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BASICS OF CAPITAL MARKET

INTRODUCTION: There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges. In terms of the number of companies listed and total market capitalization, the Indian equity market is considered large relative to the countrys stage of economic development. The number of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same period. The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions statutory liquidity requirement are still in place. A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position. Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters. There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations. India has seen a tremendous change in the secondary market for equity. Its equity market will most likely be comparable with the worlds most advanced secondary markets within a year or two. The key ingredients that underlie market quality in Indias equity market are: Exchanges based on open electronic limit orderbook; Nationwide integrated market with a large number of informed traders and fluency of short orlong positions; and No counterparty risk. Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a trading process in which traders shouted and handsignaled from within a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of Indias stock exchanges have adopted open electronic limit order.

Before 1994, Indias stock markets were dominated by BSE. In other parts of the country, the fi-nancial industry did not have equal access to markets and was unable to participate in forming prices, compared with market participants in Mumbai (Bombay). As a result, the prices in markets outside Mumbai were often different from prices in Mumbai. These pricing errors limited order flow to these markets. Explicit nationwide connectivity and implicit movement toward one national market has changed this situation (Shah and Thomas, 1997). NSE has established satellite communications which give all trading members of NSE equal access to the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals located all over the country. The arbitrages are eliminating pricing discrepancies between markets. Despite these big improvements in microstructure, the Indian capital market has been in decline during the last three years. The amount of capital issued has dropped from the level of its peak year,1994/95, and so have equity prices. In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208 billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index of equity prices, peaked at 4,361 in September 1994 and fell during the following years. A leading cause was that financial irregularities and overvaluations of equity prices in the earlier years had eroded public confidence in corporate shares. Also, there was a reduced inflow of foreign investment after the Mexican and Asian financial crises. In a sense, the market is now undergoing a period of adjustment. Thus, it is time for regulatory authorities to make greater efforts to recover investors confidence and to further improve the efficiency and transparency of market operations. The Indian capital market still faces many challenges if it is to promote more efficient allocation and mobilization of capital in the economy. First, market infrastructure has to be improved as it hinders the efficient flow of information and effective corporate governance. Accounting standards will have to adapt to internationally accepted accounting practices. The court system and legal mechanism should be enhanced to better protect small shareholders rights and their capacity to monitor corporate activities. Second, the trading system has to be made more transparent. Market information is a crucial public good that should be disclosed or made available to all participants to achieve market efficiency. SEBI should also monitor more closely cases of insider trading. Third, India may need further integration of the national capital market through consolidation of stock exchanges. The trend all over the world is to consolidate and merge existing stock exchanges. Not all of Indias 22 stock exchanges may be able to justify their existence. There is a pressing need to develop a uniform settlement cycle and common clearing system that will bring an end to unnecessary speculation based on arbitrage opportunities. Fourth, the payment system has to be improved to better link the banking and securities industries. Indias banking system has yet to come up with good electronic funds transfer (EFT) solutions. EFT is important for problems such as direct payments of dividends through bank accounts, eliminating counterparty risk, and facilitating foreign institutional investment. The capital market cannot thrive alone; it has to be integrated with the other segments of the financial system. The global trend is for the elimination of the traditional wall between banks and the securities market. Securities market development has to be supported by overall macroeconomic and financial sector environments. Further liberalization of interest rates, reduced fiscal deficits, fully marketbased issuance of Government securities, and a more competitive banking sector will help in the development of a sounder and a more efficient capital market in India. Indian Capital Market System is the key structure to all Economic and Financial transaction in India. This entry provides some simple and important organizational structure details of Capital Market Organization Structure of India.

PRIMARY CAPITAL MARKET: The capital market is divided in two different markets. These are the primary capital market and secondary capital market. The primary capital market is concerned with the new securities which are traded in this market. This market is used by the companies, corporations and the national governments to generate funds for different purpose. The primary capital market is also called the New Issue Market or NIM. The securities which are introduced in the market are sold for first time to the general public in this market. This market is also known as the long term debt market as the money rose from this market provides long term capital. The process of offering new issues of existing stocks to the purchasers is known as underwriting. At the same time if new stocks are introduced in the market, it is called the Initial Public Offering. The act of selling new issues in the primary capital market follows a particular process. This process requires the involvement of a syndicate of the securities dealers. The dealers who are running the process get a certain amount for as commission. The price of the security offered in the primary capital market includes the dealers commission also. Again, if the issue is a primary issue, the investors get the issue directly from the company and no intermediary is needed in the process. For the purpose, the investor needs to send the exact amount of money to the respective company and after receiving the money; the particular company provides the security certificates to the investors. The primary issues which are offered in the primary capital market provide the essential funds to the companies. These primary issues are used by the companies for the purpose of setting new businesses or to expanding the existing business. At the same time, the funds collected through the primary capital market, are also used for the modernization of the business. At the same time, the primary capital market is also involved in the process of creating capital for the respective economy. There are three ways of offering new issues in the primary capital market. These are:

Initial Public Offering Preferential Issue.

Rights Issue (For existing Companies)

SECONDARY CAPITAL MARKET: The secondary capital market deals with those securities that are already issued in an initial public offering in the primary market. Typically, the secondary markets are those where previously issued securities are purchased and sold. In the secondary capital market, the securities are generally sold by and transferred from one investor to another. Hence, the secondary capital market needs to be highly liquid in nature. A high transparency for the secondary market trading is also required. With the advancement of the technology, the trading concept in secondary market has changed substantially. In the earlier days, the investors needed to meet at fixed place in order to carry out the transactions. But now trading in secondary capital market has become much easier for the investors. The capital market handles the trading of stocks and bonds. The secondary bond markets play a market place for the bonds that are already issued in the primary market while the secondary stock market trades those stocks that are already issued by the issuers. The treasury bills secondary market handles the trading of treasury bills. The secondary market trading is vital for the capital market. A study in the secondary market trend can give some information on the investor's preference for liquidity. It means whether the investors want to invest their money for a short period of time or a longer period. It has been seen that the investors in the capital market do not prefer to put their money for the long term investments. But the secondary market investors, however, can compensate their investments with proper strategy. The secondary market value of a stock or a bond is different from their face value. This happens due to the fluctuating interest rates. The resale value of the bonds in the secondary market is based on the interest rates at that very time when the sale goes through. In a typical secondary market, when the interest rate falls, the bond value goes up while when the rate rises, the bond value goes down. CASH MARKET: Cash market is the marketplace for immediate settlement of transactions involving commodities and securities. In a cash market, the exchange of goods and money between the seller and the buyer takes place in the present, as opposed to the futures market, where such an exchange takes place on a specified future date. Also known as the spot market, since such transactions are settled "on the spot." Cash market transactions can take place either on a regulated exchange or over-the-counter (OTC). In contrast, transactions involving futures are conducted exclusively on exchanges, while forward transactions such as currency forwards are generally executed on the OTC market. F & O MARKET:

A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities - remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators. The consensus in the investment world is that the futures market is a major financial hub, providing an outlet for intense competition among buyers and sellers and, more importantly, providing a center to manage price risks. The futures market is extremely liquid, risky and complex by nature, but it can be understood if we break down how it functions. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. TERMINOLOGIES OF CAPITAL MARKET: SHARE: It is a unit of ownership that represents an equal proportion of a company's capital. It entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses. Two major types of shares are (1) Ordinary shares (common stock), which entitle the shareholder to share in the earnings of the company as and when they occur, and to vote at the company's annual general meetings and other official meetings, and (2) Preference shares (preferred stock) which entitle the shareholder to a fixed periodic income (interest) but generally do not give him or her voting rights. DEBENTURE: Debenture is unsecured debt backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond. FACE VALUE: The nominal value or dollar value of a security stated by the issuer is called as face value. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity (generally $1,000). It is also known as "par value" or simply "par". In bond investing, face value, or par value, is commonly referred to the amount paid to a bondholder at the maturity date, given the issuer doesn't default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond's coupon rate, then the bond is sold at a discount (below par). Conversely, if interest rates are lower than the bond's coupon rate, then the bond is sold at a premium (above par). INTRADAY TRADING: Intraday Trading is the most popular Trading that many Traders use this type of trading to cash their money soon. If you buy and sell shares in a single day then the type of Trading is called as Intraday

Trading. In Intraday Trading you can sell shares within seconds, minutes and hours after you buy, whenever you want and when you feel that your profit Target has been reached. But all the shares you bought with the intraday option should be sold 30minutes prior to the closing time. The general closing time of Stock Market is 3:30 pm. So you should sell all your shares those you bought with intraday option should be sold before 3pm. TRADING ON DELIVERY: Delivery Trading is a very secure Trading. If we buy shares today and sell them after 1 day then the type of trading is called as Delivery Trading. Share you bought in Delivery option can be sold at any time before Market closes (up to 3.30 pm). If you buy shares With the Delivery option, It will be taken as Delivery Trade only if you sell your shares after 1 day (may be next day or after a month or after a year, 3 years whenever you sell after 1 day it is called delivery Trading) In Delivery trading , it will also allow you to sell your shares within 1 day also (may be within 1 sec, 1 hour, Before market close). But if you sell the shares which were bought with Delivery option with in 1 day(may be within 1 sec, 1 hour, Before market close) would not be taken as a Delivery Trading and would be taken as Intraday Trading. All the brokerages for such Trade will be charged as per intraday brokerage charges (0.02% to 0.04%). So here you have to understand that if you buy shares with Delivery Trading option you can also sell it in Intraday. STOCK MARKET: It is the market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. SEBI: 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, sub-brokers 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.

INDEX: Index is a statistical indicator providing a representation of the value of the securities which constitute it. Indices often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured. MUTUAL FUND: Mutual Funds refers to the meaning of Mutual Fund, which is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices. These things help the fund managers to speculate properly in the right direction.

Worlds stock exchanges:


Market Capitalization (USD Billions)

Rank

Economy

Stock Exchange

Location

Trade Value (USD Billions)

United States NYSE Euronext Europe United States NASDAQ OMX Europe Japan United Kingdom China

New York City 15,970

19,813

2 3 4

New York City 4,931 3,827 3,613

13,439 3,787 2,741

Tokyo Stock Exchange Tokyo London Stock Exchange London Shanghai Exchange Hong Kong Exchange Stock

Shanghai

2,717

4,496

7 8 9

Hong Kong Canada India

Stock

Hong Kong

2,711 2,170 1,631

1,496 1,368 258

Toronto Stock Exchange Toronto Bombay Stock Exchange Mumbai

Rank

Economy

Stock Exchange

Location

Market Capitalization (USD Billions) 1,596 1,545 1,454 1,429 1,311 1,229 1,171 1,091 949

Trade Value (USD Billions)

10 11 12 13 14 15 16 17 18 19

India Brazil Australia Germany China Switzerland Spain South Korea Russia South Africa

National Stock Exchange Mumbai of India BM&F Bovespa Australian Exchange Securities So Paulo Sydney Frankfurt Stock Shenzen Zurich

801 868 1,062 1,628 3,572 788 1,360 1,607 408 340

Deutsche Brse Shenzhen Exchange

SIX Swiss Exchange

BME Spanish Exchanges Madrid Korea Exchange MICEX JSE Limited Seoul Moscow

Johannesburg 925

MAJOR STOCK INDICES:


DOW JONES INDUS. AVG S&P 500 INDEX NASDAQ COMPOSITE INDEX S&P/TSX COMPOSITE INDEX MEXICO IPC INDEX BRAZIL BOVESPA INDEX Euro Stoxx 50 Pr FTSE 100 INDEX CAC 40 INDEX DAX INDEX IBEX 35 INDEX FTSE MIB INDEX

AEX-Index OMX STOCKHOLM 30 INDEX SWISS MARKET INDEX NIKKEI 225 HANG SENG INDEX S&P/ASX 200 INDEX

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