CHAPTER-2 The financial market where the existing securities are traded is referred to as the STOCK MARKET. It provides liquidity to financial instruments which are already issued in primary market.

Stock exchange Stock exchanges are organized market place corporation or mutual organizations, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts.

History of : The origin of stock exchange in can be traced back to the letter half of 19th century. It started in the year 1875 where the formed an informal association in , In 1894 Ahmadabad stock exchange came in to existence and in the year 1956, Securities contract and regulation act gave power to the stock exchanges. In 1995 NSE and OTCEI was setup with screen based facility. Today we have 23 stock exchanges. Organisation and membership: Stock exchanges are an organised market place where members of the organisation gather to trade company stocks or other securities. The members may act either as agents for their own accounts. Stock exchange is an organised market for buying and selling corporate and other securities. It provides is a convenient and secured platform for transactions in different securities Governing body: Stock exchange is managed by a governing body which consists of 13 members, of which A] 6 members of the stock exchanges are elected by its member. B] Central Government nominates 3 members C] SEBI nominates 3 members D] One executive director is appointed by stock exchange. Stock exchange governing body consists of a President, a Vice President, Executive Director, Public Representatives and nominees of the government. Features of stock exchange: 'The characteristics of a stock exchange are as follows: 1. Market for Securities: It is a market where securities are bought and sold. 2. Deals in existing securities: It deals with shares and debentures already issued by the company. 3. Regulates trade in securities: It provides facilities for trade in securities to its members and brokers. 4. Allows dealings only in listed securities: Stock exchange maintains an official list of Securities that could be purchased and sold on its floor. 5. Transactions through authorised persons: The transactions take place by authorised brokers and members. 6. Association of persons: It is an association of persons or body of individuals which is registered. 7. Recognition from the centralVVN government: DEGREE It is an organised market COLLEGE which requires reorganisation from the

DS,VVNDC 1 central government. 8. Working as per rules: The transactions are governed by Jules and regulations of SEBI. 9. Specific location: It is a particular market place for Securities. 10. Financial indicator. They are the development indicators of national economy. 11. Membership: It is opened to individuals and corporate. Functions of stock exchange: The stock exchange performs the following functions: 1. Continuous and ready market for securities: Stock exchange provides a continuous and ready market for purchase and sale of securities. 2. Providing quoting market price: It makes possible the determination of supply and demand on price. 3. Facilities evaluation of securities: Stock exchange enables the investors to know the true worth of holdings and helps in evaluation of industrial securities. 4. Encourages capital formation. It accelerates the process of capital formation it encourages the habit of savings. 5. Provides safety and securities in dealing: They are well defined rules and regulations stock exchanges provide safety and securities in dealings. 6. Regulates company management: Listed companies have to follow the rules and regulations of concerned stock exchanges and work under its supervision. 7. Facilitates public borrowings: stock exchange serves as a platform for marketing government securities. It enables to raise the capital. 8. Provides clearing house facilities: stock exchange provides the clearing house facility to members. The members have to pay the balance amount. 9. Facilities healthy speculation: the healthy speculation keeps the stock exchange active rather than the normal speculation. 10. Serves as a economic barometer: the stock exchange act as a barometer of the economic conditions. 11. Facilities bank lending: banks easily know the prices of quoted securities and often loan to their customers on these corporate securities.

Weakness of stock exchanges in India – The following are the weakness 1. Lack of professionalism – Majority of the stock exchange lack professionalism. There is lack of education and business skill. 2. Domination of financial institutions – Indian stock exchanges are dominated by few financial institutions. 3. Domination by big operators – Some big operators dominate the stock exchange. 4. Artificial increase in priceVVN – The artificial DEGREE increase in price adversely COLLEGE affects the investing public.

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5. Poor liquidity – The Indian stock exchange suffer from poor liquidity. 6. Less floating stock - There shares and debentures offered to sale are of small portion of total stock. 7. Speculative trading - This is another weakness where the operators in the stock exchange take the benefit of short term price fluctuations.

Major recognised stock exchange in India: 1. Ahmadabad stock exchange. 2. . 3. (not operating). 4. Bhubaneswar stock exchange. 5. 6. . 7. Coimbatore stock exchange. 8. . 9. Guwahati stock exchange. 10. stock exchange. 11. . 12. . 13. . 14. . 15. Madhya Pradesh stock exchange. 16. Maghadh stock exchange. 17. Meerut stock exchange. 18. National stock exchange. 19. OTC exchange of India. 20. . 21. Saurashtra Kutch stock exchange. 22.Uttar Pradesh stock exchange. 23. . Online trading / Screen based trading system (SBTS]: [or] The procedure for trading online The online trading in stock exchange takes place in the manner: 1. Placing the order: The person buying or selling the places an order. In this order he tells the name of the company whose security he is ready to buy or sell. 2. Convey the message to computer: The terminal operator receives the order from the customer and feeds it in the computer. 3. Start matching process: Computer receives the order and starts process of matching. 4. Accept the order: After matching buying and selling process order is finished. The information says at what rate and time the order has to be finalised. 5. Delivery and payment: The payment and delivery are made according to rules. Bombay stock exchange [BSE]:_ BSE is the leading and oldest stock exchange in India as well as in Asia it was established inl875 with the formation of "The native share and stock brokers association". Features of BSE: 1. It is the oldest stock exchange in Asia. 2. It has the greatest number of listed companies and more than 4900 companies are listed in BSE. 3. BSE has a wide range of securities to empower its investors and facilities smooth transactions. 4. It is the first stock exchange in the country which obtained permanent recognition (in 1956] from the . 5. It provides an efficientVVN and transparent DEGREE market for trading equity. COLLEGE

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6. BSE has always been par with the international standards. 7. It is the first stock exchange in India and second in to obtain ISO 9001-2000 certificate. 8. BSE index and SENSEX enjoy iconic structure. 9. It has nationwide reach with presence in more than 359 cities and towns. Objectives of BSE: 1. To safeguard the interest of the public. 2. To promote fair practices in the Securities transactions. 3. To promote and develop well regulated. 4. To improve and adopt new and better ways of conducting business. 5. To bring innovations in the Indian Capital market. 6. To build as a strong brand and create value for its stakeholders. 7. To promote industrial development. Advantages of BSE: 1. A company whose share is quoted in BSE enjoys good reputation. 2. The market for such shares is widened. 3. It encourages capital formation. 4. There are open market operations. 5. It assists the enterprises in raising additional funds. 6. It raises the bargaining power of the company in the event of merger and amalgamation. 7. It helps in the economic development. 8. Liquidity of the investment is increased. 9. It safeguards the interest of the investors. Advantages of listing at BSE: 1. Detailed information is available. 2. Market is widened. 3. Transfer of securities is increased. 4. Safety to deal. 5. Liquidity of shares is increased. BSE on line trading [BOLT]: It facilities online screen based trading in securities. BOLT is Operating 2500 trader work stations located over 359 cities in India. BSE deployed this system on March 14 1995. There is back end server, which acts as a communication server and a central trading engine (CTE). NATIONAL STOCK EXCHANGE [NSE]: The National Stock ExchangeVVN [NSE] isDEGREE India's leading stock exchange COLLEGE couching various cities and towns across

DS,VVNDC 4 the country. NSE has played a catalytic role in reforming the Indian securities market. It was established in 1994 as a company interest and microstructure, market practices, trading valences. Genesis of NSE or the organisation: The National stock exchange of India has genesis In the report of the high powered study group on the establishment of new stock exchanges. It recommended the promotion of NSE by financial institutions to provide access to investors. National market system: There is development of national market system by the NSE. Any infrastructure in terms of Space, tele-Communications, computerisation, outline processing system, library, research facilities etc are all recommended for national market set up. Characteristics: The characteristics of national market system are: 1. Completely automated systems for trading and settlement procedure. 2. There is a ready market provided. 3. The members are large corporate and institutional members and institutional members and professionals drawn from various parts of the country. 4. Only large and medium size companies and PSV'S are listed. 5. The NSE has separate trading facilities. Objectives of NSE: 1. To establish a nationwide trading facility for all types of securities. 2. Enable shorter settlement cycles. 3. To ensure appropriate communication network. 4. To meet with international standards, 5. To provide for a fair, efficient and transparent securities market using electronic trading system. 6. Ensure equal access to investors all over the country. Features of NSE: 1. NSE is owned by the group of leading financial institutions. 2. There are qualified traders involved in trading securities. 3. It deals with all types of securities. 4. There is fair access to investors. 5. NSE is committed to operate a market ecosystem which is transparent. 6. It uses the electronic trading system and meets international standards. 7. It provides efficient securities market for investors. Segments and products of NSE: 1. Equities. a) IPO. b) Mutual funds. c) Exchange traded funds. 2. Derivatives. VVN DEGREE COLLEGE

DS,VVNDC 5 a) Equity derivatives. b) Futures and options. 3. Debt. a) Wholesaler debt market. b) Retail debt market. Advantages of NSE: 1. It has a nationwide courage. 2. It has fully automated screen based trading. 3. It ensures transparency in transactions. 4. It ensures professionalism in trading. 5. There is functional efficiency in transactions. 6. There is dematerialisation. Promoters of NSE: 1. IDBI LTD. 2. IFCI LTD. 3. LIC LTD. 4. ICICI LTD. 5. SBL 6. . 7. . 8. . 9. Union . 10. Oriental bank of commerce. Online Screen based system in NSE – NSE provides its customers a fully automated screen based trading system called NEAT system. Here the member can buy the qualities of securities his price, Before the NSE was set up the trading on the stock exchange in India, the trading is used take place in open outcry without use of information technology. It was time consuming. Now the online trading system is a better option. OVER THE COUNTER EXCHANGE OF INDIA OTCEI: The OTCEL was incorporated in the year 1990. Over the counter means trading across the country in scrip's. Promoters of OTCEI: UTI, GIC, ICICI, SBI, LIC, IDBI, IFCI. Features of OTCEI: 1. OTCEL is an exchange where all the activities are computerised. 2. Trading on OTCEI takes place through the network of computers. 3. OTC dealers are located at different places. 4. OTCEI deals with preference shares and debentures. 5. There are members and dealers appointed by OTCEI. Objectives of OTC._ The objectives are as follows – 1. To ensure liquidity. 2. To ensure fixed rate. 3. To have simplified procVVNess of buying DEGREE and selling. COLLEGE 4. To ensure there is quick disposal of orders DS,VVNDC 6

5. To see there is cheaper method of sale of public issue. Benefits of OTCEI - The following are the benefits of OTCEI to companies 1. It encourages entrepreneurship 2. It helps small and medium companies to raise funds 3. It helps the company to get money in case of bought out deal 4. It helps in early issue. 5. There is nationwide trading. Benefits to investors 1. There is easy accessibility 2. It ensures safety. 3. It censures liquidity. 4. It provides greater confidence to investors. 5. It is an investor friendly exchange. Regional stock exchange [RSE] of India: The regional stock exchange in India started spreading its business operations from 1894. The first RSE to start its function in India was Ahmadabad stock exchange. THE SECURITIES EXCHANGE BOARD OF INDIA (SEBI]: SEBI is an apex body for overall development and regulation of the securities market. The SEBI is the regulator for the securities market in India. Even though it was established in the year 1988, received statutory powers only on 30" Jan 1992, Structure of SEBI: SEBI consists of: 1. The chairman who is nominated by government of India. 2. Two members such that officers from union finance ministry. 3. One member from the . Objectives of SEBI: 1. To protect the interest of investors 2. To regulate the securities market. 3. To promote healthy and orderly growth of securities market. 4. To create proper market environment. 5. To ensure fair practices in securities market. 6. To create healthy environment in trading. 7. To provide suitable guidelines and education to investors. Role and functions of SEBI: The role and functions ofVVN SEBI are as follows:DEGREE COLLEGE

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1. To protect the investors through proper guidance as regards their investment. 2. To issue guidelines to companies regarding capital issues. 3. SEBI looks in to the complaints received from investors. Regulatory functions: a) Regulation of stock exchanges. b) Registration and regulation of stock brokers, merchant bankers, underwriters, and other intermediaries. c) Registration and regulation of the working of collective investment schemes including mutual funds. d) Prohibition of unfair and fraudulent practices in the securities market. e) Prohibition of insider trading. f) Regulating substantial acquisition of shares. g) To conduct inspection, inquiries and audit of stock exchanges. h) To control such practices which may harm the investors and healthy growth of stock exchange. Development functions: a) Promote investors education. b) Training of intermediaries. c) Conduct research. d) To provide published information to all market participants. e) To promote fair trade practices. f) To maintain code of conduct. g) Promoters self-regulatory organisation. Other roles: 1. SEBI conducts inspiration, enquiry and audit on stock exchange. 2. SEBI regulates the functioning of intermediaries. 3. SEBI issues guideline to companies regarding capital issues. SEBI has the following powers: a) Power to call for periodical returns from recognised stock exchanges. b) Power to call for any information from recognised stock exchanges. c) Power to control and regulate stock exchange. d) Power to make bye-laws. e) Power to compel listing of securities. Markel surveillance mechanism in SEBI: In order to ensure investor protection SEBI has an effective market surveillance mechanism. The surveillance system is adopted by SEBIVVN in two ways: DEGREE COLLEGE

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A). Surveillance cell in the stock exchanges = The Stock Exchanges are controlled and regulated. Stock exchanges are the primary regulators for detecting market manipulation, price rigging and other regulatory branches. B). Integrated surveillance department in SEBI - SEBI on its own also initiates surveillance cases based on reference received from the share holders. C) Integrated market surveillance system: In order to enhance efficacy of surveillance function herald class Integrated market Surveillance System (IMSS) is introduced by SEBI. SEBI reforms on stock exchange: The SEBI reforms are: 1) Compulsory audit and inspection of stock exchange. 2) Transparency in prices. 3) Brokers accounts and client accounts are kept separate. 4) Guidelines have been laid down for dealings. 5) Capital adequacy norms have been laid down. Listing of securities at the stock exchange: Listing of securities means permission to quote shares and debentures of facially on the trading floor of the stock exchange. [or] Listing of securities means securities are included in the official list of stock exchange for the purpose of trading. Rules for listing of securities [or]_requirement for listing [or] Criteria for listing- Any company intended in listing the securities has to fulfil certain conditions. The following information has to be filed by the company for getting its securities listed: 1. Memorandum and articles of associations. 2. Prospectus or statement in lieu of prospectus. 3. Copies of balance sheet and audited. 4. Copies in agreements with promoters, underwriters, brokers etc.. 5. Letter of consent from controller of capital issues now replaced with SEBI. 6. Specimen copies of shares and debentures certificates. 7. History of the company in brief. 8. Details of shares and debentures issued and forfeited. 9. Details of issue of bonus and dividends declared. 10. Letter of allotment, acceptance and renunciation. 11. A list of highest ten holders of each class. 12. Agreement with the managing director. 13. Minimum issued capital. 14. The details of paymentVVN of excess application DEGREE money. COLLEGE

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15. Minimum subscription. 16. Cash flow statement. 17. Public offer issue. 18. Listing application, listing lee, and listing agreement. Objectives of listing: 1. To ensure proper supervision and control of dealings in securities. 2. To regulate dealings in Securities. 3. To ensure the liquidity of securities. 4. To protect the interest of the share holder and investors. 5. To assure marketing facilities for the securities, Advantages of listing: 1. The listed securities get wide publicity. 2. Detailed information of the company is available. 3. The information increase buying and selling of securities of that organisation. 4. It protects investors’ interest as the securities are traded according to rules and regulations. 5. The listed securities are more liquid as they have ready market sale. 6. There is conditions dealing and safety dealing which raises the value of the securities. 7. The securities listed in stock exchange have better good will in the market 8. There is convenience in the sale of securities. 9. Listed securities have collateral value for loans. 10. There is a wide market for listed securities. 11. It ensures credit worthiness. Disadvantages of listing: 1. Necessary information has to be submitted to stock exchange by the listed Companies. 2. Annual reports have to be sent to large number of share holders which creates expenditure. 3. As a pre-requisite to public offer It is expansive exercise. DERIVATIVES: One of the most significant events in the securities market has been the development of financial derivatives. Meaning: Derivatives are instruments which involve payments/ receipts of income generated by the under laying asset on a national principal. [OR] Derivatives are the financial instruments which desire their value from some under laying asset. A derivative is a financial contract whose value is derived from the value of something else such as Stock price, exchange rate, etc. VVN DEGREE COLLEGE

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Characteristics of derivatives: 1. It has one or more under laying asset. 2. The value depends on price movements. 3. The risk is the truncation is reduced. 4. The contracts are translated through recognised stock exchange. 5. It should provide net settlement: Advantages of derivatives: 1. They help in discovery of futures as well as current price. 2. They help in increasing the investment. 3. They help in increasing in Savings. 4. They increase the volume traded. 5. They increase savings and investment in long run. 6. They help in transferring risk from risk averse people to risk oriented people Factors driving the growth of derivatives: 1. Innovation is derivatives market. 2. Increased volatile in market prices. 3. Market improvement in communication facilities. 4. Development of risk management tools. 5. There is an opportunity for investment. Traders in derivative market OR participants in derivative market: They are mutual funds, banks, corporate investors, etc. those who trade or participate in the derivatives market are: 1. Hedgers. 2. Speculators. 3. Arbitrageurs. 1. Hedgers: Hedgers are those traders who wish to eliminate the price risk associated with the securities being traded heading can be done by: a. Short hedge: A short hedge involves a position in the future market. Eg: an investor holding reliance shares may worry about adverse future price. b. Long hedge: A long hedge involves holding a long market position in the future market. 2. Speculators: Speculators are those classes of investors who willingly take price risks to profit from price changes in the under laying assets. They take large calculated risks. 3. Arbitrageurs: Arbitrage is a process of simultaneous purchase of Securities or derivatives in one market at lower price and other market at higher price. Arbitrageurs attempt to profit from pricing inefficiencies in the market. VVN DEGREE COLLEGE

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Uses of derivatives: 1. Risk management: The most important purpose of derivatives market is risk management. 2. Market efficiency: efficient markets are fair and competitive derivatives assist in improving the efficiency. 3. Price discovery: derivatives markets provide valuable information about the prices and expected price fluctuations of the under laying asset.

TYPES OF DERIVATIVES: Derivatives markets are of several types: 1. Forwards. 2. Futures. 3. Options. 4. Swaps. Forwards: A forwards contract is a contract between two parties who agree to buy or sell specified quantity of a financial instrument or commodity for a certain price at a certain future date. Features of forwards: 1. It is a contract between two parties. 2. The parties to contract bear counter party risk. 3. The underlying assets here are stocks, bonds, foreign exchanges, commodities. 4. Quality and quantity is decided. 5. Settlement takes place in some future. 6. There is flexibility in forward contract are also widely used in the . Advantages of forward contracts: 1. Forward contract are used to lock the price. 2. Terms and conditions are negotiable. 3. There is no initial cost. 4. No margin is required here. [Collateral] 5. The contract is settled in delivery on cash on expiry date, Demerits: 1 There is no transparency of prices. 2. There is counter party risk. 3. Not traded in stock exchange. Settlement in forward contract: 1. Physical settlement: A forward contract is settled by the physical delivery of under laying asset from the seller to the buyer. 2. Cash settlement: It does not involve actual delivery. Each party pays here. FUTURES: A futures contract is an VVNagreement between DEGREE two parties in which buyerCOLLEGE agrees to buy an under laying asset from the seller at a future date for the price agreed upon today. DS,VVNDC 12

Features of futures market: 1. Features are highly standardised controls. 2. These contracts trade an organised futures exchange. Quality and quantity are specified. 3. Prices of the contract changes every day. 4. It is a contract between two parities. 5. Delivery takes place sometime in future. 6. The number of contracts in a year is fixed. Advantages of futures market: 1. Transparency in prices. 2. Limits on price fluctuation. 3. Helps in risk management. 4. There is no counter party risk. 5. Guarantees performance of the contract. Disadvantages of future market: 1. It offers only partial edge. 2. Lack of flexibility. 3. Future specifications are standardised and for fixed amount. 4. Sometimes there is imperfect hedging 5. The leverages makes future contract high risky. OPTIONS: Option is an agreement that gives the owner the right, but not the obligation to buy or sell a specific prices for a certain period. An option is a contract in which the seller of the contract grants the buyer, the right to purchase from the seller an asset at a specific price which is agreed at the time of contract. Features of options: 1. The buyer has the right to buy or sell the asset. 2. There is option price to acquire the right. 3. There is fixed price determined at the beginning of the truncation. 4. Default on option ware like forward contract. 5. There is no obligation but only right. Advantages of options: 1. An investor can gain leverage on a stock without committing to work. 2. Option premiums are significantly cheaper. 3. Risk is limited. VVN DEGREE COLLEGE

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4. It protects the investor from price fluctuations. Disadvantages: 1. Options are very complex. 2. They require more observations. 3. The cost of trading option is higher. Types: The types of option are as follows: 1. Call option: A call option gives the holder the right but not the obligation to buy the asset by a certain date for a certain price. 2. Put option: A put option gives the holder the right but not the obligation to by a certain date for a certain price. 3. Real option: The real option is the choice of an investor in investing. 4. Traded option or exchange traded options. 5. Vanilla options: It is simply option which is more easily understood. 6. Exotic option: It is a complex option which is not easily understood. 7. American option: they are options which can be exercised at any time upon the expiration date. 8. European option: European options can be exercised at any time upon the European date. 9. Index option: They have the index of underwriting asset. 10. Stock options. They are on the individual stocks. Terminologies in options: 1. Exercise date: The date at which contract matures. 2. Heading: Heading is the process of reducing the exposure to risk, hedge is an act that reduces the price risk. 3. Spot price: Spot price of an underlying asset is the price that is quoted for immediate delivery of the asset. 4. Strike price: At the time of entering in to a contract, the parties agree upon a price at which the underlying asset may be bought or sold. This price is called exercise price or strike price. 5. Clearing house: It is an organisation that guarantees the performance of exchange traded contract. 6. Moneyness of an option: It indicates whether the option should is worth exercise or not. 7. In the money option: Here it exercises that the option should produce cash inflow. 8. Out of the money option: Here strike price is greater than stock price. 9. At the money option: Here spot price is equal to strike price. 10. Margin: The amount to be deposited at the time of future contract. 11. Expiration date: In case of futures, forwards and options expiration date is the final settlement rate. 12. Contract size: Certain number of shares. SWAP: VVN DEGREE COLLEGE A SWAP is a method of reducing financial risks. SWAP are contractual agreements to exchange or swap a DS,VVNDC 14 series of cash flows exchange of an asset for another and one liability for another. If the agreement is only for one party to swap its fixed rate of interest, payment for the floating rate payments of another. Types of swaps: 1. Interest rate swaps: They swap only interest related cash flows. 2. Currency swaps: They include current swap where one currency is exchanged for another at specified terms. Advantages of swaps: 1. Access to market for investors. 2. It can be used on long hedge instruments. 3. It provides an opportunity to restrictions company's capital structure. Disadvantages of swap: 1. Difficulty in finding a counterpart. 2. Terminating of swap requires mutual contract. 3. There is default risk as it deals with bilateral contract. Features of Swap: 1. It is a forward contract. 2. There is double coincidence of works. 3. There is credit advantage in Swap. 4. It is a necessary of an intermediary. 5. There is flexibility in swap. The differences between Forward and Future | Forward Forward Futures 1.Price remain fixed till maturity 1.Here Price fluctuates

2.There is counter party risk 2.There is no counter party risk

3.No of contracts are not fixed 3.No of contracts are fixed

4.No margin [collateral] required 4.Margin is required

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