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INDIAN EQUITY MARKET

INDEX

Acknowledgement
Stock market
Stock exchange
Segments of security market
Regulator
Who can invest in India?
Stock market trend
What causes changes in stock market?
Options available for investments
Derivatives
Factors driving the growth of Derivatives

Types of derivatives:
Comparative analysis.

ACKNOWLEDGEMENT

I wish to express my sincere gratitude to all those who extended their help,
guidance and suggestions without which it would not have been possible to
complete the project report.
I am deeply indebted to my guide Ms. Sucheta Pawar for his valuable and
enlightened guidance and who encouraged me in compilation of my project,
And last but not the least, www.google.com, without it, making the project
would have been impossible.

STOCK MARKET
Stock market is a market where the trading of company stock, both listed
securities and unlisted takes place.
The stock market is a broad entity covering a wide range of market activities
and companies whereas the stock exchanges are one part of the stock market
system.

STOCK EXCHANGE
A stock exchange is a company or organization that promotes the trading of
stocks through listing services and requirements, tools to bring buyers and
sellers together, and systems to track prices and sales data.

Stock exchanges in India


India has 21 recognised stock exchanges but the most active ones are the NSE
and the BSE.

The BSE and 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.
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.

SEGMENTS OF SECURITIES
MARKET
The securities market has two interdependent segments: the primary (new
issues) market and the secondary market.
The primary market provides the channel for sale of new securities while
The secondary market deals in securities previously issued.

REGULATOR

Why does Securities Market need Regulators?


The absence of conditions of perfect competition in the securities market makes
the role of the Regulator extremely important. The regulator ensures that the
market participants behave in a desired manner so that securities market
continues to be a major source of finance for corporate and government and the
interest of investors are protected.
Who regulates the Securities Market?
The responsibility for regulating the securities market is shared by
Department of Economic Affairs (DEA), Department of Company Affairs
(DCA) , Reserve Bank of India (RBI) and Securities and Exchange Board of
India (SEBI).
What is SEBI and what is its role?
The Securities and Exchange Board of India (SEBI) is
the regulatory authority in India established under
Section 3 of SEBI Act, 1992.
SEBI Act, 1992 provides for establishment of Securities
and Exchange Board of India (SEBI) with statutory powers for
(a) Protecting the interests of investors in securities
(b) Promoting the development of the securities market and
(c) Regulating the securities market.
Its regulatory jurisdiction extends over corporates in the issuance of capital and
transfer of securities, in addition to all intermediaries and persons associated
with securities market.
SEBI has been obligated to perform the aforesaid functions by such measures as
it thinks fit. In particular, it has powers for:

Regulating the business in stock exchanges and any other securities


markets
Registering and regulating the working of stock brokers, subbrokers etc.
Promoting and regulating self-regulatory organizations
Prohibiting fraudulent and unfair trade practices
Calling for information from, undertaking inspection, conducting
inquiries and audits of the stock exchanges, intermediaries, self
regulatory organizations, mutual funds and other persons associated with
the securities market.

WHO CAN INVEST IN


INDIA?
Any citizen of India can invest in equity
market, provided he has a pan card and a
demat account & trading can be done online or over the phone through the help
of an intermediary.
NRI's can invest in the Indian stock market under PIS (Portfolio Investment
Scheme) which is regulated by RBI but NRI's are not allowed day trading that is
to buy and sell a stock on the same day.

Investments in Indian Securities by Qualified Foreign Investors

The government allowed qualified foreign investors (QFIs), including overseas


individuals, to invest directly in Indian stock markets. So far, QFIs were
permitted to invest only in mutual fund schemes.
QFIs shall include individuals, groups or associations that are:
Resident in a country that is a member of the Financial Action Task Force
(FATF) or a country that is a member of a group which is a member of
FATF and
Resident in a country that is a signatory to IOSCOs MMOU or a
signatory of a bilateral MOU with Securities and Exchange Board of
India (SEBI).

STOCK MARKET TREND


Sudden rises or drops in stock prices are often called
spikes. Spikes are extremely difficult, if not
impossible, to predict. Stock market trends are like
the behaviour of a person. After studying how a person reacts to different
situations, we can make predictions about how that person will react to an
event. Similarly, recognizing a trend in the stock market or in an individual
stock will enable us to choose the best times to buy and sell.

Bull Markets and Bear Markets


A bull market is a rising market. In a bull
market, investors are positive. The economy
tends to be strong. Unemployment is low.
Consumers are spending money, which increases
business profits. When businesses profit,
investors demand to share a piece of the pie -they buy stocks and hang on tight to watch the
money growing. The supply of shares, then, is
low -- no one wants to give up their share of the
XYZ Co. The competition to acquire those much-coveted shares becomes
fierce, which drives the prices up even higher. Investors take risks because they
feel good about their chances of making the big bucks.

A bear market is a declining market. It tends to begin with a sharp drop in


stock prices across the board. Very rarely stock prices increase. But the bear
market keeps falling. In a bear market, the economy tends to be weak.
Unemployment increases. Consumers spend less, which results in lower
business profits; this devalues a given company's stock. Investors tend to sell
their stocks before the value decreases too much. Investors don't want to take
risks because they don't feel good about their chances.

WHAT CAUSES CHANGE IN THE


STOCK MARKET?
Many factors affect prices in the stock market, including inflation, interest rates,
energy prices, oil prices and international issues such as war, crime, fraud and
political unrest.

Inflation: Inflation is a rise in prices across the board. Inflation is the


reason a car costs Rs 1, 00,000 in 1990 and Rs 4, 00,000 in 2010. Over the long
term, inflation is good, because it means consumers are spending a lot of money
-- the economy is robust. When inflation is too high, though, consumers pull
back and spend less. After all, Rs 20 is a lot of money to spend on a toffee.
When consumers spend less, companies don't make as much money. When
companies don't make money, investors lose confidence in those companies.
Many investors sell their stock because they believe the stock is worth less and
is only going to decrease in price. As the demand for the stock decreases, the
price of the stock decreases. When this happens to many companies in the stock
market, the stock market experiences a downward shift.

Interest Rates: To bring inflation under control, the Federal Reserve


System can raise the federal funds interest rate, which is the interest rate banks
pay on loans they take from the Federal Reserve. Think of the Federal Reserve
as a credit card for banks. When banks have to pay a higher interest rate, they
often raise their own interest rates on loans and credit card accounts for
businesses and individuals. This means that businesses and consumers must pay

higher interest on borrowed funds. This usually causes consumers to spend less
and businesses to borrow less. When businesses don't borrow money to develop
that new widget, they tend to grow at a slower rate. When consumers don't buy
things and businesses don't grow, companies' profits decrease, causing a stock
price decrease. Conversely, when the Federal Reserve cuts the interest rate,
investors tend to get excited. The cut means banks will be borrowing and
lending more and at better rates. Businesses will grow and consumers will
spend. Company profits will go up. Investors tend to buy.

Earnings: When XYZ Co. reports profits, everyone wants a piece. Profit
means the company is doing well. But maybe after a while, people grow tired of
XYZ and want to buy the new ABC instead. XYZ Co. reports lower profits. As
we saw with inflation and interest rates, when a company reports lower profits,
investors lose confidence in the company and sell their stock, which decreases
the value of the stock.

Energy Prices: People always need energy. Electricity and natural gas
keep us warm, cook our food and keep our computers happy. Therefore, the
demand for energy is pretty constant. Only major changes in energy costs have
a significant effect on the stock market.

Oil Prices: People almost always need oil, in the form of gasoline.
When gas prices are high, however, some people look to alternative methods of
transportation -- carpools, public transportation, bikes, etc. Others keep paying
the high price but, as a result, buy fewer consumer goods. The stock market
tends to react negatively to high oil prices.

International and Domestic Issues: War tends to affect the stock market
negatively. The same goes for crime, fraud, and domestic or political unrest.
Consumers worry when CEOs steal money, terrorists kill innocent people, or
politicians are involved in serious scandals. Who knows what will happen next?
Consumers save their money. Businesses make less money. Investors tend to
dump their stocks, causing a fall in the market.

Fear: Besides being afraid of the market consequences of war, oil prices
or a federal interest rate hike, investors are afraid of losing their money.
Investors tend to dislike seeing their money dwindle as the price of their shares
decreases.
All these factors cause changes in the market.

OPTIONS AVAILABLE FOR


INVESTMENT
One may invest in:
Commodities (physical assets) like real estate, gold/jewellery, commodities etc
and/or
Financial assets such as fixed deposits with banks, small saving
Instruments with post offices, insurance/provident/pension fund etc.
In securities market one may invest in instruments like shares, bonds, mutual
funds etc.
Equity/Share

Total equity capital of a company is divided into equal units of small


denominations, each called a share. For example, in a company the total equity
capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each
such unit of Rs 10 is called a Share. Thus, the company then is 12 said to have
20, 00,000 equity shares of Rs 10 each.
The holders of such shares are members of the company and have voting rights.
Debt Instrument
In the Indian securities markets, the term bond is used for debt instruments
issued by the Central and State governments and public sector organizations and
the term debenture is used for instruments issued by private corporate sector.
Debt instrument represents a contract whereby one party lends money to
another on pre-determined terms with regards to rate and periodicity of interest,
repayment of principal amount by the borrower to the lender.
Mutual Fund
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange
Board of India) that pools money from individuals/corporate investors and
invests the same in a variety of different financial instruments or securities such
as equity shares, Government securities, Bonds, debentures etc.
Mutual funds can thus be considered as financial intermediaries in the
investment business that collect funds from the public and invest on behalf of
the investors. Mutual funds issue units to the investors. The appreciation of the
portfolio or securities in which the mutual fund has invested the money leads to
an appreciation in the value of the units held by investors.
Mutual Funds invest in 13 various asset classes like equity, bonds, debentures,
and commercial paper and government securities.

The schemes offered by mutual funds vary from fund to fund. Some are pure
equity schemes; others are a mix of equity and bonds. Investors are also given
the option of getting dividends, which are declared periodically by the mutual
fund.

DERIVATIVES

Derivative is a product whose value is derived from the value of one or more
basic variables, called bases (underlying asset, index, or reference rate), in a
contractual manner. The underlying asset can be equity, forex, commodity or
any other asset. For example, wheat farmers may wish to sell their harvest at a
future date to eliminate the risk of a change in prices by that date. Such a
transaction is an example of a derivative. The price of this derivative is driven
by the spot price of wheat which is the "underlying".

FACTORS DRIVING THE GROWTH OF


DERIVATIVES
Over the last three decades, the derivatives market has seen a phenomenal
growth. A large variety of derivative contracts have been launched at exchanges
across the world. Some of the factors driving the growth of financial derivatives
are:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the international
markets,
3. Marked improvement in communication facilities and sharp decline in their
costs,
4. Development of more sophisticated risk management tools, providing
economic agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks


and returns over a large number of financial assets leading to higher returns,
reduced risk as well as transactions costs as compared to individual financial
assets.

TYPES OF DERIVATIVES:
1. Forward Contract:
A forward contract is a private agreement between two parties giving
the buyer an obligation to purchase an asset (and the seller
an obligation to sell an asset) at a set price at a future point in time.
2. Future Contracts:
A contractual agreement, generally made on the trading floor of a futures
exchange, to buy or sell a particular commodity or financial instrument at
a pre-determined price in the future. Futures contracts detail the quality
and quantity of the underlying asset; they are standardized to facilitate
trading on a futures exchange. Some futures contracts may call for
physical delivery of the asset, while others are settled in cash.
3. Option Contracts
An options contract is an agreement between a buyer and seller that
gives the purchaser of the option the right to buy or sell a particular asset
at a later date at an agreed upon price. Options contracts are often used
in securities, commodities, and real estate transactions.

COMPARATIVE ANALYSIS
Basis

Equity

Derivative

Return

Capital appreciation

Capital gain

Risk

Dividend Income
Company Specified

Price Fluctuation
Market risk

Sector specified

Credit risk

Global risk

Liquidity risk

General Market Risk


VaR

Settlement risk
Initial margin

Extreme Loss

Exposure margin

Duration

Mark to market
Generally Long term

Premium margin
Short term

Participants

(more than 1 yr)


Long term Investors

(Max. 3 months)
Speculations

Hedgers

Arbitragers

Safe Investors

Hedgers

No such things

Last Thursday of any

Types of margin

Expiry Date of contract

month