A stock market or equity market is a public entity for the
trading of company stock (shares) and derivatives at an
These are securities listed on a stock exchanges as well
as those only traded privately.
The stocks are listed and traded on stock exchanges
which are entities of a corporation or mutual
The size of the world stock market was estimated at
about $36.6 trillion at the beginning of October 2008.
WHAT ARE STOCKS?
At some point, just about every company needs to
In each case, they have two choices:
Borrow the money, or
Raise it from investors by selling them a stake
(issuing shares of stock) in the company
When you own a share of stock, you are a part
owner in the company with a claim (however
small it may be) on every asset and every penny
Individual stock buyers rarely think like
owners, and it's not as if they actually have a say
in how things are done. Nevertheless, it's that
ownership structure that gives a stock its value.
A market in which securities are bought and sold:
"the company was floated on the Stock Exchange".
The initial offering of stocks and bonds
to investors is by definition done in the primary
market and 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 markets are driven by
various factors that, as in all free markets, affect the
price of stocks.
ROLE OF STOCK EXCHANGE
Raising capital for business:- common forms of raising capital-
Mobilizing savings for investments.
Creating investment opportunities for small companies.
Government capital rising for development projects.
Facilitates company growth.
SOME INDIAN STOCK EXCHANGES
BOMBAY STOCK EXCHANGE
NATIONAL STOCK EXCHANGE
JAIPUR STOCK EXCHANGE
UP STOCK EXCHANGE ASSOCIATION
MADRAS STOCK EXCHANGE
COCHIN STOCK EXCHANGE
BANGLORE STOCK EXCHANGE
GAUHATI STOCK EXCHANGE
LUDHIANA STOCK EXCHANGE
CALCUTTA STOCK EXCHANGE
NSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.
OTHER STOCK EXCHANGES
ECONOMY STOCK EXCHANGE
US & EUROPE NYSE
US & EUROPE (NORTH) NASDAQ
JAPAN TOKYO STOCK EXCHANGE
UNITED KINGDOM LONDON STOCK EXCHANGE
CHINA SHANGHAI STOCK EXCHANGE
HONG KONG HONGKONG STOCK EXCHANGE
CANADA TORONTO STOCK EXCHANGE
BRAZIL BM&F BOVESPA
ECONOMY STOCK EXCHANGE
AUSTRALIA AUSTRALIAN SECURITIES EXCHANGE
GERMANY DEUTSCHE BORSE
SWITZERLAND SIX SWISS EXCHANGE
CHINA SHENZHEN STOCK EXCHANGE
SPAIN BME SPANISH EXCHANGES
INDIA BOMBAY STOCK EXCHANGE
SOUTH KOREA KOREA EXCHANGE
INDIA NATIONAL STOCK EXCHNGE
RUSSIA MICEX – RTS
SOUTH AFRICA JSE LIMITED
BSE BUILDING; BSE
DISPLAYS SENSEX ;
PEOPLE TRADING AT
THE BOMBAY STOCK
BOMBAY STOCK EXCHANGE
Established in 1875, the Bombay Stock Exchange is
Asia's first stock exchange.
BSE Limited formerly known as Bombay Stock
Exchange (BSE) , is the oldest stock exchange in
It is a stock exchange located on Dalal
The equity market capitalization of the companies
listed on the BSE was US$1 trillion (or Re
:5526,99,93,920.3007) as of December 2011.
It the 6th largest stock exchange in Asia and the
14th largest in the world.
The BSE has the largest number of listed companies in the
As of March 2012, there are over 5,133 listed Indian
companies and over 8,196 scrip's on the stock exchange, the
Bombay Stock Exchange has a significant trading volume.
The BSE SENSEX, also called "BSE 30", is a widely used
market index in India and Asia.
Though many other exchanges exist, BSE and the National
Stock Exchange of India account for the majority of the
equity trading in India.
While both have similar total market capitalization (about
USD 1.6 trillion), share volume in NSE is typically two
times that of BSE.
NATIONAL STOCK EXCHANGE
The National Stock Exchange (NSE) is stock exchange
located at Mumbai, India.
It is the 16th largest stock exchange in the world by market
capitalization and largest in India by daily turnover and
number of trades, for both equities and derivative trading.
NSE has a market capitalization of around US 985 billion
and over 1,646 listings as of December 2011.
NSE and BSE are the two most significant stock
exchanges in India, and between them are responsible for
the vast majority of share transactions.
The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock
Exchange Fifty), an index of fifty major stocks weighted by market capitalisation.
NSE is mutually owned by a set of leading financial institutions, banks, insurance
companies and other financial intermediaries in India but its ownership and management
operate as separate entities.
There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have
taken a stake in the NSE.
In 2011, NSE was the third largest stock exchange in the world in terms of the number
of contracts (1221 million) traded in equity derivatives.
It is the second fastest growing stock exchange in the world with a recorded growth of
Stock trading is not just buying and selling stocks at the
stock market, there are so many other factors that need to
be taken care of for successful stock trading.
Anyone who invests in the stock market wishes to make
profit from the investments. To ensure that you get
significant return from your investment you have to pick
up the right stocks at the right time.
If you have decided to trade in stocks the first thing that
you need to decide is the stock market where you will
There are mainly two major stock exchanges in India
The Bombay Stock Exchange or BSE
The National Stock Exchange or NSE.
BSE is the largest stock exchange in the country and
it is the biggest in world in terms of number of listed
The NSE is the virtual exchange where you can only
Both these exchanges have their benefits and
An agent that charges a fee or commission for executing
buy and sell orders submitted by an investor. (OR)
The firm that acts as an agent for a customer, charging the
customer a commission for its services.
You can either opt for a conventional broker or you can
choose to trade online.
If you are trading online you can get the broking service
from the banking or non banking organisations offering
online trading facilities who will provide you with the DP
account and act as your broker.
A demat account is opened on the same lines as that of a
Prescribed Account opening forms are available with the
DP, needs to be filled in.
Standard Agreements are to be signed by the Client and
In case of Corporate clients, additional attachments
required are - true copy of the resolution for Demat a/c
opening along with signatories to operate the account and
true copy of the Memorandum and Articles of Association
is to be attached
Derivatives Market in India
The derivatives market is the financial
market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms
The market can be divided into two, that for exchange-
traded derivatives and that for over-the-counter
derivatives. The legal nature of these products is very
different as well as the way they are traded, though many
market participants are active in both.
Why Do We Call Them Derivatives?
• They owe their existence to the presence of a market
for an underlying asset or portfolio of assets, which
may be considered as primary securities.
• Consequently such contracts are derived from these
underlying assets, and hence the name.
• Thus if there were to be no market for the underlying
assets, there would be no derivatives
Size of Derivatives Market
The total world derivatives market has been estimated at about
$791 trillion face or nominal value,11 times the size of the entire
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
Moreover, the vast majority of derivatives 'cancel' each other out
(i.e., 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.
A forward contract is an agreement between two parties
that calls for the delivery of an asset on a specified future
date at a price that is negotiated at the time of entering
into the contract.
Every forward contract has a buyer and a seller.
The buyer has an obligation to pay cash and take delivery
on the future date.
The seller has an obligation to take the cash and make
delivery on the future date
• A futures contract too is a contract that calls for the
delivery of an asset on a specified future date at a price
that is fixed at the outset.
• It too imposes an obligation on the buyer to take delivery
and on the seller to make delivery.
• Thus it is essentially similar to a forward contract.
Forward Contracts v/s Futures
Private contract between two parties Traded on an exchange
Not standardized Standardized
Usually one specified delivery date Range of delivery dates
Settled at end of contract Settled daily
Delivery or final settlement usual Usually closed out prior to maturity
Some credit risk Virtually no credit risk
An options contract gives the buyer the right to transact on or
before a future date at a price that is fixed at the outset.
It imposes an obligation on the seller of the contract to transact
as per the agreed upon terms, if the buyer of the contract were
to exercise his right.
We have said that an option holder acquires a right to transact.
There are two possible transactions from an investor’s
standpoint – purchases and sales.
Consequently there are two types of options – Calls and Puts.
A Call Option gives the holder the right to acquire the
A Put Option gives the holder the right to sell the asset.
If a call holder were to exercise his right, the seller of the
call would have to make delivery of the asset.
If the holder of a put were to exercise his right, the seller
of the put would have to accept delivery.
We have said that an option holder has the right to transact
on or before a certain specified date.
Certain options permit the holder to exercise his right
only on a future date. These are known as European
Other types of options permit the holder to exercise
his right at any point in time on or before a specified
These are known as American Options.
What is the difference between a Right and an Obligation.
An Obligation is a binding commitment to perform.
A Right however, gives the freedom to perform if desired.
It need be exercised only if the holder wishes to do so.
In a transaction to trade an asset at a future date, both
parties cannot be given rights.
For, if it is in the interest of one party to go through with
the transaction when the time comes, it obviously will not
be in the interest of the other.
Consequently while obligations can be imposed on
both the parties to the contract, like in the case of a
forward or a futures contract, a right can be given to
only one of the two parties.
Hence, while a buyer of an option acquires a right, the
seller has an obligation to perform imposed on him.
•Longs & Shorts
The buyer of a forward, futures, or options contract is
known as the Long.
He is said to have taken a Long Position.
The seller of a forward, futures, or options contract, is
known as the Short.
He is said to have taken a Short Position.
In the case of options, a Short is also known as the
Comparison of Futures/Forwards
Instrument Nature of
Obligation to buy Obligation to sell
Call Options Right to buy Obligation to sell
Put Options Right to sell Obligation to buy
A swap is a contractual agreement between two
parties to exchange specified cash flows at pre-
defined points in time.
There are two broad categories of swaps –
Interest Rate Swaps
•Interest Rate Swaps
In the case of these contracts, the cash flows being
exchanged, represent interest payments on a specified
principal, which are computed using two different parameters.
For instance one interest payment may be computed using a
fixed rate of interest, while the other may be based on a
variable rate such as LIBOR.
There are also swaps where both the interest payments are
computed using two different variable rates – For instance one
may be based on the LIBOR and the other on the Prime Rate of
Obviously a fixed-fixed swap will not make sense.
Since both the interest payments are denominated in
the same currency, the actual principal is not
Consequently the principal is known as a notional
Also, once the interest due from one party to the other
is calculated, only the difference or the net amount is
These are also known as cross-currency swaps.
In this case the two parties first exchange principal amounts
denominated in two different currencies.
Each party will then compute interest on the amount received
by it as per a pre-defined yardstick, and exchange it
At the termination of the swap the principal amounts will be
In this case, since the payments being exchanged are
denominated in two different currencies, we can have fixed-
floating, floating-floating, as well as fixed-fixed swaps.
Assets Underlying Futures
Till about two decades ago most of the action was in futures
contracts on commodities.
But nowadays most of the action is in financial futures.
Among commodities, we have contracts on agricultural
commodities, livestock and meat, food and
fibre, metals, lumber, and petroleum products.
Historically most of the action has been in stock options.
Commodity options do exist but do not trade in the same
volumes as commodity futures.
Options on foreign currencies, stock indices, and interest rates
are also available.
•Mechanics of Future
A future contract is a contract for delivery of a standard
package of a standard commodity or financial instrument at a
specific date and place in future but at a price that is agreed
when the contract is taken out.
The future price = Spot price + cost carrying
Cost of carrying includes:
Price Earning Ratio as a
Predictor of 20 Years Return
A margin is cash or marketable securities
deposited by an investor with his or her broker.
The balance in the margin account is adjusted
to reflect daily settlement.
Margins minimize the possibility of a loss
through a default on a contract.
Example of a Futures Trade
An investor takes a long position in 2nd December gold
futures contracts on June 5th
contract size is 100 oz.
futures price is US$400
margin requirement is US $2,000/contract (US$4,000 in
maintenance margin is US $1,500/contract (US$3,000 in
Other Key Points About Futures
They are settled daily.
Closing out a futures position involves
entering into an offsetting trade.
Most contracts are closed out before
Collateralization in OTC Markets
It is becoming increasingly common for
contracts to be collateralized in OTC markets
They are then similar to futures contracts in
that they are settled regularly (e.g. every day or
If a futures contract is not closed out before
maturity, it is usually settled by delivering the assets
underlying the contract. When there are alternatives
about what is delivered, where it is delivered, and
when it is delivered, the party with the short position
A few contracts (for example, those on stock indices
and Eurodollars) are settled in cash .
Some Important Terminology
Open interest: the total number of contracts
outstanding equal to number of long positions or number
of short positions.
Settlement price: the price just before the final bell
each day used for the daily settlement process.
Volume of trading: the number of trades in 1 day
Convergence of Futures to Spot
Regulation of Futures
Regulation is designed to protect the public interest.
Regulators try to prevent questionable trading
practices by either individuals on the floor of the
exchange or outside groups.
•Accounting & Tax
It is logical to recognize hedging profits (losses) at
the same time as the losses (profits) on the item
It is logical to recognize profits and losses from
speculation on a mark to market basis.
Roughly speaking, this is what the accounting and
tax treatment of futures in the U.S. and many other
countries attempts to achieve.
A forward contract is an OTC agreement to buy
or sell an asset at a certain time in the future for
a certain price
There is no daily settlement (unless a
collateralization agreement requires it). At the
end of the life of the contract one party buys the
asset for the agreed price from the other party
Profit from a Long Forward
or Futures Position
Price of Underlying
Profit from a Short Forward or
Price of Underlying
Investment Average Return
Large stocks 12.4%
Small Stocks 17.5%
Long-term Corporate Bonds 6.2%
Long-term Government Bonds 5.8%
Treasury Bills 3.8%
Average Annual Returns and Risk Premium
Investment Average Return Risk Premium
Large stocks 12.4% 8.6%
Small Stocks 17.5% 13.7%
Treasury Bills 3.8% 0.0%
Securities Contracts (Regulation) Act, 1956
Securities and Exchange Board of India Act, 1992
SEBI (Intermediaries) Regulations Act, 2008
SEBI (Prohibition of Insider Trading) Regulations
SEBI (Prohibition of fraudulent and Unfair Trade
Practices relating to securities market) Regulations
The Depositories Act, 1996
Indian Contract Act, 1872
Income Tax Act, 1961
The Prevention of Money Laundering Act, 2002
Stock Market and Derivative Market is an important topic
in the world of Finance. While most financiers believe the
markets are neither 100% efficient, nor 100%
inefficient, many disagree where on the efficiency line the
world's markets fall.
It can be concluded that in reality a financial market can’t be
considered to be extremely efficient, or completely
The financial markets are a mixture of both, sometimes the
market will provide fair returns on the investment for
everyone, while at other times certain investors will generate
above average returns on their investment.
Derivatives are among the forefront of the
innovations in the financial markets and aim to
increase returns and reduce risk.
They provide an outlet for investors to protect
themselves from the unpredictable occurrence of
the financial markets.
These instruments are very popular with investors
not only in India, but in all over the world.