SECURITIES

MARKET
 Meaning
A financial instrument that represents: an
ownership position in a publicly-traded
corporation (stock), a creditor relationship with
governmental body or a corporation (bond), or
rights to ownership as represented by an option.

A security is a fungible, negotiable financial

instrument that represents some type of financial
value. The company or entity that issues the
security is known as the issuer.
 MARKET

A place of exchange where security trading is

conducted by professional stockbrokers.
 Security Market

Primary Secondary
 Primary Market
A market that issues new securities on an exchange.

Companies, governments and other groups obtain

financing through debt or equity based securities.

Primary markets are facilitated by underwriting groups,

which consist of investment banks that will set a
beginning price range for a given security and then
oversee its sale directly to investors. 

Also known as “New Issue Market" (NIM)

 Objectives
 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
FACTORS

1. Promoters’ Credibility

a. Promoters’ past performance with reference

to the companies promoted by them earlier.
b. The integrity of the promoters should be
found out with enquiries and from financial
magazines and newspapers.
c. Their knowledge and experience in the
related field.
2.Efficiency of the Management

a. The managing directors’ background and

experience in the field.
b. The composition of the Board of Directors is
to be studied to find out whether it is broad
based and professionals are included.
3. Project Details

a. The credibility of the appraising institution or

agency.
b. The stake of the appraising agency in the
forthcoming issue.
4. Product

a Reliability of the demand and supply

projections of the product.
b. Competition faced in the market and the
marketing strategy.
c. If the product is export oriented, the tie-up
with the foreign collaborator or agency for the
purchase of products.
5. Financial Data
a. Accounting policy.
b. Revaluation of the assets, if any.
c. Analysis of the data related to capital, reserves,
turnover, profit, dividend record and profitability ratio.

6. Litigation
Pending litigations and their effect on the
profitability of the company. Default in the payment
of dues to the banks and financial institutions.
7. Risk Factors
A careful study of the general and specific
risk factors should be carried out.

8. Auditor’s Report
A through reading of the auditors’ report is
needed especially with reference to
significant notes to accounts, qualifying
remarks and changes in the accounting
policy.
In the case of letter of offer the investors
have to look for the recent leg-audited
working results at the end of letter of offer.
9. Statutory Clearance
Investor should find out whether all the
required statutory clearance has been obtained
if not what is the current status. The clearances
used to have a bearing on the completion of the
project.

10. Investor Service

Promptness in replying to the enquiries of
allocation of shares, refund of money, annual
reports, dividends and share transfer should be
assessed with the help of past record.
There are three ways in which a company may
raise finances in the primary market:

(1) public issue

(2) rights issue, and
(3) private placement or preferential allotment.
 PUBLIC ISSUE

Public issue involves sale of securities to the

members of the public.

The first public offering of equity shares of a

company, which is followed by a listing of its
shares on the stock market, is called the Initial
Public Offering (IPO). Subsequent are called
seasonal offerings.
Initial Public Offering: The decision to go
public or more precisely the decisions to make
an IPO so that that the securities of the
company are listed on the stock market and
publicly traded is a very important decision
which calls for carefully within the benefits
against costs.
 Eligibility for IPOs:
An Indian company, excluding certain banks,
and infrastructure companies can make an IPO
if it satisfies the following conditions:

1. The company has certain track profitability

and a certain minimum net worth.
2. The securities are compulsorily listed on a
recognized stock exchange which means that a
certain minimum percent of each class of
securities is offered to the public.
3. The promoters group (promoters, directors,
friends, relatives, associates etc.) is required to
make a certain minimum contribution to the
post issue capital.

4. The promoters’ contribution to equity is

subject to a certain lock-up in period.
 RIGHTS ISSUE
According to Sec 81 of the Companies Act
1956, if a public company wants to increase its
subscribed capital by allotment of further
shares after two years from the date of its
formation or one year from the date of its first
allotment, which ever is earlier should offer
share at first to the existing share holders in
proportion to the shares held by them at the
time of offer.
The shareholders have no legal binding to
accept the offer and they have the right to
renounce the offer in favour of any person.

Shares of this type are called right shares.

Generally right shares are offered at a
advantageous rate compared with the market
rate.
 According to Section 81, the company has to
satisfy certain conditions to issue right shares.

1. Right shares must be offered to the equity

share holders in the proportion to the capital
paid on those shares.
2. A notice should be issued to specify the
number of shares issued.
3. The time given to accept the right offer should
not be less than 15 days.
4. The notice also should state the right of the
share holders to renounce the offer in favour of
others.

5. After the expiry of the time given in the

notice, the Board of Directors has the right to
dispose the unsubscribe shares in such a
manner, as they think most beneficial to the
company.
 Private Placement

In this method the issue is placed with a small

number of financial institutions, corporate
bodies and high net worth individuals.

The financial intermediaries purchase the

shares and sell them to investors at a later date
at a suitable price.
The stock is placed with issue house client
with the medium of placing letter and other
documents which taken together contribute a
prospectus, giving the information regarding
the issue.
The special feature of the private placement is
that the issues are negotiated between the
issuing company and the purchasing
intermediaries.

Listed public limited company as well as

closely held private ltd. company can access
the public through the private placement
method.
Mostly in the private placement securities are
sold to financial institutions like Unit Trust of
India, mutual funds, insurance companies,
merchant banking subsidiaries of commercial
banks and so on.
Secondary Markets:

A market where investors purchase securities

or assets from other investors, rather than from
issuing companies themselves. The national
exchanges - such as the New York Stock
Exchange and the NASDAQ are secondary
markets.
A newly issued IPO will be considered a
primary market trade when the shares are first
purchased by investors directly from the
underwriting investment bank; after that any
shares traded will be on the secondary market,
between investors themselves.

In the primary market prices are often set

beforehand, whereas in the secondary market
only basic forces like supply and demand
determine the price of the security.
Functions of Stock Exchange:

1. Maintains Active Trading

Shares are traded on the stock exchanges,
enabling the investors to buy and sell securities.
The prices may vary from transaction to
transaction.

A continuous trading increases the liquidity or

marketability of the shares traded on the stock
exchanges.
2. Fixation of Prices
Price is determined by the transactions that flow
from investors’ demand and supplier’s preferences.
Usually the traded prices are made known to the
public. This helps the investors to make better
decisions.

3. Ensures Safe and Fair Dealing

The rules, regulations and by-laws of the stock
exchanges’ provide a measure of safety to the
investors. Transactions are conducted under
competitive conditions enabling the investors to
get a fair deal.
4. Aids in Financing the Industry
A continuous market for shares provides a
favorable climate for raising capital. When it is
easy to trade the securities, investors are willing to
subscribe to the initial public offerings. This
stimulates the capital formation.

5. Performance Inducer
The prices of stock reflect the performance of the
traded companies. This makes the corporate more
concerned with its public image and tries to
maintain good performance.
6. Dissemination of Information

Stock exchanges provide information through

their various publications. They publish the
share prices traded on daily basis along with
the volume traded. Directory of Corporate
information is useful for the investors’
assessment regarding the corporate.
7. Self-regulating Organization

The stock exchanges monitor the integrity of

the members, brokers, listed companies and
clients. Continuous internal audit safeguards
the investors against unfair trade practices. It
settles the disputes between member brokers,
investors and brokers.
Trading
 Listed and permitted securities – members alone are
entitled to trading privilege.
 Investors interested in buying and selling should
place order with brokers (members).

Open Outcry System

 Traders shout and resort to signals on the trading
floor.
 Buyers makes their bids and sellers makes their
offers – bargains are closed at a mutually agreed-
upon prices.
Screen –based System

 Trading ring is replaced by computer screen.

 Enhances the informational efficiency of the
market as more participants trade at a faster
speed.
 Permits the market participants to get full
view of the market
 Establishes transparent audit trails.
Trading Procedure

 Finding a broker

 Select a broker

 Opening an Account with Broker

 Opening Demat Account

 Placing an Order
 Execution of the Order in the Stock Exchange
 Receiving Contract Note
 Payment for the shares bought or Delivery
Instruction Slip (DIS) for shares sold.
 Receiving Shares or Funds on T+2nd Day
Bulk Deals – a transaction scrip (on an
exchange) where total quantity of shares
bought / sold is more than 0.5% of the number
of equity shares.
SEBI requires the broker to disclose to stock
exchange details of bulk deals by 5:00PM

Block Deals – simultaneous large scale buy

and sell transactions at predetermine price.
Limit Order – where in limit price is specified
by the investor when the order is placed with
the broker. If the order is to purchase shares, the
broker is to execute the order at a price less than
or equal to the limit price. If the order is to sell
shares, the broker is to execute the order at a
price greater than or equal to the limit price.
Thus the investor specifies a ceiling price to
purchase and a floor price to sell shares.
Market Order – wherein the broker is instructed
to buy or sell a stated number of shares
immediately. The broker is obligated to act on a
best-efforts basis to get the best possible price
when the order is placed.

An investor placing a market order can be fairly

certain that the order will be executed but will be
uncertain of the price.
Stop Order – Conditional Market Order
Day Order
Good -Till- Cancelled (GTC) – Open Order

All-or-None Order (AON)

Immediate-or-Cancel (IOC)
Circuit Breakers – abnormal price movements
Settlements

 Depositories Act 1996 – NSDL / CSDL

 Shift to Rolling Settlement
 Transaction Costs – Trading cost / Clearing
Cost / Settlement Cost.
Settlement Cycle

A settlement cycle consists of five days trading

period within which any transaction buy/sell
must be completed. There are two types of
settlement: fixed and rolling.

A fixed cycle starts on a particular day and

ends after five days.
For example, in the Mumbai stock exchange
the settlement cycle starts on Monday and
ends of Friday.
In the NSE it starts on Wednesday of one week
and ends on the Tuesday of the following
week.
A pay-in day and a pay-out day follow the
settlement cycle. The pay-in day refers to all the
buyer brokers depositing the money for the
purchase of shares.

The payout day refers to the exchange handing

over the proceeds to the seller brokers.
Rolling Settlement

In India SEBI introduced Rolling Settlement i.e.

Daily Settlement from January 10. 2000.
Accordingly the transactions were to be settled
on a daily basis.

The time for settlement was brought down from

T+5 days to T+3 days and was further reduced to
T+2 days.
The clearing houses of the stock exchanges
undertake the clearing and settlement process.
NSE has subsidiary NSCCL which takes care of
clearing and settlement.

All trades that take place on a particular trading

day (“T”) are settled two days later (T+2 days)
LEADING STOCK EXCHANGES IN INDIA

BSE – established as ‘The Native Share and

Stock Brokers’ Association’ in 1875
It is the world’s number 1 exchange in terms of
the number of listed companies.
It is the first exchange in India and second in the
world to obtain ISO 9001:2000 certifications.
Also 1st in India and 2nd in world to receive
Information Security Management System
Features of BSE:

 Old and Largest stock exchange in Asia

 5th largest stock market in the world
 1st to introduce Equity Derivatives in India
 BSE Online Trading System (BOLT) is used
by BSE is one of the few stock trading systems
in the world that manages hybrid/mixed mode
of trading.
NSE:
It is India’s largest security exchange in terms of daily
trade numbers. It offers automated electronic trading
of a variety of securities, including equity, corporate
debt, central and state government securities,
commercial papers, CDs and Exchange Traded Funds.

NSE specializes in 3 segments:

1. Wholesale Debt
2. Capital Market
3. Futures and Options
Features of NSE:

 In terms of market capitalization, NSE is

world’s second largest exchange
 1st to start screen based trading (online trading)
 It has Settlement Guarantee Fund of more than
300 Crores which ensures settlement will go on
smoothly
 HQ in Mumbai and BO in Chennai
 It is a Joint Stock Company – Tax paying
company
Stock Market Indices

A stock index or stock market index is a method

of measuring the value of a section of the stock
market

It is computed from the prices of

selected stocks (typically a weighted average). It
is a tool used by investors and financial
managers to describe the market, and to compare
the return on specific investments.
Types of market Indices

 Price weighted index – sum of the prices of a

sample stock on certain date relation to base
date.
Assumption – investor buys one share of each
stock included in the index.
 Equal weighted index – simple arithmetic
average of price relatives of the sample stocks
on a certain date.
Assumption – equal amount in each stock
 Value weighted index – aggregate market
capitalization of the sample stocks.

Assumption – allocation on money in various

stocks in such a way that the weights assigned
to stocks are proportional to market
capitalization.
Indices of Indian Stock Exchanges

1. Sensitivity Index (Sensex) – 30 shares are

listed

2. Nifty – 50 stock index accounting 21 sectors

of economy