SECURITIES MARKET

CAPITAL MARKETS
They deal with securities with maturity period > 1
year.
CAPITAL MARKETS

PRIMARY
MARKETS

SECONDARY
MARKETS

What is a primary market?

Market where securities offered to the public for
the first time so also called as New issue market
Market which deals with raising of fresh capital
by companies through issue of securities like
shares and debentures.

Functions of primary market

The key function of the primary market is to facilitate capital
growth by enabling individuals to convert savings into
investments.

Household savings
Global investments
Sale of govt securities
Market risk

Govt & statutory agencies

SEBI (Securities and Exchange Board of India).

Registrar of companies
RBI ( if project involves foreign investment)
Stock exchanges
Industrial licensing authorities
Pollution control authorities.

Methods of issuing securities in

Primary Market: (QP)
Public Issue( offer through prospectus)
Rights Issue
Private Placement

 Public issue: When an issue / offer of securities is

made to new investors for becoming part of
shareholders family of the issuer it Is called a
public issue. Public issue can be further classified
into Initial public offer (IPO) and Further public
offer (FPO).

Public issue
Under this method, this issuing company directly
offers to the general public/ institutions a fixed
number of shares at a stated price/ bidding
through a document called prospectus.
This is the most common method followed by
joint stock companies to raise capital through the
issue of securities.
Public issue can be further classified into Initial
public offer (IPO) and Further public offer (FPO).

The prospectus must state the following:

* Name of the company
* Address of the registered office
* Existing and proposed activities
* Location of the industry
* Names of Directors
* Minimum subscription
* Names of brokers/ underwriters/ bankers/
managers and registrars to the issue.

Further public offer (FPO) or Follow on offer:

When an already listed company makes either a
fresh issue of securities to the public or an offer
for sale to the public, it is called a FPO.
A company uses FPO after it has gone through
the process of an IPO and decides to make more
of its shares available to the public or to raise
capital to expand or pay off debt.

Offer for sale

This method of offer of sale consists in outright sale of

securities through the intermediary of Issue Houses
or share-brokers.
This method consists of two stages: The first stage is a
direct sale by the issuing company to the issue house and
brokers at an agreed price. In the second stage, the
intermediaries resell the above securities to the ultimate
investors.
The issue houses or stock brokers purchase the
securities at a negotiated price and resell at a higher
price. The difference in the purchase and sale price is
called spread. It is otherwise called Bought out
deals (BOD).

Eligiblity to make a public issue

Pre-issue networth of the co. should not be less than

Rs.1 crore in the preceeding 3 years
Track record of distributable profits(min 15cr) for at least
three (3) out of immediately preceding five (5) years and
The issue size shall not exceed five (5) times its preissue networth.
In case an unlisted company does not satisfy any of the
above criterion, it can come out with a public issue only
through the Book-Building process.
In the Book Building process the company has to
compulsorily allot at least sixty percent (60%) of the
issue size to the Qualified Institutional Buyers (QIBs),
failing which the full subscription monies shall be
refunded.

Private Placement (QP)

Issue is placed with small number of investors not exceeding
49(financial institutions, corporate bodies and high net worth
investors)
It has several inherent advantage
Cost effective
No need of intermediaries, so 8-10 % issue cost saved.
Time effective
Usually 2 -3 months
Structure effectiveness
Flexible to suit the entrepreneurs & Financial
intermediaries
Access effective
Listed or unlisted companies can mobilize capital

Private Placement (QP)

(i) Preferential allotment:
When a listed issuer issues shares or convertible securities, to
a select group of persons it is called a preferential allotment.
The issuer is required to comply with various provisions which
interalia include pricing, disclosures in the notice, lockin etc, in
addition to the requirements specified in theCompanies Act.
(ii) Qualified institutions placement (QIP):
When a listed issuer issues equity shares or non-convertible
debt instruments to Qualified Institutions Buyers only, it is
called a QIP.
(iii) Institutional Placement Programme (IPP):
When a listed issuer makes a further public offer of equity
shares, or offer for sale of shares by promoter/promoter group
of listed issuer in which the offer, allocation made only to
qualified institutional buyers for the purpose of achieving
minimum public shareholding,it is called an IPP.

Right issues
It is a method of raising funds from the existing shareholders
by an listed company. Shares, so offered to the existing
shareholders are called rights shares.

A right means an option to buy certain securities at a certain

privileged price within a certain specified period.

Rights shares are offered to the existing shareholders in a

particular proportion to their existing share ownership.

The rights themselves are transferable and sale-able in the

market.

The cost of issue is minimum. There is no underwriting,

brokerage, advertising and printing of prospectus expenses.

Factors to be considered for primary

market
Economic growth

Cost of capital

Financial leverage

Financial market dept

Market liquidity

Market Regulations

Factors to be considered by the

investor
1. Promoters credibility
2. Efficiency of the mgmt
3. Project details
1. Credibility of appraising institution or agency
2. Stake of appraising agency
3. Govt norms
4. Product
5. Financial data
6. Litigation
7. Risk factors
8. Auditors report
9. Statutory report
10. Investor service

Secondary market? (QP)

SECONDARY MARKET

The market where securities already issued in the

primary market are traded is secondary market.

Provides liquidity to the securities held by the

investors.

Operates through stock exchanges that regulate

the trading activities in this market.

Health of the economy is reflected by the growth of

the stock market.

STOCK EXCHANGES
The securities regulation act of 1956 defined stock
exchange as an association , organization , or a individual
which is established for the purpose of assisting ,
regulating , and controlling business in buying ,selling and
dealing in securities.
They are auction markets for securities.
Transaction at stock exchange occur by placing an order.
Types of Orders: (QP)
Limit Orders (Order placed at price specified by client)
Market Order (Order placed at current market price)
Stop Loss Order (Order given to limit loss due to
unfavorable price movements)

Functions of a stock exchange (QP)

Maintains Active Trading

Ensures safe and fair dealing
Fixation of Prices
Aids in Financing the industry
Dissemination of Information
Performance Inducer
Monitors integrity of members, brokers
and listed companies

Major Players in Secondary Mkt

Brokerage & Advisory services:
Commission Broker
Investor
Speculator
Bull (tejiwala)
Bear(mandiwala)
Stag
Lame duck(stressed bear)
Arbitrageur
Security Dealers

Major Players in Secondary Mkt

Financial Intermediaries:

Commercial Banks

Development Financial Institutions

Insurance Company

Mutual Fund

Non Banking Financial Concerns(NBFC)

HISTORY OF STOCK EXCHANGE

The stock exchange was established by East

India company in 18th century. In India it was
established in 1850 with 22 stock brokers
opposite to town hall Bombay. This stock
exchange is known as oldest stock exchange
of Asia.

Bombay Stock Exchange

National Stock Exchange
Regional Stock Exchanges

Ludhiana Stock Exchange

Madhya Pradesh Stock

Exchange

Madras Stock Exchange

Magadh Stock Exchange

Bhubaneshwar Stock
Exchange

Mangalore Stock Exchange

Calcutta Stock Exchange

Meerut Stock Exchange

Cochin Stock Exchange

OTC Exchange Of India

Coimbatore Stock Exchange

Pune Stock Exchange

Delhi Stock Exchange

Saurashtra Kutch Stock

Exchange

Guwahati Stock Exchange

Uttar Pradesh Stock

Exchange

Vadodara Stock Exchange

Ahmedabad Stock Exchange

Bangalore Stock Exchange

Hyderabad Stock Exchange

Jaipur Stock Exchange

BOMBAY STOCK EXCHANGE

It is oldest and first stock
exchange of India established in
the year 1875. First it was
started under baniyan tree
opposite to town hall of Bombay
over 22 stock brokers.
Bombay Stock Exchange is the
oldest stock exchange in Asia with
a rich heritage of over 133 years
of existence.

NATIONAL STOCK EXCHANGE OF INDIA(NSE)

The NSE of India is the leading
stock exchange of India,
covering 370 cities and towns
in the country.
It was established in1994 by 21
leading financial institutions
and banks like the
IDBI,ICICI,IFCI,LIC,SBI,etc.
Features of NSEI
Nation wide coverage i.e., investors from all over country
Ringless i.e., it has no ring or trading floor
Screen-based trading i.e., trading in this stock exchange is done
electronically.
Transparency,i.e.,the use of computer screen for trading makes the
dealings in securities transparent.
Professionalization in trading, i.e., it brings professionalism in its

OTCEI (QP)
Started with the objective of providing a market for the
smaller companies that could not afford the listing fees
& did not fulfill the minimum capital requirement for
listing.
It was promoted by the financial institutions like UTI,
ICICI, IDBI, IFCI, LIC etc. in September 1992 specially
to cater to small and medium sized companies with
equity capital of more than Rs.30 lakh and less than
Rs.25 crore.
It has no particular marketplace or stock exchange
floor.
In OTC, buyers and sellers operate on negotiated
prices acceptable to both.
Inactive issues, less liquid shares, issues with limited
public holding comprise the OTC market.

Constituents of the capital market

1. The stock exchanges
2. Banks
3. The investment trusts and companies
4. Specialized financial institutions or
development banks.
5. Mutual funds
6. Post office saving banks
7. Non banking financial institutions
8. International financial investors and
institutions.

What does Index Represent?

Barometers of stock exchange
Indices give a broad outline of the market
movement & represent the market
index is a basket of shares, the weight of
share in index may be decided on market
cap, price etc
E.g. BSE Sensex, BSE- 200, NSE Nifty,

STOCK MARKET INDICES

Stock market indices are useful in understanding the
level of prices and the trend of price movements of
the market.
A stock market index is created by selecting a group
of stocks that are capable of representing the whole
market or a specified sector or segment of the
market.
The change in the prices of this basket of securities is
measured with reference to a base period.
There is usually a provision for giving proper weights
to different stocks on the basis of their importance in
the economy.
A stock market index act as the indicator of the
performance of the economy or a sector of the
economy.

Usefulness
Help to recognize the broad trends in the market
Can be used as benchmark for evaluating the
investors portfolio
Functions as a status report on the general
economy
Investor can use the indices to allocate funds
rationally among stocks
To do Technical analysis

CRITERIA FOR SELECTING STOCKS TO

CALCULATE INDEX
Listing history: The company should have listing history on BSE
for at least one year
Track record: The company should have listing history
Market capitalization: Company should have one among 100
market capitalizations of BSE,
And each company should have more than0.5% of total market
capitalization of BSE INDEX
Frequency of trading: Company stocks
should be traded on each and every trading
day for the last one year
Industrial representation:Company
Should be a leader in the industry it
represents

Market Capitalisation
Market capitalization is the total worth of all outstanding (issued)
shares of a company. It represents the total worth of a company.
Market capitalization= No of shares outstanding x market price of
share

Free Float Market Capitalization

Free float concept is an index construction methodology which
makes use of free float shares in the market.
Free float market capitalization is the total worth of all shares of a
company which are available for trading in the open market.
These shares are called free float shares and are available for
trading by anyone.

Example:
Company XYZ Ltd issues 10000 shares, out of which 2000 shares held by
government, 5000 shares by directors of the company and remaining 3000
shares are available in the open market for trading. Market price of share is
100 Rs.
Here;
Total Shares =
10000
Shares Held by Government =
2000
Shares Held by Directors =
5000
Shares available in the Open Market =
3000
Market price of share =
Rs 100
Here total market
=Rs 10,00,000 and
Free float market
=Rs 300,000

capitalization

of the

company is 10,000

Rs100

capitalization

of the

company is 3000

Rs100

Calculation of SENSEX and NIFTY

Sensex calculation is practiced since 1986. Initially it had been
calculated using total market capitalization method but the
methodology changed to free float market capitalization since
from 2003. Hence these days Sensex is calculated using free
float market capitalization of 30 major BSE listed companies
and by using base value 100 (1978-79). SENSEX is calculated
for every 15 seconds.
Formula for Sensex
SENSEX = (sum of free float market cap of 30 major companies of BSE) X Index
value in 1978-79 / Market cap value in 1978-79.

Example:
Suppose BSE index (SENSEX) consist of only
two stocks such as X and Y
Company X has 10000 outstanding shares
out of which only 5000 are available for
trading in open market. Market price of
share is Rs.100.
Company Y has 5000 outstanding shares
out of which 2000 shares are held by
promoters and remaining 3000 are free float
shares
(open market
shares). Market
price of share is Rs.50
Here;
Sum of free float market cap of company X and company
Y is 500000+100000 = 600000
Assume market cap during 1978-79 is 500000
Now Apply formula;
600000*100/500000 = 120

Calculation of Market Capitalization

Stock
X
Y

Issued
Stocks
10000
5000

Calculation of
capitalization
Stock
X
Y

Market price
100
50

Free

Open Market
Stocks
5000
2000

Market Cap.
1000000
250000

Float

Market price
100
50

market

Market Cap.
500000
100000

SENSEX = (sum of free float market cap of 30

major companies of BSE) X Index value in
1978-79 / Market cap value in 1978-79.

The
two

same method is used to calculate NSE nifty but includes

major changes.
Base year is 1995 and base value (index value) is 1000
Nifty represents stocks of 50 major companies of NSE.

Formula for NIFTY

NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) X

Index value in 1995 / market cap value in 1995.

BSE INDICES

BSE 100

BSE 200

BSE IPO

BSE Mid Cap and BSE Small Cap

National Stock Exchange Indices

The major stock market indices available at the National
Stock Exchange(NSE) are:
S and P CNX Nifty , CNX Nifty Junior , S and P CNX 500 , CNX
Midcap 200 , S and P CNX Defty
S and P CNX Nifty
It is an index calculated with a well diversified sample of fifty
stocks representing 23 sectors of the economy.The base
period selected for nifty is the close of prices on November
3,1995,which marks the completion of one year of operations
of NSEs capital market segment.The base value of the index
has been set at 1000.
Nifty is managed by India Index Services and
Products Ltd(IISL),which is a joint venture between NSE and
CRISIL.The index is known as S and P index because IISL
has consulting and licensing agreement with Standard and
Poors(S and P),who are world leaders in index services.

CNX Nifty Junior

It is composed of the next most liquid fifty securities so much so S and P
CNX Nifty and CNX Nifty Junior together account for the hundred most liquid
securities traded at NSE.The two indices are constituted in such a way as to
be disjoint sets,that is,a stock will never appear in both the indices at the
same time.
CNX Midcap 200
It is designed to capture the movement of the mid cap segment or mediumsized capitalization companies.The medium capitalization segment of the
stock market is being perceived increasingly as an attractive investment
segment with high growth potential.
The regional stock exchanges also bring out stock indices calculated
from stocks listed and traded at those exchanges.Many prominent financial
dailies also bring out their own stock market indices.

What is a circuit filter? (QP)

Circuit filters restrict movement of
stocks in either direction
The imposition or revision of circuit
filters is one of the surveillance
measures available with stock
exchanges to curb excess volatility.

What is dematerialization?
Conversion of shares from
physical to electronic form.

Market Participants (QP)

Regulators

Company Law Board, RBI, SEBI, Dept of

Economic Affairs( DEA), Dept of Company
affairs( DCA)

Exchange NSE/BSE
Clearing Corporation NSCCL

An organization which works with the exchanges

to handle confirmation, delivery and settlement
of transactions.

Custodian

Custodians interact with Clearing Corporation to

confirm the trades

Depository NSDL/CDSL

Holds funds or securities deposited by others

Broker

Registrar

Collection of share applications, share allotment,

dispatch of share certificates etc

Merchant Banker

is engaged in the business of issue management

Foreign institutional Investors

Primary dealers

Serves as underwriters in primary market &

as Market makers in secondary market

Bankers
Debenture Trustees

Execute trades (buy or sell) on behalf of clients

When debentures are issued, DT are

appointed to ensure contractual obligations.

Venture Capital Funds & Credit Rating

National Securities Clearing Corporation

Ltd. (NSCCL)
Determines the funds/securities obligations of the
trading members and ensures that trading members
meet their obligations
NSCCL becomes the legal counterparty to the net
settlement obligations of every member. This principle
is called `novation
If member fails on any obligations, NSCCL
immediately cuts off trading and initiates recovery.
The clearing banks and depositories provide the
necessary interface between the custodians/clearing
members for settlement of funds/securities obligations
of trading members.

The core processes involved in the

settlement process are
Determination of Obligation
NSCCL determines what counter-parties owe, and
what counter-parties are due to receive on the
settlement date.
Pay-in of Funds and Securities
Members make available required funds/securities in
designated accounts with the bank/depositories by the
prescribed pay-in time.
Pay-out of Funds and Securities
After processing the NSCCL sends electronic
instructions to the depositories/clearing banks to
release pay-out of securities/funds.

 Risk Management
A sound risk management system is integral to an
efficient settlement system.
NSCCL has put in place a comprehensive risk
management system, which is constantly monitored
and upgraded to preempt market failures.
It monitors the track record and performance of
members and their net worth; undertakes on-line
monitoring of members positions and exposure in the
market, collects margins from members and
automatically disables members if the limits are
breached.

Settlement Process in CM segment

of NSE

Process (QP)
(1) Trade details from Exchange to NSCCL
(2) NSCCL notifies to Clearing Members / Custodians who
confirm back
(3) Download of obligation and pay-in advice of
funds/securities
(4) Instructions to clearing banks to make funds available by
pay-in time.
(5) Instructions to depositories to make securities available
by pay-in-time.
(6) Pay-in of securities
(7) Pay-in of funds
(8) Pay-out of securities
(9) Pay-out of funds.
(10)
Depository informs custodians/CMs through DPs.
(11)
Clearing Banks inform custodians/CMs.

Types of Shares BSE (QP)

A
Large companies, high trading interest

B1
Middle size companies, good financial performance,
less trading interest

B2
Small companies, poor financial performance, low
trading volumes

Z
Non compliance with listing norms, Non payment of
listing fees, Non submission of quarterly results

Short selling (QP)

sale of securities not owned by
the seller (who hopes to buy them
back later at a lower price)