CAPITAL MARKET, STOCK EXCHANGES &

PRESENT SCENERIO
CAPITAL MARKET

“ FINANCIAL MARKETS & GOVERNMENT POLICIES “

- After more than four decades of heavy regulation and low rate of economic
growth, Indian Govt. opened the economy during 1991 to market forces &
promoted modernisation of financial institutions.
- For 4 decades after Independence India had followed a development
strategy based on extensive Govt. Direction.
- DFI’s, commercial banking, capital markets, Insurance, PSU’s of all nature
were strictly controlled by Govt. Policies & norms.
- Corporate Sector/ Business Sector was also under strict governance of
Govt.
 ROLE OF CAPITAL MARKET IN ECONOMIC
DEVELOPMENT
- Depends upon growth prospects based on economic policies & foreign
policies
- Growth prospects would depend upon proper management and
administration of an economy / country
- Strong & positive government with good policies and their
implementations, would lead to real GDP growth, FDI , FII, Exports
supporting BOP, profitabilities of listed companies
( short and long term ), credit policies, monetary policies,etc.
- The general / normal economic thinking has been :
“ To achieve faster economic growth, the capital market can channelise
the source of finance in the primary segment ( new issues ).”
- Capital market makes two important contributions to growth :
(i) It signals to other providers of capital ( such as banks ) the prospects
and therefore, the risk of lending to companies
(ii) It provides opportunities for investors to seek out and invest in
companies of the future.
 CAPITAL MARKET INSTITUTIONS

- Before 1991 it was CCI – Controller of capital issues

- 1992 onwards known as SEBI – Securities & Exchange Board Of India
- 1994 : NSE - National Stock Exchange
- National Securities Depository Limited ( NSDL )
( Physical form / Dematerialised form )
- 1993 : FIIs - Foreign Institutional Investors

STOCK INDICES
- An Index is a no. that represents the changes in a set of values between a
base time period and another time period
- Similarly, a stock index represents change in the value of a set of stocks
which constitute the index, over a base year
- Sensex & Nifty are the 2 major stock indices of India represents BSE and
NSE respectively
 Contd…………………..

2 Main objectives of stock indices are :

(a) To reflect market direction
(b) To indicate day to day fluctuations in the prices of scrips
- The utility of a stock market index lies in a positive relationship with
returns to different securities
- The BSE sensex consists of 30 selected stocks and Nifty consists of 50
selected stocks. Most of these Co’s are Blue Chip Co’s having a very
good track record. As they are actively traded, the index shares have a
very high liquidity
- A stock market index is created by selecting a group of stocks that
represent the whole market or a specified sector or segment of the
market. An index is calculated with reference to a base period and a base
index value
 Stock market indices are useful for a variety of
reasons. Some of them are :
- They provide a historical comparison of returns on money invested in stock
market against other forms of investments such as gold or debt
- They can be used as a standard against which to compare the performance
of an equity fund
- It is the lead indicator of the performance of the overall economy or a sector
of the economy
- Stock Indices reflect highly up-to-date information
- Modern financial applications such as Index Funds, Index Futures, and
Index Options, play an important role in financial investments and risk
management
 BSE SENSEX & OTHER INDEX NUMBERS

- BSE : Sensitive Index is a “ Market Capitalisation Weighted “ index of

30 stocks representing a sample of large well established and financially
sound companies
- The BSE sensex is the benchmark index of the Indian Capital Markets
with wide acceptance among individual investors, institutional investors,
foreign investors, and fund managers
- THE OBJECTIVES OF THE INDEX ARE :
1. To measure market movements
2. Benchmark for funds performance
3. For Index-Based Derivative products (eg) The country’s first derivative
product (ie) The country’s first derivative product (ie) Index – Futures was
launched on BSE - Sensex
 CRITERIA FOR SELECTION OF SCRIPS

The eligibility criteria to be included in the sensex can be specified as follows :

(a) Market Capitalisation : (ie) The scrip should figure in the top 100
companies listed by market capitalisation. Also market capitalisation of each scrip
should be more than 0.5% of the total market capitalisation of Index (ie) The
minimumweight should be 0.5%
(b) Liquidity & Trading Frequency : (ie) The scrip should have been traded on each &
every trading day for the last one year. Exceptions can be made for extreme
reasons like scrip suspension & so on
(c) No. of Trades : The scrip should be among the top 150 Co’s listed by average no
of trades per day for the last one year
(d) Value of shares Traded : The scrip should be among the top 150 Co;s listed by
average value of shares traded per day for last one year
(e) Trading Activity : The average no. of shares traded per day as a % of the total no.
of outstanding shares of the Co. should be greater than 0.05% for the last 1 year
------- Scrip selection would take into account a balanced representation of the
listed Co’s in the world of BSE. The index Co’s should be leaders in their Industry
Group
 SENSEX MOVEMENT

MARCH – APRIL : 2006

(i) Sensex had crossed 12000 Mark
(ii) Considered as Peak Point
(iii) Taken as a signal of performance of
Corporate Sector in India
- The daily sensex value is available in the market and it fluctuates depending
upon the demand & supply factors
- If sensex is in the range of 18000 – 20000, then it is generally considered as
positive sign in the stock market
- Sensex point below 6,000 indicates recessionary trend in the market
- BSE sensex has witnessed more than 100% return during 2004 – 2008,
over a period of 3 years
DURING 2007 : Sensex had crossed 20000 Mark (Due to progress / prospects)
DURING 2008 : Sensex started declining touching 8000 Mark ( Meltdown )
DURING 2009 : A recent improving trend around 14000 Mark ( Speculations )
 OTHER INDICES OF BSE

- Besides Sensex, BSE 100, BSE 200, BSE 500, Dollex

- 100, 200 and 500 are Index Nos related to major scrips from different
sectors
- Dollex is the US $ version of the BSE 200 Index. This is to facilitate
investment evaluation in US $ terms for foreign investors. The BASE year of
DOLLEX is the fiscal year of 1989 – 90
- Sensex was launched by BSE during 1986 – BSE pioneered the concept of
stock market indices
- The BSE has introduced a broad based index consisting of 500 Scrips w.e.f.
16thy August, 1999 to represent all segments of listed stocks. The base
date & base value of BSE – 500 is 1st February, 1999 and 1000 points
respectively. It represents all 23 major industries and 102 sub-sectors of the
Indian Economy covering more than 80% of the Total Market Capitalisation
 NIFTY AND NSE INDEX NOs

- Similarly major Indices of NSE are S&P CNX Nifty, CNX Nifty Junior, S&P CNX
500, CNX Midcap 200
- Among these Indices, S&P Nifty is considered as a Benchmark index of NSE

MAJOR STOCK EXCHANGES OF THE WORLD

(i) NASDAQ in USA : National Association Of Securities Dealers Automated
Quotations. Trading began on 8th February, 1971
Branch Exchanges in Canada and Japan
They have associations with exchanges in Hongkong and Europe
(ii) NYSE - New York Stock Exchange
(iii) Dow Jones ( The Dow Jones Industrial Average ) - Oldest continuing US
market Index - Guaging the performance of Industrial component of America’s
Stock Market
(iv) S&P 500 ( standard and poor’s corporation ) – List of 500 US companies, ordered
by market capitalisation
(v) Nikkei ( Tokyo Stock Exchange ) – Nikkei Average is the most watched Index of
Asian Stocks
(vi) Kospi ( Korea Composite Stock Price Index )
 DERIVATIVES MARKET

- A derivative security can be defined as a security whose value depends on

the value of other underlying variables
- Derivative securities are available on stocks, stock indices, bullion, index,
currency, Bonds, Interest Rates, Commodities in the World
- Derivative means Forward, Futures, or Option Contract of Pre-determined
fixed duration, linked for the purpose of contract fullfilment to the value of
specified real or financial asset or to index securities
- Derivatives are meant essentially to facilitate temporary hedging of price risk
of inventory holding or a financial / commercial transaction over a certain
period
- Acts as a form of Insurance
- RISKS in trading derivatives may change depending on what happens to
the underlying asset
- Derivatives are broadly classified into : (i) Futures (ii) Options
- Trading needs to take place through authorised exchanges
 Contd……………………

The derivatives market performs a no of economic functions :

1. Helps in managing risks
2. Helps in the discovery of future prices
3. Increases the volume traded in markets because of participation risk averse
people in greater numbers
4. Increases savings and investments in the long run
- The participants in derivatives market are of 3 types :
(i) Hedgers (ii) Speculators (iii) Arbitrageurs
- Hedgers use futures or options markets to reduce or eliminate the risk
associated with the price of an asset
- Speculators use futures and options contracts to get extra leverage in betting on
future movements in the price of an asset. They can increase both potential gains
and potential losses by usage of derivatives in a speculative venture
- Arbitrageurs are in business to take advantage of a discrepancy between prices in
2 different markets. If for example, they see the futures prices of an asset getting
out of line with the cash price, they will take offsetting positions in the 2 markets to
lock in a profit