FINANCIAL MARKET

Study material

STOCK EXCHANGES

Stock exchanges are organized and regulated markets for various securities
issued by corporate sector and other institutions. The stock exchange enable
purchase and sale of securities as commodity exchange allow trading in
commodities. The following definition explains the meaning and scope of stock
exchanges.

DEFINITIONS

Pyle-“security exchanges are market places where securities that have been
listed thereon may be bought and sold for either investment or speculation.” Sock
exchanges allow trading in securities both to the genuine investors and speculators.
Securities Contract Regulations Act, 1956- Stock exchange means anybody
of individuals, whether incorporated or no, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling in securities.”

History of stock exchanges

In 11th century France the courtiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. As these
men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin
bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or
perhaps three purses), hung on the front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in
Bruges gathered inside the house of a man called Van der Burse, and in 1309 they
institutionalized this until now informal meeting and became the "Bruges Bourse".
The idea spread quickly around Flanders and neighbouring counties and "Bourses"
soon opened in Ghent and Amsterdam.

1
The house of the Beurze family on Vlaamingstraat Bruges was the site of the
worlds first stock Exchange, circa 1415. The term Bourse is believed to have
derived from the family name Beurze.

In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351, the Venetian Government outlawed spreading rumors intended
to lower the price of government funds. There were people in Pisa, Verona, Genoa
and Florence who also began trading in government securities during the 14th
century. This was only possible because these were independent city states ruled
by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in
business ventures and get a share of their profits - or losses. In 1602, the Dutch
East India Company issued the first shares on the Amsterdam Stock Exchange. It
was the first company to issue stocks and bonds. In 1688, the trading of stocks
began on a stock exchange in London.

CHARACTERISTICS

1. It is place where securities are purchased and sold.

2. It is an association of persons whether incorporated or no.

3.The trading in a stock exchange is strictly and rules and regulations prescribed

for various transactions

4. Both genuine investors and speculators buy and sell shares.

. 5. The securities of corporations, trusts, govt etc. are allowed to be dealt at stock

exchanges

2
The role of stock exchanges

Stock exchanges have multiple roles in the economy, this may include the
following:

• Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for
expansion through selling shares to the investing public.

• Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational
allocation of resources because funds, which could have been consumed, or kept in
idle deposits with banks, are mobilized and redirected to promote business activity
with benefits for several economic sectors such as agriculture, commerce and
industry, resulting in a stronger economic growth and higher productivity levels
and firms.

• Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase

distribution channels, hedge against volatility, increase its market share, or acquire
other necessary business assets. A takeover bid or a merger agreement through the
stock market is one of the simplest and most common ways for a company to grow
by acquisition or fusion.

• Redistribution of wealth

Stocks exchanges do not exist to redistribute wealth. However, both casual and
professional stock investors, through dividends and stock price increases that may
result in capital gains, will share in the wealth of profitable businesses.

• Corporate governance

By having a wide and varied scope of owners, companies generally tend to

improve on their management standards and efficiency in order to satisfy the
demands of these shareholders and the more stringent rules for public corporations
imposed by public stock exchanges and the government. Consequently, it is
alleged that public companies (companies that are owned by shareholders who are
members of the general public and trade shares on public exchanges) tend to have

3
better management records than privately-held companies (those companies where
shares are not publicly traded, often owned by the company founders and/or their
families and heirs, or otherwise by a small group of investors). However, some
well-documented cases are known where it is alleged that there has been
considerable slippage in corporate governance on the part of some public
companies (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam
(2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat
(2003), are among the most widely scrutinized by the media).

• Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares
is open to both the large and small stock investors because a person buys the
number of shares they can afford. Therefore the Stock Exchange provides the
opportunity for small investors to own shares of the same companies as large
investors.

• Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing
estates by selling another category of securities known as bonds. These bonds can
be raised through the Stock Exchange whereby members of the public buy them,
thus loaning money to the government. The issuance of such bonds can obviate the
need to directly tax the citizens in order to finance development, although by
securing such bonds with the full faith and credit of the government instead of with
collateral, the result is that the government must tax the citizens or otherwise raise
additional funds to make any regular coupon payments and refund the principal
when the bonds mature.

• Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market
forces. Share prices tend to rise or remain stable when companies and the economy
in general show signs of stability and growth. An economic recession, depression,
or financial crisis could eventually lead to a stock market crash. Therefore the
movement of share prices and in general of the stock indexes can be an indicator of
the general trend in the economy.

4
Major stock exchanges

Twenty Major Stock Exchanges In The World: Market Capitalization & Year-to-
date Turnover at the end of October 2007

Total Share
Market Value
Turnover
(trillions of US
Region Stock Exchange (trillions of US
dollars)
dollars)
Johannesburg Securities
Africa $0.940 $0.349
Exchange
Americas NASDAQ $4.39 $12.4
Americas São Paulo Stock Exchange $1.40 $0.476
Americas Toronto Stock Exchange $2.29 $1.36
Americas/Europe NYSE Euronext $20.7 $28.7
Australian Securities
Asia-Pacific $1.453 $1.003
Exchange
South Asia Bombay Stock Exchange $1.61 $0.263
Hong Kong Stock
Asia-Pacific $2.97 $1.70
Exchange
Asia-Pacific Korea Exchange $1.26 $1.66
National Stock Exchange of
South Asia $1.46 $0.564
India
Asia-Pacific Shanghai Stock Exchange $3.02 $3.56
Asia-Pacific Shenzhen Stock Exchange $0.741 $1.86
Asia-Pacific Tokyo Stock Exchange $4.63 $5.45
Frankfurt Stock Exchange
Europe $2.12 $3.64
(Deutsche Börse)
Europe London Stock Exchange $4.21 $9.14
Madrid Stock Exchange
Europe (Bolsas y Mercados $1.83 $2.49
Españoles)
Milan Stock Exchange
Europe $1.13 $1.98
(Borsa Italiana)
Moscow Interbank
Europe Currency Exchange $0.9652 $0.4882
(MICEX)

5
 Nordic Stock Exchange
Europe $1.38 $1.60
Group OMX1
Europe Swiss Exchange $1.33 $1.58

Remarks: There are 2 pending major mergers: NASDAQ with OMX; and London
Stock Exchange with Milan Stock Exchange

The main stock exchanges in the world include:

AMERICAN STOCK EXCHANGE

AUSTRALIAN SECURITIES EXCHANGE

BELGRADE STOCK EXCHANGE

BERMUDA STOCK EXCHANGE

BOLSA MEXICANA DE VALORES

BOLSA DE VALORES DE COLOMBIA

BOLSA DE VALORES DE LIMA

BOMBAY STOCK EXCHANGE

BUCHAREST STOCK EXCHANGE

BUDAPEST STOCK EXCHANGE

CASABLANCA STOCK EXCHANGE

EURONEXT AMSTERDAM

EURONEXT BRUSSELS

EURONEXT LISBON

EURONEXT PARIS

FRANKFURT STOCK EXCHANGE

GHANA STOCK EXCHANGE

6
HELSINKI STOCK EXCHANGE

HONG KONG STOCK EXCHANGE

ISTANBUL STOCK EXCHANGE

JAKARTA STOCK EXCHANGE

JASDAQ

JOHANNESBURG SECURITIES EXCHANGE

KARACHI STOCK EXCHANGE

KOREA STOCK EXCHANGE

KUWAIT STOCK EXCHANGE

LAHORE STOCK EXCHANGE

LONDON STOCK EXCHANGE

MADRID STOCK EXCHANGE

MALAYSIA STOCK EXCHANGE

MILAN STOCK EXCHANGE

NAGOYA STOCK EXCHANGE

NIGERIA STOCK EXCHANGE

NATIONAL STOCK EXCHANGE OF INDIA

NASDAQ

NEW YORK STOCK EXCHANGE

OSAKA SECURITIES EXCHANGE

PHILIPPINE STOCK EXCHANGE

7
SANTIAGO STOCK EXCHANGE

SÃO PAULO STOCK EXCHANGE

SHANGHAI STOCK EXCHANGE

SINGAPORE EXCHANGE

STOCKHOLM STOCK EXCHANGE

TAIWAN STOCK EXCHANGE

TOKYO STOCK EXCHANGE

TORONTO STOCK EXCHANGE

WARSAW STOCK EXCHANGE

ZURICH STOCK EXCHANGE

FUCTIONS OF SOTCK EXCHANGES

1) Ensure liquidity of capital

2) Continuous market for securities.
3) Evaluation of securities.
4) Mobilizing surplus savings.
5) Helpful in raising new capital.
6) Safety in dealings.
7) Listing of securities.
8) Platform for public debt.
9) Clearing house of business information.

CLASSIFICATION CORPORATE SECURITIES

8
 The corporate securities that are dealt in capital market can be classified
under two categories.

1. Ownership securities
2. Creditorship securities

A. Ownership securities

The term owner ship securities also known as capital stock represents
shares. Shares are most universal form of raising long term funds from
the market

Kinds ownership securities or shares

1. equity shares
2. preference shares

• cumulative preference shares

• non cumulative preference shares
• Redeemable preference shares
• Irredeemable preference shares
• Participating preference shares
• non participating preference shares
• Convertible preference shares
• non convertible preference shares

3. Deferred shares

4. No par stock/shares

5. Shares with differential right

6. Sweat equity

B. Creditorship securities

9
The term creditorship securities also known as debt capital represents debentures
and bonds.

Types of debentures

1. simple or naked, un secured debentures

2. secured or mortgaged debentures
3. bearer debentures
4. registered debentures
5. redeemable debentures
6. irredeemable debentures
7. convertible debentures
8. zero interest bond/ debentures
9. zero coupon bonds
10.first debentures and second debentures
11.guaranteed debentures
12.collateral debentures

LISTING OF SECURITIES

Listing of securities means permission to quote shares and debentures officially

on the trading floor of the stock exchange. Every security issued b companies
cannot be traded at a stock exchange. The stock exchanges fix certain standards
which the company must fulfill before getting the securities listed.

REQUIREMENTS FOR LISTING

Any company intending to get its securities listed at an exchange has to

fulfill certain conditions. The following information must be filled with exchange
for getting a security listed.
i. Memorandum and articles of association.
ii. Copies all prospectus and statements in lieu of prospectuses.
iii. Copies balance sheet s, audited accounts, agreements with promoters,
underwriters, brokers, etc.

10
 iv. Letters of consent from controller of capital issues, now replaced with
SEBI.
v. Details of shares and debentures issued and shares forfeited.
vi. Details of issue of bonuses and dividends declared.
vii. History of company in brief.
viii. Agreement with managing director, etc.
ix. An undertaking regarding compliance with the provisions of the companies
Ac, 1956 and Securities Contracts Regulations Act, 1956 as well as rules
made herein.
x. A list of the highest ten holders of each class or kind of securities of the
company.

The stock exchanges are empowered to withdraw or suspend the admission

granted for trading following an breach of conditions.

OBJECTIVES OF LISTING

1. To ensure proper supervision and control of dealings in securities.

2. To protects the interests of shareholders and the investors.
3. To avoid concentration of economic power.
4. To assure marketing facilities for the securities.
5. To ensure liquidity of securities.
6. To regulate dealings in securities.
7. To require promoters to have a reasonable stake in the company.

ADVANTAGES OF LISTING

• Publicity of securities
• Protection of Investors interests
• Ensure liquidity.
• Better goodwill.

DEFECTS OF STOCK EXCHANGES IN INDIA

1. Lack of professionalism
2. domination of financial institution
3. poor liquidity
4. domination by big operators

11
 5. less floating stocks
6. speculative trading

BOMBAI STOCK EXCHANGE

Introduction

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning
three centuries in its 133 years of existence. What is now popularly known as BSE was
established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956)
from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's
pivotal and pre-eminent role in the development of the Indian capital market is widely recognized.
It migrated from the open outcry system to an online screen-based order driven trading system in
1995. Earlier an Association Of Persons (AOP), BSE is now a corporatised and demutualised
entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange
Board of India (SEBI). With demutualisation, BSE has two of world's best exchanges, Deutsche
Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in India
which has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the
world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at
USD 1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy
reference, are classified into A, B, S, T and Z groups.

12
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature , and is
tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is
constructed on a 'free-float' methodology, and is sensitive to market sentiments and market
realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has
entered into an index cooperation agreement with Deutsche Börse. This agreement has made
SENSEX and other BSE indices available to investors in Europe and America. Moreover,
Barclays Global Investors (BGI), the global leader in ETFs through its iShares® brand, has
created the 'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF enables
investors in Hong Kong to take an exposure to the Indian equity market.

BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominated futures trading
of SENSEX in the U.S. The tie-up enables eligible U.S. investors to directly participate in India's
equity markets for the first time, without requiring American Depository Receipt (ADR)
authorization. The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on
BSE. It brings to the investors a trading tool that can be easily used for the purposes of
investment, trading, hedging and arbitrage. SPIcE allows small investors to take a long-term view
of the market.

BSE provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. It has a nation-wide reach with a presence in more than 450 cities and towns of India.
BSE has always been at par with the international standards. The systems and processes are
designed to safeguard market integrity and enhance transparency in operations. BSE is the first
exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also
the first exchange in the country and second in the world to receive Information Security
Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System
(BOLT).

BSE continues to innovate. In recent times, it has become the first national level stock exchange
to launch its website in Gujarati and Hindi to reach out to a larger number of investors. It has
successfully launched a reporting platform for corporate bonds in India christened the ICDM or
Indian Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE Broadcast'
which enables information dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting
System) to facilitate information flow and increase transparency in the Indian capital market.
While the Directors Database provides a single-point access to information on the boards of
directors of listed companies, the ICERS facilitates the corporates in sharing with BSE their
corporate announcements.

13
BSE also has a wide range of services to empower investors and facilitate smooth transactions:

Investor Services: The Department of Investor Services redresses grievances of investors.

BSE was the first exchange in the country to provide an amount of Rs.1 million towards the
investor protection fund; it is an amount higher than that of any exchange in the country.
BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock
Market' under which 264 programmes were held in more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen
based trading in securities. BOLT is currently operating in 25,000 Trader Workstations
located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-
based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in
the world to trade on the BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the
price movements, volume positions and members' positions and real-time measurement of
default risk, market reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in collaboration
with reputed management institutes and universities. It offers over 40 courses on various
aspects of the capital market and financial sector. More than 20,000 people have attended the
BTI programmes

Awards

The World Council of Corporate Governance has awarded the Golden Peacock Global CSR
Award for BSE's initiatives in Corporate Social Responsibility (CSR).

The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007
have been awarded the ICAI awards for excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts
in employer branding through talent management at work, health management at work and
excellence in HR through technology

14
 It was established in 1875 as a voluntary non-profit making association at
Mumbai. It is Asia’s oldest sock exchange and is a major sock exchange in India.
The exchange has mechanism to redress grievances of investors as well as
members. I provides inputs to the investing public.

WORKING

The members of stock exchange can trade in the exchange. The

members can trade on behalf of outsiders. If a member trades on his own account
then transactions can be only among stock exchange members. He shares of listed
companies only can be traded at the exchange. BSE allows following category of
persons for trading:
• The commission broker
• The floor broker
• The tarawaniwala, akin to a jobber or specialist
• The dealer in non- cleared securities
• The odd-lo dealer
• The dealer in foreign securities or arbitrageur
• The security dealer or dealer in Govt securities.

BSE sensitive index (BSE sensex)

Introduction

The BSE came out with a stock index in 1986. It is known as BSE sensex. It is
computed from a sample of 30 stock of large , well established and financially
sound companies. The base year of BSE sensex is 1978-79 and base value is 100.

The calculation of BSE sensex involves dividing the total market capitalization of
30 companies in the index by a number called the index divisor.

15
SENSEX - The Barometer of Indian Capital Markets

Introduction

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology

of 30 component stocks representing large, well-established and financially sound companies across
key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in
both domestic and international markets through print as well as electronic media. It is scientifically
designed and is based on globally accepted construction and review methodology. Since September 1,
2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float
market capitalization-weighted" methodology is a widely followed index construction methodology on
which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX,
S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from early
nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the
late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate
caught the fancy of the investors. SENSEX has captured all these happenings in the most judicious
manner. One can identify the booms and busts of the Indian equity market through SENSEX. As the
oldest index in the country, it provides the time series data over a fairly long period of time (from 1979
onwards). Small wonder, the SENSEX has become one of the most prominent brands in the country.

Index Specification:

Base Year 1978-79

Base Index 100
Value
Date of Launch 01-01-1986
Method of Launched on full market capitalization method and effective September 01,
calculation 2003, calculation method shifted to free-float market capitalization.
Number of 30
scrips

16
Index 15 seconds
calculation
frequency

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of
index at any point of time reflects the free-float market value of 30 component stocks relative to a base
period. The market capitalization of a company is determined by multiplying the price of its stock by
the number of shares issued by the company. This market capitalization is further multiplied by the
free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated
by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market
capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the
only link to the original base period value of the SENSEX. It keeps the Index comparable over time and
is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips
etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the
trading system to calculate SENSEX every 15 seconds. The value of SENSEX is disseminated in real
time.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available
since its inception. (For more details click 'Dollex series of BSE indices')

SENSEX - Scrip Selection Criteria

The general guidelines for selection of constituents in SENSEX are as follows:

Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception may be
considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE
universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing
history would not be required.

Trading Frequency:The scrip should have been traded on each and every trading day in the last three

17
months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final rank is
arrived at by assigning 75% weightage to the rank on the basis of three-month average full market
capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover &
three-month average impact cost.

Market Capitalization Weightage:The weightage of each scrip in SENSEX based on three-month

average free-float market capitalization should be at least 0.5% of the Index.

Industry/Sector Representation:Scrip selection would generally take into account a balanced

representation of the listed companies in the universe of BSE.

Track Record:In the opinion of the BSE Index Committee, the company should have an acceptable
track record.

Understanding Free-float Methodology

Concept

Free-float methodology refers to an index construction methodology that takes into consideration only
the free-float market capitalization of a company for the purpose of index calculation and assigning
weight to stocks in the index. Free-float market capitalization takes into consideration only those shares
issued by the company that are readily available for trading in the market. It generally excludes
promoters' holding, government holding, strategic holding and other locked-in shares that will not come
to the market for trading in the normal course. In other words, the market capitalization of each
company in a free-float index is reduced to the extent of its readily available shares in the market.

Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float
methodology.

Major advantages of Free-float Methodology

A Free-float index reflects the market trends more rationally as it takes into consideration only those
shares that are available for trading in the market.

Free-float Methodology makes the index more broad-based by reducing the concentration of top few

18
companies in Index.

A Free-float index aids both active and passive investing styles. It aids active managers by enabling
them to benchmark their fund returns vis-Ã -vis an investible index. This enables an apple-to-apple
comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly
replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it
enables them to track the index with the least tracking error.

Free-float Methodology improves index flexibility in terms of including any stock from the universe of
listed stocks. This improves market coverage and sector coverage of the index. For example, under a
Full-market capitalization methodology, companies with large market capitalization and low free-float
cannot generally be included in the Index because they tend to distort the index by having an undue
influence on the index movement. However, under the Free-float Methodology, since only the free-float
market capitalization of each company is considered for index calculation, it becomes possible to
include such closely-held companies in the index while at the same time preventing their undue
influence on the index movement.

Globally, the Free-float Methodology of index construction is considered to be an industry best practice
and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a
leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI
India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian
equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the
famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float

Shareholding of investors that would not, in the normal course come into the open market for trading
are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. Specifically, the
following categories of holding are generally excluded from the definition of Free-float:

Shares held by founders/directors/ acquirers which has control element

Shares held by persons/ bodies with "Controlling Interest"

Shares held by Government as promoter/acquirer

Holdings through the FDI Route

Strategic stakes by private corporate bodies/ individuals

19
Equity held by associate/group companies (cross-holdings)

Equity held by Employee Welfare Trusts

Locked-in shares and shares which would not be sold in the open market in normal course.

BSE national index

This index was renamed as BSE national index in October 1996(formely it was
known as BSE-100 index)

The equity share of 100 companies from the specified and non specified list of the
five major stock exchanges, viz., Mumbai, Calcutta , Ahmadabad, Chennai, and
Delhi were selected for the purpose of compiling the BSE national index.

The financial year 1983-84 was chosen as the base year.

A broad-based index, the BSE-100 was formerly known as the BSE

National index. This Index has 1983-84 as the base year and was
launched in 1989. In line with the shift of the BSE Indices to the globally
accepted Free-Float methodology, BSE-100 was shifted to Free-Float
methodology effective from April 5, 2004. The method of computation
of Free-Float index and determination of free-float factors is similar to
the methodology for SENSEX

Index Specification

Base Year 1983-84

Base Index Value 100
Date of Launch January 03, 1989

20
Method of Launched on full market capitalization method and effective April 05, 2004, calculation
calculation method shifted to free-float market capitalization.

Number of scrips 100

Index calculation 15 seconds

frequency

Base Year

The financial year 1983-84 has been chosen as the base year. The price stability
during that year and proximity to the index series were the main consideration for
choice of 1983-84 as the base year. The base value was fixed at 100 points.

Dollex-100

BSE also calculates a dollar-linked version of SENSEX and historical values of

this index are available since its inception. (For more details click 'Dollex series of
BSE indices')

BSE-100 index - Scrip Selection Criteria

The general guidelines for selection of constituents in BSE-100 are as follows:

1. Trading Frequency: The scrip should have been traded on 95% of the trading
days in the last three months. Exceptions can be made for extreme reasons like
scrip suspension etc.

2. Final Rank: The scrip should figure in the top 200 companies listed by final
rank. The final rank is arrived at by assigning 75% weightage to the rank on the

21
basis of three-month average full market capitalization and 25% weightage to the
liquidity rank based on three-month average daily turnover & three-month average
impact cost.

3. Industry/Sector Representation: Scrip selection would generally take into

account a balanced sectoral representation of the listed companies in the universe
of BSE.

NATIONAL STOCK EXCHANGE

National stock exchange was incorporated in November,1992 with an equity

capital of Rs. 25 crores. It is not an exchange in the traditional sense where brokers
own and manage the exchange. NSE is a professionally managed national market
for shares, PSU bonds, debentures and gvt securities with all the necessary
infrastructure and trading facilities. It is an electronic screen based system where
members have equal access and equal opportunity of trade irrespective of their
location in different parts of the country as they are connected through a satellite
network. The system helps to integrate the national market and provide a modern
system with complete audit trial of all transactions.

OBJECIVES OF NSE

1. Providing a nation wide trading facility for equities, debt instruments etc.
2. Ensure equal access to investors all over the country through an
appropriate communication network.
3. Provide fair efficient and transparent securities market o investors using
electronic trading system.
4. Enable shorter settlement cycles and book entry settlement system.
5. Attain current international standards of securities market.

S&P CNX Nifty

This is the index of NSE. S&P CNX Nifty is a stock index diversified in to fifty
and accounting for twenty three sectors of the economy.

This index is built by India index service product Ltd.(IISL) and credit rating
information service of India Ltd (CRISIL).The index is named as S&P CNX Nifty

22
(S&P stands for standard and poor and CNX stands for CRISIL NSE index)

NSE – 50 index introduced on April 22 ,1996

Nifty junior

The junior also consist of fifty stocks belong to madcap companies. Stocks that are
having market capitalization greater than Rs. 2 billion are included with the
objective of measuring the performance of stock in the madcap range.

SECURITY ANALYSIS

For making proper investment involving both risk and return, the investor has to
make a study of the alternative avenue of investment-their risk and return
characteristics and make proper expectation of the risk and return of the
alternative investment under consideration. He has to tune the expectations to his
preferences of the risk and return for making a proper investment choice. The
process of analyzing individual securities and the market as a whole and estimating
the risk and return expected from each of the investments with a view to
identifying under valued securities for selling is both an art and science and this is
what is called investment analysis

PROCEDURE FOR DEALING AT STOCK EXCHANGES

The buying and selling at stock exchanges is not allowed to outsiders. They
have to approach brokers who are members of the exchange and dealings can only
be through them. The following procedure is followed for dealing at exchanges.

1) Selection of a broker.
2) Placing an order
3) Making the contract
4) Contract note
5) settlement

OPERATORS AT STOCK EXCHANGES

23
 1. jobbers
2. brokers
3. tarawaniwalas

DEFECTS OF STOCK EXCHANGES IN INDIA

7. Lack of professionalism
8. domination of financial institution
9. poor liquidity
10. domination by big operators
11. less floating stocks
12. speculative trading

INVESTMENT

Investment is parting with one’s fund, to be used by another party, user of fund ,for productive
activity. It can mean giving an advance or loan or contributing to the equity or debt capital of a
corporate or non corporate business unit. Generalized , investment means conversion of cash or
money in to a monitory asset or claim on future money for a return.

MODES OF INVESTMENT

A. Security forms of investment

1. Corporate debentures/bonds
a) Convertible
b) Non convertible

2. Public sector bonds

a) Taxable

b) Tax free

24
 3. Preference shares

4. Equity shares

a) New issue

b) Right issue

c) Bonus issue

B. Non- security forms of investment (non marketable)

1. National saving scheme

2. National saving certificate

3. Provident funds

a) Statutory provident fund

b) Recognized provident funds

c) Un recognized provident funds

d) Public provident funds

4. Corporate fixed deposits

5. Life insurance policies

6. Unit scheme of unit trust of India

7. Post office savings bank account

8. Others

SECURITY ANALYSIS

For making proper investment involving both risk and return, the investor has to make a study of
the alternative avenue of investment-their risk and return characteristics and make proper
expectation of the risk and return of the alternative investment under consideration. He has to
tune the expectations to his preferences of the risk and return for making a proper investment
choice. The process of analyzing individual securities and the market as a whole and estimating

25
the risk and return expected from each of the investments with a view to identifying under valued
securities for selling is both an art and science and this is what is called investment analysis

PORTFOLIO

A combination of such securities with different risk return characteristics will constitute the
portfolio of the investor. Thus port folio is the combination of various assets or instruments of
investments. Port folio simply means group or collection of securities. It is a group of securities
such as shares and debentures held by an investor.

PORTFOLIO MANAGEMENT

Portfolio management simply refers to management of investment portfolio. It comprises all the
process involved in the creation and maintenance of investment portfolio. It is concerned with
proper investment decision with regard to what to buy and sell.

Phases of portfolio management

1. Security analysis
2. Portfolio analysis
3. Portfolio selection
4. Portfolio revision
5. Portfolio evaluation

MONEY MARKET

The money market is a place for trading in money and short term financial assets that are close
substitute for money. This transaction may carried out by telephone, mail, ect…

SIGNIFICANCE OF MONEY MARKET

26
1. Economic development

2. Profitable investment

3. Borrowing by the government

4. Importance for central bank

5. Mobilisation of funds

6. Self sufficiency of commercial banks

7. Savings and investment

STRUCTURE OF MONEY MARKET

The Structure of money market can be studied as follows

Money market

27
 components institutions instruments

COMPONENTS OF MONEY MARKET

1. Call money market

2. Collateral loan market

3. Acceptance market

4. Bill market

THE INSTITUTION OF MONEY MARKET

1. Commercial banks
2. Central bank
3. Acceptance houses
4. Non banking financial intermediaries
5. Bill brokers

MONEY MARKET INSTRUMENTS

1. Commercial bill
2. Treasury bill
3. Call and short notice money market
4. Certificate of deposit
5. Commercial papers
6. Repurchase agreement
7. Inter bank participation certificate

PLAYERS IN THE INDIAN MONEY MARKET

28
 1. Reserve bank of India
2. Financial institution like IFCI, IDBI, ICICI, LIC, UTI, etc...
3. Commercial banks
4. Discount and finance house of India
5. Brokers
6. Provident fund
7. Corporate unit, etc..

CAPITAL MARKET

The term capital market refers to the institutional arrangements for facilitating the borrowing
and lending of long term funds. It is an organized mechanism for for effective and efficient
transfer of money capital or financial resources from the investing parties,

Functions

1. Mobilization of financial resources

2. Securing the foreign capital
3. Effective allocation of the mobilized financial resources

COMPONENTS OF CAPITAL MARKET

1. New issue market or primary market

2. Stock market or secondary market
3. Financial institution

Primary market is a market for securities like new shares ,debentures , etc..offered for first
time in the market. It is also known as new issue market.

METHODS OF RAISING CAPITAL IN PRIMARY MARKET

1. Public issue
2. Private placement
3. Offer for sale

29
 4. Right issue
5. Bonus issue

PRIMARY MARKET INTERMEDIARIES

A number of agencies called intermediaries play a critical role in the process of issue of new
securities. They are

1. Merchant bankers

2. Underwriters

3. Bankers to an issue

4. Registar to an issue

5. Share transfer agent

6. Debenture trustees

7. Brokers to an issue

8. Portfolio managers

Stock market, share market or bourse is a corporation or mutual organization which provides
facilities for stock brokers and traders, to trade company stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income and dividends. The
securities traded on a stock exchange include: shares issued by companies, unit trusts and other
pooled investment products and bonds. To be able to trade a security on a certain stock
exchange, it has to be listed there.

Functions

1. Ensure liquidity of capital

2. Continuous market for securities
3. Evaluation of securities
4. Mobilizing surplus savings
5. Helpful in raising new capital
6. Safety in dealings

30
 7. Listing of securities
8. Plat form for public debt
9. Clearing houses of business information

Opportunities for Foreign Investors in Indian Stockmarkets

Direct Investment

Foreign companies are now permitted to have a majority stake in their Indian affiliates
except in a few restricted industries. In certain specific industries, foreigners can even
have holding up to 100 per cent.

Investment through Stock Exchanges

Foreign Institutional Investors (FII) upon registration with the Securities and Exchange
Board of India (SEBI) and the Reserve Bank of India (RBI) are allowed to operate in
Indian stock exchanges subject to the guidelines issued for the purpose by SEBI.

Important requirements under the guidelines

1. Portfolio investment in primary or secondary markets will be subject to a ceiling of 30

per cent of issued share capital for the total holding of all registered FII's. In any one
company an FII holding is subject to a ceiling of 10 percent of the total issued capital.

However, in applying the ceiling of 30 per cent, the following are excluded:

• Foreign investment under a financial collaboration which is permitted up to 51 per

cent in all priority areas.
• Investment by FII's through offshore single/regional funds, GDR's and euro
convertibles.

2. Disinvestment is allowed through a broker of a Stock Exchange.

3. A registered FII is required to buy or sell only for delivery. It is not allowed to offset a
deal. It is also not allowed to sell short.

Investment in Euro Issues/Mutual Funds floated overseas

Foreign investors can invest in Euro issues of Indian companies and in India-specific
funds floated abroad.

31
 Broking Business

Foreign brokers upon registration with the SEBI are now allowed to route the business of
registered FIIs. Guidelines for the purpose have been issued by SEBI.

Asset Management Companies / Merchant Banking

Foreign participation in Asset Management Companies and Merchant Banking Companies

is permitted.

32