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Stock Market Operations Investment in Shares Dr. S M Shafi Department of Business & Financial Studies University of Kashmir. Synoptic View • Investment Instruments & Avenues • Stock Market • Case for Investing in Shares • Market Index Investment Instruments & Avenues Financial Instruments Two Categories: 1. Money Market Instruments 2. Capital Market Instruments Money Market Instruments 1. Certificate of Deposits 2. Commercial Paper 3. Treasury Bills All maturing within One Year [ Short Term Instruments] Capital Market Instruments 1. Shares 2. Debentures ( Bonds ) S h a r e s 1. Equities ( No Fixed Dividend, Voting Right) 2. Preference Shares ( Dividend Fixed, No Voting Right) [ Maturing after One Year] Debentures: 15% 5000 Debentures of Rs.1000 each Types of Debentures Secured/Unsecured Redeemable/ Convertible/ Zeero Coupon or Naked Irredeemable Non-Convertible Rate/ Specific Debentures Debentures Coupon Rate Investment Options Available To Small Investors Investment Options Remarks • Require huge investment • Land • No stream of regular income • Low risk, highly rewarding. low liquidity • Bank deposits • Low return; low risk & high liquidity • Shares • Regular income plus capital appreciation high • return/risk Bonds • Generate steady regular income • Low return & low risk 8 Stock Market Stock Market Raising of Capital From market: 1. Primary Market [Through IPO] 2. Secondary Market [ Stock Exchange] Why Stock Exchange Market? Two Reasons 1. For exit & Entry Purposes 2. Price Discovery Stock Exchanges • 23 Stock Exchanges in India • BSE & NSE – The most followed • BSE is the Oldest • NSE is modern and professionally driven • Regional Stock Exchanges • Bourses in French Language Listing • Initial Listing in Regional Stock Exchange is Mandatory. • Then you can List in BSE or NSE or both • Initial Listing Fee and Yearly Listing Fee Specified/Non-Specified Group Specified Group Non-Specified Group Non-Cash List Cash List Three years Mandatory in this After Three Years shift to Group Non- Specified Group Stock Markets: Then & Now Earlier Now Physical Exchange Virtual Open Outcry System, Screenbased Traded Trading Floor Client Broker, Floor Internet Brokers Types of Players in the Market • Gamblers • Speculators • Investors Types of Brokers Bull [ Tejiwala] Bear [ Mandiwala] Jobber [Tarawaniwala] Stag [ who buys fresh issues from IPO] Speculative Transaction Bulls & Bears Earlier: a) Carry Forward System b) Badla System C) Margin Trading Now : a) Carry Forward Abolished b) T+2 c) Margin Trading Continues d) Govt. Thinks of T+1 The Case for Investing in Stocks The Case for Investing in Shares Company Price Price Nov. Nov. 2005 Gain 2004 Times About 2 RIL 440 810 times About 2 J&K BANK 250 465 times More than INFOSIS 1250 2700 2 times About 3 BHEL 450 1200 times 19 The Case for Investing in Shares Colgate India Ltd: Capital Appreciation by 90 times Shares bought in 1980-81 100 Bonus issue in 1982 [ 1 : 1 ] 100 200 Bonus issue in 1985 [ 1 : 1 ] 200 400 Bonus issue in 1987 [ 1 : 1 ] 400 800 Bonus issue in 1989 [ 1 : 1 ] 800 1600 Bonus issue in 1992 [ 3 : 5 ] 960 2560 20 The Case for Investing in Shares Colgate India Ltd: Capital Appreciation by 90 times 1980-81 1993-94 No of Shares bought in 1980 100 2560 Market price per share 125 440 Market value of investment 12500 11,26,400 Growth in investment 90 times Market price of gold 1400 4200 Growth in gold value 3 times 21 Different Issue Prices Issue at Par Issue at Premium Issue at Discount Methods of Pricing 1. Fixed Pricing Mechanism 2. Book Building Fixed Pricing Mechanism • Price is fixed by the promoter….. • Same price is paid by all the subscribers 23 Book Building Method Book Building Method • Bids are invited from the investors with a band price say 450-900 • On the basis of the bids, cut-off price is fixed. • The cut off price to be paid by all Different Values What are the different values? : Face value : Book value : Market value 25 Market Index Major Indices BSE Sensex = 30 Scrips Covers 16 Sectors NSE CNX S&P Nifty = 50 Scrips Covers 22 Sectors Thursday, May 08, 2008 Free-Float No. of Full Mkt. Cap.(Rs. Free-Float Weight Scrip Code Scrip Name Close Price Mkt. Cap Shares(normal) in Crores) Adj. Factor in Index(%) (Rs.in Crores) 500325 RELIANCE 2,666.15 1,453,648,601 387,564.52 0.50 193,782.26 16.56 532174 ICICI BANK L 891.30 1,111,477,508 99,065.99 1.00 99,065.99 8.46 500209 INFOSYS TECH 1,779.80 571,995,750 101,803.80 0.85 86,533.23 7.39 500510 LARSEN & TOU 2,886.20 292,147,098 84,319.50 0.90 75,887.55 6.48 500010 HOUSING DEVE 2,720.60 284,029,121 77,272.96 0.85 65,682.02 5.61 500875 I T C LTD 215.05 3,768,561,010 81,042.90 0.70 56,730.03 4.85 532454 BHARTI ARTL 827.60 1,897,907,446 157,070.82 0.35 54,974.79 4.70 500112 STATE BANK O 1,729.80 631,558,654 109,247.02 0.45 49,161.16 4.20 500312 ONG CORP LTD 1,028.35 2,138,872,530 219,950.96 0.20 43,990.19 3.76 500470 TATA STL 845.65 731,234,846 61,836.87 0.70 43,285.81 3.70 500180 HDFC BANK LT 1,508.40 354,432,920 53,462.66 0.80 42,770.13 3.65 532712 REL COM LTD 542.95 2,064,026,881 112,066.34 0.35 39,223.22 3.35 500103 BHEL 1,760.20 489,520,000 86,165.31 0.35 30,157.86 2.58 500376 SATYAM COMP 471.10 670,479,293 31,586.28 0.95 30,006.97 2.56 500696 HIND UNI LT 250.95 2,177,983,566 54,656.50 0.50 27,328.25 2.33 532555 NTPC LTD 192.70 8,245,464,400 158,890.10 0.15 23,833.51 2.04 532540 TCS LTD. 943.70 978,610,498 92,351.47 0.25 23,087.87 1.97 500390 RELIANCE ENR 1,394.10 234,668,582 32,715.15 0.70 22,900.60 1.96 532532 JAIPRAK ASSO 269.05 1,170,563,191 31,494.00 0.60 18,896.40 1.61 532868 DLF LIMITED 643.80 1,704,832,680 109,757.13 0.15 16,463.57 1.41 500300 GRASIM INDUS 2,331.85 91,674,210 21,377.05 0.75 16,032.79 1.37 500570 TATA MOTORS 669.10 385,490,822 25,793.19 0.60 15,475.91 1.32 500440 HINDALCO IN 180.05 1,227,184,963 22,095.47 0.70 15,466.83 1.32 507685 WIPRO LTD. 497.15 1,461,439,242 72,655.45 0.20 14,531.09 1.24 500520 MAHINDRA & M 678.75 245,741,813 16,679.73 0.80 13,343.78 1.14 500359 RANBAXY LABO 470.05 373,227,647 17,543.57 0.70 12,280.50 1.05 532500 MARUTISUZUK 770.25 288,910,060 22,253.30 0.50 11,126.65 0.95 500087 CIPLA LTD. 211.55 777,291,358 16,443.60 0.65 10,688.34 0.91 500425 AMBUJA CEME 111.40 1,522,373,923 16,959.25 0.55 9,327.59 0.80 500410 ACC LTD 743.25 187,634,983 13,945.97 0.60 8,367.58 0.71 TOTAL 2,388,066.86 1,170,402.47 Construction of Stock Market Indices: Market Capitalisation Method Share Price in Price in No. of Out- M.Cap. In M.Cap. in base Yr current Yr standing shares Base year Current year ( In million ) A 50 70 10 500 700 B 40 50 8 320 400 C 100 90 7 700 630 D 20 80 5 100 400 E 15 24 9 135 216 ------- --------- 1755 2346 Market Cap. Index = 2346/1755 = 133.67 Index Divisor • 100/base year market capitalization • Suppose base year M. Capitalisation= 5500 crores • Remember the base year Market Capitalization was kept equal to 100 Points • Thus Index Divisor= 100/5500=1/55 • Suppose further that the Current Market Capitalisation= 10,00,000 crores • Thus Index would be= 1/55X 10,00,000= 18818 Other BSE & NSE Indices • BSE 100 BSE IT • BSE 200 BSE FMCG • BSE 500 BSE Capital Goods • BSE Tech BSE Consumer Dur • Dollex 30 BSE H Care • DOLLEX 100 BSE Bankex • Dollex 200 BSE Auto • BSE PSU BSE Metal Foreign Indices • NASDAQ 100 • NYSE • LSE 100 • Standard & Poor 500 • Dow Jones Industrial Averages( DJIA) 200 • CAC 40 ( French) • Dax 15 ( German) • Nikkei 225 ( Japan) • Hang Seng ( Hong Kong) WHO SELECTS THESE STOCKS? They are selected by the Index committee of IISL. Some of the criteria they follow include : 1)Market capitalization. 2)Liquidity. 3)Continuity. 4)Industry representation. 5)Listed history. Represents 44% of market capitalization 16 sectors 52% of trading volumes Risk Profile of Various Assets Return speculative share. growth share. Debentures bluechip sh. PSU Bonds Govt. sec. Risk ………………RISK – RETURN – RELATIONSHIP………………. 33 R e g u l a t o r 1947 To 1992 From June ,1992 Capital Issues Control Act , 1947 Securities and Exchange Board of India SEBI, 1992 Stricter Liberal IPOs not easily Possible strict pricing IPOs Possible with Free Pricing Regime regime Transparency: Transparency: More Transparency ensured: No Transparency ensured 1. Risk Factors a) Internal b) External Regulates: Equities & Debentures, Bonds Derivatives, Mutual Funds, How to Set a Limit to Your Greed? Here Are Some Tips: 1.
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