Capital Markets

»Secondary Markets
 The Secondary Market
• Purchases and sales of existing stocks and bonds occur
in the secondary market.
• Transactions in the secondary market do not provide
additional funds to the firm.
• The secondary market increases the liquidity of
securities outstanding and lowers the required returns of
investors.
• Composed of organized exchanges like the NSE and
BSE plus the over-the-counter (OTC) market.
 Chronology of Events
• Sensex compiled in 1986
• 1994: Equity Trading starts at NSE
• 1995: Trading goes electronic for the first
time in India through NEAT System
followed by BOLT
• 1996: Depositories comes into existence,
NSDL created, sponsored by NSE, IDBI
and UTI
• 1999: FIIs allowed in Indian soil
 Chronology of Events: Cont
• February 2000: NSE launches first
time internet trading.
• June 2000: derivatives trading
commences on index futures and index
options.
• November 2000: SEBI approved
trading through wireless medium on
WAP platform. NSE.IT launched the
wireless application protocol (WAP).
 Chronology of Events: Cont
• Nov: 2001: options and futures on
individual stocks allowed trading.
• 2001: Badla banned, Sebi allows
margin trading, major stocks move
towards rolling settlements.
• 2003: T+2 settlements in all stocks.
• 2003: Demutualisation of exchanges.
 Market
Capital Market -- The market for relatively long-
term (greater than one year original maturity)
financial instruments.
Primary Market -- A market where new securities
are bought and sold for the first time (a “new
issues” market).
Secondary Market -- A market for existing (used)
securities rather than new issues.
 The Secondary Market
• Stock exchange is the term commonly used
for a secondary market, which provide a place
where different types of existing and listed
securities such as shares, debentures and
bonds, government securities can be bought
and sold on a regular basis.
• Unlisted shares are traded in OTC exchange.
 Stock exchange
• A body which is incorporated for the purpose of
assisting, regulating or controlling the business
of buying, selling or dealing with securities.
• The central government has delegated power to
SEBI to recognise Stock exchanges.
Main characteristics of a stock exchange
• 1. It is an organised market.
• 2. It provides a place where existing and approved
securities can be bought and sold easily.
• 3. In a stock exchange, transactions take place
between its members or their authorised agents.
• 4. All transactions are regulated by rules and by
laws of the concerned stock exchange.
• 5. It makes complete information available.
 Participants
• Investors
• Issuers
• Depository and DP
• SEBI
• Stock exchange
• Stock market intermediaries like:
– Merchant bankers, underwriters, portfolio
managers, brokers, bankers, registrar, CRA etc.
 FUNCTIONS OF A STOCK
EXCHANGE
1. Provides ready and continuous market
2. Provides information about prices and sales
3. Provides safety to dealings and investment
4.Helps in mobilisation of savings and capital
formation.
5.Barometer of economic and business
conditions.
6. Better Allocation of funds.
 ADVANTAGES OF STOCK EXCHANGES
• To the Companies
• (i) The companies whose securities have been listed on a
stock exchange enjoy a better goodwill and credit-standing
than other companies because they are supposed to be
financially sound.
• (ii) The market for their securities is enlarged as the
investors all over the world become aware of such securities
and have an opportunity to invest
• (iii) As a result of enhanced goodwill and higher demand,
the value of their securities increases and their bargaining
power in collective ventures, mergers, etc. is enhanced.
• (iv) The companies have the convenience to decide upon the
size, price and timing of the issue.
 ADVANTAGES OF STOCK EXCHANGES
• To the Investors:
• (i) The investors enjoy the ready availability of facility and
convenience of buying and selling the securities at will
and at an opportune time.
• (ii) Because of the assured safety in dealings at the stock
exchange the investors are free from any anxiety about
the delivery and payment problems.
• (iii) Availability of regular information on prices of
securities traded at the stock exchanges helps them in
deciding on the timing of their purchase and sale.
• (iv) It becomes easier for them to raise loans from banks
against their holdings in securities traded at the stock
exchange because banks prefer them as collateral on
account of their liquidity and convenient valuation.
 ADVANTAGES OF STOCK EXCHANGES
• To the Society
• (i)The availability of lucrative avenues of investment and the liquidity
thereof induces people to save and invest in long-term securities. This
leads to increased capital formation in the country.
• (ii) The facility for convenient purchase and sale of securities at the
stock exchange provides support to new issue market. This helps in
promotion and expansion of industrial activity, which in turn
contributes, to increase in the rate of industrial growth.
• (iii) The Stock exchanges facilitate realisation of financial resources to
more profitable and growing industrial units where investors can
easily increase their investment substantially.
• (iv) The volume of activity at the stock exchanges and the movement
of share prices reflect the changing economic health.
• (v) Since government securities are also traded at the stock exchanges,
the government borrowing is highly facilitated.
 LIMITATIONS OF STOCK
EXCHANGES
• Like any other institutions, the stock exchanges too
have their limitations. One of the common evils
associated with stock exchange operations is the
excessive speculation.
• Another shortcoming of stock exchange operations
is that security prices may fluctuate due to
unpredictable political, social and economic factors
as well as on account of rumours spread by
interested parties.
 Stock market index
A stock market index is a measure of the relative value of a
group of stocks in numerical terms. As the stocks within an
index change value, the index value changes. An index is
important to measure the performance of investments
against a relevant market index.

Major indices in India

• BSE Sensex
• BSE national index
• Nifty
• RBI equity share index
• FE ordinary share price index
 Purpose of an Index

• Analyze the movements of prices of various listed

stocks
• The return on the index is helpful in evaluating the
portfolio risk-return analysis.
• Industry-wise comparisons
• Measuring the growth in the secondary market
• Compare a given share price behavior with its
movements
 Sectoral Indices
• BSE IT Sector Index
• BSE FMCG Sector Index
• BSE Capital Goods Sector Index
• BSE Consumer Durable Index
• BSE Healthcare Sector Index
 Trading Mechanism
•NSE introduced a nation-wide on-line fully-
automated screen based trading system (SETS)
• Electronically matching of orders on a strict
price/time priority
• Nation wide trading
• Anonymity of transactions
• NEAT system supports an order driven market,
orders matched on the basis of time and price
priority
 Dematerialization of Shares

• Investor approaches a DP, opens account at NSDL

• Fills the demat form, submits to the DP along with
The share certificates writing “surrendered for
dematerialization”
• DP intimates NSDL, submits shares certificates to
the registrar and transfer agents (RTA)
• RTA confirms the case, destroys the certificates,
confirms to NSDL.
• NSDL updates the system, informs the DP, RTA
• DP update its records, informs the investor .
Advantages of Depository System

• Elimination of bad deliveries

• Exemption of stamp duty on share transfers
• Swiftness of transactions
• Faster payments on sale of shares
• No scope for forgery of share certificates
 Trading Basics
• Investor selects a stock
• Places the order with a broker
• Broker communicates the same to the stock
exchange
• The order stays in the queue and gets executed
when it logs on to the system within the buy limit
that has been specified
• The share buy or sell will be sent to the demat
account of the buyer or seller by the broker
 Types of orders at NSE
Time Conditions
• Day, GTC, GTD, IOC
Price Conditions
• Limit Price/Order
• Market Price/Order
• Stop Loss (SL) Price/Order
Quantity Conditions
• Disclosed Quantity (DQ)
• Minimum Fill (MF)
Order Matching
• When valid orders are entered or received by the
system, they are numbered, time stamped and then
scanned for a potential match
• Each order has a distinctive order number and a unique
time stamp on it
• If a match is not found, then the orders are stored in the
books as per the price/time priority
Matching Priority
The best sell order is the order with the lowest price and a
best buy order is the order with the highest price. The
unmatched orders are queued in the system by the
following priority
By Price:
A buy order with a higher price gets a higher
priority and similarly, a sell order with a lower
price gets a higher priority.
Illustration
100 shares @ Rs. 35 at time 9:30 a.m.
500 shares @ Rs. 35.05 at time 9:43 a.m.
The second order price is greater than the first
order price and therefore is the best buy order
By Time:
If there is more than one order at the same price,
the order entered earlier gets a higher priority
Illustration
200 shares @ Rs. 72.75 at time 9:30 a.m.
300 shares @ Rs. 72.75 at time 9:35 a.m.
Both orders have the same price but they were
entered in the system at different time. The first
order was entered before the second order and
therefore is the best sell order
 Market Timings
• Monday to Friday
• Normal Market Open : 09:00 hours
Normal Market Close : 15:30 hours
• The pre-open session lasts for 15 minutes from 9
AM to 9:15 AM and is divided into three parts. In
the first 8 minutes orders are placed. These orders
can be cancelled or modified during this period. In
the next 4 minutes price discovery will be done, and
orders will be executed. The remaining 3 minutes
are the buffer period to facilitate transition between
pre open and continuous trading session.
Trading Mechanism at BSE
• Open outcry trading system till the mid 1990s
• Switched over to BOLT from march 14, 1995
• Traders enter orders for purchase or sale of securities
from trader work stations (TWSS)
• Trading on the BOLT system is conducted from
Monday to Friday between 9:00 a.m. and 3:30 p.m.
 Financial Instruments
• Stock
– Equity
– Preferential
• Bonds/ Debentures
o Partly Convertible Debentures,
o Fully Convertible Debentures
o Non-Convertible Debentures Warrants
o Coupons
o Secured Premium Notes
o Other Hybrids Bonds
• Options and futures
• Units of Mutual Funds
 Compulsory Rolling Settlement (CRS)
Segment
• T+5 basis, December 31, 2001
• T + 3 basis, April 1, 2003
• T+2 basis, April 1, 2003
• T+1 basis for Financial Derivatives
Under a rolling settlement environment, the trades done
on a particular day are settled after a given number of
business days rather than during an ‘account period’
of a week or fortnight.
 Margin Trading
• Margin is the money actually borrowed from the
broker, who uses the investor’s stocks thus
purchased as collateral for the funds advanced
• Margins are collected to safeguard against any
adverse price movement
• Margins are quoted as a percentage of the value
the transaction.
Circuit Breakers
• Tackle the problem of volatility in stock
• If a stock registers a high limit in a day or low limit in
a day, a circuit breaker is applied.
• At this level trading on that particular level is either
stopped for a number of hours or for a day
• Two circuit breakers, one for a particular stock and the
other for the whole market
The index-based market-wide circuit breaker is applied
at three stages:
When the index moves up or down by 10 percent
When the index moves up or down by 15 percent
When the index moves up or down by 20 percent
Movement Time Trading halted for
in either
index
10% Before 1:00 pm 1 hour

At or after 1:00 pm before 0.5 hours

2:30 pm
At or after 2:30 pm No halt in trading

15% Before 1:00 pm 2 hour

At or after 1:00 pm before 1 hours

2:00 pm
At or after 2:00 pm Halt for remainder
of the day
20% Anytime during the trading Halt for remainder
hours of the day
 Price Bands

• Daily price bands of 2% (either way) on

securities as specified by the Exchange
• Daily price bands of 5% (either way) on
securities as specified by the Exchange
• Daily price bands of 10% (either way) on
securities as specified by the Exchange
• No price bands are applicable on scrips on
which derivative products are available or scrips
included in indices on which derivative products
are available
 Delisting
• Removal of shares of listed company from
Stock exchange.
• Reasons
– High cost of listing
– Promoters wants to increase their holding
– Poor trading
– Suspension or cancellation of trading by
regulators.
 Buyback of shares
• Under section 68 of companies act 2013,
companies are allowed to buy back its shares
from the open market.
• Reasons:
– To increase EPS
– To use surplus cash
– To safeguard promoters against hostile takeovers.
– Compulsory buyback on suspension of trading.
 Buyback of shares
• Conditions:
– Buyback of shares is authorized by article
– Shares are fully paid
– Should be completed in 12 months
– Time gap between two issues must be at least 365 days.
– Buyback should not exceed 25% of paid up capital and
reserve.
– Buyback should not exceed 25% of paid up capital in a
FY.
– After Buyback Debt should not be more than two times
of paid up capital and reserve.
 Category of Shares at BSE

A Group
• Also known as specified shares
• Companies with best fundamentals, growth
prospects and are mostly blue chips
B1 Group
• Companies having less trading interest
• Middle-sized Companies, financial performance
is reasonable
B2 Group
• Companies are small or show poor profits
• Very low trading volumes
• Very large number of shares
• Low liquidity
Z Group
• This is a new group of shares in the process of
being created on BSE
• Otherwise have been delisted from the exchange
• Better to avoid these shares since they have an
uncertain future
 BSE Sensex: Journey
Base Year: 78-79
•25th July 1990: 1K
•15th January 1992: 2K
•29th February 1992: 3K
•30th March 1992: 4K
•8th October 1999: 5K
•11th February 2000: 6K
•20th June 2005: 7K
•8th September 2005: 8K
•28th November 2005: 9K
•6th February 2006: 10K
 BSE Sensex: Journey
• 21/03/2006- 11000
• 20/04/2006- 12000
• 30/10/2006- 13000
• 05/12/2006- 14000
• 06/07/2007- 15000
• 19/09/2007- 16000
• 26/09/2007- 17000
• 09/10/2007- 18000
• 15/10/2007- 19000
• 29/10/2007- 20000
 BSE Sensex: Journey
• 08/01/2006*- 21000
• 22/03/2014- 22000
• 09/05/2014- 23000
• 13/05/2014- 24000
• 16/05/2014- 25000
• 07/07/2014- 26000
• 02/09/2014- 27000
• 05/11/2014- 28000
• 23/01/2015- 29000
• 04/03/2015- 30000
The journey back from 21000 to 8000:
•Jan 21, 2008: The Sensex saw its highest ever loss of 1,408
points at the end of the session on Monday. It tumbled to the
day's low of 16,963.96
•Jan 22, 2008: The Sensex saw its biggest intra-day fall on
Tuesday when it hit a low of 15,332, down 2,273 points. However,
it recovered losses and closed at a loss of 875 points at 16,730
•Jan 16, 2008: Below 20000
•Jan 18, 2008: Below 19000
•Jan 21, 2008: Below 18000 and below 17000 on the same day.
•Jan 22, 2008: Below 16000
•March 17, 2008: Below 15000
•June 24, 2008: Below 14000
•July 1, 2008: Below 13000
•October 6, 2008: Below 12000
•October 8, 2008: Below 11000
•October 17, 2008: Below 10000
•October 24, 2008: Below 9000
 BSE Sensex: Journey
• 08/01/2006*- 21000
• 06/03/2009- 8000
• 17/03/2009- 9000
• 26/03/2009- 10000
• 13/04/2009- 11000
• 04/05/2009- 12000
• 18/05/2009- 13000
• 18/05/2009- 14000
• 03/06/2009- 15000
• 04/09/2009- 16000
• 30/09/2009- 17000
Sensex fall from 21000 to 8000
Sensex’s trek back to 18000
On 5 November 2010, the Sensex closed above 21,000 points.
On 10 March 2014, the Sensex closed above 22,095.30.
On 9 May 2014, the Sensex crossed record 23,000 level for the first time.
On 12 May 2014, the Sensex closed at its record all time high of 23,551.
On 13 May 2014, the Sensex crossed record 24,000 level for the first time.
On 16 May 2014, the Sensex crossed record 25,000 level for the first time.
On 7 July 2014, the Sensex crossed record 26,000 level for the first time.
On 2 September 2014, the Sensex closed at 27,019.39.
On 24 March 2014, the Sensex closed above 22,095.30.
On 9 May 2014, the Sensex crossed record 23,000 level for the first time.
On 12 May 2014, the Sensex closed at its record all time high of 23,551.
On 13 May 2014, the Sensex crossed record 24,000 level for the first time.
On 16 May 2014, the Sensex reached its peak of 25,364.71.
On 5 June 2014, the Sensex closed at 25,019.51.
On 7 July 2014, the Sensex crossed record 26,000 level for the first time.
On 2 September 2014, the Sensex closed at 27,019.39, for its first close above the
27,000 level.
• Previous day's close or adjusted close price
/ base price is the opening price. In case if
no price is discovered in pre-open session,
the price of first trade in the normal market
is the open price.