Equity Market-
An Overview
Introduction:
Main market participants in stock market are:
1. There are 23 stock exchanges in India. NSE & BSE being the
important ones.
2. Regulators like SEBI, CLB,RBI,DEA & DCA.
3. Listed securities-more than 10000
4. Depositories-NSDL & CSDL
5. Brokers
6. FIIs
7. Merchant Bankers-Manage the issue of securities.
8. Mutual Funds
9. Custodians-Look after inv back off of MFs
10. Registrars-Investor related services
11. Underwriters
12. Bankers to the issue.
Types of Equity Market
Primary Equity Market: Deal in the issuance of
new securities. E.g. Public Issue, Rights Issue,
Private Placement & Preferential allotment.
Secondary equity market : Where outstanding
securities are traded.
Primary Equity Market
Used by company to raise capital . There are 4 ways to it:
a) Public Issue-Concept of Stock Invest and Book building.
b) Rights issue-Selling securities in primary market by issuing
rights to the existing shareholders.
c) Private placements- Sale of securities to a limited no of
investors like FIs, MFs, VCFs, banks etc. For listed and
unlisted companies and the identity of investor not known
when offer document is prepared.
d) Preferential allotment: Sale of securities to a limited no of
investors like FIs, MFs, VCFs, banks etc. For listed and the
identity of investor known when offer document is
prepared.
Secondary Equity Market ( Stock Market )-History,
Background, Definition & Advantages.
1. Stock Markets in existence since 18th century.
2. Real beginning after the enactment of the Co. Act 1850 with
feature of limited liability.
3. Native Share and Stock Brokers’ Association at Bombay in 1875 is
the first stock exchange and is a precursor to BSE.
4. 23 stock exchanges . Main being NSE & BSE.
Definition: Stock Market is a private or public market for trading of
company stock & security( fungible negotiable instrument
representing financial value ) as well as those derivatives of Co.
stock at an agreed price.
Advantages:
1. Important source to raise capital.
2. Provides liquidity.
3. Allows businesses to be traded publicly which enhances customer
confidence.
National Stock Exchange (NSE)
Formed by FIs & started trading in 1994.
Purpose:
a) Provide nation wide trading facilities for debt,
equity and hybrids.
b) Facilitate equal access to investors across the
country.
c) Impart fairness , efficiency and transparency to
security trading.
d) Reduce settlement cycle.
e) Meet international security standards.
NSE ( Contd )
Features:
a) Ring less, national computerized exchange.
b) Two segments- Capital Market Segment which deals in equities & convertible
debentures. Wholesale debt segment (WDS) which deals in high value txns in
govt. securities, PSU bonds, commercial papers & other debt instruments.
c) Order driven system.
d) Trade confirmation slip is printed after each trade.
e) Identity of traders not revealed.
f) Members are required to deliver security & cash by a certain day. Pay out is in
the following day.
g) All trades in NSE are guaranteed by NSCC ( National Securities Clearing
Corporation.)
Indices:
IISL ( India Index Services & Products Ltd ) formed by NSE & Crisil provide
variety of indices and index related services. Main indices being S&P CNX
Nifty ( 50 stocks across 21 Sectors ), S&P CNX Nifty Junior, CNX 100, S&P
CNX Nifty 500, CNX Midcap, Nifty Midcap 50, S&P CNX Defty & CNX Midcap
200.Nift is market –cap weighted i.e. the weights of constituents reflect the
relative market cap. Of the cos.
Bombay Stock Exchange ( BSE )
Established in 1875 .
Features:
a) Switched from outcry system to screen based system in 1995.
b) Jobbers play an important role In BSE. They are brokers who
trade on their own account and hence offer a two way (bid- ask
rate) rate quote.
c) BSE has adopted both quote driven and order driven system.
d) World’s no 1 exchange in terms of numbers of listed securities
( more than 4700) and 5th in terms of transactions.
e) Sensex is an index of 30 stocks representing 12 major sectors
is tracked worldwide and is sensitive to market sentiments as
well as market realities. Sensex is free float weighted i.e. the
weights of constituents reflect the relative market values of the
free floats of the cos. Other indices include BSE 100, BSE 200
BSE Midcap etc.
Trading in stock Market
Participants vary from small individual stock brokers to large
hedge fund traders.
Open outcry
Trading
Screen based trading
Screen based system a) enhances the no of trades as more no of
participants can trade. b) market participants get overview of the
market which enhances investor confidence. c) establishes
transparent audit trails.
Electronic Limit Order Book (ELOB) market system adopted for
trading. Two types of orders- Limit Order & Market Order.
Matching is done on a price-time priority. Limit order book is
displayed on the screen i.e. it is open to trade audit.
Settlement
Seller Seller broker Buyer broker Buyer
Concept of depositories.
Concept of Rolling Settlement.
Day Activity for the Day
T Trade
T+1 Custodial confirmation & final obligation.
T+2 Pay-in/Pay-out of funds and securities.
T+3 Auction for shortages.
T+4 -
T+5 Pay-in/Pay-out of funds and securities for auction.
SEBI –Role & Challenges Ahead
Came in existence in 1992.
Preamble
“…..to protect the interests of investors in
securities and to promote the development
of, and to regulate the securities market
and for matters connected therewith or
incidental thereto”
.
SEBI ( Contd )
Objectives:
a) Regulate business in stock exchanges and other
security market.
b) Register and regulate the working of capital market
intermediaries.
c) Register and regulate the working of MFs.
d) Promote and regulate self regulatory org.
e) Prohibit fraudulent and unfair trade practices.
f) Investor education & training of intermediaries.
g) Prohibit insider trading.
h) Regulate substantial acquisition of shares and
takeovers of the companies
SEBI (Contd)
Initiatives:
1. Freedom in designing and pricing instruments.
2. Introduction of Stock invest.
3. Ban of badla.
4. Screen based trading.
5. Electronic transfer
6. Risk Management- capital adequacy, limits on exposure and turnover, margins
based on VAR, online monitoring of positions.
7. Rolling settlement
8. Corporate governance code.
9. Change in management structure-50 percent non broker directors.
10. Registration & regulation of Intermediaries.
11. Redressal of investor grievances.
12. Regulation of Mutual Funds.
13. Regulation of foreign portfolio investment.
14. Development of a code for take over.
15. Introduction of equity derivatives.
