WHAT YOU HAVE COVERED?

1. Indian Financial System

2. Macro economic environment.
3. About Stock Exchanges.
4. Introduction to Capital Market.
5. Primary Market
• Primary Market Mechanism.
• Floating of Public Issue, Right & Bonus Issue.
• Merchant Banking
• Broker-Client Relationship
C.P.C.M. L.S.E. 1
 PRINCIPLES OF INVESTING
• Do not borrow money for trading and investing in
capital market.
• Do not disturb your proportion of investment in
different assets.

“Blessed is he who expecteth nothing,

For he shall not be disappointed.”

“Blessed is he who expecteth nothing,

For he shall enjoy everything.”
2
 INTRODUCTION 21990530.prv.gif

1. Secondary Market Comprises

of buyers and sellers of securities
after the allotment is done.
2. It is adjustment of holding among investors
thru mechanism of Stock Exchanges.
3. Activities are associated with post allotment of
securities thru Stock Exchanges.
4. Activities begin after the securities are in
hands of investors. Contd.

C.P.C.M. L.S.E. 3
 INTRODUCTION
5. The Securities are listed and admitted to trade by the
Stock Exchanges.
6. It comprises of debt, equity & Derivatives, Debentures
Stock, Units of Mutual Funds and any other marketable
security.
7. Secondary Market provides efficient platform for trading.
8. Stock Exchanges provide the secondary market activities,
and
9. Other intermediaries too play important role.

C.P.C.M. L.S.E. 4
 SECURITIES MARKET

Primary
market / Listing Secondary
IPO market

C.P.C.M. L.S.E. 5
 Secondary Market Activities
1. Listing of Securities.
2. Registration of Intermediaries.
3. Opening of Demat Account.
4. Client Registration.
5. Trading thru SEBI registered Brokers.
6. Clearing of Trades.
7. Settlement of Trades.

C.P.C.M. L.S.E. 6
INVESTMENT ALTERNATIVES-vis-a-
vis-RISK PROFILE
- Provident Fund - Fixed Deposits
-Government Securities -Insurance Policies
Low Risk
-National Saving Schemes -Infrastructure Bonds
-Postal Savings

-Corporate Bonds & Debentures

-Corporate Fixed Deposits
Medium Risk
-Mutual Funds
-Shares

High Risk
-Derivative Products
 EQUITY/SHARES/STOCKS????

• Shares – ownership of a
company

• Increase in value of your

shares + dividends + Bonus
shares.

C.P.C.M. L.S.E. 8
 MUTUAL FUNDS ???
• For people who don’t want to be
actively involved/ consider
themselves unaware…

• Mutual Funds
– Professionally Managed
– Provide Portfolio Diversification
– Liquidity
– Transparency
– Choice of Schemes (Open Ended
& Close Ended)
C.P.C.M. L.S.E. 9
MUTUAL FUNDS ???
• Those who do not
have time to study the
Stock Markets, Mutual
Funds are the best bet.

• They save lot of their

time, and lot of
chances for extra
earnings too.

C.P.C.M. L.S.E. 10
 What are Derivatives?
• Financial instruments
whose values depend on
the values of other, more
basic underlying assets.
va t i v e s
Deri
• Useful in reallocating risk
either across time or
across individuals with
different risk bearing
preferences.
C.P.C.M. L.S.E. 11
 BASICS OF DERIVATIVES
• Futures
A future contract is an agreement between the buyer and
seller for the purchase and sale of a particular asset at a
specific future date.
• Options
An option is a contract that provides the buyer (holder)
of the option the right but not obligation to buy or sell a
specified asset at an agreed price on or upto a particular
date.
The seller has the obligation to buy or sell that specified
asset at that agreed price. Two types of options: Put
(Right to sell) & Call (Right to buy).
C.P.C.M. L.S.E. 12
Growth of NSE F&O (Rs. Crore)
Year Turnover Avg. Daily T.O
2000-01 2365 11.74
2001-02 101926 410.70
2002-03 439862 1753.00
2003-04 2130610 8388.10
2004-05 2546982 10107.80
2005-06 4824175 20100.73
2006-07 7356242 29543.00

2007-08 13090477-75 52153.50

2008-09 11010482-20 45310.63
2009-10 2370614-86 64070.67
(upto May’09)

C.P.C.M. L.S.E. 13
 DEBT
• Government Securities
• Treasury Bills
• State Bonds
• PSU & FI’s Bonds
• Corporate Debentures
• Commercial Papers
• Certificate of Deposits
• Call Money Market

C.P.C.M. L.S.E. 14
 INTERMEDIARIES
1. Stock Exchanges.
2. Stock Brokers.
3. Sub-Brokers.
4. Clearing Corporations
5. Clearing Banks
6. Portfolio Managers.
7. Investment Advisors.
8. Registrar & Transfer Agents.
9. Depositories. Contd.

C.P.C.M. L.S.E. 15
 INTERMEDIARIES
10. Depository Participants.
11. Bankers to the Issues.
12. Underwriters.
13. Custodian of Securities.
14. Foreign Institutional Investors.
15. Credit Rating Agencies.
16. Venture Capital Funds.
17. Mutual Funds.
18. Collective Investment Schemes.
19. Any other associated with Capital Market.
C.P.C.M. L.S.E. 16
 ROLE OF INTERMEDIARIES
1. Trading is carried out by investors thru the
intermediaries.
2. Intermediaries are required to be registered
by SEBI.
3. Each intermediary plays its role in Market.
4. Code of conduct specified for each
Intermediary.

C.P.C.M. L.S.E. 17
 ROLE OF INTERMEDIARIES
5. Net-worth criteria specified for
intermediaries.
6. Intermediaries help in Trade management
and execution.
7. The Intermediaries perform the trade
clearing and settlement.
8. Registered intermediaries are responsible
for their acts.

C.P.C.M. L.S.E. 18
 MARKET INSTRUMENTS
1. EQUITY.
2. DEBT INSTRUMENTS.
3. DEBENTURES.
4. ADRs, GDRs, FCCBs, IDRs
5. DERIVATIVE PRODUCTS.
– (Futures & Options)
– UNITS OF MUTUAL FUNDS
C.P.C.M. L.S.E. 19
C.P.C.M. L.S.E. 20
 LISTING OF SECURITIES
1. It means formal admission of a security to trade
at Stock Exchange.
2. Listing is governed under Companies Act, 1956,
SC(R) A, 1956, SC(R) Rules 1957 and guidelines
issued by SEBI and MOF.
3. Any company intending to issue securities to the
public should seek listing at Stock Exchanges.
4. In case securities are not listed, company has to
make refund to investors.
Cont.
C.P.C.M. L.S.E. 21
 LISTING OF SECURITIES
5. Listing agreement binds the company to
comply to the prescribed clauses.
6. Bye Laws of Stock Exchanges & Listing
Agreement stipulate norms for Listing and
Trading of Securities.
7. The Listing Agreement has as many as 52
clauses.
8. Listing Agreement is enforceable under the
SC(R)A, 1956.

C.P.C.M. L.S.E. 22
 LISTING AGREEMENT
IMPORTANT CLAUSES
1. Letter of Allotment will be issued immediately.
2. To effect transfer of shares without undue delay.
3. Not to charge any fee.
4. To notify Exchange immediately regarding Board
Meeting with regard to bonus and right issue
etc.
5. To get the new issues listed with the Exchange.
6. To close member books at least once in a year
Contd.
C.P.C.M. L.S.E. 23
 LISTING AGREEMENT

7. To Close its Transfer Book for the purpose of

dividend, bonus shares etc.
8. To notify the Exchange any change in general
character.
9. To supply B/S and P&L A/c to Exchange.
10. To notify the Exchange any major events like
strike, lock out etc.
11. To pay listing fee to Stock Exchanges.
C.P.C.M. L.S.E. 24
 LISTING AGREEMENT
12. To publish interim as well as final result of the
company.

13. Company will issue call notices & other related

documents to the share holders & no Fees is to be
charged for the same.
14. To send copy of B. Sheet / Profit & Loss A/c to
each and every Shareholder

15. To fill with exchanges quarterly information on

Shareholding pattern

C.P.C.M. L.S.E. 25
 LISTING AGREEMENT

16. To supply proceedings of all AGM & EGM

To Exchange.

17.To comply with guidelines on disclosers

and investors protection issued by SEBI
from time to time.

18. To comply with Rules of corporate

governance.
C.P.C.M. L.S.E. 26
C.P.C.M. L.S.E. 27
 About Mutual Funds
• It is pooling of savings of different
investors.
• The amount collected is invested in
Stock Market.
• The M. F. operate under various
schemes regulated by SEBI.

C.P.C.M. L.S.E. 28
 About Mutual Funds
• In India UTI started this concept with US
64 scheme.
• There are 38 Mutual Funds in India
registered with SEBI.
• Mutual Funds are diversified into various
schemes to suit need of Investors.
• You can make one time investment or You
can invest through SIP & NFO.

C.P.C.M. L.S.E. 29
 About Mutual Funds
• Various types of Funds.
1. Income Funds.
2. Balanced Funds.
3. Liquid Funds.
4. Gilt Funds.
5. Index Funds.
6. Exchange Traded Funds.
7. Gold Exchange Traded Funds
8. Real Estate Funds Etc..
9. Special Sector Funds
10. FMP
11. Tax Saver / ECSS.
C.P.C.M. L.S.E. 30
 STRUCTURE OF MFs
• Fund Sponsor: They establish the MFs and are
therefore promoters of the Funds.
• Trustees: It is board who issue broad guidelines
and are approved by SEBI. The Board is
independent and are guardians of the investors
money.
• Asset Management Company: They manage day
to day affairs of Funds, and are operational arm.
• Fund Manager.

C.P.C.M. L.S.E. 31
C.P.C.M. L.S.E. 32
 TRADING MECHANISM
Trading Mechanism consists of:
1. Buy- sell quotes.
2. Trading over electronic screens.
3. Dematerialized Securities.
4. Execution of Trades.
5. Risk Management Systems.
6. Clearing & Settlement.

C.P.C.M. L.S.E. 33
 TRADING IN INDIA
1. Operates thru sophisticated SBTS.
2. At NSE it is “National Exchange for Automated
Trading” (NEAT).
3. At BSE it is “BSE On-line Trading System”
(BOLT).
4. NSE brought screen based trading in India.
5. Today all Stock Exchanges have SBTS.
6. Cent percent trades take place thru SBTS.

C.P.C.M. L.S.E. 34
 BENEFITS OF SBTS
1. Increase in the market efficiency.
2. Enhancement of market quality and
liquidity.
3. Reduction of settlement risks.
4. Elimination of mismatches.
5. Improvement in Management
Information System.
6. Flexibility in system and enhancement in trading
volumes.
7. Support of uniform nation wide market.
C.P.C.M. L.S.E. 35
 Hub
TRADING NETWORK
Satellite

BSE Building

Delhi Office Beach

Mainframe Computer Broker Workstation

C.P.C.M. L.S.E. 36
 TRADING NETWORK
1. Mainframe computer located at Central place.
2. M. Computer connected to Central Hub.
3. Central Hub connected to satellite.
4. Central Hub transmits data to & fro via
Satellite to Broker work stations.
5. Mainframe Computer keeps records of all
transactions.

C.P.C.M. L.S.E. 37
SETTLEMENT CYCLE

C.P.C.M. L.S.E. 38
 STEPS IN TRADING
1. Decision to Trade by Investors.
2. Registering with a Broker.
3. Opening a demat account.
4. Placing of an Order.
5. Execution of Trades.
6. Clearing & Settlement of Trades.
7. Pay-in of Funds & Securities.
8. Pay-out of Funds & Securities.
C.P.C.M. L.S.E. 39
CLEARING & SETTLEMENT

Trade Details
Pay-out

Pay in

Inst. To DP Inst. To Bank

DP informs CM Bank informs CM

C.P.C.M. L.S.E. 40
 CLEARING & SETTLEMENT
1. Trade details from Exchange to C. C.
2. C.C. notifies the trade details to clearing
members/ custodians who affirm back.
3. Download of obligations 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.

C.P.C.M. L.S.E. 41
 CLEARING & SETTLEMENT
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.

C.P.C.M. L.S.E. 42
 ROLLING SETTLEMENT
Function Activity Day
Trading Rolling Settlement Trading T
Clearing Custodial Confirmation T+1
Delivery Generation T+1
Settlement Securities & Funds pay-in T+2
Securities & Funds pay-out T+2
Valuation of shortages at T+1 T+1
Closing Price
Post Close Out T+2
Settlement C.P.C.M. L.S.E. 43
C.P.C.M. L.S.E. 44
REFORMS IN CAPITAL MARKET
1. There has been a sea change in Capital market.
2. The 1990s was a decade of reforms in Indian
Economy.
3. It was the age of emergence of securities market
from the backwaters into mainstream in Indian
Financial System.
4. Process of reforms had begun in 1980s.
5. Free pricing regime followed with the abolition
of Capital Issues Control Act, 1947.
6. Markets have become more institutionalised.
C.P.C.M. L.S.E. 45
REFORMS IN SECONDARY MARKET
1. Establishment of SEBI.
2. DIP Guidelines.
3. Screen Based Trading.
4. Dematerialization of Securities.
5. Shortening of Trading Cycle.
6. Introduction of Rolling Settlement.
7. Derivative Trading.
8. Risk Management.
9. Investor Protection.
C.P.C.M. L.S.E. 46
 REFORMS IN SECONDARY MARKET
10. Globalization, and other Reforms.
11. Setting up of Clearing Corporations.
12. Professional management of Stock Exchange post de-
mutualisation.
13. Regulation to protect investors against take over,
insider trading etc.
14. Buy back of Securities.
15. Continuing Disclosure Scheme.
16. World class surveillance System.
17. Corporate Governance.
C.P.C.M. L.S.E. 47
 RECENT REFORMS
• Short selling for institutional investors
• Cross-margining across Exchanges.
• Restructuring of regional stock exchanges
• Integrated market surveillance system
• National Institute of Securities Market
being set up by SEBI
• Unified Corporate Bond market thru BSE.
• I.P.O. Grading.
C.P.C.M. L.S.E. 48
THANK
YOU
C.P.C.M. L.S.E. 49
 STOCK INDICES
• 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
• Stock Market is a place where the stocks of a listed
company are traded.
• A single figure that sums up the overall performance of the
market on a daily basis is the Stock Index.
• A good Stock Index captures the movement of the well
diversified and highly liquid stocks.

C.P.C.M. L.S.E. 50
• Index movements reflect the changing expectations of the
stock market about future dividends of the corporate
sector.
• The index is calculated by finding the weighted average of
the prices of the most actively traded companies in the
market, where the weights are generally in proportion to
the market capitalization of the company.

C.P.C.M. L.S.E. 51
 But when and where did it all
start?
• Stock Exchanges as a centre for trading were established
as early as the 16th century. In Antwerp, a major financial
hub in Belgium, traders gathered together in 1531 to
speculate in shares and commodities.
• London and Paris set up Exchanges sometime near the end
of the 17th century. Close to hundred years later, in 1792,
the New York Stock Exchange (NYSE) was established,
which is still one of the world’s most powerful exchanges
today.

C.P.C.M. L.S.E. 52
• In India, the Stock Exchange, Mumbai, was established in
1875 as "The Native Share and Stockbrokers Association"
(a voluntary non-profit making association) and is now
popularly known as the Bombay Stock Exchange (BSE).
• The other major exchange is the National Stock Exchange
of India Limited (NSE) and was incorporated in November
1992. Combined the two trading zones are responsible for
99.9% of the trading done in India.

C.P.C.M. L.S.E. 53
 Types of Indexes available:-

• Broad-Market Index: This consists of all the

large, liquid stocks of the country and becomes the
benchmark for the entire capital market of the country. An
example for this is the S&P CNX 500.
• Specialized Index: We can either have Industry
or Sector specific Index for any particular sector
• of the economy which then serves as the benchmark for
that particular industry or we can have an index for the
highly liquid stocks. Taking an example for an industry
specific index we have the S&P Banking Index which is a

C.P.C.M. L.S.E. 54
• capitalization-weighted index of 26 domestic equities
traded on the New York Stock Exchange and NASDAQ,
The stocks in the Index are high-capitalization stocks
representing a sector of the S&P 500. Similarly, The S&P
CNX Nifty is a relevant example for an index composed of
highly liquid stocks

C.P.C.M. L.S.E. 55
 Determinants of a Stock Index

• Liquidity – Liquidity of stocks as measured by the

“impact cost” criterion which determines the cost faced
when actually trading the index. For example if the current
market price of a stock is Rs 200 and a trader purchases it
at Rs 202 (due to involved transaction costs) then the
market impact cost is 1% and the stock is considered
highly liquid for lower impact cost.

C.P.C.M. L.S.E. 56
• Diversification – Diversification, by putting stocks
of various sectors that reflect the economy, is used to
cancel out stock noise which is essentially the individual
stock fluctuations and to reduce investor’s risks. An index
must thus have a balanced representation of all sectors.
• Optimum size - More stocks lead to greater
diversification but the limiting factor is the size of the
• index. Increasing number of stocks in an index from 10 to
say 30 gives a sharp reduction in risks but increasing the
number beyond a point does very little in risk reduction.
Further it might lead to addition of illiquid stocks. For
57
example, the optimal size for BSE Sensex is 30.
• Market Capitalization: The index include
primarily the stocks of companies that have significant
market capitalization with respect to the index such that
any major change in the price of the stock is reflected in
the index. For example in BSE 30 Index, the scrip must
have a minimum of 0.5% of the market capitalization of
the Index.

C.P.C.M. L.S.E. 58
• Averaging - Every stock primarily moves for two
reasons: The news about the company and the news about
the country. An ideal index is affected only by the latter,
that is the news of the economy and the effect of the
former is knocked out by proper averaging. The various
methods of averaging employed are:

C.P.C.M. L.S.E. 59
• Price Weighted: The weights assigned are
proportional to the stock prices.
• Market Capitalization Weighted: The
equity price is weighted by the market capitalization
of the company. Hence each constituent stock in the index
affects the index value in proportion to the market value of
all outstanding shares.

C.P.C.M. L.S.E. 60
 (Current market capitalization)
• Index = ---------------------------------------- x Base Value
(Base Market Capitalization)
Where:
CMS = Sum of (current market price * outstanding shares) of all
securities in the index
BMS = Sum of (market price * issue size) of all securities as on base
date.

C.P.C.M. L.S.E. 61
 Sensex (BSE 30)

• The index includes 30 companies which figure in top 100

in terms of market capitalization and are also among the
leaders in their industry groups. Presently the following
are the constituent companies: ACC, Infosys, ICICI Bank,
Dr. Reddy’s Lab, SBI, CIPLA, Zee Telefilms, Nestle
India, RPL, RIL, HCL Tech., Bajaj Auto, BHEL, Castrol,
BSES, Colgate Palmolive, Hindalco, Grasim, Glaxo, Hero
Honda, Gujrat Ambuja Cements, HLL, HPCL, ITC, L&T,
MTNL, Ranbaxy, TISCO, TELCO and Satyam.

C.P.C.M. L.S.E. 62
 Standard and Poor’s CRISIL
NSE Exchange NIFTY

• S&P CNX NIFTY is an S&P endorsed Stock Index owned

by the India Index Services Ltd. (IISL). It is a highly
diversified index, accurately reflecting the overall market
conditions and is composed of 50 liquid stocks. It is
backed by solid economic research and three extremely
respected organizations (NSE, CRISIL, and S&P).

C.P.C.M. L.S.E. 63
 Signals from the Stock Index

• The Index finds uses in various fields starting from

economic research to helping investors choose appropriate
portfolio for investment. For example the index funds are
funds that passively invest in the market i.e. the portfolio
returns of the index funds is same as that of the Index.
• the Index is an indicator of the overall mood of the
investors in the secondary market, it helps a company
answer questions like is it the right time to take out an
IPO, how to price the issue, etc.

C.P.C.M. L.S.E. 64
• It acts as a signal to the government of the ‘feel good’
factor prevailing in the economy. As much as the
finance ministry may want to ignore it, the performance of
the stock market right after the introduction of the budget
gives an immediate feedback to the Finance Minister about
the acceptability of the budget.

C.P.C.M. L.S.E. 65
• However, the market index is a double edged sword.
Because the index is influenced by expectations of
the future performance of the stocks, it leads to a self
fulfilling prophecy. Suppose an investor thinks that
the stock of the company is going to go down and this
feeling prevails across the market then everyone would
want to get out of the company’s stock. This will
automatically lead to the stock prices crashing.

C.P.C.M. L.S.E. 66
• The Stock Index can often also act as a trigger to herd
mentality. Any downturn in the market would be
reinforced by the collective action of the investors to
hedge against any losses and get out of the market. This
would further depress the market.

C.P.C.M. L.S.E. 67
 Indian Debt Market
• A market where fixed income securities of
various types and features are issued and
traded.
• It include securities issued by central and
state government, municipal corporations,
government bodies and commercial bodies
such as financial institutions, bank, public
sector units, public limited companies.
C.P.C.M. L.S.E. 68
 Advantages of Investment in
Debt Market
TO INVESTOR:
• Steady income
• Safety
• Risk free
TO FINANCIAL SYSTEM:
Reduction in borrowing cost.
Providing greater funding avenues

C.P.C.M. L.S.E. 69
 RISKS ON DEBT
• Default risk
• Interest rate risk:
• Counter party risk
• Price risk
• Reinvestment Risk

C.P.C.M. L.S.E. 70
 Instrument Profile
• GOVERNMENT SECURITIES:
Zero coupon bonds
Coupon bearing bonds
Treasury bills
STRIPS
PUBLIC SECTOR BONDS:
Government guaranteed bond
Debentures
PSU bonds
Commercial paper
C.P.C.M. L.S.E. 71
• PRIVATE SECTOR BONDS:
• Debentures
• Bonds
• Commercial paper:
• Floating rate bonds
• Zero coupons bond
• Inter corporate deposit

C.P.C.M. L.S.E. 72
• STRIPS: Zero coupon bonds have a duration equal to the bond's
time to maturity, which makes them sensitive to any changes in the
interest rates. Investment banks or dealers may separate coupons from
the principal of coupon bonds, which is known as the residue, so that
different investors may receive the principal and each of the coupon
payments. This creates a supply of new zero coupon bonds.
• The coupons and residue are sold separately to investors. Each of
these investments then pays a single lump sum. This method of
creating zero coupon bonds is known as stripping and the contracts are
known as strip bonds. "STRIPS" stands for Separate Trading of
Registered Interest and Principal Securities. [2]

C.P.C.M. L.S.E. 73
 COMMERCIAL PAPER
• An unsecured, short-term debt instrument issued by a corporation, typically
for the financing of accounts receivable, inventories and meeting short-term
liabilities. Maturities on commercial paper rarely range any longer than 270
days. The debt is usually issued at a discount, reflecting prevailing market
interest rates. Commercial paper is not usually backed by any form of
collateral, so only firms with high-quality debt ratings will easily find buyers
without having to offer a substantial discount (higher cost) for the debt issue.
A major benefit of commercial paper is that it does not need to be registered
with the Securities and Exchange Commission (SEC) as long as it matures
before nine months (270 days), making it a very cost-effective means of
financing. The proceeds from this type of financing can only be used on
current assets (inventories) and are not allowed to be used on fixed assets,
such as a new plant, without SEC involvement .

C.P.C.M. L.S.E. 74
 TREASURY BILLS
•    A treasury bills nothing but promissory note issued by
the Government under discount for a specified period
stated therein. The Government promises to pay the
specified amount mentioned therein to the beater of the
instrument on the due date. The period does not exceed a
period of one year. It is purely a finance bill since it does
not arise out of any trade transaction. It does not require
any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is
clams against the Government. Treasury bill are issued
only by the RBI on behalf of the Government

C.P.C.M. L.S.E. 75
• FLOATING RATE BOND: A type of bond bearing a
yield that may rise and fall within a specified range
according to fluctuations in the market.
• A zero-coupon bond (also called a discount bond or deep discount
bond) is a BOND bought at a price lower than its face value, with the
face value repaid at the time of maturity. It does not make periodic
interest payments, or have so-called "coupons," hence the term zero-
coupon bond. When the bond reaches maturity, its investor receives its
par (or face) value.

C.P.C.M. L.S.E. 76
 Bonds
• A debt investment in which an investor loans money to an
entity (corporate or governmental) that borrows the funds for
a defined period of time at a fixed interest rate.
• Factors determine the price of bond:
• Economic conditions
• Money market and capital market conditions
• Political and social condition
• Credit quality of the issuer
• Interest rate prevailing in the market
• The rate of new issue

C.P.C.M. L.S.E. 77
 Yield of Bond
• Yield refers to the percentage rate of return paid on bond
in the form of interest.
• It is a effective rate of interest on bond
• YTM refers to the percentage rate of return paid on bond,
If the instrument is bought and held till maturity date.
• Relation between Yield and Price:
• they are inversely related

C.P.C.M. L.S.E. 78
 Secondary Debt Market
• The segments in the secondary debt market based on the
characteristics of the investors and the structure of the
market are:
Wholesale Debt Market - where the investors are mostly
Banks, Financial Institutions, the RBI, Primary Dealers,
Insurance companies, MFs, Corporate and FIIs.
• Retail Debt Market involving participation by individual
investors, provident funds, pension funds, private trusts,
NBFCs and other legal entities in addition to the wholesale
investor classes.

C.P.C.M. L.S.E. 79
 Wholesale Debt Market
• The Exchange started its trading operations in June 1994 by enabling the
Wholesale Debt Market(WDM) segment of the Exchange. This segment
provides a trading platform for a wide range of fixed income securities that
includes Central government securities, treasury bills (T-bills), state
development loans (SDLs), bonds issued by public sector undertakings
(PSUs), floating rate bonds (FRBs), zero coupon bonds (ZCBs), index bonds,
commercial papers (CPs), certificates of deposit (CDs), corporate debentures,
SLR and non-SLR bonds issued by financial institutions (FIs), bonds
issued by foreign institutions and units of mutual funds (MFs).

C.P.C.M. L.S.E. 80
 Trading System
• The WDM trading system, known as NEAT (National Exchange for
Automated Trading), is a fully automated screen based trading system
that enables members across the country to trade simultaneously with
enormous ease and efficiency. It supports an anonymous order driven
market which operates on a price/time priority and provides
tremendous flexibility to users in terms of orders with various
time/price/quantity related conditions that can be placed on the system.
It also provides on-line market information like total order depth, best
buys and sells available, quantity traded, the high, low and last traded
price for securities are available at all points of time.

C.P.C.M. L.S.E. 81
• The WDM Trading system provides two market sub-types: continuous market
and negotiated market. In the continuous market, the buyer and seller do not
know each other and they put their best buy/sell orders, which are stored in
order book with price/time priority. If orders match, it results into a trade. The
trades in WDM segment are settled directly between the participants, who take
an exposure to the settlement risk attached to any unknown counter-party. In
the NEATWDM system, all participants can set up their counter-party
exposure limits against all probable counter-parties. This enables the trading
member/participant to reduce/ minimize the counterparty risk associated with
the counter-party to trade. A trade does not take place if both the buy/
sell participants do not invoke the counter-party exposure limit in the trading
system.

C.P.C.M. L.S.E. 82
• In the negotiated market, the trades are normally decided by the seller
and the buyer outside the exchange, and reported to the Exchange
through a trading member for approval. Thus, deals negotiated or
structured outside the exchange are disclosed to the market through
NEAT-WDM system. In negotiated market, as buyers and sellers
know each other and have agreed to trade, no counter-party exposure
limit needs to be invoked.

C.P.C.M. L.S.E. 83
• There are normally two types of transactions,
which are executed in the Wholesale Debt
Market :

An outright sale or purchase and

• A Repo trade
•

C.P.C.M. L.S.E. 84
• An outright Buy or sell transaction is a one where there is no intended reversal of the
trade at the point of execution of the trade. The Buy or sell transaction is an
independent trade and is in no way connected with any other trade at the same or a
later point of time.

A Ready Forward Trade (which is normally referred to as a Repo trade or a

Repurchase Agreement ) is a transaction where the said trade is intended to be
reversed at a later point of time at a rate which will include the interest component for
the period between the two opposite legs of the transactions.

So in such a transaction, one participant sells securities to other with an agreement to

purchase them back at a later date. The trade is called a Repo transaction from the
point of view of the seller and it is called a Reverse Repo transaction from point of
view of the buyer.

C.P.C.M. L.S.E.
• Repos therefore facilitate creation of liquidity by permitting the seller
to avail of a specific sum of money (the value of the repo trade) for a
certain period in lieu of payment of interest by way of the difference
between the two prices of the two trades.

Repos and reverse repos are commonly used in the money markets as
instruments of short-term liquidity management and can also be
termed as a collateralized lending and borrowing mechanism. Banks
and Financial Institutions usually enter into reverse repo transactions
to manage their reserve requirements or to manage liquidity.

C.P.C.M. L.S.E. 86