Financial market

Capital market and money market

Capital Market:

1 – Primary market

2 – Secondary market

Secondary market:

1 – Stock market and OTC market

What is an Over-The-Counter Market

A decentralized market, without a central physical location, where market

participants trade with one another through various communication modes such as
the telephone, email and proprietary electronic trading systems. An over-the-
counter (OTC) market and an exchange market are the two basic ways of
organizing financial markets.

Capital Market'

Definition: Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc. The buying/selling is undertaken by
participants such as individuals and institutions.

Description: Capital markets help channelise surplus funds from savers to

institutions which then invest them into productive use. Generally, this market
trades mostly in long-term securities.

Capital market consists of primary markets and secondary markets. Primary

markets deal with trade of new issues of stocks and other securities, whereas
secondary market deals with the exchange of existing or previously-issued
securities. Another important division in the capital market is made on the basis of
the nature of security traded, i.e. stock market and bond market.
A Securities market is an exchange where sale and purchase transactions of
securities are conducted on the base of demand and supply. A well-functioning
securities market should be able to provide timely and accurate information on the
past transactions, liquidity, low transaction costs (internal efficiency) and securities
prices that rapidly adjusted to all available information (external efficiency).

TYPES OF SECURITIES MARKETS:

In the context of equity products, which this publication seeks to cover in depth,
the following markets could be defined:

1 - Primary Market

2 - Secondary Market

3 - Derivative Market

There are two level of securities markets:

 Primary Market is the market for new securities issues and is facilitated by
underwriting groups. The companies sell their securities to the public
directly to the investors through the underwriters (normally investment
banks for stock and bond issuance). When the firm is issuing shares for the
very first time, it is called Initial Public Offering (IPO). New shares issued
by firms whose shares are already trading in the market are called seasoned
or secondary issues. Issuing company receives cash from the sale and uses it
to expand or fund the operations. After the initial sale, the securities trading
will be conducted on the secondary market.
 Secondary market, the secondary market is that market in which the buying
and selling of the previously issued securities is done. The transactions of
the secondary market are generally done through the medium of stock
exchange. The chief purpose of the secondary market is to create liquidity
in securities.
 WHAT ARE STOCKS? Stock is a share in the ownership of a company.
Stock represents a claim on the company's assets and earnings. As you
acquire more stock, your ownership stake in the company becomes greater.
Whether you say shares, equity, or stock, it all means the same thing.
Key strengths of the Indian securities markets

The securities markets in India have made enormous progress in developing

sophisticated instruments and modern market mechanisms. The key strengths of
the Indian capital market include:

A fully automated trading system on all stock exchanges,

A wide range of products,

an integrated platform for trading in both cash and derivatives,

and a nationwide network of trading through over 4,6184 corporate brokers

. A significant feature of the Indian securities market is the quality of regulation.

The market regulator, Securities and Exchange Board of India (SEBI) is an
independent and effective regulator. It has put in place sound regulations in respect
of intermediaries, trading mechanism, settlement cycles, risk management,
derivative trading and takeover of companies. There is a well designed disclosure
based regulatory system. Information technology is extensively used in the
securities market. The stock exchanges in India have the most advanced and
scientific risk management systems. The growing number of market participants,
the growth in volume of securities transactions, the reduction in transaction costs,
the significant improvements in efficiency, transparency and safety, and the level
of compliance with international standards have earned for the Indian securities
market a new respect in the world.

Market Segments
The securities market has two interdependent and inseparable segments, the new
issues (primary) market and the stock (secondary) market. The primary market
provides the channel for creation and sale of new securities, while the secondary
market deals in securities previously issued. The securities issued in the primary
market are issued by public limited companies or by government undertakings.
The resources in this kind of market are mobilized either through the public issue
or through private placement route. It is a public issue if anyone can subscribe it,
whereas if the issue is made available to a selected group of persons it is termed as
private placement. There are two major types of issuers of securities, the corporate
entities who issue mainly debt and equity instruments and the government (central
as well as state) who issue debt securities (dated securities and treasury bills).The
secondary market enables participants who hold securities to adjust their holdings
in response to changes in their assessment of risks and returns. Once the new
securities are issued in the primary market they are traded in the stock (secondary)
market. The secondary market operates through two mediums, namely, the over-
the-counter (OTC) market and the exchange-traded market. OTC markets are
informal markets where trades are negotiated. Most of the trades in the government
securities are in the OTC market.

STOCK EXCHANGE A stock exchange can be defined as a centralized market

for buying and selling stocks where the price is determined through supply-demand
mechanism

Functions of Stock Exchange (Securities)

1. Providing Liquidity and Marketability to Existing Securities: The basic

function of a Stock Exchange is to provide liquidity and marketability to existing
securities. • It is a ready market for conversion of securities into cash and vice
versa.
2.Pricing of Securities • Pricing of securities is the main function of a Stock
Exchange. • Stock Exchange fixes prices for shares trading on it,
3.Safety of Transactions : Existing legal framework in Stock Exchange provides
safety of transactions. • Stock Exchange provides a safe and fair deal in securities
market.
4.Contributes to Economic Growth • Stock Exchange contributes to economic
growth.
5.Spreading of Equity Cult : Stock Exchange develops the habit of equity cult
among the Public. • Stock Exchange encourages people to save and invest in
securities.
6.Providing Scope for Speculation :. • Stock Exchange encourages the
speculative activity in a restricted and controlled manner.
7.Improves the Company’s Performance • Stock Exchange improves the
company’s performance.
8.Helps in Raising New Capital : The new companies and existing companies
need capital for their activities.
9.Clearing House of Business Information • According to the instructions of the
Stock Exchanges, all the listed companies have to provide financial statements,
annual reports and other reports to the exchange
10. Economic Barometer • Stock Exchange is an economic barometer of the
country. Economic conditions of the country are known through the stock indices.

Types of Financial Market:

The financial market may be classified as primary market or secondary market.

Primary Market: The market mechanism for the buying and selling of new issues
of securities is known as primary market. This market is also termed as new issues
market because it deals in new issues of securities.
Secondary Market: It deals with securities which have already been issued and
are owned by investors, both individual and institutional. These may be traded
between investors.
The buying and selling of securities already issued and outstanding take place in
stock exchanges. Stock exchanges constitute the secondary market in securities.
Participants in the Financial Market:
The major participants are:
1 - The buyers and sellers of securities or the investors and the issuers.
2 - Financial intermediaries are the second major class of participants in the
financial system. There are two types of financial intermediaries in the financial
system, namely:
A - Banking financial intermediaries
B - Non-banking financial intermediaries such as insurance companies, housing
finance companies, unit trusts and investment companies.
3 - Individuals and institutions who facilitate the trading or exchange process in
the system.
4 - Stock Exchanges: A stock exchange is an institution where securities that have
already been issued are bought and sold.
Presently there are 23 stock exchanges in India, the most important ones being the
NSE and BSE.
5 - Listed Securities: Securities that are listed on various stock exchanges and
hence eligible for being traded there are called listed securities.
6 -Depositories: A depository is an institution which dematerializes physical
certificates and effects transfer of ownership be electronic book entries.
7 - Brokers: Brokers are registered members of the stock exchanges through
whom investors transact.
8 - Foreign Institutional Investor (FII): Institutional investors from abroad who
are registered with SEBI to operate in the Indian capital market are called foreign
institutional investors.
9 - Market Merchant Bankers: Firms that specialize in managing the issue of
securities are called merchant bankers. They have to be registered with SEBI.
10 - Primary Dealers: primary dealers serve as underwriters in the primary
market and as market makers in the secondary market for government securities.
11 - Mutual funds: A mutual fund is a vehicle for collective investment. It pools
and manages the funds of investors
12 - Registrars: Also known as a transfer agent, a registrar is employed by a
company or a mutual fund to handle all investor-related services.
13 - Underwriters: An underwriter agrees to subscribe to a given number of
shares in the event the public subscription is inadequate.
14 - Bankers to an Issue: The bankers to an issue collect money on behalf of the
company from the applicants.

15 - Debenture Trustees: When debentures are issued by a company, a

debenture trustee has to be appointed to ensure that the borrowing firm fulfills its
contractual obligations.

Role of Primary Market:

Primary market is the medium for raising fresh capital in the form of equity and
debt. It mops up resources from the public and makes them available for meeting
the long- term capital requirements of corporate business and industry. The
primary market brings together the two principal constituents of the market,
namely the investors and the seekers of the capital.

Capital formation takes place in the primary market. The economic growth of
country is possible only through the primary market.

Methods of Floating New Issues( capital) in primary market:

1 - Public Issue 2 - Rights Issue 3 - Private Placement

Public Issue : It involves sale of securities to members of the public. The issuing
company makes an offer for sale to the public directly of a fixed number of shares
at a specific price. Public issues are mostly underwritten by strong public financial
institutions.
This is the most popular method for floating securities in the new issue market
Rights Issue: The rights issue involves selling of securities to the existing
shareholders in proportion to their current holding It is an inexpensive method of
floatation of shares as the offer is made through a formal letter to the existing
shareholders.

Private Placement: A private placement is a sale of securities privately by a

company to a selected group of investors. The securities are normally placed, in a
private placement, with the institutional investors, mutual funds or other financial
institutions This method is useful to small companies.

Problems of new issue market:

 Market fluctuations - your business may become vulnerable to market

fluctuations beyond your control
 Cost - the costs of flotation can be substantial and there are also ongoing
costs of being a public company, such as higher professional fees.
 Responsibilities to shareholders - in return for their capital, you will have
to consider shareholders' interests when running the company - which may
differ from your own objectives.
 The need for transparency - public companies must comply with a wide
range of additional regulatory requirements and meet accepted standards of
corporate governance including transparency, and needing to make
announcements about new developments.
 Demands on the management team - managers could be distracted from
running the business during the flotation process and through needing to deal
with investors afterwards.
 Investor relations - to maximize the benefits of being a public company and
attract further investor interest in shares, you will need to keep investors
informed.

What is IPO?  Process of selling securities to public in primary market Made

with 2 types –

• Fixed Price Issues

• Book building Issues Majorly done to raise Capital Process is directed towards
both institutional& the retail investors
There are mainly any of the two purposes behind an IPO

1. ESTABLISHING NEW BUSINESS

2. EXPANSION OF EXISTING BUSINESS

Companies, new as well as old, can offer shares to the investors in the primary
market. This kind of tapping the savings is called an IPO (Initial Public Offering).
SEBI regulates the way in which the companies can make this offering.

Investors’ protection in primary market:

Investors are the pillar of the financial and securities market. They determine the
level of activity in the market. They put the money in funds, stocks, etc. to help
grow the market and thus, the economy. It thus very important to protect the
interests of the investors. investor protection involves various measures established
to protect the interests of investors from malpractices. Securities and Exchange
Board of India (SEBI) is responsible for regulations of the Mutual Funds and
safeguard the interests of the investors. Investor protection measures by SEBI are
in place to safeguard the investors from the malpractices in shares, the stock
market, Mutual Fund, etc.
Recent trends in Primary Market……

1 - Raising of Capital The fresh capital raised through new issue markets has
enhanced from decade to decade. The primary market has become an important
source of mobilizing fund for Indian issuers since the commencement of the
economic reformed process in 1991-92 There is a preference for raising resources
in the primary market through private placements of debt instruments. Private
placements accounted for about 91% of total resources mobilized through domestic
resources issues by the corporate sector during 2000-01.

2 - Resource mobilization through Primary Market Particulars 2014-15 2015-16

% share in total amount No. of Issues Amount(Cr)

3 - Sector wise resource mobilization in primary market Source; SEBI

4 - The public sector organizations like financial institutions, PSUs have started
dominating in the primary market. The increase in the amount mobilized was on
account of higher level of capital mobilization by banks and financial institutions.
The public sector mobilized funds primarily in the form of Bonds. Banks and
financial institutions were primarily responsible for the trend.

5: - Factors which have accelerated the growth of Primary Market Investment

Industrial Growth The industrial growth and exhausting production capacities in
the industry has necessitated further expansion of industrial capacities. It induced
the companies to mobilize resources for further investment in future

6: Initiatives taken by SEBI for the development of Primary Market

Electronic-IPO The e-IPO norms are aimed at reducing the time taken between
share sale and listing to 6 days from past 12 days, enhance the reach of retail
investors and reduce costs for issuers. The e-IPO norms are started on 1 January
2016. Favorable norms for listing of start-ups and SMEs SEBI recently
introduced the listing norms for start-ups aimed at encouraging Indian
entrepreneurs to remain within the country, rather than moving to overseas markets
for raising capital. SEBI has already made it easier for the SMEs to raise money
from capital market.

SEBI measures for primary market:

SEBI has introduced various guidelines as regulatory measures for capital issues.
They are as below:

1. Disclosure of All Material Facts is made Compulsory: SEBI has made it

compulsory for companies do disclose all the facts and risk factors
regarding the projects undertaken by the company
2. Encouragement to Initial Public 0ffers: In order to encourage Initial
Public Offers (IPO) in the primary market, SEBI has permitted companies to
determine the par value of shares issued by them
3. Increase of Popularity to Private Placement Market: In recent years,
private placement market has become popular with issuers because of
stringent entry and disclosure norms for public issues
4. Underwriting has made Optional: To reduce the cost of issue in primary
market, SEBI has made underwriting of issue optional
5. Issue of Due Diligence Certificate: The lead managers have to issue due
diligence certificate, which has now been made part of the offer document
6. Conditions regarding Application Size etc.
7. Regulation of Merchant Banking: SEBI has brought Merchant banking
under its regulatory framework.
 8. Reforms as to Mutual Funds: The Government has now permitted the
setting up of private mutual funds and a few have already been set up

Module 2
Stock Exchange: Secondary market is the market in which securities
already issued by companies are subsequently traded among investors. The
secondary market where continuous trading in securities takes place is the stock
exchange. The stock exchange were once physical market places where the agents
of buyers and sellers operated through the auction process.
These are being replaced with electronic exchanges where buyers and sellers are
connected only by computers over a telecommunications network. Auction trading
is giving way to “screen- based” trading where bid prices and offer prices (or ask
prices) are displayed on the computer screen. Bid price refers to the price at which
an investor is willing to buy the security. Offer price refers to the price at which an
investor is willing to sell the security.
The bid-offer spread, the difference between the bid price and the offer price
constitutes his margin or profit. “ Stock exchange is a centralized market for
buying and selling stocks where the price is determined through supply-demand
mechanisms”. “ Stock exchange means anybody of individuals, whether
incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities”.
Stock Exchange – Definition:
An association or organization or body of individuals established for the
purpose of assisting, regulating and controlling the business of buying,
selling and dealing in securities

Functions of Stock Exchanges( secondary market):

1 - Maintains active trading: Shares are traded on the stock exchanges, enabling
the investors to buy and sell securities. A continuous trading increases the liquidity
or marketability of the shares traded on the stock exchanges.
2- Fixation of prices: Price is determined by the transactions that flow from
investors demand and suppliers preferences.
3-Ensures safe and fair dealing: The rules, regulations and by-laws of the stock
exchanges provide a measure of safety to the investors. Transactions are conducted
under competitive conditions enabling the investors to get a fair deal.
4- Aids in financing the industry: A continuous market for shares provides a
favorable climate for raising capital.

5 - Dissemination of information: Stock exchanges provide information through

their various publications.

6 - Performance inducer: The prices of stocks reflect the performance of the

traded companies. 7 - Self-regulating organization: The stock exchanges monitor
the integrity of the members, brokers, listed companies and clients.

Stock Exchanges in India:

At present there were 23 stock exchanges recognized by the central government.
1 - The Bombay Stock Exchange (BSE) : The BSE is established in 1875. It is
one of the oldest organized exchanges in the world

2 - The National Stock Exchange (NSE):

The NSE is inaugurated in 1994. It seeks to

(a) establish a nation-wide trading facility for equities, debt and hybrids,

(b) facilitate equal access to investors across the country,

© impart fairness, efficiency, and transparency to transactions in securities,

(d) shorten settlement cycle, and (e) meet international securities market
standards.

3 - Inter-connected Stock Exchange of India (ISE): For the purpose of compete

with the NSE and BSE, the 14 regional stock exchanges joined together and
promoted a new organization called Inter-connected Stock Exchange of India Ltd.

4 - Over the Counter Exchange of India (OTCEI): Trading takes place through
a networkof computers of over the counter (OTC) dealers located at several places,
linked to a central OTC computer using telecommunication links

Organization and regulatory framework of exchange market in india ( main

regulatory of exchange market in India)

Indian Capital Markets are regulated and monitored by the Ministry of Finance,
The Securities and Exchange Board of India and The Reserve Bank of India.
The Ministry of Finance regulates through the Department of Economic Affairs -
Capital Markets Division. The division is responsible for formulating the policies
related to the orderly growth and development of the securities markets.

The Regulators

Securities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority
established under the SEBI Act 1992 and is the principal regulator for Stock
Exchanges in India. SEBI’s primary functions include protecting investor interests,
promoting and regulating the Indian securities markets.

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act,
1934. The RBI is responsible for implementing monetary and credit policies,
issuing currency notes, being banker to the government, regulator of the banking
system, manager of foreign exchange, and regulator of payment & settlement
systems while continuously working towards the development of Indian financial
markets. The RBI regulates financial markets and systems through different
legislations

National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and
implement rules and regulations to govern the securities market. These rules and
regulations extend to member registration, securities listing, transaction
monitoring, compliance by members to SEBI / RBI regulations, investor protection
etc.

Weaknesses( Defects) of Stock Exchange in india:

1. Lack of Professionalism:

The majority of stock brokers lack professionalism. They lack proper education,
business skills, infra-structural facilities etc
2. Domination of Financial Institutions:

Indian stock markets are dominated by a few financial institutions. The U.T.I.,
LIC, GIC are the main players in Indian stock markets. The buying and selling by
these institutions sets the tone in the market

3. Poor Liquidity:

The Indian stock exchanges suffer from poor liquidity. A small number of scrips
are regularly traded on stock exchanges

4. Domination by Big Operators:

Some big operators influence the sentiment of stock exchanges in India. In

Bombay Stock Exchange 3-4 operators used to call the shots

5. Less Floating Stocks:

There is a scarcity of floating stock in Indian stock exchanges. The shares and
debentures offered for sale are a small portion of total stocks.

6. Speculative Trading:

The trading in stock exchanges is mainly speculative in nature. The operators try to
derive benefit out of short-term price fluctuations.

Trading of securities in secondary market:

In the secondary market, investors trade securities without the involvement of the
issuing companies. ... The primary market provides interaction between the
company and the investor while the secondary market is where investors buy and
sell securities from other investors.

The secondary market is where securities are traded after the company has sold its
offering on the primary market. It is also referred to as the stock market.

In the primary capital market, investors buy directly from the issuing company.
In the secondary market, investors trade securities among themselves.When a
company goes public, it sells new stocks and bonds for the first time. Usually, that
sale takes the form of an initial public offering.

Measures of SEBI for Secondary Market reforms in India

SEBI has introduced a wide range of reforms in the secondary market. These can
be discussed under the headings, namely,

1 - Governing Body of the stock exchange: The Board of directors of stock

exchange has to be reconstituted so as to include non-members, public
representatives, government representatives to the extent of 50% of total number of
members.

2 - Infrastructure Development of the stock exchange: Sufficient infrastructure

should be available in any stock exchange to facilitate trade. For example, National
Stock Exchange, (NSE) was set up with sophisticated screen-based trading.

3 - Settlement and Clearing: SEBI has withdrawn carry forward transactions and
introduced certain modified regulations. All stock exchanges should follow the
practice of weekly settlement.

4 - Debt Market Segment: NSE has a wholesale debt market segment to enable the
traders to trade in debt instruments.

5 - Price Stabilization: SEBI keeps a constant watch over the unusual fluctuations
in prices. It has instructed the stock exchanges to monitor the prices of newly listed
securities.

6 - Delisting: SEBI has streamlined the norms for delisting of securities from
stock exchanges.

7 - Brokers: SEBI has regulated the functioning of brokers through the following
measures.

1. Each broker and sub-broker should get their names registered with the stock
exchange.

8 - insider trading.
Major Stock Exchanges in India:

 Bombay Stock Exchange (BSE) ...

 National Stock Exchange of India (NSE) ...
 Multi Commodity Exchange of India (MCX) ...
 National Commodity and Derivatives Exchange (NCDEX)

Module 3
Listing of securities:

Meaning: Listing refers to the admission of the securities of a company on a

recognised stock exchange for trading. Listing of securities is undertaken with
the primary objective of providing marketability, liquidity and transferability of
shares.

Advantages(Merits) of Listing:

1 - Provides Liquidity to securities.

2 - Regular information
3 Easy Transferability
4 Income tax benefit
5 Transparency in dealing.
6 Helps the company to gain national importance and widespread recognition.
7 Helps in rising additional capital.

Disadvantages:

- 1 - Listed companies are subjected to do various regulatory measures of

the stock exchange and SEBI.
- 2 - Essential information has to be submitted by the listed companies to
stock exchange. 3 – 3 - Annual meeting and annual general report.

Listing Requirements:

For this purpose companies have been classified into 2 groups:-

1. Large Cap Companies (minimum issue size of Rs.10 crores and market
capitalization of not less than Rs.25 crores)
2. Small Cap Companies (minimum issue size of Rs.3 crores and market
capitalization of not less than Rs.5 crores).

Procedures( Steps in Listing )

1. • Submission of Letter of Application along with the necessary documents.

2. • Payment of Listing Fees.

3. • Collection of Listing Fees

4. • Trading Permission by SEBI.

5. • Payment of 1% Security with the designated SE.

6. • Advertisement.

LISTING FEES:

All companies listed on BSE are required to pay to BSE the Annual Listing Fees
by 30th April of every financial year. Particulars Amount (in Rs.) Initial Listing
Fees Rs.20,000 Listed Capital (in Rs. Crs) Annual Listing Fees (in Rs.)

DELISTING:

Delisting is the process of termination of permission given to a listed company

from trading its securities on the stock exchange. They can be in 2 ways:-

1. Compulsory Delisting

2. Voluntary Delisting

What is Right Issue?

These are the shares issued by the company with the purpose of increasing the
subscribed share capital of the company through an additional issue.

What is Bonus Issue?

These are shares issued as a gift to the existing shareholders depending on the
number of shares held by them.
 Module 4

Stock Exchange

The secondary tier of the capital market is what we call the stock market or the
stock exchange. The stock exchange is a virtual market where buyers and sellers
trade in existing securities. It is a market hosted by an institute or any such
government body where shares, stocks, debentures, bonds, futures, options etc are
traded.

A stock exchange is a meeting place for buyers and sellers. These can be brokers,
agents, individuals. The price of the commodity is decided by the rules of demand
and supply. In India, the most prominent stock exchange is the Bombay Stock
Exchange. There are a total of twenty-one stock exchanges in India.

Stock Market Importance

•Stock market is an important part of the economy of a country.

•The stock market exists so that companies can raise money without incurring any
debt (such is the case of a loan).

•Company issue shares to the public in what is known as an Initial Public Offering
(IPO).

•If there are more people buying a stock than people selling it, the price goes up
with the demand

Functions of the Stock Exchange

 Liquidity and Marketability: One of the main drawing factors of the stock
exchange is that it enables high liquidity. The securities can be sold at a
moments notice and be converted to cash. It is a continuous market and the
investors can divest and reinvest with ease as per their wishes.
 Price Determination: In a secondary market, the only way to determine the
price of securities in via the rules of supply and demand. A stock exchange
enables this process via constant valuation of all the securities. Such prices
 of shares of various companies can be tracked via the index we call the
Sensex.
 Safety: The government strictlt governs and regulates the stock exchanges.
In case of the BSE, the Securities Board of India is the governing body. All
the transactions occur within the legal framework. This provides the investor
with assurances and a safe place to transact in securities.
 Contribution to the Economy: As we know the stock exchange deals in
already issued securities. But these securities are continuously sold and
resold and so on. This allows the funds to be mobilized and channelised
instead of sitting idle. This boosts the economy.
 Spreading of Equity: The stock exchange ensures wider ownership of
securities. It actually educates the public about the safety and the benefits of
investing in the stock market. It ensures a better quality of transactions and
smooth functioning. The idea is to get more public investors and spread the
ownership of securities for the benefit of everyone.
 Speculation: One often hears that the stock exchange is a speculative
market. And while this is true, the speculation is kept within the legal
framework. For the stake of liquidity and price determination, a healthy dose
of speculative trading is necessary, and the stock exchange provides us with
such a platform.

Trading and Settlement Procedure

1] Selecting a Broker or Sub-broker

When a person wishes to trade in the stock market, it cannot do so in his/her

individual capacity. The transactions can only occur through a broker or a sub-
broker. So according to one’s requirement, a broker must be appointed.

Now such a broker can be an individual or a partnership or a company or a

financial institution (like banks). They must be registered under SEBI. Once such a
broker is appointed you can buy/sell shares on the stock exchange.

2] Opening a Demat Account

Since the reforms, all securities are now in electronic format. There are no issues
of physical shares/securities anymore. So an investor must open a dematerialized
account, i.e. a demat account to hold and trade in such electronic securities.
So you or your broker will open a demat account with the depository participant.
Currently, in India, there are two depository participants, namely Central
Depository Services Ltd. (CDSL) and National Depository Services Ltd. (NDSL).

3] Placing Orders

And then the investor will actually place an order to buy or sell shares. The order
will be placed with his broker, or the individual can transact online if the broker
provides such services. One thing of essential importance is that the order
/instructions should be very clear. Example: Buy a 100 shares of XYZ Co. for a
price of Rs. 140/- or less.

Then the broker will act according to your transactions and place an order for the
shares at the price mentioned or an even better price if available. The broker will
issue an order confirmation slip to the investor.

4] Execution of the Order

Once the broker receives the order from the investor, he executes it. Within 24
hours of this, the broker must issue a Contract Note. This document contains all the
information about the transactions, like the number of shares transacted, the price,
date and time of the transaction, brokerage amount etc.

Contract Note is an important document. In case of a legal dispute, it is evidence of

the transaction. It also contains the Unique Order Code assigned to it by the stock
exchange.

5] Settlement

Here the actual securities are transferred from the buyer to the seller. And the funds
will also be transferred. Here too the broker will deal with the transfer. There are
two types of settlements,

 On the Spot settlement: Here we exchange the funds immediately and the
settlement follows the T+2 pattern. So a transaction occurring on Monday
will be settled by Wednesday (by the second working day)
 Forward Settlement: Simply means both parties have decided the settlement
will take place on some future date.
 Module 5
Stock market indices:
Index: is a tool which measures change. Example: Consumer Price Index measures
Inflation. Also Human Development Index measures development of a country.

Stock Market Index: More than 7000 Companies are listed on BSE and NSE.

• Measuring the performance of each stock is tough and its difficult to infer
anything from it.

• Stock Market Index measures the performance of the Stock Exchange

What Are Stock Indices?

A stock market index is a statistical measure which shows changes taking place
in the stock market. It is a tool used by investors and financial managers to
describe the market, and to compare the return on specific investments.

To create an index, a few similar kinds of stocks are chosen from amongst the
securities already listed on the exchange and grouped together.
The criteria of stock selection could be the type of industry, market
capitalisation or the size of the company. The value of the stock market index is
computed using values of the underlying stocks.

- Measures aggregate price movements of companies’ shares on an

exchange
- Provide a snapshot of how share prices are performing in a particular
stock market, or across several markets

A stock index or stock market index is a measurement of a section of the stock

market. It is computed from the prices of selected stocks. It is a tool used by
investors and financial managers to describe the market, and to compare the
return on specific investments

Stock market indices are the barometers of the stock market.They mirror the
stock market behavior.With some 7,000companies listed on the Bombay stock
exchange, it is notpossible to look at the prices of every stock to find out
whetherthe market movement is upward or downward. The indicesgive a broad
 outline of the market movement and represent themarket. Some of the stock
market indices are BSE Sensex, BSE-200, Dollex, NSE-50, CRISIL-500,
Business Line 250 and RBIIndices of Ordinary Shares

Some of the important indices in India are:

 Benchmark indices – BSE Sensex and NSE Nifty

 Sectoral indices like BSE Bankex and CNX IT
 Market capitalization-based indices like the BSE Smallcap and BSE Midcap
 Broad-market indices like BSE 100 and BSE 500

Purpose :
They facilitate the investors in identifying the general pattern of the market.
Investors take the stock market as a reference to decide about which stocks to
go for investing.

Free Float

A company's free float refers to the number of outstanding shares that are
available to the public for trade.

The equation for free float is as follows:

Free Float = Outstanding Shares – Restricted Shares

The two most common kinds of indices are

1 – Price-weighted

2 - and market capitalization-weighted index.

The two most common methods of forming (Developing) indices are :

1 - Market capitalization Weighted Index:
In an index using market-cap weighting, stocks are given weight on the basis of
their market capitalization in comparison with the total market capitalization of the
index.

2 - Price Weighted Index

In this method, an index value is calculated on the basis of the company’s stock
price, and not market capitalization. Stocks with higher prices have greater
weightings in the index than stocks with lower prices

WHY DO WE NEED INDICES?

Indices are an important part of the stock market. Here’s why we need stock
indices:

1 – sorting: in a share market, there are thousands of companies listed. How do

you differentiate between all of those and pick one or two to buy? How do you sort
them out?

2 – Representation: Indices act as a representative of the entire market or a certain

segment of the market. In India, the BSE Sensex and the NSE Nifty are considered
the benchmark indices

3 – Comparison: An index makes it easy for an investor to compare performance.

An index can be used as a benchmark to compare against

4 – Passive investment : Many investors prefer to invest in a portfolio of

securities that closely resembles an index. This is called passive investment. An
index portfolio helps investors cut down cost of research and stock selection

Stock market indices in India:

From among the stocks listed on the exchange, some similar stocks are selected
and grouped together to form an index. This classification may be on the basis of
the industry the companies belong to, the size of the company, market
capitalization or some other basis. For example, the BSE Sensex is an index
consisting of 30 stocks. Similarly, the BSE 500 is an index consisting of 500
stocks.

The values of the grouped stocks are used to calculate the value of the index. Any
change in the price of the stocks leads to a change in the index value. An index is
thus indicative of the changes in the market.

Some of the important indices in India are:

 Benchmark indices – BSE Sensex and NSE Nifty

 Sectoral indices like BSE Bankex and CNX IT
 Market capitalization-based indices like the BSE Smallcap and BSE Midcap
 Broad-market indices like BSE 100 and BSE 500

In Bombay Stock Exchange (BSE)

SENSEX

The BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called
the BSE 30 or simply the SENSEX, is a free float market weighted stock market
index of 30 well established and financially sound companies listed on Bombay
Stock Exchange. Sensex is the stock market index indicator for the BSE. It was
first published in 1986

Established : 1875

Asia s first stock exchange

Largest stock exchange in India

SenSEX is the index of the BSE

In National Stock Exchange (NSE)

NIFTY

The NIFTY 50 index is National Stock Exchange of India’s benchmark stock

market index for Indian equity market. Nifty is owned and managed by India Index
service & products (IISL) . The NIFTY 50 covers 13 sectors of the Indian
economy and offers investment managers exposure to the Indian market in one
portfolio.
Nifty is the market indicator of NSE. It ideally is a collection of 50 stocks but
presently has 51 listed in it. It is also referred to as Nifty 50 and CNX Nifty by
some as it is owned.

Established : 1992

2nd largest stock exchange in India

NIFTY is the the index of the NSE (the benchmark index of NIFTY is NSE)

Mechanism or system of trading in NSE and BSE:

Now we will be dealing on the trading platforms or the software used for trading.
In order to induce more transparency and efficiency in the trading system, NSE
and BSE introduced nationwide online fully automated “Screen Based Trading
System”. The trading platform used by BSE is called BOLT-Bombay Online
Trading. The order of investors is placed on the basis of time and price basis.

Recently BSE has launched new software for trading called BEST (BSE Electronic
Smart Trader). It can be downloaded directly from Android play store and an
investor can enjoy zero transaction charges for 6 months on cross currency
derivatives.

Now we will be moving into the trading Process

 Trading system of BSE and NSE

Trading at both the exchanges takes place through an open electronic limit order
book in which order matching is done by the trading computer. There are no
market makers or specialists and the entire process is order-driven, which means
that market orders placed by investors are automatically matched with the best
limit orders. As a result, buyers and sellers remain anonymous. The advantage of
an order-driven market is that it brings more transparency by displaying all buy
and sell orders in the trading system. However, in the absence of market makers,
there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which
provide an online trading facility to retail customers. Institutional investors can
also take advantage of the direct market access (DMA) option in which they use
trading terminals provided by brokers for placing orders directly into the stock
market trading system.

Different type of settlement:

1 - Collective Safe Custody (CSC)

CBF’s settlement system, CASCADE, provides a highly efficient platform for the
settlement of transactions in German as well as foreign and international securities
that are eligible for collective safe custody (CSC). CASCADE covers the entry and
processing of instructions for all parts of the settlement process including:

 Transfers of securities

 Administration of securities

 Matching of free and against payment instructions

 Settlement of transactions through transfer of cash and securities.

CASCADE supports cash settlement in EUR in central bank money via TARGET2
(the interbank payment system for the real-time processing of cross-border
transfers throughout the European Union) and in other currencies via Clearstream´s
correspondent banks in commercial bank money.

The transactions processed via CASCADE are delivery instructions resulting from
over-the-counter (OTC) and stock exchange trading (Xetra, floor trading), trading
on the Eurex Bonds and Eurex Repo platforms and Eurex exercises. The
instructions also include central counterparty deliveries.

CBF maintains links with numerous CSDs outside Germany which allows
securities kept with these CSDs to be included in its collective safe custody
service. For the settlement of securities transactions between CBF’s customers and
customers of CSDs, there are technical links between the CASCADE platform and
the settlement platforms of the CSDs in question.

Individual Safe Custody

CBF also supports its customers in the settlement of transactions in securities kept
in individual safe custody (physical securities) and offers in particular:

 Deposit and withdrawal of physical securities to and from the holdings in the
vaults

 Recording and administration of certificate numbers (ledger)

 Conducting checks against the list of invalidated or stopped securities

 Processing defective and replacement certificates.

.What is settlement?

Investors do buying and selling of securities on stock exchange platform by

placing buy / sale orders through their brokers. This process is referred as trading
and is carried out by stock exchanges for a specific period. After the trading is
activity is completed, the process of delivering securities by the seller and delivery
of money by the buyer is called as payin process. This activity also has to be
conducted within a specified time frame.After the pay in is over, then starts the
process of payout wherein the buyer will get shares and seller will get money.The
above activitiesof trading,pay in, payout are collectively referred as settlement.
Each settlement is identified by a unique number called as settlement id.Settlement
number is a 7 digit number. More details are given below in the document.
2.What is the procedure for buying / selling securities through stock exchange
in demat form?

The procedure for buying / selling securities indemat form through a stock
exchange is similar to the procedure for buying / selling physical shares.

What is bad delivery?

Bad Delivery. Describing a stock that cannot be transferred, especially because of
improperly filed paperwork or another fairly innocuous reason. In other words, the
delivery of such a stock is only stopped by legal and/or regulatory rules

Short delivery means the seller of the shares has defaulted on the settlement of
shares. Short delivery is an event where the seller of the shares, defaults on the
delivery of the shares by T+2 Days. In such cases, the exchange holds an auction
for the same quantity of shares & delivers it to the buyer.

NSE indices:

1 – NIFTY 50

2 – NIFTY IT

3 – NIFTY NEXT 50

4 – NIFTY Bank

5 – NIFTY 500

Stock market indices in Foreign countries (overview):

Stock market indexes measure the value of a section of a country’s stock market
via a weighted average of selected stocks. These indexes help investors and
analysts describe the market and compare different investments. Many mutual
funds and exchange-traded funds (ETFs) attempt to track these indexes to provide
investors with exposure to a given market. The three most common types of
indexes are ‘global’ indexes, ‘regional’ indexes, and ‘national’ indexes.

In this article, we will look at global stock market indexes, regional stock market
indexes, and national stock market indexes around the world, as well as some
important considerations for investors looking to gain exposure using these
indexes.

Global Stock Market Indexes

Global stock market indexes track equities from all around the world. For example,
the MSCI World Index tracks large and mid-cap equities across 23 developed
countries covering approximately 85% of the free float-adjusted market
capitalization in each country. It’s worth noting that global stock market indexes
weighted by market capitalization don’t offer exposure to emerging markets or
frontier markets since they’re too small for inclusion.

Along with the MSCI, the most popular global stock market indexes include:

 FTSE All-World Index

 S&P Global 100 Index
 S&P Global 1200 Index
 Dow Jones Global Titans 50
 Russell Global Index

Regional Stock Market Indexes

Regional stock market indexes track equities from specific regions around the
world. For instance, these indexes may cover Asian, European, or Latin American
equities. They help investors and analysts compare the performance of specific
countries to a general region to highlight what assets are over- and under-
performing. The funds tied to these indexes may also be helpful in building
exposure to specific regions of the world.

The most popular regional stock market indexes include:

Asia

 S&P Asia 50 Index

 Dow Jones Asian Titan 50 Index
 FTSE ASEAN 40 Index

Europe

 Euro Stoxx 50 Index

 FTSE Euro 100 Index
  S&P Europe 350 Index

Latin America

 S&P Latin America 40 Index

National Stock Market Indexes

National stock market indexes provide exposure to individual countries. In some

cases, the equities in these indexes will consist entirely of large-cap stocks, similar
to the Dow Jones Industrial Average in the United States. In other cases, the
equities may be considered small-cap since the country may not have many large
companies. This is often the case in emerging market and frontier market
economies.

The top 10 national stock market indexes include:

China

 SSE Composite Index

 SZSE Component Index
 CSI 300 Index

India

 Bombay Stock Market Index

 National Stock Exchange of India Index
 MCX Stock Exchange Index

Italy

 FTSE MIB Index

 FTSE Italia Mid Cap Index
 MIBTel Index

Brazil

 Bovespa Stock Index

 IBrX Stock Index
 ITEL Stock Index
Other Stock Market Indexes

There are many other types of specialized stock market indexes for certain
demographics. For example, the S&P Islamic Index and Shariah indexes are geared
toward investors adhering to Islamic laws, while other indexes cater towards goals
like Environmental-Social-Government (or ESG) investments. Investors may want
to consider these types of indexes, which may also provide exposure to global
stocks with certain restraints.

Some popular alternative stock market indexes include:

 S&P Global BMI Shariah Index

 Stoxx Global ESG Leaders Index

Invest in Stock Market Indexes

Investors can build exposure to these stock market indexes into their portfolios
using mutual funds or exchange-traded funds that track the underlying index. For
example, the iShares MSCI World ETF (URTH) tracks the popular MSCI World
Index and provides exposure to global stock markets.

When evaluating mutual funds and ETFs, investors should consider a variety of
different factors, including the fund's expense ratio, diversification, and other
factors.

The Bottom Line

Global stock market indexes help investors and analysts describe the market and
compare different investments. There are three types of stock market indexes,
including global stock market indexes, regional stock market indexes, and national
stock market indexes. Investors can leverage these indexes to gain exposure to
international stock markets using mutual funds or exchange-traded funds tied to
these indexes.