2. STOCK EXCHANGES IN INDIA
INTRODUCTION
The existence of capital markets can be traced back
to the before 18th century in which the securities of
company were traded . The growth of capital
market can be linked to the growth of the corporate
sector.
3. MEANING: “As an association,organisation
or body of individuals,whether
incorporated or not, established for the
purpose of assisting,regulating and
controlling business in buying, selling and
dealing in securities”.
Meaning and Definition
4. • It is a place where securities are purchased
and sold.
• A stock exchange is an association of persons
whether incorporated or not.
• Both genuine investors and speculative buy
and sell shares.
• The trading is strictly regulated by rules and
regulations.
Nature of STOCK EXCHANGE
5. a. ENSURE LIQUIDITY OF CAPITAL
b. REGULAR MARKET FOR SECURITIES
c. EVALUATION OF SECURITIES
d. MOBILISING OF SURPLUS SAVINGS
e. HELPFUL IN RAISING CAPITAL
f. SAFETY IN DEALINGS
g. LISITING OF SECURITIES
h. PLATFORM FOR PUBLIC DEBT
i. CLEARING HOUSE FACILITY
j. SMOOTHENS THE PRICE MOVEMENTS
FUNCTIONS OF STOCK EXCHANGE
6. • LIQUIDITY OF INVESTMENTS
• NEGOTIABILITY OF SECURITIES
• ASSSURES SAFETY
• KNOWLEDGE OF TRUE VALUE
• MINIMIES RISK
• EDUCATES INVESTORS
BENEFITS TO THE INVESTORS
7. • EHANCES THE CREDIT STANDING
• WIDENS THE MARKET
• REDUCE THE DANGER
• MINIMIES THE RISK
• MINIMIES THE PRICE FLUCTUATIONS
• BETTER BARGAINING POWER
• ENJOY SEVERAL TAX ADVANTAGES
BENEFITS TO THE COMPANY
8. • STIMULATES INVESTMENT
• HELPS THE GOVERNMENT
• ASSIST IN THE BEST UTILIZATION
• SMOOTHENS THE PROCESS CAPITAL
FORMATION
• REFELECTS BUSINESS CONDITIONS
BENEFITS TO THE COMMUNITY
9.
10. Primary Markets
• Primary market - where borrowers issue new
securities in exchange for cash from investors
• Selling of new securities is handled by
investment dealers
• Investment dealers act as intermediaries
between buyers and sellers
12. Global Perspective
• Investment banks act as global coordinators linking
separate underwriting syndicates globally in selling
equity issues
• Reasons for raising fund internationally include:
1. The limited size of the Canadian market
2. Management of foreign exchange exposure
3. Interest rate differentials
4. Availability of private placements
13. Money Market
• Dominated by financial institutions
• Operates as a dealer or over-the-counter market
(OTC)
• Sold in denominations > $100,000
• Most recognized money market instrument are T-
bills
• T-bills are highly liquid and sold in 91, 182, 364 day
maturities
• Other money market instruments include
commercial paper, Banker Acceptances, eurodollars
14. Debt Markets
• Bond markets represent the most important
markets for intermediate and long-term debt
• The bond market operates as OTC market
• Other important debt markets include
- Asset-backed Securities (ABS)
- Mortgage-backed securities (MBS)
15. Equity Markets
• Common stocks, preferred stock and warrants trade
in equity markets
• Equity securities trade on stock exchanges
• Stock exchanges operate as:
- Auction markets (TSE, NYSE, CDNX, ME)
or
- Over-the-counter (NASDAQ)
16. HOW FIRMS ISSUE SECURITIES??
• When firms need to raise capital they may
choose to sell (or float) new securities. These
new issues of stocks, bonds, or other
securities typically are marketed to the public
by investment bankers in what is called the
primary market.
• Purchase and sale of already issued securities
among private investors takes place in the
secondary market.
17. Where to BUY or SELL??
• There are two types of primary market issues
of common stock. Initial public offering, or
IPOs, are stocks issued by a formerly privately
owned company selling stock to the public for
the first time.
• Seasoned new issues are offered by
companies that already have floated equity
18. Listing of Securities and Trading in Securities:
Investment Bankers and Underwriting
Public offerings of both stocks and bonds
typically are marketed by investment bankers,
who in this role are called underwriters. More
than one investment banker usually markets the
securities. A lead firm forms an underwriting
syndicate of other investment bankers to share
the responsibility for the stock issue.
19. The bankers advise the firm regarding the terms on
which it should attempt to sell the securities. A
preliminary registration statement must be filed
with the Securities and Exchange Commission (SEC)
describing the issue and the prospects of the
company. This preliminary prospectus is known as a
red herring because of a statement printed in red
that the company is not attempting to sell the
security before the registration is approved. When
the statement is finalized and approved by the SEC,
it is called the prospectus. At this time the price at
which the securities will be offered to the public is
announced.
20. Major Types of Orders
Market orders
- Buy or sell at the best current price
Limit orders
- Order specifies the buy or sell price
Stop loss
- Conditional order to sell stock if it drops to a given price
Stop buy order
- Investor may want to limit loss if stock increases in price
21. Major Types of Orders
Short sales
- Sell overpriced stock that you don’t own and purchase
it back later (at a lower price)
- Borrow the stock from another investor (through your
broker)
22. Major Types of Orders
Buying on Margin:
On any type order, instead of paying 100% cash, borrow a
portion of the transaction, using the stock as collateral
Interest rate is based on the call money rate from a bank
Regulations limit proportion borrowed and the investor’s
equity percentage (margin)
- Margin requirements are from 50% up
Maintenance margin
- Required proportion of equity to stock value
- Minimum requirement is at least 25%
- Margin call to meet margin requirement
23. Major Types of Orders
Margin Example:
Buy 100 shares at $60 = $6,000 position
Borrow 50%, investment of $3,000
If price increases to $70, position
Value is $7,000
Less - $3,000 borrowed
Leaves $4,000 equity for a
$4,000/$7,000 = 57% equity position
24. 5-24
Private Equity and Venture Capital
• Private Equity is the used for the rapidly growing area
of equity financing for nonpublic companies.
• Banks are generally not interested in making loans to
start-up companies, especially ones:
– with no assets (other than an idea)
– run by fledgling entrepreneurs with no track record.
• Firms with this profile search for venture capital (VC),
an important part of the private equity markets.
25. 5-25
Venture Capital, I
• Venture Capital refers to financing new, often high-risk, start-ups.
• Individual venture capitalists invest their own money.
• Venture capital firms pool funds from various sources, like
– Individuals
– Pension funds
– Insurance companies
– Large corporations
– University endowments
• Venture capitalists know that many new companies will fail.
• The companies that succeed can provide enormous profits.
26. 5-26
Venture Capital, II
• To limit their risk:
– Venture capitalists generally provide financing in stages.
– Venture capitalists actively help run the company.
• At each stage, enough money is invested to reach the next stage.
– Ground-floor financing
– Mezzanine Level financing
• At each stage of financing, the value of the founder’s stake grows and the
probability of success rises.
• If goals are not met, the venture capitalists withhold further financing.
• If a start-up succeeds:
– The big payoff frequently comes when the company is sold to another
company or goes public.
– Either way, investment bankers are often involved in the process.
27. 5-27
Selling Securities to the Public
• The primary market is the market where investors purchase newly issued
securities.
– Initial public offering (IPO): An IPO occurs when a company offers stock for
sale to the public for the first time.
– Seasoned equity offering (SEO): If a company already has public shares, an SEO
occurs when a company raises more equity.
• The secondary market is the market where investors trade previously
issued securities. An investor can trade:
– Directly with other investors.
– Indirectly through a broker who arranges transactions for others.
– Directly with a dealer who buys and sells securities from inventory.
28. 5-28
The Primary Market for Common Stock
• An IPO (and an SEO) involves several steps.
– Company appoints investment banking firm to arrange financing.
– Investment banker designs the stock issue and arranges for fixed commitment
or best effort underwriting.
– Company prepares a prospectus (usually with outside help) and submits it to
the Securities and Exchange Commission (SEC) for approval. Investment banker
circulates preliminary prospectus (red herring).
• Upon obtaining SEC approval, company finalizes prospectus.
• Underwriters place announcements (tombstones) in newspapers and
begin selling shares.
30. 5-30
The Secondary Market for Common Stock, I.
• The bid price:
– The price dealers pay investors.
– The price investors receive from dealers.
• The ask price:
– The price dealers receive from investors.
– The price investors pay dealers.
• The difference between the bid and ask prices is
called the bid-ask spread, or simply spread.
31. 5-31
The Secondary Market for
Common Stock, II.
• Most common stock trading is directed
through an organized stock exchange or
trading network.
• Whether a stock exchange or trading network,
the goal is to match investors wishing to buy
stocks with investors wishing to sell stocks.
32. 5-32
The New York Stock Exchange
• The New York Stock Exchange (NYSE), popularly known as the Big Board, celebrated
its bicentennial in 1992.
• The NYSE has occupied its current building on Wall Street since the early 1900’s.
• For 200 years, the NYSE was a not-for-profit New York State corporation.
• The NYSE went public in 2006
– (NYSE Group, Inc., ticker: NYX)
– Naturally, NYX stock is listed on the NYSE
• In 2007, NYSE Group merged with Euronext to form NYSE Euronext, the world’s
largest exchange.
33. 5-33
NYSE Seats and Trading Licenses
• Historically, the NYSE had 1,366 exchange members. These members:
– Were said to own “seats” on the exchange.
– Collectively owned the exchange, although professionals managed the exchange.
– Regularly bought and sold seats (Record seat price: $3 million in 2005)
– Seat holders could buy and sell securities on the exchange floor without paying
commissions.
• In 2006, all of this changed when the NYSE went public.
– Instead of purchasing seats, exchange members purchase trading licenses:
• number limited to 1,500
• In 2007, a license would set you back a cool $55,000—per year.
– Having a license entitles the holder to buy and sell securities on the floor of the
exchange.
34. 5-34
Types of NYSE Members, I.
• The largest number of NYSE members are registered as commission
brokers.
• Commission brokers execute customer orders to buy and sell stocks.
• Second in number of NYSE members are specialists, or market makers.
• Market makers are obligated to maintain a “fair and orderly market” for
the securities assigned to them.
35. 5-35
Types of NYSE Members, II.
• When commission brokers are too busy, they may
delegate some orders to floor brokers, or two-
dollar brokers, for execution.
– Floor brokers have become less important because of
the efficient SuperDOT system (designated order
turnaround),
– SuperDOT allows orders to be transmitted
electronically directly to the specialist.
• A small number of NYSE members are floor
traders, who independently trade for their own
accounts.
36. NYSE-Listed Stocks
• In 2006, the total number of companies listed on the NYSE represented a
total global market value of about $25 trillion.
• Initial and annual listing fees are charged based on the number of shares.
• To apply for listing, companies have to meet certain minimum
requirements with respect to
– The number of shareholders
– Trading activity
– The number and value of shares held in public hands
– Annual earnings
37. Operation of the New York Stock Exchange
• The fundamental business of the NYSE is to attract and process order flow.
• In 2007, the average trading volume on the NYSE was over
2 billion shares a day.
• Volume breakdown:
– About one-third from individual investors.
– Almost half from institutional investors.
– The remainder represents NYSE-member trading, mostly from specialists acting
as market makers.
38. NYSE Floor Activity
• There are a number of specialist’s posts, each with a roughly figure-eight
shape, on the floor of the exchange.
• At the telephone booths, commission brokers:
– Receive customer orders.
– Walk out to specialist’s posts where the orders can be executed,
– Return to confirm order executions, and receive new customer orders.
• Coat colors indicate the person’s job or position.
