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Financial System

The financial system is the backbone of any country
Financial System

Money market

Foreign Exchange market

Capital market GILT securities market

STOCK MARKETS IN THE WORLD

Stock exchanges are open markets that trade in financial assets like stocks, bonds, futures, options etc. It usually refers to the secondary market The securities contract act defines stock market as “an association, organization or body of individuals whether incorporated or not established for a purpose of assisting, regulating and controlling business of buying, selling and dealing in securities. There are a number of major stock exchanges across the world and each of them plays an important role in determining the overall financial and economic condition of any economy

Major Stock Exchanges in the World

Rank Economy
1 2 3 4 5 6 7 8 9 United States & Europe United States & Europe Japan United Kingdom China Hong Kong Canada Brazil Australia

Stock Exchange
NYSE Euronext NASDAQ OMX (US & North Europe) Tokyo Stock Exchange London Stock Exchange Shanghai Stock Exchange Hong Kong Stock Exchange Toronto Stock Exchange BM&F Bovespa Australian Securities Exchange

Location
New York City New York City Tokyo London Shanghai Hong Kong Toronto São Paulo Sydney

Market Cap
14,242 4,687 3,325 3,266 2,357 2,258 1,912 1,229 1,198

Trade Value
20161 13552 3972 2837 3658 1447 1542 931 1197

185 1.031 1.007 996 985 800 789 Trade Value 1758 887 2838 1226 148 2029 589 514 372 .090 1.Rank Economy 10 11 12 13 14 15 16 17 18 Germany Switzerland China Spain India South Korea India Russia South Africa Stock Exchange Deutsche Börse SIX Swiss Exchange Shenzhen Stock Exchange BME Spanish Exchanges Bombay Stock Exchange Korea Exchange National Stock Exchange of India MICEX-RTS JSE Limited Location Frankfurt Zurich Shenzen Madrid Mumbai Seoul Mumbai Moscow Johannesburg Market Cap 1.055 1.

● Even central banks watch movement of stock markets to make sure if the economy is functioning smoothly This was highlighted in September 2008. when stock markets plunged in response to falling financial institutions in the US and central bank had to step in to try and improve liquidity and ease economic crisis. ● .

Main Characteristics of Stock Markets .

● ● It is an organized market It provides a place where registered and approved securities can be bought and sold easily In a stock exchange. It makes complete information available to public in regard to prices and volume of transactions taking place every day ● ● ● . transactions take place between its members or their authorized users All transactions are regulated by rules and by laws of the concerned stock exchange.

Functions of Stock Markets .

Provides ready and continuous market By providing a place where listed securities can be bought and sold regularly and conveniently. debentures. . This provides a high degree of liquidity to the holdings in these securities as the investors can encash their holdings when they want. bonds and government securities. a stock exchange ensures a ready and continuous market for various shares.

In fact... .Provides information about prices A stock exchange maintains complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volume to press and other media. now a days you can get information about minute to minute movement in prices of selected shares on TV channels like CNBC.

Provides safety to dealings and investments Transactions of the SE are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed. This gives high degree of safety .

This facilitates mobilizing savings for investment in industrial and commercial establishments and contributes to capital formation. .Helps in mobilization of savings and capital formation Efficient functioning of stock market creates a an active and growing primary market.

and acts as the barometer which indicates the general conditions of the atmosphere of business. ● ● . The share prices rise during the periods of economic prosperity and vice versa. as the shares prices are highly sensitive to changing economic. reflects the investors’ assessment of the economic and business conditions in a country. This.Barometer of economic and business condition ● Stock exchanges reflect the economic health of a country. in short. social and political conditions.

Better Allocation of Funds As a result of stock market transactions. . funds flow from the less profitable to more profitable enterprises and they avail of the greater potential for growth. Financial resources of the economy are thus better allocated.

Advantages of Stock Market .

. .As a result of enhanced goodwill and higher demand.To Companies . mergers.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 . the value of their securities increases and their bargaining power in collective ventures.Listed companies enjoy a better goodwill and credit-standing as they are supposed to be financially sound and transparent. etc. is enhanced.

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.The investors have avenue to direct their savings in better earning prospects.Because of the assured safety in dealings at the stock exchange the investors are free from any anxiety about the delivery and payment problems.They can 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. They can participate in growth of listed companies . . .To Investors . .

.To Society .A decent stock exchange encourages primary markets. which in turn contributes. .The Stock exchanges facilitate realization of financial resources to more profitable and growing industrial units where investors can easily increase their investment substantially. to increase in the rate of industrial growth. This helps in promotion and expansion of industrial activity.Availability of lucrative avenues of investment and the liquidity thereof induces people to save and invest in securities. This leads to increased capital formation in the country .

Since government securities are also traded at the stock exchanges.. The bonds issued by governments.The volume of activity at the stock exchanges and the movement of share prices reflect the changing economic health. municipal corporations and public sector undertakings (PSUs) are found to be on offer quite frequently . the government borrowing is highly facilitated. electricity boards.

BUYING AND SELLING OF SECURITIES .

Capital markets are subdivided into two types Primary Markets: These are markets where issuers and buyers of new offerings of stocks and bonds come together Secondary Markets: These are the markets where trading of previously purchased securities takes place .

How Are Securities Traded In Secondary Markets ● The buyers and sellers participate in the market with the help of intermediaries like stock brokers Selling investor Broker representing selling investor Buying investor Broker representing buying investor .

Stock Quotes In The Exchange .

Individual Stock Quote .

Bond quotes in the market .

Individual Bond Quote .

Types of Orders .

Every buy order will need a corresponding sell order to get executed and vice versa Let us see different types of orders that traders can use for execution of trade ● ● .● A single order can be either a buy order or a sell order.

Orders based on Time Conditions .

● ● . then only 5000 shares are traded and the order for the other 5000 shares will be canceled. as the name suggests. For example. if an order is placed for 10000 shares and if the order is matched only for 5000.Immediate or Cancel order ● Immediate or Cancel order (IOC): In an IOC order. the matching price should be available immediately otherwise the order will be canceled A partial match of order is allowed – that means quantity does not need to be matched and in that case unmatched quantity will be canceled.

the order will stay open till the defined date. **Acceptance of different types of orders varies from exchange to exchange and may depend upon brokers.Good till date/ canceled order ● Good till date order: In a good till date order. Orders will be canceled if they are not executed by that date. ● ● . Good till canceled order: This order is valid till its canceled by the customer. if not executed.

whatever the price may be. Market orders are used when you definitely want your order to be processed and are willing to risk slightly different price. In an active market the market order will surely be executed but not necessarily at exact price that the trader intended. ● ● . For eg: A market order placed at when the stock was at 100 rs might get executed at 100.Market Orders ● Market Orders are orders to buy or sell a contract at current price. below or above 100.

If its a sell limit order. it will get executed at Rs 100 or below. If one places a buy limit order at Rs 100. They may or may not get filled depending upon the way the stock is moving. it will get executed at or above rs 100. ● . limit order are used when you want to make sure you get a suitable price and are willing to risk not being filled at all.Limit Orders ● Limit Order: Limit orders are orders to buy or sell a contract at specific or better price.

in that they are orders to buy or sell a contract at the best available price. the trader's stop order will be processed as a market order.Stop Orders ● Stop orders are similar to market orders. For example. but they are only processed if the market reaches a specific price. a trader might place a buy stop order with a price of 572. if the market price is 567. ● . If the market then trades at 572 or above. and will then get filled at the current best price.

but not necessarily at the price that the trader intended. the stop price must be below the current price. so if the stop (or trigger) price is reached. .. so for a buy order.. and for a sell order. the stop price must be above the current price.Stop Orders. Stop orders will trigger if the market trades at or past the stop price.contd ● ● Stop orders are processed as market orders. the order will always get filled.

Margin Trading .

● Margin account is a brokerage account in which the broker lends the customer cash to purchase securities. ● ● . then buy low later. so you hope to sell high now. Shorting a security means borrowing it and selling it. You do it because you believe the security’s value will decline. thereby “covering” the short. with the understanding that at some future date you will buy the security and return it. The loan account is collateralized by the securities and the cash Purchasing on margin means borrowing some of the money used to buy securities.

● Margin requirements amount to security deposits. If the value of the stock drops considerably the investor would either have to sell the stock or deposit more cash into his account ● . They exist to protect your broker against losses.

Thereafter. The maintenance requirement is the minimum amount to be collateralized in order to keep an open position. It is generally lower than the initial requirement. the amount required to be kept in collateral until the position is closed is the maintenance requirement. ● ● .Initial and Maintenance margin ● There are two types of margins required to be maintained in such accounts – Initial Margin and Maintenance Margin The initial margin requirement is the amount required to be collateralized in order to open a position.

or the broker may set the maintenance requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by the trader. the regulators. the exchange. ● .● Maintenance margin allows the price to move against the margin without forcing a margin call immediately after the initial transaction. however. On instruments determined to be especially risky.

They can do this by selling the securities. options or futures if they are long and by buying them back if they are short. But if they do none of these.Margin Call ● When the margin posted in the margin account is below the minimum margin requirement. then the broker can sell their securities to meet the margin call. The investors now either have to increase the margin that they have deposited or close out their position. ● ● ● . the broker or exchange issues a margin call.

it can cause a domino effect of selling which will lead to other margin calls and so forth. ● ● ● .● If a margin call occurs unexpectedly. the brokerage will require the trader to fully fund their position or liquidate it. in such a case. In extreme cases. This situation most frequently happens as a result of an adverse change in the market value of the leveraged asset or contract. It could also happen when the margin requirement is raised. certain securities may cease to qualify for margin trading. either due to increased volatility or due to legislation. effectively crashing an asset class or group of assets.

The maintenance margin is not collateral. so the current price is compared to the previous day's price. if the holder has a short position. this is the money needed to buy back. In other words.● The current liquidating margin is the value of a securities position if the position were liquidated now. but a daily payment of profits and losses. Futures are marked-to-market every day. it is the money they can raise by selling it. if they are long. The profit or loss on the day of a position is then paid to or debited from the holder by the futures exchange ● ● .

because the exchange is the central counterparty to all contracts. To ensure they can fulfill this obligation. ● ● . Additional margin is intended to cover a potential fall in the value of the position on the following trading day. Certain other exchange traded derivatives.● This is possible. are marked-to-market in the same way. such as options on futures contracts. This premium margin is equal to the premium that they would need to pay to buy back the option and close out their position. and the number of long contracts equals the number of short contracts. The seller of an option has the obligation to deliver the underlying of the option if it is exercised. This is calculated as the potential loss in a worst-case scenario. they have to deposit collateral.

● . Margin required is 23% of 2.000 Rupees. You can easily calculate the margins required for a futures lot. So lot value of Titan is 1000 x 225 = 2. Similarly. you can calculate margin required for all stocks.25. For example.000 which amounts to 51. Titan Industries lot size is 1000 shares & margin required is 23%.750 Rupees. Titan is currently trading at 225 Rupees a share.Calculation of Margin on Futures ● Below's the tabular info of Stocks traded in Futures segment in Indian Stock Market.25.

No 22 23 24 25 26 27 28 29 30 31 Stock Name BAJAJ HINDUSTAN BALRAMPUR CHINI MILLS BANK OF BARODA BANK OF INDIA BATA INDIA BEML MPHASIS BF UTILITIES BGR ENERGY SYSTEMS BHARAT ELECTRONICS BHARAT FORGE BHARAT PETROLEUM CORPN BHARTI AIRTEL BHARAT HEAVY ELECTRICALS BHUSHAN STEEL BIOCON LIMTED BOMBAY DYEING& MFG CO BOMBAY RAYON FASIONS RELIANCE INFRASTRUCTURE CAIRN INDIA LMITED CANARA BANK Lot Size 8000 4000 500 1000 500 500 1000 500 1000 250 1000 500 1000 1000 1000 1000 1000 1000 500 1000 500 Margin% 21 23 18 24 20 18 17 24 29 17 19 15 16 20 21 19 20 17 20 14 20 22 32 19 19 23 21 28 27 21 17 24 14 18 41 42 39 40 34 35 36 37 38 33 .No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Stock Name 3I INFOTECH ABAN OFFSHORE ABB ALSTOM PROJECTS INDIA ABG SHIPYARD ACC ADANI ENTERPRISES ADANI POWER CORE EDUCATION TECHNOLOGIES ALLAHABAD BANK ALOK INDUSTRIES ANDHRA BANK APOLLO TYRES HEXAWARE TECHNOLOGIES DELTA CORP ARVIND ASHOK LEYLAND ASIAN PAINTS (INDIA) AUROBINDO PHARMA BAJAJ AUTO BAJAJ HOLDINGS INVESTMENT LI Lot Size 8000 1000 250 500 1000 250 500 4000 1000 2000 11000 2000 4000 4000 2000 4000 8000 125 2000 250 500 Margin% 33 25 19 26 17 14 30 32 17 Sr.Sr.

No 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 Stock Name CENTRAL BANKOF INDIA CENTURY TEXTILES & INDUSTRIES CESC CHAMBAL FERTILISERS& CHEMICAL CIPLA CNX BANK NIFTY CNX INFRASTRUCTURE INDEX CNX IT INDEX CNX PSE INDEX COAL INDIA COLGATE-PALMOLIVE (INDIA) TATA COFFEE CROMPTON GREAVES CUMMIN INDIA DABUR INDIA DEVELOPMENT CREDIT BANK KINGFISHER AIRLINES DECCANCHRONICLE HOLDINGS DENA BANK DHANLAXMI BANK DISH TV INDIA DIVI'S LABORATORIES Lot Size 2000 1000 1000 2000 1000 25 100 50 75 1000 250 250 2000 500 2000 8000 8000 4000 4000 4000 4000 500 Margin% 21 21 21 19 14 11 11 11 11 14 17 17 22 18 17 22 24 29 25 31 24 17 .Sr.

Margin Account .

Examples for Margins .

60 You borrow 100*250*0.40 Liabilities 25. Maintenance margin 40% You put 100*250*0.● ● You buy 100 shares of NTPC @ Rs250 each Initial margin is 60%.000 25000 Initial Margin Borrowing 15000 10000 25000 ● ● Assets 1000 shares .

● ● NTPC price goes down to 150 Your maintenance margin becomes 5000/15000 = 30% This will trigger a margin call Liabilities 15.000 15000 Maintenance Margin Borrowing 5000 10000 15000 ● Assets 1000 shares .

Determine the returns on transaction if – no margin was used and 60% initial margin was used (assume no transaction cost) . He sold these shares at Rs 100 each.● Calculating return on margin trade Suppose an investor purchased 500 shares at Rs 50 each.

Returns when no margin used ● ((100-50)*500)/((500*50))*100 = 100% .

60 = 15000 Investor borrowing = 25000*0.40 = 10000 Sale proceeds = 500*100 = 50000 Return on trade = (50000-10000)/15000 = 266% .Returns when margin was used ● ● ● ● ● Size of purchase transaction = 500*50 = 25000 Margin requirement = 25000*0.

If the initial margin was 60% and maintenance margin was 30% when will the margin call be triggered? = 50(1-0.Example for understanding when maintenance margin call would occur ● Investor purchased 500 shares of a stock at Rs 50 each stock.57 .60)/(1-0.3) = 28.