai and Pune. Bangalore is considered to be the Silicon Valley of India because it is the leading IT exporter.[3][4] Exports dominate the industry and constitute about 77% of the total industry revenue. However, the domestic market is also significant with a robust revenue growth.[1] The industry’s share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY2012. According to Gartner, the "Top Five Indian IT Services Providers" are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies.[5] Regulated VSAT links became visible in 1994.[6] Desai (2006) describes the steps taken to relax regulations on linking in 1991:
  12. 12. In 1991 the Department of Electronics broke this impasse, creating a corporation called Software Technology Parks of India (STPI) that, being owned by the government, could provide VSAT communications without breaching its monopoly. STPI set up software technology parks in different cities, each of which provided satellite links to be used by firms; the local link was a wireless radio link. In 1993 the government began to allow individual companies their own dedicated links, which allowed work done in India to be transmitted abroad directly. Indian firms soon convinced their American customers that a satellite link was as reliable as a team of programmers working in the clients’ office. Videsh Sanchar Nigam Limited (VSNL) introduced Gateway Electronic Mail Service in 1991, the 64 kbit/s leased line service in 1992, and commercial Internet access on a visible scale in 1992. Election results were displayed via National Informatics Centre's NICNET. The Indian economy underwent economic reforms in 1991, leading to a new era of globalization and international economic integration. Economic growth of over 6% annually was seen during 1993-2002. The economic reforms were driven in part by significant the internet usage in the country. The new administration under Atal Bihari Vajpayee 1999 govt pm—which placed the development of Information Technology among its top five priorities— formed the Indian National Task Force on Information Technology and Software Development. Wolcott & Goodman (2003) report on the role of the Indian National Task Force on Information Technology and Software Development: Within 90 days of its establishment, the Task Force produced an extensive background report on the state of technology in India and an IT Action Plan with 12
  13. 13. 108 recommendations. The Task Force could act quickly because it built upon the experience and frustrations of state governments, central government agencies, universities, and the software industry. Much of what it proposed was also consistent with the thinking and recommendations of international bodies like the World Trade Organization (WTO), International Telecommunications Union (ITU), and World Bank. In addition, the Task Force incorporated the experiences of Singapore and other nations, which implemented similar programs. It was less a task of invention than of sparking action on a consensus that had already evolved within the networking community and government. "The New Telecommunications Policy, 1999" (NTP 1999) helped further liberalize India's telecommunications sector. The Information Technology Act 2000 created legal procedures for electronic transactions and e-commerce. Throughout the 1990s, another wave of Indian professionals entered the United States. The number of Indian Americans reached 1.7 million by 2000. This immigration consisted largely of highly educated technologically proficient workers. Within the United States, Indians fared well in science, engineering, and management. Graduates from the Indian Institutes of Technology (IIT) became known for their technical skills. The success of Information Technology in India not only had economic repercussions but also had far-reaching political consequences. India's reputation both as a source and a destination for skilled workforce helped it improve its relations with a number of world economies. The relationship between economy and technology—valued in the western world— facilitated the growth of an entrepreneurial class of immigrant Indians, which further helped aid in promoting technology-driven growth 13
  14. 14. 14 Recent development The economic effect of the technologically inclined services sector in India— accounting for 40% of the country's GDP and 30% of export earnings as of 2006, while employing only 25% of its workforce—is summarized by Sharma (2006): "Today, Bangalore is known as the Silicon Valley of India and contributes 33% of Indian IT Exports. India's second and third largest software companies are headquartered in Bangalore, as are many of the global SEI-CMM Level 100 Companies."[citation needed] Numerous IT companies are based in Mumbai, such as TCS (among India's first and largest), Reliance,[disambiguation needed] Patni, LnT InfoTech, Myzornis Corporation and i-Flex. Thiruvananthapuram (Trivandrum), the capital of Kerala state, is the foremost among the Tier II cities that is rapidly growing in terms of IT infrastructure. As the software hub of Kerala, more than 80% of the state's software exports are from here.[7] Major campuses and headquarters of companies such as Infosys, Oracle Corporation, IBS Software Services and UST Global are located in the city. India's biggest IT company Tata Consultancy Services is building the country's largest IT training facility in Trivandrum—the project is worth INR10 billion and will have a capacity of 10,000 seats. The completion of the facility is expected in 2014 or 2015.[8] On 25 June 2002, India and the European Union agreed to bilateral cooperation in the field of science and technology. A joint EU-India group of scholars was formed on 23 November 2001 to further promote joint research and development. India holds observer status at CERN, while a joint India-EU Software Education and Development Center will be located in Bangalore
  15. 15. 15 Employment This sector has also led to massive employment generation. The industry continues to be a net employment generator - expected to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people.[1] Generally dominant player in the global outsourcing sector. However, the sector continues to face challenges of competitiveness in the globalized and modern world, particularly from countries like China and Philippines. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crises has deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries, which have been growing phenomenally over the last few years.[10] India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata Group in partnership with Burroughs.[11] The first software export zone SEEPZ was set up here way back in 1973, the old avatar of the modern day IT park. More than 80 percent of the country's software exports happened out of SEEPZ, Mumbai in 1980s.[12] Future Outlook The Indian IT market currently focuses on providing low cost solution in the services business of global IT. Presence of Indian companies in the product development business of global IT is very meagre, however, this number is slowly on the raise. US giants that outsource work to India, do not allocate the high end
  16. 16. SDLC (Software Development Life Cycle) processes like requirement analysis, high level design and architectural design, although some Indian IT players have enough competency to take up and successfully complete these high level software jobs. The other prominent trend is, IT jobs, that were earlier confined to Bangalore, are slowly starting to experience a geographical diffuse into other cities like Chennai, Hyderabad and Pune. The growth is not fast paced, this, can be largely attributed to the lethargic attitude of the government in providing proper telecommunication infrastructure. The penetration levels are higher for mobile, but, the speed at which the backbone infrastructure works (network speed) and the coverage it offers are far below what other countries of the world have currently in offer. 16 The Indian Advantage The above listed views might possibly work against India’s’ dream to become the biggest contributor to world IT business, but, if there is one factor that is particular only to India, and, the one that can nullify all negative factors lined up against it, would be, the volume of young, English speaking talent pool that India has got to offer. This number far exceeds, any other country can generate in the coming years. It cannot be denied that China is gearing up to reduce the English fluency gap, but, at the same time, doing it with ease like India, is a topic of discussion. From Services to Product Orientation The migration of Indian IT companies to mainstream product development is not happening any time in the near future, this, primarily can be attributed to the fact that was discussed in earlier section, which is, lack of innovation culture amongst the top hierarchy of the firm, and, less availability of skilled management
  17. 17. graduates in the country. However, what might possibly happen is, global multinationals that are currently outsourcing services and back office jobs to India, might outsource more of higher level jobs in SDLC (Software Development Life Cycle) like requirement analysis and architecture design. The other opportunity is, Indian subsidiaries of global multinationals might take up significant chunk of the product development than what they are currently doing, this, however, is not happening currently because, the global IT firms are still not comfortable in working out a way to extract high end work from Indian companies. 17 Research and Development- The new drivers The research in the industry was earlier concentrated towards programming technologies like Java, in the recent times, the research focus changed towards technologies like mobile computing, cloud computing and software as a service. This shift is attributed to preference of clients towards the ubiquitous computing over standalone computing and the growing demand for low cost computing solutions.
  18. 18. 18 CHAPTER 4 INDIAN SECURITIES MARKET PRIMARY MARKET The primary market is that part of the capital markets that deals with the issue of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is a public offering. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Features of primary markets are:  This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).  In a primary issue, the securities are issued by the company directly to investors.  The company receives the money and issues new security certificates to the investors.  Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
  19. 19.  The primary market performs the crucial function of facilitating capital 19 formation in the economy.  The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." Secondary market The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production). Stock exchange and over the counter markets. With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market. The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid
  20. 20. secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade “over the counter,” or by phoning the bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan Exchange 20 MONEY MARKET As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities.[1] It provides liquidity funding for theglobal financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending—banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.
  21. 21. Finance companies typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury to fund the US public debt:  Trading companies often purchase bankers' acceptances to be tendered for 21 payment to overseas suppliers.  Retail and institutional money market funds  Banks  Central banks  Cash management programs  Merchant banks CAPITAL MARKETS Capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.[1]Financial regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange
  22. 22. 22 Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties. Modern capital markets are almost invariably hosted on computer-based electronic trading systems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public.[2]There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year.[3] A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock includepension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. [4]
  23. 23. A second important division falls between the stock markets (for equity securities, also known as shares, where investors acquire ownership of companies) and the bond markets(where investors become creditors) 23
  24. 24. 24 CHAPTER 5 ROLE OF IT IN STOCK EXCHANGE INFORMATION TECHNOLOGY’S ROLE TO REGULATE STOCK MARKET In the 21st century the business world is marked by drastic changes. These changes are paced by continuous innovations in computer & telecommunicating technologies. The choice of a relevant IT is a crucial decision as it is bound to have a long term & lasting impact on the future of the enterprise. Up-gradation of technology helps in increasing productivity, reducing cost & in improving total quality. IT is being helpful & has a great impact in business. elp to identify the critical areas for competitive advantage of business organization. the help of IT. Decision-making and operational control by managers has been improved by IT. trials, potential new entrants, etc. reducing decision making time, monitoring the competitors and better control on transaction.
  25. 25. 25 during strategic business planning. emergence of global financial system. INFORMATION TECHNOLOGY (IT) SHAPING INDIAN STOCK MARKET Traditionally stock trading is done through stock brokers, personally or through telephones. As number of people trading in stock market increase enormously in last few years, some issues like location constrains, busy phone lines, miss communication etc start growing in stock broker offices. Information technology (stock market software) helps stock brokers in solving these problems with online stock trading. It is an internet based stock trading facility. Investor can trade shares through a website without any manual intervention from stock Broker. In this case these online stock trading companies are stock broker for the investor. They are registered with one or more Stock Exchanges. Mostly online trading websites in India trades in BSE and NSE. Installable Software Based Stock Trading Terminals and Web (Internet) Based Trading Applications are two different type of trading environments available for online equity trading. ROLE OF DEMAT In India, shares and securities are held electronically in a Dematerialized (or "Demat") account, instead of the investor taking physical possession of certificates. A Dematerialized account is opened by the investor while registering with
  26. 26. an investment broker (or sub-broker). The Dematerialized account number is quoted for all transactions to enable electronic settlements of trades to take place. Every shareholder will have a Dematerialized account for the purpose of transacting shares. Access to the Dematerialized account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the Dematerialized account are automatically made once transactions are confirmed and completed. 26 GOAL India adopted the Demat System for electronic storing, wherein shares and securities are represented and maintained electronically, thus eliminating the troubles associated with paper shares. After the introduction of the depository system by the Depository Act of 1996, the process for sales, purchases and transfers of shares became significantly easier and most of the risks associated with paper certificates were mitigated. BENIFITS The benefits of demat are enumerated as follows:  Easy and convenient way to hold securities  Immediate transfer of securities  No stamp duty on transfer of securities  Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)  Reduced paperwork for transfer of securities  Reduced transaction cost  No "odd lot" problem: even one share can be sold
  27. 27.  Change in address recorded with a DP gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.  Transmission of securities is done by DP, eliminating the need for notifying 27 companies.  Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.  A single demat account can hold investments in both equity and debt instruments.  Traders can work from anywhere (e.g. even from home). Benefit to the company The depository system helps in reducing the cost of new issues due to lower printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors. Benefit to the investor The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.
  28. 28. 28 Benefits to brokers It reduces risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall trading and profitability. It increases confidence in their investors.
  29. 29. 29 CHAPTER 6 The evolution of stock market technology Technology has contributed to a bang and a crash at the London Stock Exchange and created an invisible world where billions of pounds changes hands in milliseconds. But with EU red tape altering the financial sector's landscape, technology's evolutionary journey at the London Stock Exchange is far from over. Nestling in Paternoster Square in the shadow of St Paul's Cathedral, the London Stock Exchange, which makes its money through charging investors fees for trading shares and selling market data, is a technology pacemaker. For a trading venue, the faster and more efficiently it can carry out a deal and the more up to date information it can store and retrieve, the more attractive it is to investors. These investors want to buy or sell shares quickly, to prevent changes in price during the transaction. Accurate market data is also important for investors to make informed choices. Share trading took centre stage almost 300 years after share prices were published twice a week on a 10-by-4-inch sheet of paper and distributed from Jonathan's Coffee-house in London. The year 1986 saw what is known as the financial sector's Big Bang. It was the end of October 1986 when the Stock Exchange Automated Quotation system replaced the trading floor. This screen-based quotation system was used by brokers to buy and sell stock rather than meeting face to face.
  30. 30. 30 Technology's major impact The shortening of the period between a trade being initiated and complete, or the reduction of latency as it is known, is the ultimate aim of any stock exchange worth its salt. The Big Bang of 1986 did this and more. "It brought significant benefits to both institutional and private investors, with private investors gaining low-cost independent access to the market through the proliferation of new services," says Robin Paine, chief technology officer at the London Stock Exchange. Cheap and efficient trading is what securities traders wanted and that is what they got. Volumes transacted saw unprecedented increases, with the average daily number of trades going through the ceiling. The trading floor where dealers met remained, and was used in emergencies while the technology was in its infancy. However, this soon became a thing of the past as electronically-generated trading volumes rose unabated. Just before the Big Bang's meteoric impact, the average number of daily trades at the London Stock Exchange was 20,000, amounting to about £700m worth of shares changing hands. After the introduction of automated trading the figure went up to a daily average of 59,000 trades a few months later. In 1987 the London Stock Exchange was transacting as much business in a month as it did in a whole year before 1986, with an average daily value of £1bn. Today, the average daily number of shares traded is 566,000, with an average daily value of £16.6bn.
  31. 31. These figures would be impossible to reach without technology that can reduce the time taken to complete a deal and handle massive volumes. "Without technology, exchanges could not accommodate the increased transaction flows that are generated both by the proliferation of end investors, and by electronic trading, algorithms and low latency," says Bob McDowall, analyst at TowerGroup. 31 The stock market crash But the technological transformation was not plain sailing. No major technological advance with such a deep impact on how an industry operates can be introduced without a hitch. This was no exception, and the stock market crash of 20 years ago that saw share prices plummet was more than a hitch, and was partly a result of the immaturity of the new technologies introduced in the Big Bang. Trading in certain stocks could not be stopped and spiralled out of control. Eventually stocks across the world lost billions of pounds in value, and the London Stock Exchange lost 23% of its value in a single day. McDowall says that although technology and the automation of selling did not cause the 1987 crash, technology did contribute to the velocity of the fall in share prices. "The technology at that time lacked refinement to react to a wider range of factors beyond the share prices themselves," he says.
  32. 32. Technology went through a quick facelift after the City woke up the morning after 1987's Black Monday. McDowall said the exchange had to introduce circuit breakers very quickly into the markets. These limited the velocity at which share prices could fall, before a halt was called to trading in the particular stock. 32 Algorithmic trading These circuit breakers became more important with the proliferation of algorithmic trading. It is not humanly possible to manually transact the number of trades done on the stock exchange today. To reach these levels there must be a certain level of automation. Hence computers are today initiating many trades using algorithms. Algorithmic trading, or "algo trading" as it is known in the financial sector, relies on computer systems to buy shares automatically when predefined market conditions are met. This method of trading is the future, says Paine. "The markets will continue to be further digitised with the proliferation of algorithms set to increase. About half of all volume on the exchange now is electronically generated and we believe this trend will continue." The rest is generated by manual intervention where traders submit orders using an interactive screen. Jonas Rodny, senior communications manager at the Nordic Exchange, said although it is difficult to be precise about levels of algorithmic and automated trading at the exchange, these are responsible for a significant amount of transactions.
  33. 33. "Our assumption is that both algorithmic and automated trading are growing very rapidly, currently accounting for at least a fifth of the overall trading volume on the Nordic Exchange and possibly quite a lot more," he says. The Nordic Exchange was created in 2006 by integrating the exchanges in Stockholm, Copenhagen, Helsinki, Iceland, Tallinn, Riga and Vilnius. OMX operates the Nordic Exchange and has a technology arm that develops technology for the exchange as well as licensing technology out to others. 33 The London Stock Exchange Given the technological advancement in the 1980s and the resulting metamorphosis of the London Stock Exchange, it is no surprise that the company takes technology so seriously. In 2003 the exchange instigated its Technology Roadmap, and after four years the exchange's all-singing, all-dancing core trading platform Tradelect was launched. Since its July launch the platform has set record after record in terms of the volumes and the values traded. In August this year the exchange processed a record £17.62bn of transactions in one day on Tradelect. But there is no time to sit back and watch in a sector where technological innovation can so dramatically impact a company's financial performance. Constant innovation is essential if the exchange is to be able to compete with an increased number of trading venues. To this end the London Stock Exchange's Technology Roadmap II has already been initiated.
  34. 34. Rodny said the Nordic Stock Exchange's heritage is built on technological innovation, and the challenges it faces are twofold. Exchanges need to be able to provide sufficient latency to support more regular and faster trading, which allows investors to take market opportunities more quickly. "The other key challenge arises from the fact that the continuous increase in volumes puts further constraints on capacity, not just at exchange level, but along the entire transaction chain," says Rodny. 34 The future of European exchanges Recent forces driving innovation at the exchanges across Europe stem from the European Union's Markets in Financial Instruments Directive (Mifid). This piece of pan-European red tape has introduced more competition in the stock trading sector. Mifid has compelled EU nations to remove what is known as the concentration rule that states that all trades must go through local exchanges. This has been the case for some time in the UK, but now it is happening across Europe and will inevitably lead to the creation of more alternative trading and reporting venues. Two projects known as Boat and Turquoise have been created to offer trade reporting and execution facilities, respectively, on the back of Mifid. Turquoise was set up by Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS as an alternative trading venue, while Boat was developed by a consortium including many of the above-mentioned banks to offer a trade reporting venue.
  35. 35. KPMG consultant Lee Epstein says Mifid has opened up the stock trading and reporting sector to new players because it becomes more attractive for them to be able to work across Europe. "Before this you had so many different rules across Europe it was difficult," he says. 35 A fragmented market He says the introduction of alternative trade execution and reporting venues following Mifid will fragment the market, and technology will be important to differentiate venues. Nemone Wynn-Evans, head of market development at UK-based exchange Plus Markets, says innovation will focus on succeeding in an increasingly fragmented market which increases competition and introduces new challenges. "The impact of fragmentation and the lowering of transaction costs will mean huge volume increases in transaction data, and in particular market data," says Wynn- Evans . Technical innovation is required to be able to use all this data to optimise trades, she says. "The challenge of data volumes is not just an issue for investors, but also for surveillance functions and regulators." Plus Markets, which is a Recognised Investment Exchange in the UK, is currently installing new trading and market surveillance technology in conjunction with OMX to expand its stock coverage and enable algorithmic trading. McDowall agrees that continuous innovation is essential. "It is an important factor if it provides business innovation combined with greater efficiency, speed of execution and reduction in costs."
  36. 36. Rodny says innovation around speed, capacity and flexibility are important. "Capacity to take care of the increased volumes, speed in order to provide algo trading and flexibility to be able to integrate trading across asset classes and across markets." So in a computerised environment where high speed, high volume trading is critical, technology has a strong hand to play. Add to this the need to retain massive amounts of data and be able to access it efficiently and you have a boardroom that appreciates the value of technology and will not shy away from investing in it. The London Stock Exchange is an example of how a centuries-old organisation can meet today's business challenges through an acute focus on technology innovation. 36
  37. 37. 37 CHAPTER 6 MODERN TRENDS OF IT IN INDIA The help of online database on both national and international information can be accessed which he valuable tool for making decisions. Expansion of e-commerce, e-business, m-commerce etc has emerged as a sunrise market for the software industry business. The modern trends of IT in India are as follows: E-commerce Electronic Commerce is doing business online or selling and buying products & services through Web storefronts. The use of computer is a primary tool to perform basic business operations. The Internet is the primary communication mode for electronic commerce. To provide foundation to this commerce, the electronic data interchange (EDI) is a strategically means. Thus, the business transactions between customers and suppliers, and all operations of a firm are facilitated. The functional areas covered by it are: finances, information services, human resources, manufacturing, and marketing. Electronic business also requires the firm’s interaction with the environmental parties such as government, competitors, labour unions etc. E-commerce has opened several new avenues of employment and progress. This new offspring is a blend of commerce, electronics and management. If electronic means are applied to commerce, the efficiency of commerce enhances. Here electronic imply the internet. In pursuing commerce, various technical methods like middleware, than section server etc., are emphasized upon instead of conventional methods of 'ordering', 'payment' etc. Also for efficient use of electronics, the knowledge of various software e.g., Java Beans, Servlet, COM/d, Com etc are required.
  38. 38. 38 M–Commerce M- Commerce (M-Com) is a type of e-commerce that enables the users to access the internet through handheld wireless devices. Buying & selling, the services are accomplished by means of cellular phones, personal data assistants such as palm pilots and their combination. The emerging technology that has made m-commerce as an advanced business mode is WAP (Wireless Application Protocol). It utilizes the mobile handset devices equipped with web-ready micro- browsers. M-Commerce has a great market potential due to its faster and more secured wireless working as compared to the working of wire line e-commerce. It saves time and money. It is quick and safe also due to mobile speed passwords. For example, in mobile banking, the customers can access their accounts through handheld devices from anyplace. They need not sit in front of their computer (having Internet connectivity). They can pay their bills, can see the stock quotations and trading and can acquaint themselves with any desired information from anywhere. They can even know about traffic bottlenecks, if any, in their movement way.
  39. 39. 39 CHAPTER 7 STOCK TRADING AND INFORMATION TECHNOLOGY REVOLUTION Information technology has made a tremendous development in respect of our approach at a mass level. It opens the door of several avenues as well as has brought in several threats, which should be analyzed carefully. Due to development in technology, the information can be transferred from one place to another in very short span of time, earlier which required lot of time. Transfer of large information and storing capacity for a long period also has some draw backs, inherent in the process itself. For example, manipulation of message is very easy and it requires small level of technical literacy. It is also observed that master in a subject may not be many times able to express his views effectively as compared to a person having less knowledge of subject but more computer literacy, who can make better presentations. Here, the knowledge part of the core subject has been compromised with proficiency with technology. Whole economy of the world is very much dependent upon the technological advancement. This increased competition in each segment of the market. The Internet makes the stock exchange accessible in the global market. Being more accessible will give them the opportunity to pick up a bigger market share, and give them a greater market value. There has been a migration from a Screen based trading system for government securities to an order matching system so as result in better price discovery and more transparency in the market related transactions in government securities Negotiated Dealing System (NDS)- which has been in use for many years now, has been enhanced to provide for changing market and regulatory requirements. Clearing Corporation Of India Ltd., (CCIL) as a fully IT enabled entity providing for electronic transaction processing as well as reporting has enabled the market to grow in depth and
  40. 40. coverage as well. Use of the Multi-Lateral Net Settlement Batch facility for effecting the settlements arrived at by various clearing systems (such as the Stock Exchanges), through the RTGS mode Pilot projects entailing the use of Multi Application Smart cards have not only yielded satisfactory results; their usage for financial inclusion has opened up new vistas for their wide spread use across the country. Use of credit transfer based RTGS transactions by brokers, constituents etc. pertaining to the funds leg of secondary market transactions. To provide an interactive and user friendly service, banks and financial institutions have adopted the most recent technological trends. Queuing at banks is a thing of the past; now-a- days customers can enjoy various facilities at the doorstep of their banks and at other locations. Phone banking and SMS banking services can also keep customers updated with the status of their money, investments and offer an array of additional services. TRENDS AND OPERATIONS IN SECURITIES MARKET Year 2010- 11 belongs to activities in primary market -which witnessed record number of Initial Public Offerings (IP0s)/ Follow-on Public Offerings (FPOs) and new debt issues (Non- Convertible Debentures/ Bonds) including the biggest ever IPO of Coal India which came out with issue size of Rs. 15,199.4 crore in October 2010. In debt segment, State Bank of India, the country's largest bank, came out with debt issues in multiple trenches which were subscribed by investors multiple times. Secondary market segment showed signs of recovery of Indian corporate from global financial crises witnessed in 2008. The recovery phase was clearly reflected in substantial increase in average market capitalisation, revenues and profit after tax of top 500 listed companies at NSE and BSE. With growth in domestic demand being intact, Indian companies also showed significant improvement on export front in 2010-11 despite the fact that the global economy is still recovering from financial crises. The cumulative value of exports for the period from April, 2010 to March 2011 to US $ 245.8 billion (Rs. 11,18,822.8 crore) as against US $ 178.7 40
  41. 41. billion (Rs. 8,45,533.6 crore) registering a growth of 37.5 per cent in Dollar terms and 32.3 per cent in Rupee terms over the same period last year. During 2010-11, Foreign Institutional Investors (FIIs) made record investments of Rs. 1, 46,438 crore in the Indian market (equities and debt combined) surpassing the previous high of 2009-10 net investments of Rs. 1, 42,658crore. This reflects their confidence in Indian securities market and better growth potential of Indian 41 1 Installable Software Based Stock Trading Terminals These trading environments require software to be installed on investor’s computer. This software is provided by the stock broker. This software requires high speed internet connection. These kind of trading terminals are used by high volume intraday equity traders. r than stock broker. This makes order execution very fast. single screen including stock market charts, live data, alerts, stock market news etc. Web (Internet) Based Trading Applications This kind of trading environments doesn’t require any additional software installation. They are like other internal websites which investor can access from around the world through normal internet connection such as: ck trading without calling or visiting broker’s office.
  42. 42. 42 any time. analysis of stocks. h email or chat.
  43. 43. 43 CHAPTER 8 FUTURE GROWTHOF INDIAN ECONOMY AND STOCK MARKET The future of Indian stock market is heavily dependent upon the following three parameters, which are discussed in the sub-sections given below: Future growth of the Indian economy, annual inflation, and productivity related improvements. -flow and out-flow of Foreign Institutional Investment. -earnings ratios. India's economy grew at an annual rate of from 9% to 10% last five years from 2005-2010; during the agriculture averaging around 5% per year. India also survived from the Great Recession of 2008-09 due to minimal exposure of financial sector to sub-prime lending and domestic demand driven growth. According to our estimates, its economy's average annual growth rate during the two years, 2008-10, is likely-to be around 7% (in real terms), with the current fiscal year outperforming the last one by over 1 %. Favorable demographics, high savings rate, rising middle class, and underleveraged households suggest that domestic demand, and the economy, will continue to grow strongly. Taking a long-term view and assuming an exchange rate of 46 INR to 1 USD, an annual growth rate of 7% in 2009-10 and 8.5% during 2010-11, the market sentiment being overly buoyant, an inflation of 6% per year, the size of the Indian economy in nominal terms is likely to be USD 1,250 billion in 2009-10, USD 2,400 billion in 2014-15, and USD 4,640 billion in 2019-20. This implies a cumulative nominal annual growth of 14% and an approximate four-fold increase in the coming decade. During 2009-10, the hi-tech services and products include information technology (IT) and application development, business process outsourcing (BPO), knowledge process outsourcing (KPO), drug research and
  44. 44. clinical research outsourcing (CRO), engineering services outsourcing (ESO), software and solutions related to the consumer Internet, software as a service (SAAS), open source, software services, and telecommunications (both wireless and wire-line) products and services are expected to grow at an annual rate of 17- 18% annually. There would be considerable fluctuations in the growth rates over the years and within the sub-components of each group, but each group would continue to claim an important place in dictating the SENSEX level. Since productivity in Public Sector Undertakings (i.e., PSUs or companies where the federal and state governments own more than 50% equity) and family owned businesses has improved at a very fast pace, these two sectors have become particularly important for the investing community. For example, Evalueserve's analysis shows that on an average, the productivity improvement for the 500 companies listed in BSE-500 was approximately 8% per year during 2005-2011, and it was more than 10% per year for most family-owned businesses. These improvements were mainly driven by penetration of IT in all sectors and management and organizational innovations. For PSUs that are listed in the Indian stock markets, productivity improvements were significantly higher. For example, during March 2005, the average net profit per employee for the PSUs that are a part of BSE-PSU index vent up from USD 1,000 per employee to USD 11,500 per employee and the average revenue per employee went up 8 times during the period. Although these figures are quite impressive, according to our estimates, an additional 80% in productivity improvements would occur during 2005-15 on an average for a typical firm listed in the Indian stock markets. Clearly, such an improvement of 6% a year by itself would not increase the valuations of these firms since the productivity of other good competitors would proportionately also increase. Nevertheless, such a productivity increase would help these firms compete more effectively in a global market place. 44
  45. 45. 45 CHAPTER 9 Development of Securities Market A satisfactory pace of economic growth in any economy is contingent upon availability of adequate capital. A well-developed securities market, while acting as provider of funding for economic activity at macro level, plays the specific roles in an economy, viz., diffusing stress on the banking sector by diversifying credit risk across the economy; supplying funds for long-term investment needs of the corporate sector; providing market-based sources of funds for meeting government’s financing requirements; providing products with flexibility to meet the specific needs of investors and borrowers; and allocating capital more efficiently. The main impulse for developing securities markets, including both equity and debt segments, depends on country-specific histories and more specifically, in the context of the financial system, it relates to creating more complete financial markets, avoiding banks from taking on excessive credit, risk diversification in the financial system, financing government deficit, conducting monetary policy, sterilizing capital inflows and providing a range of long-term Assets. Prior to the early 1990s, most of the financial markets in India faced controls of pricing, entry barriers, transaction restrictions, high transaction costs and low liquidity. A series of reforms were undertaken since the early 1990s so as
  46. 46. 46 to develop the various segments of financial markets by phasing out administered pricing system, removing barrier restrictions, introducing new instruments, establishing institutional framework, upgrading technological infrastructure and evolving efficient, safer and more transparent market practices. Against this backdrop, this paper essentially brings to the fore the evolutionary process that has occurred in the securities markets in India along with an assessment of the impact of reform. Following this introduction, section II and III set out the developments in corporate equity and debt markets, respectively. Section IV discusses the developments in the Government securities market. The paper concludes with a broad assessment of the developments in the securities markets and outlines the way forward for bringing the Indian securities market on par with international counterparts.
  47. 47. 47 CHAPTER 10 Conclusion  Companies come to the stock market in a variety of different ways and for a variety of reasons.  As a private investor, you can sometimes get an allocation of newly-issued shares, but often the issue will be confined to institutional investors. With internet shares, and the movement towards direct online IPOs, this may change for the better.  Most of the time you will be trading in a company's ordinary shares on the secondary market.  Companies issue other types of share - notably preference shares, convertibles, and warrants - and even if you don't own them they may have an effect on your dividend entitlement if they dilute earnings.  A scrip issue is designed to improve marketability of ordinary shares, and does not dilute your ownership.  A rights issue is designed to raise more money for the company, and existing shareholders will be invited to buy first. You have a choice about whether to exercise your rights, but if you do not, your ownership may be diluted.

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