IAPM (Unit 1 & 2)

UNIT - I
CHAPTER- 01
INTRODUCTION OF INVESTMENT
Generally, investment is the application of money for earning more money. Investment also means
the utilization of resources in order to increase income or production output in the future. An amount
deposited into a bank or machinery that is purchased in anticipation of earning income in the long
run is both examples of investments.
Investment definition according to finance, the practice of investment refers to the buying of a
financial product or any valued item with anticipation that positive returns will be received in the
future. Investing in securities such as shares, debentures and bonds is profitable as well as exciting.
Investing in financial securities is now considered to be one of the best avenues for investing one’s
savings while it is acknowledged to be one of the most risky avenues of investment. The most
important feature of financial investments is that they carry high market liquidity. The method used
for evaluating the value of a financial investment is known as valuation.
Investment
Investment is an activity that is associated with savings by people who further invest their savings in
financial avenues. Investment is the employment of funds on assets with the aim of earning income
or capital appreciation. Investment has two attributes namely time and risk. Investment in its
broadest sense means the present consumption is sacrificed to get a return in the future. The
sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute of
the investment indicates risk factor. In other words, investment means conversion of cash or money
into a monetary asset or a claim on future money for a return.
Speculation
Speculation means taking up the business risk in the hope of getting short term return. The act of
trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or
all of the initial outlay, in expectation of a substantial gain. It essentially involves buying and selling
securities with the expectation of getting profit from the price fluctuations and delivery of securities
is least important in trade. Speculation is the practice of engaging in risky financial transactions in an
attempt to profit from fluctuations in the market value of a tradable good such as a financial
instrument, rather than attempting to profit from the underlying financial attributes embodied in the
instrument such as capital gains, interest, or dividends.
Dr. Meghashree A. Dadhich

Gambling
Gambling consists in taking high risks not only for high returns but also for thrill and excitement.
Gambling is unplanned and surrounded by uncertainty and is based on tips and rumours. A gambling
is usually a very short term investment in a game or chance. Typical examples of gambling are horse
races, card games, lotteries etc. The time horizon involves in gambling is shorter than speculation
and investment. People gamble as a way to entertain themselves, earning incomes would be the
secondary factor. There is no risk and return trade off in the gambling and the negative outcomes are
expected.
Distinction between Investors & Speculators
S. No. Basis of Distinction Investor Speculator
An investor has a relatively A speculator has a very short
01. Planning Horizon longer planning horizon. His planning horizon. His holding
holding period is usually at may be a few days to a few
least 1 year. months.
02. Risk Disposition An investor is normally not A speculator is ordinarily
willing to take more than willing to take high risk.
moderate risk.
03. Return Expectation An investor usually seeks a A speculator looks for a high
modest rate of return with the rate of return in exchange for
limited risk assumed by him. the high risk borne by him.
04. Basis for Decisions An investor gives greater A speculator relies more on
significance to fundamental hearsay and market
factors and attempts on careful psychology.
evaluation of the prospects of
firm.
05. Leverage Typically an investor uses his A speculator normally resorts
own funds and avoids to borrowings.
borrowed funds.
Characteristics of Investment
1. Rate of Return – ROR is defines as Annual Return + (Ending Price – Beginning Price) /
Beginning Price.
2. Risk – Risk of an investment refers to the variability of its rate of return. The greater the
variability of the possible outcomes, the greater is the risk. Risk can be defined as the “chance
that the expected or prospective advantage, gain, profit or return may not materialize or that the
outcome of investment may be less than the expected outcome”. Total risk of security =
Unsystematic Risk + Systematic Risk
3. Marketability – An investment is highly marketable or liquid if: It can be transacted quickly; the
transaction cost is low; the price change between two successive transactions is negligible.

4. Tax Shelter – Some investments provide tax benefits, other do not. Tax benefits are of following
three kinds – Initial Tax benefit; Continuing Tax Benefits; Terminal Tax Benefits.
5. Convenience – It refers to the ease with which the investment can be made and looked after.
Degree of convenience associated with investments varies widely.
6. Capital Growth – It refers to appreciation of investment. Capital growth has become an
important character of investment. Now, investors are constantly seeking ‘growth stock’ of the
growing industry and bought at the right time.
7. Purchasing Power Stability – It refers to the buying capacity of investment in market.
Investment always involves the commitment of current funds with the objective of receiving
greater amounts of future funds.
8. Stability of Income – It refers to constant return from an investment. Every investor always
considers stability of monetary income and stability of purchasing power of income.
Investment Objectives
An investment is made because it serves some objectives for an investor, depending on the life stage
and risk appetite of the investor. Investment objectives are shaped by a person’s overall financial
position, investment constraints and many personal factors. The main investment objectives are
increasing the rate of return and reducing the risk. Other objectives can be considered as follows: -
1. Return: - Investors always expect a good rate of return from their investments. Most
investors want some level of income generation in their portfolio. The return should assure
the safety of the principal amount, regular flow of income and be a hedge against inflation.
2. Risk: - Risk of holding securities is related with the probability of actual return becoming
less than the expected return. Investments’ risk is just as important as measuring its expected
rate of return because minimizing risk and maximizing rate of return are inter-related
objectives in the investment management.
3. Liquidity: - Marketability of the investment provides liquidity to the investment. If a portion
of a investment could be converted into cash without much loss of time, it would help the
investor meet the emergencies.
4. Hedge against inflation: - Since there is inflation in almost all the economy, the rate of
return should ensure a cover against the inflation. The return rate should be higher than the
rate of inflation; otherwise the investor will have loss in real terms.
5. Safety: - The selected investment avenue should be under the legal and regulatory
framework. From the safety point of view investments can be ranked as follows: bank
deposits, government bonds, non-convertible debentures, convertible debentures, preference
shares, equity shares and deposits with non-banking financial companies.
Investment Process
The investment process outlines the steps in creating a portfolio. The investment process provides a
structure that allows investors to see the source of different investment strategies and philosophies.
The investment process can be divided into five stages: -
1. Investment Policy: - It involves determining the investor’s objectives and the amount of
his/her investible wealth. The essential ingredients of the policy are the investible funds,
objectives and the knowledge about the investment alternatives and market. The investible
funds may be generated through savings or from borrowings. The objectives are framed on
the premises of the required rate of return, need of regularity of income, risk perception and
the need of liquidity. The knowledge about the investment alternatives and market plays a
key role in the policy formulation.
2. Security Analysis: - It involves examining several individual securities within the broad
categories of financial assets. There are many approaches to security analysis such as
technical analysis & fundamental analysis (Market, Industry & Company analysis).
3. Valuation of Asstes: - It helps the investor to determine the return and risk expected from an
investment in the common stock. The real worth of the share is compared with the market
price and then the investment decisions are made.
4. Construction of Portfolio: - A portfolio is a combination of securities. The portfolio is
constructed in such a manner to meet the investor’s goals and objectives. The investor tries to
attain maximum return with minimum risk. Towards this end he diversifies (debt-equity,
industry & company diversification) his portfolio and allocates funds among the securities.
5. Evaluation: - The portfolio has to be managed efficiently through evaluating the portfolio
time to time. The variability in returns of securities is measured and compared. The low
yielding securities with high risk are replaced with high yielding securities with low risk
securities. To keep the return at a particular level necessitates the investor to revise the
components of the portfolio periodically.
MARKETABLE INVESTMENT AVENUES

At present, a wide variety of investment avenues are open to the investors to suit their needs and
nature. The knowledge about the different avenues enables the investor to choose investment
intelligently. There are various physical, financial and marketable investment avenues available for
the investor, such as-
1. Equity Shares

An equity share, commonly referred to as ordinary share also represents the form of fractional or
part ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such shares are members of
the company and have voting rights. The types of equity shares are:-
 New Issue: A company issues a prospectus inviting the general public to subscribe its shares.
The prospectus contains details regarding the date of payment and amount of money payable.
A company can offer to the public up to its authorized capital.
 Rights Share: These are the shares issued to the existing shareholders of a company. Such
kind of shares is issued to protect the ownership rights of the investors. Right shares can be
issued by a company only if the Articles of Association of the company permits. Rights shares
are generally offered to the existing shareholders at a price below the current market price, i.e.
at a concessional rate, and they have the options either to exercise the right or to sell the right
to another person.
 Bonus Share: Bonus in the general sense means getting something extra in addition to normal.
In business, bonus shares are the shares issued free of cost, by a company to its existing
shareholders. In other word, these are the type of shares given by the company to its
shareholders as a dividend.
 Sweat Equity Share: These shares are issued to exceptional employees or directors of the
company for their exceptional job in terms of providing know-how or intellectual property
rights to the company. The purpose of sweat issue is to retain the intellectual property and
knowhow of the company.
2. Preference Stock
Preference shares (also called preferred shares) are so-named because preferred shareholders have a
higher claim on the issuing company's assets than common shareholders. In the most extreme case,
this means that preferred shareholders must be paid for their interest in the company before common
shareholders in the event of company bankruptcy and liquidation. The day-to-day implication of this
claim is that preferred shares guarantee dividend payments at a fixed rate, while common shares
have no such guarantee. The following are the types of preference share: -
 Convertible and Non Convertible Preference Shares: Convertible preference shares
possess an option or right whereby they can be converted into an ordinary equity share at
some agreed terms and conditions. Non convertible simply do not have this option but has all
other normal characteristic of a preference share.

 Redeemable and Irredeemable Preference Shares: Redeemable preference share is very
commonly seen preference share which has a maturity date on which date the company will
repay the capital amount to the preference shareholders and discontinue the dividend
payment thereon. Irredeemable preference shares does not have any maturity date which
makes this instrument very similar to equity except that the dividend of these shares is fixed
and they enjoy priority in payment of both dividend and capital over the equity shares. Since
there is an absence of maturity, they are also known as perpetual preference share capital.
 Participating and Non Participating Preference Shares: Participating preference shares
are a unique type of preference shares which has an additional benefit of participating in
profits of the company apart from the fixed dividend. The distribution may depend on the
terms and conditions mentioned in the agreement which may vary to some extent from case
to case.
 Cumulative and Non Cumulative Preference Shares: Non payment of preference dividend
does not amount to bankruptcy but this does not mean that the liability of the company is
lost. If the shares are cumulative preference shares, the dividends are cumulated and
therefore paid when the company makes profit. In short, dividend of cumulative preference
shares will have to be paid as long as the company earns profit in any year. Whereas, for non
cumulative preference shares, a company can skip the dividend in the year, the company has
incurred losses.
3. Debentures
Debentures are creditor ship securities representing long-term indebtedness of a company. A
debenture is an instrument executed by the company under its common seal acknowledging
indebtedness to some person or persons to secure the sum advanced. It is, thus, a security issued by a
company against the debt. A public limited company is allowed to raise debt or loan through
debentures after getting certificate of commencement of business if permitted by its Memorandum of
Association.
 Redeemable and Irredeemable Debentures: Redeemable debentures are those which can
be redeemed or paid back at the end of a specified period mentioned. Irredeemable
debentures are those which are not repayable at any time by the company during its
existence. The debenture holders cannot claim their redemption. However, they are due for
redemption if the company fails to pay interest on such debentures or on winding up of the
company. They are also called perpetual debentures.

 Secured and Unsecured Debentures: Secured or mortgaged debentures carry either a fixed
charge on the particular asset of the company or floating charge on all the assets of the
company. Unsecured debentures, on the other hand, have no such charge on the assets of the
company. They are also known as simple or naked debentures.
 Convertible and Non-convertible Debentures: Convertible debentures are those which can
be converted by the holders of such debentures into equity shares or preference shares,
cannot be converted into shares. Now, a company can also issue partially convertible
debentures under which only a part of the debenture amount can be converted into equity
shares.
4. Bonds
Corporations and governments borrow money to finance the things they require. Corporations and
governments need money to build or expand their operation, pay for operational expenses and other
costs associated with running an organization. Instead of going to a single lending institution for the
money, they have the option of borrowing money from many investors in the form of a bond. Bond
is a long term debt instrument that promises to pay a fixed annual sum as interest for specified period
of time.
Features of Bond
 Set Maturity Dates - Bonds have set maturity dates that can range from 01 to 30 years.
Short-term bonds (mature in three years or less), intermediate bonds (mature in three to ten
years) and long-term bonds (mature in ten years or more).
 Interest Payments - Bonds typically offer some form of interest payment; however, this
depends on their structure: "Fixed Rate Bonds" provide fixed interest payments on a regular
schedule for the life of the bond; "Floating Rate Bonds" have variable interest rates that are
periodically adjusted; and, "Zero Coupon Bonds" do not pay periodic interest at all, but offer
an advantage in that they are can be bought at a discounted price of the face value and can be
redeemed at the face value at maturity.
 Principal Investment Repayment - Bond issuers are obligated to repay the full principal
amount of a bond in a lump sum when the bond reaches maturity.
 Credit Ratings - Investor can evaluate the "default risk" (the risk that the issuers won't be
able to make interest or principal payments) of a bond by checking the rating it has been
given by a bond rating agency such as Moody's Investors Service or Standard and Poor's.
 Callable Bonds - If the bond has a "call feature", the issuer is allowed to redeem the bond
before its maturity date, repay the loan and thus, stop paying interest on it.

Benefits
 Bonds can be a reliable source of current income depending on the structure of the bond;
 Bonds provide a certain element of liquidity, as the bond market is large and active;
 If investor sell a bond before it matures, investor may receive more or less than principal
amount because bond values fluctuate;
 Generally, interest income from federal government bonds is exempt from taxation at the
state and local level, and the interest income from municipal bonds is usually not subject to
federal tax;
 In the spectrum of the investment options, investment grade bonds are a relatively low-
risk investment.
5. Warrants
A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at
a fixed price called exercise price until the expiry date. Warrants and options are similar in that the
two contractual financial instruments allow the holder special rights to buy securities. Both are
discretionary and have expiration dates. The word warrant simply means to "endow with the right",
which is only slightly different from the meaning of option. Warrants are frequently attached to
bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends.
They can be used to enhance the yield of the bond and make them more attractive to potential
buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable
and can be sold independently of the bond or stock. In the case of warrants issued with preferred
stocks, stockholders may need to detach and sell the warrant before they can receive dividend
payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the
investor can earn dividends.
6. Mutual Funds
An investment vehicle that is made up of a pool of funds collected from many investors for the
purpose of investing in securities such as stocks, bonds, money market instruments and similar
assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to
produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.
One of the main advantages of mutual funds is that they give small investors access to professionally
managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult
(if not impossible) to create with a small amount of capital. Each shareholder participates
proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can

typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share,
which is sometimes expressed as NAVPS.
Closed-End Funds
A closed-end fund has a fixed number of shares outstanding and operates for a fixed duration
(generally ranging from 3 to 15 years). The fund would be open for subscription only during a
specified period and there is an even balance of buyers and sellers, so someone would have to be
selling in order for you to be able to buy it. Closed-end funds are also listed on the stock exchange so
it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also
specified which means that they terminate on specified dates when the investors can redeem their
units.
Open-End Funds
An open-end fund is one that is available for subscription all through the year and is not listed on the
stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to
buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value.
7. Insurance
Insurance may be described as a social device to reduce or eliminate risk of loss of life and property.
Insurance is a scheme of economic cooperation by which members of the community share the
unavoidable risks. Insurance is a legal contract between two parties whereby one party called
‘insurer’ undertakes to pay a fixed amount of money on the happening of a particular event. The
other party called ‘insured’ pays in exchange a fixed sum known as premium.
8. Deposits
The simplest form of investment is bank deposits such as saving accounts and fixed deposits. Saving
deposits have low interest rates whereas fixed deposits have higher interest rates varying with the
period of maturity. Fixed deposits may also be recurring deposits wherein savings are deposited at
regular intervals. Some banks have reinvestment plans wherein the interest in reinvested as it gets
accrued. The principal and accumulated interest is paid on maturity.
9. Real Estate
Real estate that generates income or is otherwise intended for investment purposes rather than as a
primary residence. It is common for investors to own multiple pieces of real estate, one of which
serves as a primary residence, while the others are used to generate rental income and profits through
price appreciation.
Common examples of investment properties are apartment buildings and rental houses, in which the
owners do not live in the residential units, but use them to generate ongoing rental income from

tenants. Those who invest in real estate also expect to generate capital gains as property values
increase over time.
10. Money Market Instruments
Debt instruments which have a maturity less than one year at the time of issue are called money
market instruments. These instruments are highly liquid and have negligible risk. Money market is
dominated by the Government, Financial Institutions, Banks and Corporate. The major money
market instruments are Treasury Bills, Commercial Papers, Certificate of Deposits (CDs).
UNIT - I
CHAPTER- 02
RISK & RETURN ANALYSIS
Definition of 'RISK'
Risk is simply the measurable possibility of either losing value or not gaining value. In investment
terms, risk is the uncertainty that an investment will deliver its expected return. Risk includes the
possibility of losing some or all of the original investment. Different versions of risk are usually
measured by calculating the standard deviation of the historical returns or average returns of a
specific investment. A high standard deviation indicates
a high degree of risk. Many companies now allocate large amounts of money and time in
developing risk management strategies to help manage risks associated with their business and
investment dealings. A key component of the risk management process is risk assessment, which
involves the determination of the risks surrounding a business or investment.
A fundamental idea in finance is the relationship between risk and return. The greater the amount of
risk that an investor is willing to take on, the greater the potential return. The reason for this is that
investors need to be compensated for taking on additional risk.
A. Systematic Risk
Systematic risk is due to the influence of external factors on an organization. Such factors are
normally uncontrollable from an organization's point of view. It is a macro in nature as it affects a
large number of organizations operating under a similar stream or same domain. It cannot be planned
by the organization. The types of systematic risk are depicted and listed below.
1. Interest Rate Risk

Interest-rate risk arises due to variability in the interest rates from time to time. It particularly affects
debt securities as they carry the fixed rate of interest. The types of interest-rate risk are - Price risk &
Reinvestment rate risk. Price risk arises due to the possibility that the price of the shares,
commodity, investment, etc. may decline or fall in the future. Reinvestment rate risk results from
fact that the interest or dividend earned from an investment can't be reinvested with the same rate of
return as it was acquiring earlier.
2. Market Risk
Market risk is associated with consistent fluctuations seen in the trading price of any particular
shares or securities. That is, it arises due to rise or fall in the trading price of listed shares or
securities in the stock market. The meaning of different types of market risk is as follows: Absolute
risk, Relative risk, Directional risk, Non-directional risk, Basis risk and Volatility risk.
Absolute risk is without any content. For e.g., if a coin is tossed, there is fifty percentage chance of
getting a head and vice-versa.
Relative risk is the assessment or evaluation of risk at different levels of business functions. For e.g.
a relative-risk from a foreign exchange fluctuation may be higher if the maximum sales accounted
by an organization are of export sales.
Directional risks are those risks where the loss arises from an exposure to the particular assets of a
market. For e.g. an investor holding some shares experience a loss when the market price of those
shares falls down.
Non-Directional risk arises where the method of trading is not consistently followed by the trader.
For e.g. the dealer will buy and sell the share simultaneously to mitigate the risk
Basis risk is due to the possibility of loss arising from imperfectly matched risks. For e.g. the risks
which are in offsetting positions in two related but non-identical markets.
Volatility risk is of a change in the price of securities as a result of changes in the volatility of a risk-
factor. For e.g. it applies to the portfolios of derivative instruments, where the volatility of its
underlying is a major influence of prices.
3. Purchasing Power or Inflationary Risk
Purchasing power risk is also known as inflation risk. It is so, since it emanates (originates) from the
fact that it affects a purchasing power adversely. It is not desirable to invest in securities during an
inflationary period. The types of power or inflationary risk are Demand inflation risk and Cost
inflation risk.
The meaning of demand and cost inflation risk is as follows:

Demand inflation risk arises due to increase in price, which result from an excess of demand over
supply. It occurs when supply fails to cope with the demand and hence cannot expand anymore. In
other words, demand inflation occurs when production factors are under maximum utilization.
Cost inflation risk arises due to sustained increase in the prices of goods and services. It is actually
caused by higher production cost. A high cost of production inflates the final price of finished goods
consumed by people.
B. Unsystematic Risk
Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such
factors are normally controllable from an organization's point of view. It is a micro in nature as it
affects only a particular organization. It can be planned, so that necessary actions can be taken by the
organization to mitigate (reduce the effect of) the risk. The types of unsystematic risk are depicted
and listed below.
1. Business or Liquidity Risk

Business risk is also known as liquidity risk. It is so, since it emanates (originates) from the sale and
purchase of securities affected by business cycles, technological changes, etc. The types of business
or liquidity risk are Asset liquidity risk and Funding liquidity risk.
Asset liquidity risk is due to losses arising from an inability to sell or pledge assets at, or near, their
carrying value when needed. For e.g. assets sold at a lesser value than their book value.
Funding liquidity risk exists for not having an access to the sufficient-funds to make a payment on
time. For e.g. when commitments made to customers are not fulfilled as discussed in the SLA
(service level agreements).
2. Financial or Credit Risk
Financial risk is also known as credit risk. It arises due to change in the capital structure of the
organization. The capital structure mainly comprises of three ways by which funds are sourced for
the projects. These are as follows: Owned funds - Share Capital; Borrowed funds; & Retained
earnings, Reserve and Surplus.

3. Operational Risk
Operational risks are the business process risks failing due to human errors. This risk will change
from industry to industry. It occurs due to breakdowns in the internal procedures, people, policies
and systems. The types of operational risk are Model risk, People risk, Legal risk and Political risk.
Model risk is involved in using various models to value financial securities. It is due to probability of
loss resulting from the weaknesses in the financial-model used in assessing and managing a risk.
People risk arises when people do not follow the organization’s procedures, practices and/or rules.
That is, they deviate from their expected behaviour.
Legal risk arises when parties are not lawfully competent to enter an agreement among them.
Furthermore, this relates to the regulatory-risk, where a transaction could conflict with a government
policy or particular legislation (law) might be amended in the future with retrospective effect.
Political risk occurs due to changes in government policies. Such changes may have an unfavourable
impact on an investor. It is especially prevalent in the third-world countries.
Numerical portion of Risk-Return Analysis!!!

UNIT - II
CHAPTER- 01
NEW ISSUE MARKET (NIM)
The primary market is the part of the capital market that deals with issuing of new securities and
does not have a physical structure or form. All the agencies which provide the facilities and
participate in the process of selling new issues to the investors constitute the NIM. Companies,
governments or public sector institutions can obtain funds through the sale of a new stock or bond
issues through primary market. This is typically done through an investment bank or finance
syndicate of securities dealers. The process of selling new issues to investors is
called ‘underwriting’. Dealers earn a commission that is built into the price of the security offering,
though it can be found in the prospectus. In the case of a new stock issue, this sale is an Initial
Public Offering (IPO). Primary markets create long term instruments through which corporate
entities borrow from capital market.
Features of primary markets are:
 This is the market for new long term equity capital. The primary market is the market where
the securities are sold for the first time. Therefore it is also called the New Issue Market
(NIM).
 In a primary issue, the securities are issued by the company directly to investors.
 The company receives the money and issues new security certificates to the investors.
 Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating capital formation in the
economy.
 The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going
public."
The new issues may take the form of equity shares, preference shares or debentures. The firms
raising funds may be new companies or existing companies planning expansion. The new companies
need not always be entirely new enterprises. They may be private firms already in business, but
‘going public’ to expand their capital bases. ‘Going Public’ means becoming public limited
companies to be entitled to raise funds from the general public in the open market. The main
objectives of a capital issue are given below: -
 To promote a new company,
 To expand an existing company;
 To diversify the production;
 To meet the regular working capital requirements;
 To capitalize the reserves;
Many investors buy new issues because they often experience tremendous demand and, as a result,
rapid price increases. Other investors don't believe that new issues warrant the hype that they receive
and choose to watch from the sidelines. An investor who purchases a new issue should be aware of
all the risks associated with investing in a product that has only been available to the public for a
short time; new issues often prove to be rather volatile and unpredictable.
For inducing the public to invest their savings in new issues, the services of a network of specialised
institutions (underwriters and stockbrokers) is required. The more highly developed and efficient this
network, the greater will be the inflow of savings into organized industry. Till the establishment of
the Industrial Credit and Investment Corporation of India (ICICI) in 1955, this kind of underwriting
was sorely lacking in India. Instead, a special institutional arrangement, known as the managing
agency system had grown. Now it has become a thing of the past.
Managing successful floatation of new issues involves three distinct services
The main function of the New Issue Market is to facilitate the ‘transfer of resources’ from savers to
users. Conceptually, however, the New Issue Market should not be conceived as a platform only for
the purpose of raising finance for new capital expenditure.
In fact, the facilities of the market are also utilised for selling existing concerns to the public as
going concerns through conversions of existing proprietary enterprises or private companies into
public companies.
1. Origination
2. Underwriting and
3. Distribution of new issues
The origination requires careful investigation of the viability and prospectus of new projects. A
preliminary investigation undertaken by the sponsors of the issue. This involves a careful study of
the technical, economic, financial and legal aspects of the issuing companies to ensure that it
warrants the backing of the issue house. Origination includes advice on such aspects of capital issues
as: determination of the class of security to be issued and price of the issue in terms of market
conditions; the timing and magnitude of issues; method of flotation; and technique of selling and so
on. A careful scrutiny and approval of a new issue proposal by well-established financial institutions

known for their competence and integrity improves substantially its acceptability by the investing
public and other financial institutions. This is especially true of issues of totally new enterprises.
Underwriting means guaranteeing, purchase of a stipulated amount of a new issue at a fixed price.
The idea of underwriting originated on account of uncertainties prevailing in the capital market as a
result of which the success of the issue becomes unpredictable. If the issue remains undersubscribed,
the directors cannot proceed to allot the shares, and have to return money to the applicants if the
subscription is below a minimum amount fixed under the Companies Act. Consequently, the issue
and hence the project will fail. Underwriting entails an agreement whereby a person/organisation
agrees to take a specified number of shares or debentures or a specified amount of stock offered to
the public in the event of the public not subscribing to it, in consideration of a commission the
underwriting commission. If the issue is fully subscribed by the public, there is no liability attaching
to the underwriters; else they have to come forth to meet the shortfall to the extent of the under-
subscription.
Distribution means sale of stock to the public. The sale of securities to the ultimate investors is
referred to as distribution; it is another specialised job, which can be performed by brokers and
dealers in securities who maintain regular and direct contact with the ultimate investors. The ability
of the New Issue Market to cope with the growing requirements of the expanding corporate sector
would depend on this triple-service function. The term-lending institutions, the LIC, the UTI and
several other financial institutions usually underwrite new issues as direct investments for their own
portfolios. This is placed with stockbrokers who have a system of inviting subscriptions to new
issues from the public.
Parties involved in the New Issue
As a student of investment management, one should know the number of agencies involved and their
respective role in the public issue. The promoters also should have a clear idea about the agencies to
coordinate their activities effectively in the public issue. The main agencies involved in the public
issue are-
1. Managers to the issue: Lead managers are appointed by the company to manage the public
issue programmes. Their main duties are (a) drafting of prospectus (b) preparing the budget of
expenses related to the issue (c) suggesting the appropriate timings of the public issue (d)
assisting in marketing the public issue successfully (e) advising the company in the appointment
of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc. and
(f) directing the various agencies involved in the public issue. There are many agencies which
are performing the role of lead managers to the issue. The merchant banking division of the

financial institutions, subsidiary of commercial banks, foreign banks, private sector banks and
private agencies are available to act as lead managers.
2. Registrar to the issue: In consultation with the lead manager, the Registrar to the issue is
appointed. Quotations containing the details of the various functions they would be performing
and charges for them are called for selection. Among them the most suitable one is selected. It is
always ensured that the registrar to the issue has the necessary infrastructure like computer,
internet and telephone. The Registrars to the issue normally receive the share application from
various collection centers. They recommend the basis of allotment in consultation with the
Regional Stock Exchange for approval. They arrange for the dispatching of the share certificates.
They handover the details of the share allocation and other related registers to the company.
Usually registrars to the issue retain the issuer records at least for a period of six months from the
last date of dispatch of letters of allotment to enable the investors to approach the registrars for
redressal of their complaints.
3. Underwriters: Underwriter is a person/organization who gives an assurance to the issuer to the
effect that the former would subscribe to the securities offered in the event of non-subscription
by the person to whom they were offered. They stand as back-up supporters and underwriting is
done for a commission. Underwriting provides an insurance against the possibility of inadequate
subscription. Some of the underwriters are financial institutions, commercial banks, merchant
bankers, members of the stock exchange, Export and Import Bank of India etc. The underwriters
are exposed to the risk of non subscription and for such risk exposure they are paid an
underwriting commission. When appointing an underwriter, the financial strength of the
prospective underwriter is considered because he has to undertake the agreed non-subscribed
portion of the public issue. The other aspects considered are-
1. Experience in the primary market;
2. Past underwriting performance and default,
3. Outstanding underwriting commitment,
4. The network of investor clientele of the underwriter, and
5. His overall reputation.
4. Bankers to the issue: The responsibility of collecting the application money along with the
application form is on bankers to the issue. The bankers charge commission besides the
brokerage, if any. Depending upon the size of the public issue more than one banker to the issue
is appointed. When the size of the issue is large, three or four banks are appointed as bankers to
the issue. The number of collection centers is specified by the central government. The bankers
to the issue should have branches in the specified collection centers. In big or metropolitan cities
more than one branch of the various bankers to the issue are designated as collecting branch for
acceptance of money. To create investment awareness in the minds of the people collecting
branches are designated in the different towns of the state where the project is being set up. If the
collection centers for application money are located nearby people are likely to invest the money
in the company shares. The following activities are associated with a public issue – Acceptance
of application and application monies; Acceptance of allotment or call monies; Refund of
application monies; Payment of dividend or interest warrants.
5. Advertising agents: Advertising a public issue is very essential for its promotion. Hence, the past
track record of the advertising agency is studied carefully. Tentative programmes of each
advertising agency along with the estimated cost are called for. After comparing the
effectiveness and cost of each programme with the other, a suitable advertising agency is
selected in consultation with the lead managers to the issue. The advertising agencies take the
responsibility of giving publicity to the issue on the suitable media. The media may be
newspapers /magazines/ hoardings/press release or a combination of all.
6. The financial institutions: The function of underwriting is generally performed by financial
institutions. Therefore, normally they go through the draft of prospectus, study the proposed
programme for public issue and approve them. IDBI, IFCI, ICICI, LIC, GIC and UTI are the
some of the financial institutions that underwrite and give financial assistance. The lead manager
sends copy of the draft prospectus to the financial institutions and includes their comments, if
any in the revised draft.
Regulatory bodies: The various regulatory bodies related with the public issue are:
1. Securities Exchange Board of India
2. Registrar of companies
3. Reserve Bank of India (if the project involves foreign investment)
4. Stock Exchanges where the issue is going to be listed
5. Industrial licensing authorities
6. Pollution control authorities (clearance for the project has to be stated in the prospectus)
7. Collection Centers: There should be at least 20 mandatory collection centers inclusive of the
places where stock exchanges are located. If the issue is not exceeding Rs. 10 cr (excluding
premium if any) the mandatory collection centers are the four metropolitan centers viz. Mumbai,
Delhi, Calcutta and Chennai and at all such centers where stock exchanges are located in the
region in which the registered office of the company is situated. In addition to the collection
branch, authorized collection agents may also be appointed. The names and addresses of such
agent should be given in the offer documents. The collection agents are permitted to collect such
application money in the form of cheques, draft, stock invests and not in the form of cash. The
application money so collected should be deposited in the special share application account with
the designated scheduled bank either on the same day or latest by the next working day.
Methods of Floating New Issue
The methods by which new issues of shares are floated in the primary market in India are:
1. Public Issue – The issuing company makes an offer for sale to the public directly of a fixed
number of shares at a specific price. The offer is made through a legal document called
‘prospectus’. Thus a public issue is an invitation by a company to the public to subscribe to the
securities offered through a prospectus. Public issues are mostly underwritten by strong public
financial institutions. This is the most popular method for floating securities in the new issue
market, but it involves an elaborate process and consequently it is an expensive method.
2. Right Issue – It involves selling of securities to the existing shareholders in proportion to their
current holding. As per section 81 of the Companies Act 1956, when a company issues
additional equity capital it has to be offered first to the existing shareholders on a pro rata basis.
However, the shareholders may forfeit this special right by passing a special resolution and
thereby enable the company to issue additional capital to the public through a public issue.
3. Private Placement – It 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. The terms of the issue are negotiated
between the company and the investors.
Investor Protection by Securities Regulators in the Primary Share Markets
Investor protection is one of the most important elements of a thriving securities market or other
financial investment institution. Investor protection focuses on making sure that investors are fully
informed about their purchases, transactions, affairs of the company that they have invested in and
the like. SEBI had issued guidelines for the protection of the investors through the Securities and
Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
Objective of SEBI
The SEBI has been entrusted with both the regulatory and developmental functions. The objectives
of SEBI are as follows:
 Investor protection, so that there is a steady flow of savings into the Capital Market.
 Ensuring the fair practices by the issuers of securities, namely, companies so that they can
raise resources at least cost.

 Promotion of efficient services by brokers, merchant bankers and other intermediaries so
that they become competitive and professional.
So we can understand that primary function of SEBI is the protection of the investors’ interest and
the healthy development of Indian financial markets. No doubt, it is very difficult task for the
regulators to prevent the scams in the markets considering the great difficulty in regulating and
monitoring each and every segment of the financial markets.
Measure taken by SEBI
 Issue of guidelines: SEBI has issued guidelines to companies. These guidelines are for
bringing transparency in their operations and also for avoiding exploitation of investors by
one way or the other. SEBI keep watch on all intermediaries and see that they follow the
guidelines in the right spirit. It also takes panel actions when the guidelines are not followed.
These steps give protection to investors.
 Public interest advertisements: SEBI issues public interest advertisements to enlighten
investors on the basic features of various instruments and minimum precautions they should
take before choosing an investment.
 Dealing with complaints of investors: The investors can make complaints to SEBI if they
face problems relating to their investment in industrial securities and financial assets. SEBI
receives thousands of complaints relating to non-receipt of refund orders, allotment letters,
non-receipt of dividend or interest and delays in the transfer of shares and debentures.
 Investor education: SEBI is aware that investor education and educate investors through
publishing of newsletters. These publications are for the education, guidance and protection
of investors.
 Disclosures by companies: SEBI has introduced norms for disclosure of half yearly audited
results of companies. It has also revised the format of prospectus to provide more
information to investors.
SEBI has been instrumental in bringing greater transparency in capital issues. SEBI has issued
detailed guidelines to standardize disclosure obligations of companies issuing securities. SEBI
constantly reviews its guidelines to make them more market friendly and investor friendly. SEBI
conduct inspection, inquiries and audits of stock exchanges, intermediaries and self regulating
organisations and takes suitable remedial measures wherever necessary. Further, it penalizes those
who undertake fraudulent and unfair trade practices.
UNIT – II
CHAPTER- 02
THE SECONDARY MARKET
Primarily there are two types of stock markets – the primary market and the secondary market.
Basically the primary market is the place where the shares are issued for the first time. So when a
company is getting listed for the first time at the stock exchange and issuing shares – this process is
undertaken at the primary market. That means the process of the Initial Public Offering (IPO) and
the debentures are controlled at the primary stock market. In the primary market, securities are
offered to public for subscription for the purpose of raising capital or fund. On the other hand the
secondary market is the stock market where existing stocks are brought and sold by the retail
investors through the brokers. It is the secondary market that controls the price of the stocks.
Generally when we speak about investing or trading at the stock market we mean trading at the
secondary stock market. It is the secondary market where we can invest and trade in the stocks to get
the profit from our stock market investment.
The secondary market, also called the aftermarket, is the financial market in which previously
issued financial instruments such as stock, bonds, options, and futures are bought and sold.
Secondary market refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in
the secondary market. Secondary market comprises of equity markets and the debt markets.
For the general investor, the secondary market provides an efficient platform for trading of his
securities. For the management of the company, Secondary equity markets serve as a monitoring and
control conduit-by facilitating value-enhancing control activities, enabling implementation of
incentive-based management contracts, and aggregating information (via price discovery) that
guides management decisions.
Secondary market is an equity trading venue in which already existing/pre-issued securities are
traded among investors. Secondary market could be either auction or dealer market. While stock
exchange is the part of an auction market and Over-the-Counter (OTC) is a part of the dealer
market. Now these are the broadest classification of the stock markets that is true for any country as
well as India.
But the Indian stock markets can be divided into further categories depending on various aspects like
the mode of operation and the diversification in services. The stock exchanges in India, under the
overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI),
provide a trading platform, where buyers and sellers can meet to transact in securities. First of the
two largest stock exchanges in India can be divided on the basis of operation. The trading platform
provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical

location to trade. They can trade through the computerized trading screens available with the NSE
trading members or the internet based trading facility provided by the trading members of
NSE. While the Bombay stock exchange or BSE is a conventional stock exchange with a trading
floor and operating through mostly offline trades, the National Stock Exchange or NSE is a
completely online stock exchange and the first of its kind in the country. The trading is carried out at
the National Stock Exchange through the electronic limit order book (LOB).
Relationship between the Primary and Secondary Market
1. The new issue market cannot function without the secondary market. The secondary market
provides liquidity for the issued securities. The issued securities are traded in the secondary
market offering liquidity to the stocks at a fair price.
2. The stock exchanges through their listing requirements, exercise control over the primary
market. The company seeking for listing on the respective stock exchange has to comply with all
the rules and regulations given by the stock exchange.
3. The primary market provides a direct link between the prospective investors and the company.
By providing liquidity and safety, the stock markets encourage the public to subscribe the new
issues. The marketability and the capital appreciation provided in the stock market are the major
factors that attract the investing public towards the stock market. Thus, it provides an indirect
link between the savers and the company.
4. Even though they are complementary to each other, their functions and the organizational set up
are different from each other. The health of the primary market depends on the secondary market
and vice-versa.
Important Functions of Stock Exchange/Secondary Market
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country. Every
major change in country and economy is reflected in the prices of shares. The rise or fall in the share
prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a
pulse of economy or economic mirror which reflects the economic conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The
securities of profitable and growth oriented companies are valued higher as there is more demand for
such securities. The valuation of securities is useful for investors, government and creditors. The
investors can know the value of their investment, the creditors can value the creditworthiness and
government can impose taxes on value of securities.

3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the
companies names in the trade list only after verifying the soundness of company. The companies
which are listed they also have to operate within the strict rules and regulations. This ensures safety
of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal and this leads
to capital formation and economic growth.
5. Spreading of Equity Cult:
Share market collects every type of information (more particularly about their economic condition)
in respect of the listed companies. Generally, this information is published or in case of need
anybody can get it from the stock exchange free of any cost. In this way, the stock exchange guides
the investors by providing various types of information. Consequently, the number of shareholders
in companies is increasing continuously. Thus, the stock exchanges are playing a vital role in
ensuring wider share ownership. Stock exchange encourages people to invest in ownership securities
by regulating new issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
When securities are purchased with a view to getting profit as a result of change in their market
price, it is called speculation. It is allowed or permitted under the provisions of the relevant Act. It is
accepted that in order to provide liquidity to securities, some scope for speculation must be allowed.
The share market provides this facility. To ensure liquidity and demand of supply of securities the
stock exchange permits healthy speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of securities. The
presence of stock exchange market gives assurance to investors that their investment can be
converted into cash whenever they want. The investors can invest in long term investment projects
without any hesitation, as because of stock exchange they can convert long term investment into
short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded so such
companies can easily raise fresh capital from stock market. The general public hesitates to invest in

securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to
profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These attractive
opportunities encourage people to save more and invest in securities of corporate sector rather than
investing in unproductive assets such as gold, silver, etc.
The Stock Exchanges
A stock exchange is an institution, organization or association that serves as a market for trading
financial instruments such as stocks, bonds and their related derivatives. Most modern stock
exchanges, like NYSE Euronext, have both a trading floor and an electronic trading system. There
are 24 stock exchanges in the country, 20 of them being regional ones with allocated areas. Three
others set up in the reforms era, viz., National Stock Exchange (NSE), the Over the Counter
Exchange of India Limited (OTCEI) and Inter-connected Stock Exchange of India Limited (ISE)
have mandate to nationwide trading network. The ISE is promoted by 15 regional stock exchanges in
the country and has been set up at Mumbai. The ISE provides a member-broker of any of these stock
exchanges an access into the national market segment, which would be in addition to the local
trading segment available at present. The NSE and OCTEI, ISE and majority of the regional stock
exchanges have adopted the screen based trading system (SBTS) to provide automated and modern
facilities for trading in a transparent, fair and open manner with access to investors across the
country. As on 31 March 1999, total 9,877 companies were listed on the stock exchanges and the
market capitalization was 5,30,772 crore. The total single sided turnover on all stock exchanges
during 1998-99 was Rs 10,23,381. The following are the names of the various stock exchanges in
India:
1. The Bombay Stock Exchange,
2. The Ahmedabad Stock exchange Association Ltd.,
3. Bangalore Stock Exchange Ltd.,
4. Stock Exchange Association Ltd.,
5. The Calcutta Stock Exchange Association Ltd.,
6. Cochin Stock Exchange Ltd.,
7. The Delhi Stock Exchange Association Ltd.,
8. The Guwahati Stock Exchange Ltd.,
9. The Hyderabad Stock Exchange Ltd.,
10. Jaipur Stock Exchange Ltd.,
11. Kanara Stock Exchange Ltd.,
12. The Ludhiana Stock Exchange Association Ltd.,
13. Madras stock Exchange Ltd.,
14. Madhya Pradesh Stock Exchange Ltd.,
15. The Magadh Stock Exchange Ltd.,
16. Mangalore Stock Exchange Ltd.,
17. Pune Stock Exchange Ltd.,
18. Saurashtra Kutch Stock Exchange Ltd.,
19. The Uttar Pradesh Stock Exchange Association Ltd.,
20. Vadodara Stock Exchange Ltd.,
21. Coimbatore Stock Exchange,
22. Meerut Stock Exchange Ltd.,
23. Over The Counter (OTC) Exchange of India,
24. The National Stock Exchange of India
National Stock Exchange
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India,
located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in the
country. NSE was the first exchange in the country to provide a modern, fully automated screen-
based electronic trading system which offered easy trading facility to the investors spread across the
length and breadth of the country. NSE has a market capitalization of more than US$1.65 trillion,
making it the world’s 12th-largest stock exchange as of 23 January 2015. NSE's flagship index,
the CNX Nifty, the 50 stock indexes, is used extensively by investors in India and around the world
as a barometer of the Indian capital markets. The major stock market indices available at the NSE
are: S&P CNX Nifty, CNE Nifty Junior, S&P CNX 500, CNX Midcap 200, S&P CNX Defty.
NSE was set up by a group of leading Indian financial institutions at the behest of the government of
India to bring transparency to the Indian capital market. Based on the recommendations laid out by
the government committee, NSE has been established with a diversified shareholding comprising
domestic and global investors. The key domestic investors include Life Insurance Corporation of
India, State Bank of India, IFCI Limited IDFC Limited and Stock Holding Corporation of India
Limited. And the key global investors are Gagil FDI Limited, GS Strategic Investments Limited,
SAIF II SE Investments Mauritius Limited, Aranda Investments (Mauritius) Pte Limited and PI
Opportunities Fund I.
NSE offers trading, clearing and settlement services in equity, equity derivatives, debt and currency
derivatives segments. It is the first exchange in India to introduce electronic trading facility thus

connecting together the investor base of the entire country. NSE has 2500 VSATs and 3000 leased
lines spread over more than 2000 cities across India.
The exchange was incorporated in 1992 as a tax-paying company and was recognized as a stock
exchange in 1993 under the Securities Contracts (Regulation) Act, 1956, when P. V. Narasimha
Rao was the Prime Minister of India and Manmohan Singh was the Finance Minister. NSE
commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The capital
market (equities) segment of the NSE commenced operations in November 1994, while operations in
the derivatives segment commenced in June 2000.
Bombay Stock Exchange
The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street, Kala
Ghoda, Mumbai, Maharashtra, India. Established in 1875 the BSE is considered to be one of Asia’s
fastest stock exchanges, with a speed of 200 microseconds and one of India’s leading exchange
groups and the oldest stock exchange in the South Asia region. BSE came out with a stock index in
1986, which is known as BSE-SENSEX. It is an index composed with 30 stocks representing a
sample of large, well established and financially sound companies selected from different industry
groups. The base year of BSE SENSEX is 1978-79 and the base value is 100. The index was
renamed in October 1996 as BSE-100 index and is now calculated by taking the prices of 100 stocks
listed at BSE only. In 1994, two new index series namely the BSE-200 and the Dollex-200 indices
were launched by BSE. Meanwhile, there has been a steady increase in the number of listed
companies and the market capitalization of companies.
Bombay Stock Exchange is the world's 10th largest stock market by market capitalization at $1.7
trillion as of 23 January 2015. More than 5,000 companies are listed on BSE. BSE also provides a
host of other services to capital market participants including risk management, clearing, settlement,
market data services and education. It has a global reach with customers around the world and a
nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive
the growth of the Indian capital market and stimulate innovation and competition across all market
segments. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000
certifications. It is also the first Exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its On-Line
trading System (BOLT). It operates one of the most respected capital market educational institutes in
the country (the BSE Institute Ltd.). BSE also provides depository services through its Central
Depository Services Ltd. (CDSL) arm.
The BSE & NSE

Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay
Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence
since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However,
both exchanges follow the same trading mechanism, trading hours, settlement process, etc. At the
last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all
the listed firms on the BSE, only about 500 firms constitute more than 90% of its market
capitalization; the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant
share in spot trading, with about 70% of the market share, as of 2009, and almost a complete
monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. Both
exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation.
The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.
Members of the Stock Exchange
The Securities Contract Regulation Act of 1956 has provided uniform regulation for the admission
of members in the stock exchanges. The qualifications for becoming member of a recognized stock
exchange are: -
 The minimum age prescribed for the members is 21 years;
 He should be an Indian citizen;
 He should be neither a bankrupt nor compounded with the creditors;
 He should not be convicted for fraud or dishonesty;
 He should not be engaged in any other business connected with a company;
 He should not be defaulter of any stock exchange;
 The minimum required educational qualification is 12th standard.
In recent days, highly qualified persons such as Company Secretaries, Charted Accountants and
MBA’s are becoming members of the stock exchanges. A member, if he has completed five years of
membership in a stock exchange can apply for membership in other stock exchanges.
TRADING SYSTEM IN STOCK EXCHANGES

A stock exchange is a market for trading in securities. But it is not an ordinary market; it is a market
with several peculiar features. In a stock exchange, buyers and sellers do not meet directly and

interact with each other for making their trades through stock exchanges. Trading in a stock
exchange takes place in two phases: First – the member brokers execute buy or sell orders on behalf
of their clients (investors). Second – the securities and cash are exchanged. For the exchange of
securities and cash between the traders, the services of two other agencies are required, namely the
clearing house (corporation) of the stock exchange and the depositories.
Regulations Framework 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 (i.e. share, debt and derivatives) as well as protecting the
interest of the investors. In particular, it is responsible for-
1. Institutional reforms in the securities markets,
2. Building regulatory and market institutions,
3. Strengthening investor protection mechanism, and
4. Providing efficient legislative framework for securities markets.
The Division administers legislations and rules made under the
1. Depositories Act, 1996,
2. Securities Contracts (Regulation) Act, 1956 and
3. Securities and Exchange Board of India Act, 1992.
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. All
financial intermediaries permitted by their respective regulators to participate in the Indian securities
markets are governed by SEBI regulations, whether domestic or foreign. Foreign Institutional
Investors are required to register with SEBI in order to participate in 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. It
regulates the foreign exchange markets through the Foreign Exchange Management Act, 1999.
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. NSE has a set of Rules and Regulations specifically applicable to
each of its trading segments. NSE as an entity regulated by SEBI undergoes regular inspections by
them to ensure compliance.
Trading Mechanism
The system of trading prevailing in stock exchanges for many years was known as Floor Trading. In
this system, trading took place through an open outcry system on the trading floor or ring of the
exchange during official trading hours. In floor trading, buyers and sellers transact business face to
face using a variety of signals to buy or sell the desired securities. After the completion of a
transaction at the trading floor between the brokers acting on behalf of the investors, the buyer
investor would receive the share certificate and the seller investor would receive the cash through
their respective brokers.
In the new electronic stock exchanges, which have a fully automated computerized mode of trading,
floor trading is replaced with a new system of trading known as Screen-based Trading. In this new
system, the trading ring is replaced by the computer screen and distant participants can trade with
each other through the computer network. 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 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.
Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on
Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am
and 3:30 pm, Indian Standard Time, Monday through Friday. Delivery of shares must be made in

dematerialized form, and each exchange has its own clearing house, which assumes all settlement
risk, by serving as a central counterparty.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index
for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the
index's free-float market capitalization. It was created in 1986 and provides time series data from
April 1979, onward.
Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about
62% of its free-float market capitalization. It was created in 1996 and provides time series data from
July 1990, onward.
How Online Trading Works
A share of stock is basically a tiny piece of a corporation. Shareholders - people who buy stock are
investing in the future of a company for as long as they own their shares. The price of a share varies
according to economic conditions, the performance of the company and investors' attitudes. The first
time a company offers its stock for public sale is called an Initial Public Offering (IPO), also
known as "going public." When a business makes a profit, it can share that money with its
stockholders by issuing a dividend. A business can also save its profit or re-invest it by making
improvements to the business or hiring new people. Stocks that issue frequent dividends are income
stocks. Stocks in companies that re-invest their profits are growth stocks.
Brokers buy and sell stocks through an exchange, charging a commission to do so. A broker is
simply a person who is licensed to trade stocks through the exchange. A broker can be on the trading
floor or can make trades by phone or electronically. An exchange is like a warehouse in which
people buy and sell stocks. A person or computer must match each buy order to a sell order, and vice
versa. Some exchanges work like auctions on an actual trading floor, and others match buyers to
sellers electronically.
Benefits of Online Trading
 It (almost) eliminates the middleman - Years ago, you couldn’t make a trade without
meeting or at least calling your broker. Now, it takes only a few clicks. This accessibility
could certainly make online trading attractive for those who may not have had the finances or
the connections to work with a full-service broker in the past. Online traders can buy and sell
without ever speaking to a broker. However, online trading allows you to trade with virtually
no direct broker communication.

 It’s cheaper - Having a broker execute your trades for you cost money. And while
you’ll pay for online trades, the cost won’t be as high. As more brokerages allow online
access, the prices continue to drop.
 It offers greater investor control - Online traders can trade when they want. Online trading
allows nearly instantaneous transactions. Also, investors are able to review all of their
options instead of depending on a broker to tell them the best bets for their money.
 You can monitor your investments in real time - Online brokerages offer advanced
interfaces and the ability for investors to see how their money is performing throughout the
day. Log in through your phone or your computer and you can see any gains or losses in real
time. These brokerages also offer more tools for traders of all levels, posting not only finance
news but also providing analytic platforms and research reports.
Stock Market Quotations & Indices
In stock exchanges, continuous trading in securities takes place and these trades occur at different
prices. As a result, even on a single day, prices of securities may fluctuate. On any trading day, four
prices can be easily identified: Opening Price, Closing Price, Highest Price of the Day & Lowest
Price of the Day. Ordinarily, prices move in a cyclical fashion, alternatively showing increasing &
declining tendencies. The short-term as well as long-term fluctuations in prices of securities are
indicators of the variations in the underlying economic variables. In addition to the price quotations
of individual securities, stock exchanges make available stock market indices, which are useful in
understanding the level of prices and the trend of price movements of the market as a whole. Stock
market indices are meant to capture the overall behaviour of equity markets.
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 group
of securities is measured with reference to a base period. A stock market index act as the indicator of
the performance of the overall economy or a sector of the economy.
BSE came out with a stock index in 1986, which is known as BSE-SENSEX. It is an index
composed with 30 stocks representing a sample of large, well established and financially sound
companies selected from different industry groups. The base year of BSE SENSEX is 1978-79 and
the base value is 100. The index was renamed in October 1996 as BSE-100 index and is now
calculated by taking the prices of 100 stocks listed at BSE only. In 1994, two new index series
namely the BSE-200 and the Dollex-200 indices were launched by BSE. Meanwhile, there has been
a steady increase in the number of listed companies and the market capitalization of companies. The

major stock market indices available at the NSE are: S&P CNX Nifty, CNE Nifty Junior, S&P CNX
500, CNX Midcap 200, S&P CNX Defty.
* CNX is CRISIL NSE Index, which is an index supported by CRISIL (Credit Rating & Information Services of India
Ltd.) the Indian rating agency for debts and risks in investments and Standard and Poor the counterpart of CRISIL in
USA.
Types of orders in Secondary Market

There are several different types of orders you can place when buying or selling a stock. The
following briefly describes the more frequently used orders.
Limit Order
Unlike market orders, a limit order permits you to specify the lowest or highest price at which you
will sell or buy a specified number of shares. A limit order guarantees the price at which you will be
filled, but it does not guarantee you an immediate execution - or whether your order will be filled at
all. There are two main reasons for this. First, if you place a limit order to buy a stock at Rs 50.00
and the current market price is Rs 60.00, you will not be filled until the price drops to Rs 50.00 or
less, which may never happen. Secondly, market orders take priority over limit orders.
Consequently, even if you place a limit order to buy a specific stock at the current market asking
price, you may not get an immediate fill if there are numerous unfilled market orders ahead of your
limit order. In fact, you may not get filled at all if, after the outstanding market orders are filled, the
price of the stock goes higher - above your limit price.
Market Order or Best Rate Order
This is an order to buy or sell a specific number of shares at the best price available at the time the
order is routed to the trading floor. Because market orders are normally executed immediately at the
current market price after they have been routed to the relevant exchange, these orders are almost
always filled within a very short period of time. However, because a market order cannot specify a
price for the shares, the actual price at which the order will be filled will be unknown until the order
is executed. Consequently, if the market price of the shares is rising quickly, a market order may be
filled at a higher price than that quoted at the time the order was sent to the customer's broker for
execution. Accordingly, if one wishes to buy or sell shares at definite price, a market order should
not be used.
Stop Order
A stop order is an order to buy or sell a security when its price surpasses a particular point, thus
ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's
loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop
order becomes a market order. Stop orders are particularly advantageous to investors who are unable
to monitor their stocks for a period of time, and brokerages may even set these stop orders for no
charge. One disadvantage of the stop order is that the order is not guaranteed to be filled at the
preferred price the investor states. Once the stop order has been triggered, it turns into a market
order, which is filled at the best possible price. This price may be lower than the price specified by
the stop order. Moreover, investors must be conscientious about where they set a stop order. It may
be unfavourable if it is activated by a short-term fluctuation in the stock's price. For example, if
stock ABC is relatively volatile and fluctuates by 15% on a weekly basis, a stop loss set at 10%
below the current price may result in the order being triggered at an inopportune or premature time.
Stop Limit Order
A stop-limit order will be executed at a specified price (or better) after a given stop price has been
reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at
the limit price or better. These orders are similar to stop-loss orders, but as their name states, there is
a limit on the price at which they will execute. There are two prices specified in a stop-limit order;
the stop price that will convert the order to a sell order, and the limit price. Instead of the order
becoming a market order to sell, the sell order becomes a limit order that will only execute at the
limit price or better. Of course, there is no guarantee that this order will be filled, especially if the
stock price is rising or falling rapidly. Stop-limit orders are sometimes used because if the price of
the stock or other security falls below the limit, then the investor does not want to sell and is willing
to wait for the price to rise back to the limit price.
Open Order (Good till Cancelled)
An open order is an order to buy or sell a security that remains in effect until it is either cancelled by
the customer, until it is executed or until it expires. Open orders commonly occur when investors
place restrictions on their buy and sell transactions. These orders must be renewed at least twice a
year - no later than the end of April and end of October. A lack of liquidity in the market or for a
particular security can also cause an order to remain open.
Day Order
A day order is an order that is good for that day only. If it is not filled it will be cancelled, and it will
not be filled if the limit or stop order price was not met during the trading session. All orders are
ordinarily treated as day orders unless specified as other types of orders.
LISTING OF SECURITIES

Listing means admission of securities to dealings on a recognized stock exchange. The securities
may be of any public limited company, Central or State Government, quasi governmental and other
financial institutions/corporations, municipalities, etc. The objectives of listing are mainly to:
 Provide liquidity, marketability and free negotiability to the securities;
 Mobilize savings for economic development;
 Protect interest of investors by ensuring full disclosures;
 Ensure proper supervision, provide safety and control over transactions and deals.
When a private company decides to go public and issue shares, it will need to choose an exchange
on which to be listed. To do so, it must be able meet that exchange's listing requirements and pay
both the exchange's entry and yearly listing fees. Listing requirements vary by exchange and include
minimum stockholder's equity, a minimum share price and a minimum number of shareholders.
Exchanges have listing requirements to ensure that only high quality securities are traded on them
and to uphold the exchange's reputation among investors.
“Why company required listing”
 To enhance their brand image and market value;
 To broaden and diversified the number of shareholders;
 To create marketability and liquidity;
 To create favourable impression on the investor;
 For wide publicity through IPOs and price quoted in the newspaper.
“Why investor prefer to the listed companies”
 Liquidity – Listed shares can be sold at any recognized stock exchange and converted into cash
quickly. Buyers-Sellers would be easily available in the security market.
 Best Prices – According to the demand-supply of the shares in the secondary market; the prices
are determined. This results the best price availability.
 Regular Information – Stock exchanges provides adequate information regarding the current
worth of the securities.
 Periodic Reports – Listed companies have to provide periodic report to the public. It enhances
the reliability in the eyes of the investors.
 Transferability – Listing provides immediate transferability of the shares in the trading account
of shareholders.
 Wide Publicity – Since the prices are quoted on the scrip of the stock exchanges, the listed
companies get wide publicity. This not only does good to the investor but also to the corporate to
attract the public for the further issue and investment.
Qualification for Listing
1. Minimum Listing Requirements for New Companies - The following eligibility criteria
have been prescribed for listing of companies on BSE, through Initial Public Offerings (IPOs)
& Follow-on Public Offerings (FPOs):
 The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as
"the Company") shall be Rs. 10 crore for IPOs & Rs.3 crore for FPOs;
 The minimum issue size shall be Rs. 10 crore;
 The minimum market capitalization of the Company shall be Rs. 25 crore;
2. Payment of Excess Application Money – According to the direction given by the SEBI, if
company received excess applications at the time of IPO and due to the limitation of stocks and
their lots company issued less share to the applied investors than company has to repay
investor’s excess money within 30 days of the closure of the public issue. Beyond 30 days;
Company shall be liable to pay an interest at 15% p.a. on excess amount paid by investors.
3. Minimum Requirements for Companies Delisted by BSE seeking Relisting on BSE -
Companies delisted by BSE and seeking relisting at BSE are required to make a fresh public
offer and comply with the existing guidelines of SEBI and BSE regarding initial public
offerings.
4. Listing on Multiple Exchanges – When the paid-up capital of the company is above Rs. 5
crore, it is obligatory for the company to seek listing on more than one stock exchange.
5. Allotment of Securities - As per the Listing Agreement, a company is required to complete the
allotment of securities offered to the public within 30 days of the date of closure of the
subscription list and approach the Designated Stock Exchange for approval of the basis of
allotment. In case of Book Building issues, allotment shall be made not later than 15 days from
the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors.
6. Articles of Association – The AOA of the company should be intune with the sound corporate
practice. If veto power has been provided to a Director or a class of Directors to over rule the
majority decisions, the security of the company is not qualified for listing.
7. Submission of Letter of Application - As per Section 73 of the Companies Act, 1956, a
company seeking listing of its securities on BSE is required to submit a Letter of Application
to all the stock exchanges where it proposes to have its securities listed before filing the
prospectus with the Registrar of Companies.
8. Trading Permission - As per SEBI Guidelines, an issuer company should complete the
formalities for trading at all the stock exchanges where the securities are to be listed within 7
working days of finalization of the basis of allotment. A company should scrupulously adhere
to the time limit specified in SEBI (Disclosure and Investor Protection) Guidelines 2000 for
allotment of all securities and dispatch of allotment letters/share certificates/credit in
depository accounts and refund orders and for obtaining the listing permissions of all the
exchanges.
9. Payment of Listing Fees - All companies listed on stock exchange are required to pay the
Annual Listing Fees by 30th April of every financial year as per the Schedule of Listing Fees
prescribed from time to time. The schedule of Listing Fee is given here under:
Sr.No. Particulars Norms
1 Initial Listing Fees Rs. 20,000/-

2 Annual Listing Fees
(i) Upto Rs. 5 Crs. Rs. 15,000/-
(ii) Rs.5 Crs. To Rs.10 Crs. Rs. 25,000/-
(iii) Rs.10 Crs. To Rs.20 Crs. Rs. 40,000/-
(iv) Rs.20 Crs. To Rs.30 Crs. Rs. 60,000/-
Rs. 70,000/- plus Rs. 2,500/- for every increase of Rs. 5
(v) Rs.30 Crs. To Rs.100 Crs.
crs or part thereof above Rs. 30 crs.
(vi) Rs.100 Crs. to Rs.500 Crs.
(vii) Rs.500 Crs. to Rs.1000 Crs.
(vi) Above Rs. 1000 Crs.
Note: In case of debenture capital (not convertible into equity shares), the fees will be 75% of the above fees.
* includes equity shares, preference shares, Indian depository receipts, fully convertible debentures, partly convertible
debentures and any other security convertible into equity shares.
10. Advertisement Prohibited – The company should not advertise that ‘issue over subscribes’ or
‘thanks to the investing’ or ‘overwhelming response’ etc during the subscription period. If the
company give such kind of advertisement, listing will be refused by the stock exchange after
intimating to the stock exchange division of the Ministry of Finance.
11. Public Offer Size – The size of the public offer and value of the shares should be stated in the
first page of the prospectus. If the shares are issued at premium, that also should be stated.
Preferential allotment to the directors and workers of the company and the reservation for
allotment to the non-resident Indians should be indicated clearly on the prospectus.
Conclusion
Listing means admission of securities of an issuer to trading privileges (dealings) on a stock
exchange through a formal agreement. The prime objective of admission to dealings on the exchange
is to provide liquidity and marketability to securities, as also to provide a mechanism for effective
control and supervision of trading. At the time of listing securities of a company on a stock
exchange, the company is required to enter into a listing agreement with the exchange. The listing

agreement specifies the terms and conditions of listing and the disclosures that shall be made by a
company on a continuous basis to the exchange.

IAPM (Unit 1 &amp; 2)

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UNIT - I

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

MARKETABLE INVESTMENT AVENUES

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

1. Interest Rate Risk

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

1. Business or Liquidity Risk

Dr. Meghashree A. Dadhich

Numerical portion of Risk-Return Analysis!!!

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

TRADING SYSTEM IN STOCK EXCHANGES

Dr. Meghashree A. Dadhich

Settlement Cycle and Trading Hours

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

Types of orders in Secondary Market

Dr. Meghashree A. Dadhich

1 Initial Listing Fees Rs. 20,000/-

Dr. Meghashree A. Dadhich

Dr. Meghashree A. Dadhich

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IAPM (Unit 1 & 2)

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