Stock Market

Stocks

Definition: Stock or capital stock is the capital raised

by a company or corporation through issue and
subscription of shares

Types
Common stocks
Characteristics discretionary dividend payments, residual claim,
limited liability and voting rights
Preference or preferred stocks they are senior to common
stocks but junior to bonds
Characteristics no voting rights, typically nonparticipating and
cumulative; but they can be participating and non-cumulative as well
Convertible preferred stocks
Stock Market

It is the place where stocks are traded

Those who hold stocks of corporations are called
stockholders
Stock holders are the residual claimant
A corporation has three alternative ways to sell
stocks or issues to raise capital from the market
Classification of Issues

Issues

Public Rights Preferential

Initial Public Offering Further Public Offering

Fresh Issue Offer for Sale Fresh Issue Offer for Sale
Public Issue

A public issue is an offer to the public to subscribe to

the share capital of a company
Public issue could be
Initial Public Offering (IPO) an unlisted company makes
either a fresh issue of securities or an offer for sale of its
existing securities or both for the first time to the public, which
paves way for listing and trading of the issuers securities
Follow on Public Offering or Further Public Offering or
Further Issue - an already listed company makes either a fresh
issue of securities to the public or an offer for sale of its
existing securities to the public, through an offer document.
BACK
Rights Issue

Rights Issue - a listed company proposes to issue fresh

securities to its existing shareholders as on a record date
The rights are normally offered in a particular ratio to
the number of securities held prior to the issue to
maintain their proportional ownership/not to dilute the
stake of current shareholders
Best suited to companies that fail to have retained
earnings
Generally allow the shareholders to pay a price slightly
lower than the market price and then sell those shares in
the market to make profit
It is a low cost distribution of new shares
An Example

Suppose A owns 1000 shares of firm B.

Outstanding shares of B is 1 million and it plans to issue
0.5 million new issues.
As current ownership interest is 0.1% and therefore, he is
offered 500 new issues. So, the ownership interest
remains the same.
If the market value of common stock is RS 100 per share
and the new shares are offered at a 10% discount, then A
purchases them at Rs 90 per share and B receives a total
of Rs 45 million.
After the rights offering the market value of the firm is
Rs96.67 per share and As total investment is Rs 145000
Preferential Issue/Private Placements/
Preferential Allotments

Preferential issue is issue of shares or of convertible

securities by listed companies to a select group of
persons under Section 81 of the Companies Act, 1956
This is a faster way for a company to raise equity capital.
Investors involved in private placements are usually
large banks, mutual funds, insurance companies and
pension funds.
Qualified Institutional Placements: SEBI introduced
QIP on May 08, 2006 whereby a listed company can
issue equity shares and convertible securities to
qualified institutional buyers (QIB).
Qualified Institutional Buyers

Public financial institution as defined in section 4A of the Companies

Act, 1956
Scheduled commercial banks
Mutual funds
Foreign institutional investors registered with SEBI
Multilateral and bilateral development financial institutions
Venture capital funds registered with SEBI
Foreign Venture capital investors registered with SEBI
State Industrial Development Corporations
Insurance Companies registered with the Insurance Regulatory and
Development Authority (IRDA)
Provident Funds with minimum corpus of Rs.25 crores
Pension Funds with minimum corpus of Rs. 25 crores
Issue Price
Issue price is the price at which a company's shares are
offered initially in the primary market
Firm commitment underwriting the underwriter
guarantees the sale of new issues at a fixed price by buying
them from the corporate issuer
Net proceed the price at which the investment bank purchases the
stock from the issuer
Gross proceed the price at which the investment bank resells the
stocks to the investor
Underwriters spread the difference between the gross and the net
proceeds
Best efforts underwriting
Syndicate the group of investment banks that help sell
and distribute the new issues
Book Building

Indian primary market ushered in an era of free

pricing in 1992 which provided guidelines that the
issuer in consultation with Merchant Banker shall
decide the price
There are two types of issue prices:
Fixed price where the company and the Lead Merchant
Banker fix a price
Floor price or price band - where the company and the Lead
Manager stipulate a floor price or price band and leave it to the
market forces to determine the final price; a process known as
price discovery through book building
 Avenue Supermarts IPO subscribed 2.5 times;
QIB demand strong
The initial public offer (IPO) of Avenue Supermarts got oversubscribed 2.5 times by
2.45 pm of Day 2 of the bidding process.

Data available with stock exchanges showed that the issue had received 11.31 crore
bids, which was higher than 4.43 crore shares on the block.

The quota for QIBs was subscribed about 4 times, non institutional Investors (NIIs)
by 1.5 times and retail individual investors (RIIs) by 3.5 times.

The company had on Tuesday raised Rs 561 crore by allotting them 18.76 million
shares to 35 anchor investors including government of Singapore, Fidelity, TRowe
Price and JP Morgan, among others, at Rs 299 apiece.

The Rs 1,870-crore issue is being sold in the price band of Rs 295 to Rs 299 per
share. It will conclude on March 10. The minimum bid lot is 50 equity shares and in
multiples of 50 thereafter.

Source: economictimes.indiatimes.com (March 9, 2017)

Private-sector lender RBL Bank will raise fresh equity of Rs 832.5 crore in its initial public offering. The bank, which
first filed its draft red herring prospectus in June last year with the Securities and Exchange Board of India (SEBI), had
planned to raise Rs 1,100 crore which included a pre-IPO placement of up to Rs 500 crore.

In December, it had raised Rs 488 crore from Asian Development Bank and the UK-based CDC group, completing the
pre-IPO placement. The bank will use the money raised through the issue for boosting its tier-I capital base, for growing
its assets and to ensure compliance with Basel-II norms.

RBL has also brought down the size of its offer for sale (OFS) in the IPO to about 16.9 million shares now from 17.5 mn
shares 14 months earlier. Though private equity investors Beacon India and GPE India have stuck with their plan to sell
about 13 mn shares together, some individual investors have withdrawn their plan to sell in the IPO, shrinking the size of
the OFS by 600,000 shares.

With better performance of the secondary market, some individuals might have postponed their sell-off plans, said a
banker.

RBL's IPO was stuck for about a year because of a pending case against it for breach of the disclosure norms related to
issue of shares worth Rs 600 crore to select investors. In June this year, SEBI accepted the bank's settlement offer and
decided to end the proceedings it had initiated. This paved the way for the IPO, for which the revised documents are still
not in the public domain.
NEW DELHI: The initial public offering by RBL Bank kicked off on Friday, with the
issue receiving bids for 66 per cent of the issue size by 5:30 pm on Day 1.

As per data available with BSE and NSE, investors bade for 2.5 crore shares against the
total issue size of 3.79 crore shares. The issue was seeing a good response from retail
individual investors (RIIs), who bade for 76 per cent of the quota limit in the initial hour.
The quota for qualified institutional buyers (QIBs) was subscribed by 66 per cent. The
issue will be closed on Tuesday next week.

The price band is Rs 224-225 a share. As much as Rs 832 crore of the IPO is issue of
fresh equity and the remaining Rs 382 crore is offer for sale by existing investors.

The bank had on Thursday fetched Rs 364 crore by issuing shares to 28 anchor investors
at the upper price band of Rs 225. Mutual funds applied for 63 lakh equity shares, which
was 39.02 per cent of the total anchor portion, the bank said.

Experts noted that the bank has stayed away from stressed sectors such as steel, power
and infrastructure, which has helped it to maintain its asset quality at better levels
compared to peers.

This is despite 60 per cent of its loan exposure to corporates and MSMEs. Gross NPAs
stand at 1 per cent of loans, while restructured book is small at 0.1 per cent of loans.
"Large asset quality shocks are unlikely though loan book growth has been high for
the last 23 years," said brokerage Prabhudas Lilladher.

Net Interest Income (NII) for the lender grew to Rs 819.21 crore in FY16 from Rs
186.79 crore in FY12, which represents a CAGR of 44.71 per cent in the four year
period. Between FY12 and FY16, the bank's loan book, net interest income (NII), and
net profit grew at a compounded annual rate of 40-50 per cent. It was able to sustain
the growth momentum in FY16 as well.

The shares of private sector lender RBL, formerly known as Ratnakar Bank, on
Wednesday debuted on the National Stock Exchange at Rs 274.2 per share, a 22%
premium over the offer price. The IPO opened for subscription on August 19 through
August 23, with an issue price of Rs 225 a share.

The company's IPO was subscribed a staggering 70 times over.

Yes Bank was the last private lender to hit the capital markets in 2005. Taking into
account state-run banks as well, Punjab and Sind Bank last went public six years ago
in 2010.

Kotak Mahindra Capital, Axis Capital, Citigroup, Morgan Stanley were the global
merchant bankers for the deal while HDFC Bank, ICICI Securities, IDFC Securities,
IIFL and SBI Caps were the lead managers for the local market.
Valuation of Common Stock

Chartists attempt to predict changes in stock prices

by analyzing the charts of stock prices

Behaviouralists predict the value of stock based on

their perceptions towards investors psychology and
behaviour

Fundamentals determine the value of stock on the

basis of a firms current assets and future
profitability
One-Period Valuation Model

This is the simplest model determining valuation of stock.

This assumes that an investor holds the stock for one
period, and after getting the dividend he sells it off
The stocks price is determined as

D1 P1
P0
1 ke 1 ke
where D1 is the first period dividend, P1 is the selling price
and ke is the investors required return on the equity.

If P0 current selling price then the investor will buy the

stock
Generalised Dividend Valuation Model

The generalised multi-period formula for stock

valuation is an extension of the one-period valuation
model
D1 D2 Dn Pn
P0 ...
1 ke (1 ke ) 2
(1 ke ) n
(1 ke ) n

Alternatively, since Pn will have negligible impact on P0

for large n, the formula can be written as

Dt
P0
t 1 (1 k e ) t
The Gordon Growth/Dividend Discount Model

Since it is difficult to estimate an infinite series of

dividends, a simplified version is offered.
Many firms strives to increase their dividends at a
constant rate each year, g
D0 (1 g ) D0 (1 g ) 2 D0 (1 g )
P0 ...
1 ke (1 ke ) 2
(1 ke )
D0 (1 g ) D1
P0
ke g ke g
This model is valid only if
Dividends grow at a constant rate,
ke > g
Determination of Stock Prices in the Market

Factors:
Stock specific - peoples expectations about the company, its
future earnings capacity, financial health and management,
level of technology and marketing skills; impact is long run
Market specific overall business environment like high
economic growth, friendly budget, stable government or war,
economic crisis, communal riots etc.; impact is short run
Bid price the price at which a buyer intends to buy
a share
Ask price the price at which a seller intends to sell
a share
Stock Tracker
Bid (Buy side) Ask (sell side)
Quantity Price (Rs.) Quantity Price (Rs.)
1000 50.25 2000 50.35
500 50.10 1000 50.40
550 50.05 1500 50.50
2500 50.00 3000 50.55
1300 49.85 1450 50.65
5850 8950
Best Buy Order: Order with the highest price
Best Sell Order: Order with the lowest price
Bid-Ask Spread: the difference between the prices of best bid and ask
It is the indicator of liquidity of a stock
Capital Asset Pricing Model (CAPM)

Measures relationship between risk and equilibrium

returns on risky assets
Unsystematic/idiosyncratic risk it affects a single
or a small group of stocks; firm specific risk; can be
eliminated through diversification
Systematic risk it affects the overall market or a
large number of stocks
Only systematic risk is relevant for CAPM
Appropriate risk premium on an asset will be
determined by its contribution to the risk of an
investors overall portfolio
CAPM (contd.)

Systematic risk of a stock relative to the average

market stock is measured using coefficient or .

Ra measures the return on stock a.

RM measures the market return or average stock
return.
= 1 implies as much systematic risk from a as from
the market
In CAPM the risk premium from a stock is
proportional to its beta, .
 CAPM (contd.)

Rf is the return from risk-free assets

E (Ra) is expected return from stock a
E (Ra) Rf is the risk premium for stock a
The ratio of risk premium to beta should be same for
any two securities or stocks
Rearranging E (Ra) = Rf + a [E (RM) Rf]
Expected return on stock a depends on
Pure time value of money, Rf
Reward for bearing risk, [E (RM) Rf]
Amount of systematic risk, a
Example

Calculate the expected return on stock A, if the

expected market return is 10 percent, return on risk
free asset is 5 percent and the beta on stock A is 1.25.

E (RA) = 5% + 1.25 (10% - 5%) = 11.25%

Efficient Market Hypothesis

Assumes prices of securities in financial markets fully

reflect all available information

Current prices in a financial market will be set so that

the optimal forecast of a securitys return using all
available information equals the securitys equilibrium
return

Markets are the best predictor of stock price movements

no one can beat the market
Measuring the Level of Stock Market

Stock market indices measure the level of

fluctuations in all stock values
Stock indices tell us both how much the value of an
average stock has changed and how much total
wealth has gone up or down
Methods:
Full market capitalization index
Free-float market capitalization index
Price weighted index
Full Market Capitalization Method

In this method, the number of shares outstanding

multiplied by the current market price per share of a
company, known as market capitalisation,
determines the companys weight in the index.
The index can be computed by adding up the market
capitalization of all companies listed and dividing it
by the number of securities in the index.
Companies with large market capitalisation get
larger weights in this method.
 Free-Float Market Capitalization Method

Free float is the percentage of shares that are freely

available for purchase in the markets.
It excludes shares of a company held by government,
controlling share holders and their families, companys
management, shares locked under the employee stock
ownership plans etc, known as closely held shares.
Thus, companies with large full market capitalisation
but less free-float will have less weight under this
method.
Under free-float weighting scheme a float factor is
assigned to each stock
Price Weighted Index

In this method, the index is calculated by adding the

prices of each of the stocks in the index and then
dividing them by the total number of stocks included
in the index.
Stocks with a higher price will be given more weight
and, therefore, will have a greater influence over the
performance of the index.
Examples of Index Calculations

NYSE Composite Index

Weighting Float-adjusted market cap
Base date December 31, 2002
Base value (closing) 5000
Share changes (<10%) Quarterly
Return calculations Price and total return indexes

Index is calculated using Laspeyres Formula

Where Dt is the divisor, C1 is the adjustment factor for

the base date market capitalization
Examples of Index Calculations

All BSE Indices except for BSE-PSU, are calculated

using the following formula:
Indext =
BIV: Base Index Value
Changes in Base market capitalization (BMC) is calculated as

Eg. Old BMC = 2450 crore; Old market capitalization = 4781

crore and 100 crore new shares have been added. Then
New BMC = [2450(4781 + 100)]/4781 = 2401.24 crore
Evolution of Indian Stock Market
Long term negotiable securities were introduced
towards the end of the eighteenth century, 1793.
The Companies Act was enacted in 1950 which
introduced the feature of limited liability and
generated investors interest in corporate securities
The Native Share and Stock Brokers Association, now
BSE, was established in Bombay in 1975.
Formation of exchanges that followed were in
Ahmedabad in 1894, Calcutta in 1908 and Madras in
1937.
Till the 1960s was the largest stock exchange in India
which was taken over by BSE from late 1960s onwards.
Pattern of Growth of Indian Stock Market
Year No. of Stock No of Listed Market Percentag
Exchanges Companies Capitalizatio e change
n (Rs in Market
Crores) Cap
1946 7 1125 971
1961 7 1203 1292 33.06
1971 8 1599 2675 107.04
1975 8 1852 3273 22.36
1980 9 2265 6750 106.23
1990-91 22 2471 90836 1245.72
1999-00 23 5815 112842 24.23
2004-05 23 4731 1698428 1405.14
2007-08 21 4887 5138014 202.52
2012-13 26 5133 6214941 20.96
2014-15 21 7439 29905402 381.19
2015-16 13 7799 27968558 -6.48
Indian Indices (BSE)

BSE SENSEX, first compiled in 1986, is now calculated on a

'free-float Market Capitalization-Weighted' methodology of 30
component stocks representing large, well-established and
financially sound companies across key sectors
BSE 100 is comprised of 100 stocks listed at five major stock
exchanges in India -Mumbai, Calcutta, Delhi, Ahmedabad
and Madras
BSE Smallcap and Midcap they track the performance of firms
with relatively smaller market capitalization
'BSE-200, and the 'DOLLEX-200 which is BSE 200 quoted in
US dollars, were introduced on May 27, 1994
BSE-500 Index constructed w.e.f. Aug 9, 1999 represents
nearly 93% of the total market capitalisation on BSE and
covers all 20 major industries of the economy.
BSE Indices

S&P BSE SENSEX

S&P BSE SENSEX 50
S&P BSE SENSEX Next 50
S&P BSE 100
S&P BSE Midcap
S&P BSE Smallcap
S&P BSE 200
S&P BSE 500
S&P BSE All cap
S&P BSE LargeCap
S&P BSE SmallCap Select Index
S&P BSE MidCap Select Index
S&P BSE LargeMidCap
S&P BSE MidSmallCap
NSE

NSE was incorporated in November 1992

It brought with it the best global practices
It established nationwide trading facility
It ensured all investors equal access through
appropriate communication network
It is professionally managed in that the ownership
and management is completely separated from the
right to trade on the exchange
Indian Indices (NSE)

S&P CNX Nifty Index Base date Method

NIFTY 500 01/01/1995 Full market capitalization
is a well
NIFTY 50 03/11/1995 Free-float capitalization
diversified 50
NIFTY Next 50 01/01/1997 Free-float capitalization
stock index
NIFTY 100 01/01/2003 Free-float capitalization
accounting for
NIFTY Midcap 50 01/01/2004 Full market capitalization
22 sectors of
NIFTY 200 01/01/2004 Free-float capitalization
the economy
NIFTY Midcap 150 01/04/2005 Free-float capitalization
NIFTY Smallcap 250 01/04/2005 Full market capitalization
All Nifty NIFTY Full Midcap 100 01/04/2005 Full market capitalization

indices have NIFTY Smallcap 50 01/04/2005 Full market capitalization

base value of NIFTY Full Smallcap 01/04/2005 Full market capitalization

100
1000 NIFTY MidSmallcap 400 01/04/2005 Full market capitalization
Cash Market Turnover (Rs Crore)

Chart Title
700,000.00

600,000.00

500,000.00

400,000.00

300,000.00

200,000.00

100,000.00

0.00

BSE NSE
F&O Market Turnover (Rs Crore)

10000000
9000000
8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0

BSE NSE
Global Indices

Some important international indices are:

The Dow Jones Industrial Average
Price weighted index of 30 largest stocks of the US economy
Divided by Dow divisor; Dow Divisor on March 15, 2017:
0.14602128057775
The Standard and Poors (S&Ps) 500 Index
Market capitalization weighted index of 500 largest firms of the US
market
The Nasdaq Composite Index
Market capitalization index of all listed stocks on Nasdaq
The Nasdaq 100 Index
Market capitalization index of 100 largest computer, software and
telecom stocks of the US economy
Global Indices

The FTSE (Financial Times Stock Exchange) 100

consists of 100 largest companies by full market
value listed on London Stock Exchange. It is the
benchmark index to indicate the performance of the
European market
The MSCI (Morgan Stanley Capital International)
indices consist of MSCI EAFE (Europe, Australia
and Far East), MSCI Europe, MSCI World, MSCI
EMI (Emerging Markets Index) and MSCI Pacific
Basin Indices. MSCI indices are free-float adjusted
market capitalization index
MSCI Indices

MSCI EAFE measures developed market equity

performance excluding US and Canada; consists of 21
developed country market indices; covers approximately
85% of the free-float market capitalization of each of the
21 countries
MSCI World Index represents large and mid-cap equity
performance across 23 developed market countries
covering 85% of the free float-adjusted market
capitalization in each country
MSCI EMI consists of 23 countries representing 10%
of world market capitalization; covers 85% of the free
float-adjusted market capitalization in each country