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The two major stock exchanges in India are: National Stock Exchange (NSE)
Bombay Stock Exchange (BSE).
1.2 National Stock Exchange
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With the liberalization of the Indian economy, it was found inevitable to lift the
Indian stock market trading system on par with the international standards. On the
basis of the recommendations of high powered Pherwani Committee.
The National Stock Exchange was incorporated in 1992 by Industrial
Development Bank of India, Industrial Credit and Investment Corporation of
India, Industrial Finance Corporation of India, all Insurance Corporations,
selected commercial banks and others.
The National Stock Exchange (NSE) is India's leading stock exchange covering
various cities and towns across the country. NSE was set up by leading
institutions to provide a modern, fully automated screen-based trading system
with national reach. The Exchange has brought about unparalleled transparency,
speed & efficiency, safety and market integrity. It has set up facilities that serve as
a model for the securities industry in terms of systems, practices and
procedures.
Trading at NSE can be classified under two broad categories:
Wholesale debt market
Capital market
Wholesale debt market operations are similar to money market operations institutions and corporate bodies enter into high value transactions in financial
instruments such as government securities, treasury bills, public sector unit
bonds, commercial paper, certificate of deposit, etc.
NSE has several advantages over the traditional trading exchanges. They are as
follows:
NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the
securities.
Delays in communication, late payments and the malpractices prevailing in
the traditional trading mechanism can be done away with greater operational
efficiency and informational transparency in the stock market operations, with
the support of total computerized network.
NSE Nifty
S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors
of the economy. It is used for a variety of purposes such as benchmarking fund
portfolios, index based derivatives and index funds.
NSE came to be owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first
specialized company focused upon the index as a core product. IISL have a
consulting and licensing agreement with Standard & Poor's (S&P), who are world
leaders in index services. CNX stands for CRISIL NSE Indices. CNX ensures
common branding of indices, to reflect the identities of both the promoters, i.e.
NSE and CRISIL. Thus, 'C' Stands for CRISIL, 'N' stands for NSE and X stands
for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's
Financial Information Services.
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SENSEX
The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that
subsequently became the barometer of the Indian stock market.
SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. First compiled in 1986, SENSEX is a
basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of SENSEX is 1978-79 and the base
value is 100. The index is widely reported in both domestic and international
markets through print as well as electronic media.
The launch of SENSEX in 1986 was later followed up in January 1989 by
introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100
stocks listed at five major stock exchanges.
The values of all BSE indices are updated every 15 seconds during the market
hours and displayed through the BOLT system, BSE website and news wire
agencies.
All BSE-indices are reviewed periodically by the index committee of the
exchange.
1. OVERVIEW OF THE REGULATORY FRAMEWORK OF THE
CAPITAL MARKET IN INDIA
India has a financial system that is regulated by independent regulators in the
sectors of banking, insurance, capital markets and various service sectors. The
Indian Financial system is regulated by two governing agencies under the
Ministry of Finance. They are
1 Reserve Bank of India
The RBI was set up in 1935 and is the central bank of India. It regulates
the financial and banking system. It formulates monetary policies and
prescribes exchange control norms.
2 The Securities Exchange Board of India
The Government of India constituted SEBI on April 12, 1988, as a nonstatutory body to promote orderly and healthy development of the
securities market and to provide investor protection.
brokerage firm. Any one having following document can open all the above
mentioned account and can start trading.
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Definition: An IPO is short for an initial public offering. Like the name says, it's
when a company initially offers shares of stocksto the public. It's also called "going
public." An IPO is the first time the owners of the company give up part of that
ownership to stockholders.
Advantages of an IPO for the Company
The IPO is an exciting time for a company because it means it has become
successful enough to require much more capital to continue to grow. It's often the
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only way for the company to get enough cash to fund a massive expansion. For the
owners, it's finally time to cash in on all their hard work. They usually award
themselves a significant percentage of the stock, and so stand to make millions the
day it goes public. An IPO is the first sale of stock by a private company to the
public. Its often called going public.
What are the risks? IPOs are usually more risky than a stock thats been
on the stock market for a while. No one can predict how the price of an IPO will
change once it goes on sale. Before you decide, read the prospectus from the
company issuing the IPO. The prospectus describes the business plan and notes
important risk factors. Check whether the company is making money or when it
expects to become profitable.
2.
Are there any fees? In most cases, you wont pay any commission to buy
an IPO. Thats because the company issuing the IPO hires underwriters to price
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and market the new stock. Underwriters get large fees for their services. Their fees
are built into the initial offering price of the stock.
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Types/Kinds of Shares
As per section 43 of the said Act, the share capital of a company limited by shares
shall be of two kinds only, namely : (a) equity share capital (b) preference share capital
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1.
Small cap stocks have a market cap of Rs.2000 cr or less. They are likely to
grow quickly, but are riskier.
2.
Mid cap stocks have a market value of between Rs.2000 to 10000 cr
3.
Large cap stocks have a market cap of Rs.10000 cr or more. They grow
more slowly, but are not as risky.
Blue chip stocks are fairly valued, may not be growing quickly, but have proven
themselves over the years to be solidly run companies in stable industries. They
usually pay dividends, and are considered a safer investment than growth or value
stocks They are also known as income stocks.
Sector: Stocks are also grouped by industry sector Here are the nine most common
sectors:
1.
2.
3.
4.
5.
6.
7.
8.
9.
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Stock index
Stock market index (stock index) - a composite measure of price change for a
certain group of assets (commodities, derivatives, securities), which is called
"index basket".
Accounting for stock index of the selected group of securities and other assets you
can see the behavior of a particular market sector. With it, investors can track the
mood of the market (its direction of motion) or a separate sector. This is possible
even if the asset price index in the sample vary in different directions. So why, in
fact, need a stock market index? By itself, the stock market index does not mean
anything. This is the usual number, devoid of value. Interestingly not the stock
market index and its dynamics, down from a daily calculation of the index.
What to study and analyze large volumes of information on all traded securities,
the investor is much easier to track the desired stock indexes in order to see the
status of a particular industry or general economic picture. I must say that now, to
exchange stock indexes are often judged on the state of the economy of entire
countries. In the case where the dynamics of the index is negative, that is, the
market falls, then it is called a "bear." When the motion is directed upwards taking power, "bull."
All the exchanges make their calculations based on stock indices traded on these
securities. In addition, markets and stock exchanges can simultaneously calculate
the number of market indexes that contain various "index basket". The values of
stock indices and their dynamics are published in the media, in the regular reports
of financial news, as well as information on Internet sites.
Securities:
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Types of Securities
There are many different securities that you can invest your money in. They're
usually divided into two categories. Equity securities grant you partial ownership
of a company. Debt securities are considered loans to companies or entities of the
government. Here's a quick refresher on some of the most popular security
investments.
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Once you have bought or sold shares, the transaction is complete only when you
have got the shares you purchased, or received money for the shares you sold. This
is called settlement in stock market parlance. The stock exchanges have a complex
mechanism in place to ensure that every trade is properly matched, and shares are
received or delivered properly. There are basically three tasks that are performed in
the process of buying and selling of securities. They are:
Trading
Clearing
Settlement
Trading basically deals with placing an order and its execution. Clearing deals with
the determination of obligations in terms of funds and securities. Settlement means
that the trade will be completed and for trades on the BSE the settlement agent is
called as Clearing House (CH) while on the NSE it is termed the National
Securities Clearing Corporation (NSCCL).
The clearing and settlement mechanism in the Indian securities market has
witnessed several innovations. The stock exchanges in India were earlier following
a system of account period settlement for cash market transactions and then the
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T+2 rolling settlement was introduced for all the securities. The members receive
the funds / securities in accordance with the pay-in / pay-out schedules notified by
the respective exchanges. The trades are settled irrespective of default by any
member and the exchange follows up with the defaulting member subsequently for
recovery of his or her dues to the exchange.
Two depositories viz., the National Securities Depositories (NSDL) and the Central
Depositories Services (CDSL) provide electronic transfer of securities and more
than 99 per cent of the turnover is settled in dematerialised form. The members /
custodians make available the required securities in their pool accounts with
depository participants (DPs) by the prescribed pay-in time for securities. The
depository transfers the securities from the pool accounts of members / custodians
to As per the schedule determined by the clearing agency, the securities are
transferred on the pay-out day by the depository from the settlement account of the
clearing agency to the pool accounts of members / custodians. The pay-in and payout of securities is put into effect on the same day for all settlements. Select banks
have been empanelled by the clearing agencies for the electronic transfer of funds.
The members are required to maintain accounts with any of these banks.
The members are informed electronically of their pay-in obligations of funds. The
members make available the required funds in their accounts with clearing banks
by the prescribed pay-in day. The clearing agency forwards the funds obligations
files to the clearing banks which, in turn, debit the accounts of members and credit
the account of the clearing agency. In some cases, the clearing agency runs an
electronic file to debit members accounts with clearing banks and credit its own
account. On the payout day, funds are transferred by the clearing banks from the
account of the clearing agency to the accounts of members as per the members
obligations. In the T+2 rolling settlement, the pay-in and pay-out of funds as well
as securities take place within two working days after the date of trade.
WHAT ARE SETTLEMENT AGENCIES?
Clearing Corporations
A clearing corporation, with the help of clearing members, custodians, clearing
banks and depositories, settles the trades executed on exchanges. It performs the
following tasks:
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Clearing Members :
Clearing members (CMs) are the members of the clearing houses/clearing
corporations who facilitate settlement of trades done on the stock exchanges.
He/she could be a broker or a custodian registered with the SEBI since he/ she is
an important intermediary in the capital market and an essential link in the
depository system. The CMs main activity is to facilitate pay-in/pay-out of
securities to / from stock exchanges/clearing house/ clearing corporations either on
their own behalf or on behalf of their clients. The securities which are due for
delivery can be delivered directly from the clients account (depending on whether
the exchange provides this facility) or through CMs to the stock exchanges /
clearing house / clearing corporation account.
Similarly, pay-out of securities can be delivered directly to the clients account on
the basis of information given to a clearing house by the CM or to the CMs
account. In the capital market segment all the trading members of the exchange are
the clearing members of the clearing corporation. However, please note that in the
case of trades done in the future and option market, clearing members can be a
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National Securities Depository (NSDL) NSDL, the first and the largest
depository in India, was established in August 1996. NSDL has been promoted by
the Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and
National Stock Exchange of India (NSE). As on January 18, 2010, they have
crossed 1 crore active investor accounts.
Central Depository Services (I) (CDSL) : CDSL has been promoted by the
Bombay Stock Exchange and the Bank of India. It was formed in February 1999.
Both the depositories have a network of depository participants (DPs) which are
further electronically connected to their clients. So, DPs act as a link between the
depositories and the clients. CDSL was promoted by the Bombay Stock Exchange
(BSE) jointly with leading banks such as the State Bank of India, Bank of India,
Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India,
Bank of Maharashtra, Canara DS Bank & The Calcutta Stock Exchange.
bull market a strong stock market where stock prices are rising and
investor confidence is growing. It's often tied to economic recovery or an economic
boom, as well as investor optimism.
bear market a weak market where stock prices are falling and investor
confidence is fading. It often happens when an economy is in recession and
unemployment is high, with rising prices.
Economic factors
1. Interest rates
The bank can raise or lower interest rates to stabilize or stimulate the Canadian
economy. This is known as monetary policy. If a company borrows money to
expand and improve its business, higher interest rates will affect the cost of its
debt. This can reduce company profits and the dividends it pays shareholders. As a
result, its share price may drop. And, in times of higher interest rates, investments
that pay interest tend to be more attractive to investors than stocks.
2. Economic outlook
If it looks like the economy is going to expand, stock prices may rise. Investors
may buy more stocks thinking they will see future profits and higher stock prices.
If the economic outlook is uncertain, investors may reduce their buying or start
selling.
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3. Inflation
Inflation means higher consumer prices. This often slows sales and reduces profits.
Higher prices will also often lead to higher interest rates. For example, the RBI
may raise interest rates to slow down inflation. These changes will tend to bring
down stock prices. Commodities however, may do better with inflation, so their
prices may rise.
4. Deflation
Falling prices tend to mean lower profits for companies and decreased economic
activity. Stock prices may go down, and investors may start selling their shares and
move to fixed-income investments like bonds. Interest rates may be lowered to
encourage people to borrow more. The goal is increased spending and economic
activity. The Great Depression (2008) was one of the worst periods of deflation
ever.
5. Economic and political shocks
Changes around the world can affect both the economy and stock prices. For
example, a rise in energy costs can lead to lower sales, lower profits and lower
stock prices. An act of terrorism can also lead to a downturn in economic activity
and a fall in stock prices.
6. Changes in economic policy
If a new government comes into power, it may decide to make new policies.
Sometimes these changes can be seen as good for business, and sometimes not.
They may lead to changes in inflation and interest rates, which in turn may affect
stock prices.
Full-service investment firms You'll pay fees and commissions for the
investment advice they give you, and for buying and selling stocks.
Opening an investment account
Before you can buy stocks, you have to open an account with an investment firm.
There are 2 main types:
1.
Cash account This is the most common type of account. It allows you to
pay cash for your stocks. You will have to fill out an account opening form or an
investor profile form (also known as know your client information). Your
investor profile helps your advisor understand your goals and your tolerance for
risk.
2.
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Since screen based trading has been found to be more cost-effective, transparent, and userfriendly it is gaining increasing foothold. In recent years, many developed markets have been
working to automate and introduce screen based trading systems. The last decade has witnessed a
dramatic increase in both the number and the market share of screen-based trading systems.
Electronic trading has been removing geographical constraints and allowing much higher trade
volumes to be handled, and in customized ways that until recently would have been technically
impossible or prohibitively expensive.
The BSE Online Trading System (BOLT) and later developments
The Bombay Stock Exchange (BSE) switched over from the open outcry
trading system to a fully automated computerized mode of trading known as
the BSE Online Trading (BOLT) system in 1995. This system, which is both
order and quote driven, was commissioned on 14 March 1995 and in May
1995, it was introduced for all the securities listed on the BSE.
Actually, it started with the screen based trading and in September 1997,
switched over to the direct online access facility. In the initial stages, BOLT
was available to brokers of the BSE based in Mumbai through leased lines.
Today, it is available all over the country and even abroad.
Firms that have generated significant profits are those that follow the best
forex practices. In spite of the lure of more profits, these traders never gave
up the business ethics that they had adhered to earlier. Thus, major
developments have taken place in the forex market, mainly due to the
presence of those honest players.
In the currency market, even though the prominently traded currencies are
the US dollar, Japanese yen, the Euro and the British pound, almost all the
other major currencies of the world are also traded in different parts of the
world. In most instances, the trade in currencies takes place more frequently
if there is a booming trade between particular countries.
Almost all the countries of the world have trade relationships with the United
States, Japan and the European Union. It is this advantage that has resulted
in the US dollar being the most traded currency in the world. All the trade in
commodities and other goods are invoiced in the dollar. Literally speaking,
the US is the main beneficiary of the liberalized financial system.
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Capital Market
Capital market deals with medium term and long term funds. It refers to all facilities and the
institutional arrangements for borrowing and lending term funds (medium term and long term).
The demand for long term funds comes from private business corporations, public corporations
and the government. The supply of funds comes largely from individual and institutional
investors, banks and special industrial financial institutions and Government
Definition: Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc. The buying/selling is undertaken by
participants such as individuals and institutions.
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ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA :Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below
1.
In developing countries like India the importance of capital market is self evident. In this market,
various types of securities helps to mobilise savings from various sectors of population. The twin
features of reasonable return and liquidity in stock exchange are definite incentives to the
people to invest in securities. This accelerates the capital formation in the country.
2.
The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity to
investors to buy or sell their securities, while permanent capital with the company remains
unaffected.
3.
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The stock exchange is a central market through which resources are transferred to the industrial
sector of the economy. The existence of such an institution encourages people to invest in
productive channels. Thus it stimulates industrial growth and economic development of the
country by mobilising funds for investment in the corporate securities.
4.
Ready And Continuous Market :The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.
5.
Technical Assistance :-
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