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. A person or organization which holds shares of stocks is called a shareholder. The aggregate value of a corporation's issued shares is its market capitalization. When one buys a share of a company he becomes a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides the portfolio with the growth necessary to reach the long-term investment goals. Research studies have proved that the equities have outperformed than most other forms of investments in the long term. Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment. However, this does not mean all equity Since to investments would guarantee similar high returns. Equities are high-risk investments. 1990 till investors on One needs to study them carefully before investing. Indian stock market has returned about date, 17%
an average in terms of increase in share prices or capital
appreciation annually. Besides that on average stocks have paid 1.5 % dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration. The first company to issue shares of stock was the Dutch East India Company, in 1602. The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. technique example, of pooling the capital to finance a the building of ships, made Netherlands maritime superpower. The for Before
adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could only be undertaken by governments or by very wealthy individuals or families. Equity markets, the world over, grew at a great speed in the decade of the nineties. After the bear markets of the late eighties, the world markets saw one of the largest ever bull markets of more than ten years. The opening up of Indian economy in the 1990's led to a series of financial sector reforms, prominent being the capital market reforms. These reforms have led to the development of the Indian equity markets to t standards of the major global equity markets. All this started with the abolition of Controller of Capital Issues and subsequent free pricing of shares. The introduction of dematerialization of shares, leading to faster and cheaper transactions and introduction of derivative products and compulsory rolling settlement has followed subsequently. Despite a series of stock market scams and crises beginning from 1992 Harsh ad Mehta's scam to the Kean Parikh’s 2001 scam, the Indian equity markets have transformed themselves from a broker dominated market to a mass market. The introduction of online trading has given a much-needed impetus to the Indian equity markets. However, over the years, reforms in the equity markets have brought the country on par with many developed markets on several counts. Today, India boasts of a variety of products, including stock futures, an instrument launched only by select markets. The introduction of rolling settlement is the latest step in the direction of overhauling the stock market. The equity market of the country will most likely be comparable with markets with the world's most advanced secondary regard to international best practices. The market moved to
compulsory rolling settlement and now all settlements are executed on T+2 basis and market is gearing up for moving to T+1 settlement in 2004 while the Straight Through Processing (STP) is in place from December 2002.
The importance of equity market is increasing.
Rightly, realizing the
advantages of resource allocation through market, Government of India and Reserve Bank of India have been pushing reforms in equity markets. Series of steps are being taken to remove hurdles, increase market efficiency and to make it attractive for the retail investors to take part in the equity market. It may not be an exaggeration to say that the Indian markets are resourceful to put themselves on par with the markets of the developed countries. The Indian markets have assimilated in a relatively lesser time, many a developments that took long time in the developed markets. DEVELOPMENTS IN EQUITY MARKET The Government of India has been trying to improve market efficiency, enhance transparency and bring the Indian Equity Market up to international standards. Many reform measures have been initiated in the 90s. The principal ones are the formation of Securities Exchange Board of India (SEBI), repeal of the Capital Issues (Control) Act, 1947, introduction of screen-based trading, shortening of trading cycle, demutualization of stock exchanges, establishment of depositories disappearance of physical share certificates and better risk management systems in stock exchanges. The formation of Semi was the first attempt towards integrated regulation of the securities market. Sebi regulates all market intermediaries and has the powers to impose monetary penalties for misconduct of any intermediary. One of the major stumbling blocks in fair pricing of capital issues has been the Capital Issues (Control) Act, 1947. The issuers were denied the opportunity to economically raise money from the capital market. This is now a matter of the past thanks to the repeal of the Act itself. Sebi has also issued Disclosure and Investor Protection (DIP) guidelines to ensure fair prices for the investors, though however, many issuers in the 90s could unfairly price their capital issues at the cost of the poor common investors. The introduction of Screen Based Trading Systems (SBTS) by NSE is a major
it is certainly a major step forward in broadening the financial markets. While the product range in derivatives is still was of limited (futures and options on stocks and stock indices). The geographical barriers to trade were dismantled resulting in increased trading volumes. Often the securities were delivered after 30 days or more due to weekly/fortnightly settlements and carry forward transactions. Sebi has enforced the discipline to compulsorily settle trades in T+3 days since April 2002. Presently all actively traded shares are held. investor as a demutualized structure separating the roles management and trading to eliminate any conflict of interest Another notable development in the Indian equity among the stakeholders to improve market efficiency and to focus on interest. This made the markets more efficient. NSE established ownership. bad deliveries and quicker transfer of ownership of shares. (NSCCL) in April 1996 has been a major development in managing counterparty risks in the equity market. This avoids physical movement of certificates. While most of the above measures have helped in reinforcing confidence in the Indian equity market by providing more transparent and efficient buying. traded and settled in demit form. selling and transfer of . The setting up of National Securities Clearing Corporation Ltd. and minimizing the chances of fraud. This was possible due to the great advancements in the area of information technology. All scrips are now under rolling settlement since December 2001. This has helped in increasing trading volumes since traders are now more confident about default-free settlements. SBTS electronically matches orders cutting down time.development in the capital market.. Very long settlement cycle was another major hindrance in effecting deliveries in the equity market. The Equity Market is incomplete without products to manage risks in portfolio values. This is slated to reduce to T+2 days from April 2003. derivatives trading appeared on Indian exchanges in June 2000. market has been the introduction of depositories to dematerialize the share certificates. cost and errors. At long last.
the financial markets have become increasingly global. Following the implementation of reforms in the securities industry in the past years. Over the past few years. Indian market has gained from foreign inflows through investment of Foreign Institutional Investors (FIIs) route. India posted a turnover ratio of 93. have accelerated over the years. International Scenario: Global integration. between high- income and developing countries. Indian stock markets have stood out in the world ranking. The correlation of global markets over a period of time is presented in (Table 12).1 %. the widening and intensifying of links. which was quite comparable to the other developed markets. cumulative net investments by FIIs amounted to US $ 51.shares. Cross border capital flows have shifted from public transfers to primarily private sector flows. As may be seen from (Table 1-4). which shows that the markets are increasingly getting interlinked. The descriptive statistics of the major markets in terms of daily returns is presented in (Table 1-3). As per . During 2006-07.967 million.
The share of US in worldwide market capitalization decreased from 38. It is significant to note that US alone accounted for about 48. India ranked 15 th in terms of market capitalization (18th in 2004 and 17th in 2005) and 18th in terms of total value traded in stock exchanges and 21st in terms of turnover ratio as of December 2006. The stock markets worldwide have grown in size as well as depth over the years.5%. A comparative study of concentration of market indices and index stocks in different world markets is presented in the (Table 1-5). As can be observed from (Table 1-6).84 % as at end 2006. The ten largest index stocks share of total market capitalization is 32.4% in case of US.2% in India and 13.91 trillion in 2006.61 trillion in 2004 to US $ 67. Despite having a large number of companies listed on its exchanges. the turnover of all markets taken together have grown from US $ 39.6% whereas US index accounted for 89.85 % as at end-2004 to 35.Standard and Poor's Fact Book 2007. .19 trillion in 2006 (US $ 43. India accounted for a meager 0.99 % of worldwide turnover in 2006. while Indian listed companies accounted for 1.51% of total market capitalization in 2006.94% in total world turnover in 2006. It is seen that the index stocks share of total market capitalization in India is 81.68 trillion in 2005). The market capitalization of all listed Companies taken together on all markets stood at US $ 54.
has not been uniform across countries. which is a measure of liquidity. a car or house with no outstanding debt is considered the owner's equity since he or she can readily sell the items for cash.2 % for high-income countries and 96.141 for middle-income countries and 6. Equity is a term whose meaning depends very much on the context. World Bank' Domestic Product (GDP) in some of the major country groups. 3. Stocks are equity because they . For example. one can think of equity as ownership in any asset after all debts associated with that asset are paid off. also referred to as "shareholder's equity". In the context of margin trading. 11. The market capitalization as a percentage of GDP was the highest at 112.6 % for low-income countries.177 for low-income countries as at end 2006.733 for high-income countries. The turnover ratio.6 % as at end 2005. EQUITY AS AN INVESTMENT Equity is: 1. was 122. 2. Market capitalization as percentage of GDP in India stood at 68.9% for the high income countries as at end 2005 and lowest for middle income countries at 49. Stock or any other security representing an ownership interest. In general. The total number of listed companies stood at 28. On the balance sheet. there The has been an increase in market capitalization as percentage of Gross increase. the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses).5%.According to the 'World Development Indicators 2007. the value of securities in a margin account minus what has been borrowed from the brokerage. however.
over shorter time frames. Buy during Times of Pessimism 8. Hunt for Value and Bargains 9. Invest for Real Returns 2. Similarly financial planners advocate pruning of the equity holdings with advancement in the investor’s age. It is impossible to produce a superior performance . INVESTING PRINCIPLES 1. Never Follow the Crowd 4. whereas bonds are classified as debt because they represent an obligation to pay and not ownership of assets.represent ownership of a company. The ability of equities to deliver over longer time frames and even outperform other investment avenues like gold. This is the primary reason why any fund manager worth his salt always recommends a sufficiently long (at least 3 years) time frame for an equity-oriented investment. Learn from your Mistakes 7. However. equities also hold the potential to be a very risky asset class and expose the portfolio to high levels of volatility. No-one Knows Everything If you buy the same securities as other people. Keep an Open Mind 3. Everything Changes 5. property and bonds is an often chronicled fact. you will have the same results as other people. when the investor is typically closer to retirement (shorter investment horizon) and has a lower risk appetite as well. Avoid the Popular 6. Search Worldwide 10.
he should have idea of the company’s break-even point and company’s position in the stock exchange. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward. which an investor wishes to buy. If he invests for a short period of time it is speculative but when he holds it for a fairly long period of time the anticipation is that he would receive some return on his investment. balance sheet and statement of changes of income. The kind of industry to which they belong and the analysis of the company's internal working through statements like income statement. Bear markets have always been temporary. In the process. Share prices usually turn upward from one to twelve months before the bottom of the business cycle and vice versa. when lost. Fundamental analysis is a method of finding out the future price of a stock. it uses the various sources of financial information available in the country and accordingly advises in which company an investor should invest. Equity Research does the research of company’s income and growth. may not return for many years. ECONOMIC ANALYSIS . FUNDAMENTAL ANALYSIS The investor while buying stock has the primary purpose of gain. that popularity will always prove temporary and. The investor should bear in mind that while he makes investment decision. If a particular industry or type of security becomes popular with investors. For this EQUITY RESEARCH is done.unless you do something different from the majority. And so have bull markets. The method for forecasting the future behavior of investments and the rate of return on them is clearly through an analyze of the broad economic forces in which they operate.
through purchase of stock. 3. These may be areas. For example. A study of the economic forces would give an idea about future corporate earnings and the payment of dividends and interest to investors. In some countries the population growth has slowed down whereas in India and some other third world countries there has been a population explosion. like health. RESEARCH AND TECHNOLOGICAL DEVELOPMENTS: The economic forces relating to investments would be depending on the amount of resources spent by the government future. consumer demand Likewise. which affect the performance of organizations in which they wish to participate. 2. A particular industry or a . Population explosion will give demand for residences. on the the particular investor technological development affecting the Broadly should invest in those industries which are getting a large amount of share in the funds of the development of the country. investors should prefer to invest in industries. which have a large amount of labor force because in the future such industries will bring better rates of return. Some of the broad forces within which the factors of investment operate are: 1. which the investor may consider for investments. like more industries like hotels. POPULATION: Population gives an idea of the kind of labor force in a country. CAPITAL FORMATION: Another consideration of the investor should be the kind of investment that a company makes in capital goods and the capital it invests in modernization and replacement of assets.Investors are concerned with those forces in the economy. refrigerators service and industries cars. in India in the present context automobile industries and spaces technology are receiving a greater attention.
In India. 4. NATURAL RESOURCES AND RAW MATERIALS: The natural corporate investor resources are to a large extent and overall growth. which is published. nuclear and solar energy and new synthetics should give the opportunity untapped recently tapped resources which would also produce higher investment opportunity. the broad classification of industry is made according to stock exchange list. group to which it 110ngs and the yearto-year returns through corporate profits. INDUSTRIAL ANALYSIS The industry has been defined as homogeneous groups of people doing a similar kind of activity or similar work.particular company which an investor would like to invest can also be viewed at with the help of the economic indicators such as the place. (C) Textiles. an In India. . This gives a distinct classification to industry to industry in different forms such as: (A) Engineering. (F) Chemicals and Pharmaceuticals. (B) Banking and Insurance. (G) Retail. (E) Steel Mills and Alloys. technological to invest in responsible for a country's in the condition recycling of of discoveries or economic development improvement materials. (D) Cement. value and property position of the industry.
Although competition is there. (L) FMCG. There are generally three stages of an industry. find that it is time to stabilize them. Industry should also be evaluated or analyzed through its life cycle. During this time the investor will notice great increase in the activity of the firm. which have been in the market now. THE EXPANSION STAGE: The efficient firms. number of firms have gone down during ill pioneering stage itself and there are a large . the. The market competitive pressures keep on increasing with the en" of new-firms and the prices keep on declining and then ultimately profits fall. expansion stage and stagnation stage. there will be a great demand for the product. THE PIONEERING STAGE: The industrial life cycle has a pioneering stage when the new inventions and technological developments take place. At this stage all firms compete with each other and only a few efficient firms are left to run the business and most of the other firms are wiped out in the pioneering stage itself. (J) Automobiles and Ancillary. 2. 1. (K) Telecommunications. (M)Miscellaneous. Industry life cycle may also be studied through the industrial life cycle state. These stages are pioneering stage. Taking a look at the profit many new firms enter into the same field and ill. Production will rise and in relation to production. market becomes competitive. the profits are also very high as the technology is new. (I) Information Technology. At this stage.(H) Sugar.
This stage lasts from five years to fifty years of a firm depending on the potential and productivity and policy to meet the change of competition and rapid change in buyer and customer habit. After this stage develops the stage of stagnation or obsolescence. 3.number of firms left to run the business in the industry. THE STAGNATION STAGE: During the stagnation stage the investor will find that although there is increase in sales of an organization. The investor will find that this is the best time to make an investment. This is the period of security and safety and this is also called period of maturity for the firm. This is the time when each one has to show competitive strength and superiority. The industry finds that it is at a loss of power and cannot expand. begin to change their course of action and start on a new venture should make a continuous evaluation of their investments. During most of the firms who have realized the competitive nature of the industry and the arrival of the stagnation stage. this is not in relation to the profits earned by the company. but having waited for the stability period there has been a dynamic selection process and a few of the large number of firms are left in the industry. the efficiency with which it operates its financial position and its ful1l with respect to . COMPANY ANALYSIS Company analysis is a study of the variables that influence the future of a firm both qualitatively and quantitatively. It is a method of assessing the competitive position of a firm earning and profitability. At the pioneering stage it was difficult to find out which of the firm to invest in. In firms in which they have received profits for large number of years and have reached stagnation they can plan to their investments and find better avenues in those firms where the expansion stage has set in. Profits are also there but the growth in the firm is lower than it was in the expansion stage.
are the income statement. Complete. Consistent and Comparable may be taken by the investors of the firm. quality of management and record of its earnings and dividend. the balance sheet. financial statements of an organization. These statements are useful for investors. as evaluated by the fundamental analysis. Prices not only reflect intrinsic facts. which is dependent on the company's financial performance. Technical analysis assumes that current prices should represent all known information about the markets. its TECHNICAL ANALYSIS Technical analysis is simply the study of prices as reflected on price charts.the earning of its shareholders. The basic which are required as tools of the fundamental analyst. While evaluating a company. This basic approach is analyzed through the financial statements. they also represent human emotion and the pervasive mass . then the share is supposed to be undervalued and it should be purchased but if the current market price shows that it is more than intrinsic value then according to the theory the share should be sold. The fundamental nature of this analysis is that each share of a company has an intrinsic value. If the market price of a share is lower than the intrinsic value. They believe that the market price of share in a period of time will move towards its intrinsic value. creditors as well as internal management of a firm and on the basis these statements the future course of action statement must be carefully judged to find out that they are: • • • • Correct. and the statement of changes in financial position.
creating the graph. 1. not necessarily facts. greed. Markets may move based upon people’s expectations. Trends exist in all time frames and all markets. a combination of the OPENING. This second type of data is called a PRICE BAR. Prices are. Analysts use their technical research to decide whether the current market is a BULL MARKET or a BEAR MARKET. growth chart. However. Each individual equity. Trends can be classified in three ways: UP. In doing so. hysteria. it draws a . a function of supply and demand. Individual data plots for charts can be made using the CLOSING price for each day. DOWN or RANGEBOUND. Stock charts can be An ARITHMETIC chart has equal vertical distances between each unit of price. in the end. The plots are connected together in a single line. elation. A LOGARITHMIC chart is a percentage 2. A trend reflects the average rate of change in a stock's price over time. TRENDS The stock chart is used to identify the current trend. HIGH and/or LOW prices for that market session can be used for the data plots. creating a dense visual display of stock movement. Individual price bars are then overlaid onto the graph. Also. drawn in two different ways. In an uptrend. assuming that prices reflect both facts and emotion. panic.psychology and mood of the moment. human emotions…fear. etc. CLOSING. a stock rallies often with intermediate periods of consolidation or movement against the trend. market and index listed on a public exchange has a chart that illustrates this movement of price over time. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon chart formations. also dramatically effect prices. STOCK CHARTS A stock chart is a simple two-axis (X-Y) plotted graph of price and time. on a moment to moment basis.
In doing so. Taking a position near a top or a bottom can be very profitable. there will be a POSITIVE rate of price change over time. they tend to find SUPPORT or RESISTANCE and bounce off the line in the opposite direction. In a downtrend. 3. Stock charts display . When price bars then return to that trend line. Very often a straight line can be drawn UNDER three or more pullbacks from rallies or OVER pullbacks from declines. There is no apparent direction to the price movement on the stock chart and there will be LITTLE or NO rate of price change. it draws a series of lower highs and lower lows on the stock chart. VOLUME Volume measures the participation of the crowd.series of higher highs and higher lows on the stock chart. a stock declines often with intermediate periods of consolidation or movement against the trend. Range bound price swings back and forth for long periods between easily seen upper and lower limits. A stock in an uptrend will continue to rise until some change in value or a condition occurs. In an uptrend. Trends tend to persist over time. Chart readers try to locate TOPS and BOTTOMS. Declining stocks will continue to fall until some change in value or conditions occur. Trends can be measured using TRENDLINES. there will be a NEGATIVE rate of price change over time. In a downtrend. which are those points where a rally or a decline ends.
4. by traders can measure buying and selling interest these will show green bars for up days and red bars Investors and watching how many up or down days in a row occur and how their volume compares with days in which price moves in the opposite direction. Liquid stocks require very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated quickly from a portfolio. Investors and traders use indicators such as ON BALANCE VOLUME to see whether participation is lagging (behind) or leading (ahead) the price action. This one fact separates it from the colder world of value-based analysis. In other words. So it's no surprise that over the last . When a rally runs out of new participants. The stock chart activates both left-brain and rightbrain functions of logic and creativity. stocks under accumulation often will rise some time after the buying begins. Alternatively. Stocks that are sold with great interest than bought are said to be under DISTRIBUTION. stocks under distribution will often fall some time after selling begins. PATTERNS AND INDICATORS How can one organize the endless stream of stock chart data into a logical format? Charts allow investors and traders to look at past and present price action in order to make reasonable predictions and wise choices.volume through individual HISTOGRAMS below the price pane. Stocks that are bought with greater interest than sold are said to be under ACCUMULATION. It takes volume for a stock to rise but it can fall of its own weight. It is a highly visual medium. Liquid stocks are very easy for traders to buy and sell. Stocks trade daily with an average volume that determines their LIQUIDITY. Rallies require the enthusiastic participation of the crowd. Often for down days. a stock can easily fall. Stock chart analysis does not work well on illiquid stocks. Accumulation and distribution often LEAD price movement.
categorized over the years as having well-known ones include a HEAD These patterns have been or bearish bias. They look deeply into the rear view mirror to locate the future. a math-oriented examination in which the basic elements of price and volume are run through a series of calculations in order to predict where price will go next. Chart . a classic book written on the subject just after World War II. Indicator analysis uses math calculations to measure the relationship of current price to past price action. This method gained popularity through both the writings of Charles Dow and Technical Analysis of Stock Trends. Oscillators react very quickly to short-term changes in price. DOUBLE BOTTOMS and FLAGS. flipping back and forth between OVERBOUGHT and OVERSOLD levels. chart landscape features such as GAPS and TRENDLINES are said to have great significance on the future course of price action. Also. OF CHANGE.century two forms of analysis have developed that focus along these lines of critical examination. ON BALANCE VOLUME and STOCHASTICS. DOUBLE TOPS. Almost all indicators OSCILLATORS. The oldest form of interpreting charts is PATTERN ANALYSIS. The core of investors and traders that make up the market each day tend to act with a herd mentality as price rises and falls. MACD. Both patterns and indicators measure market psychology. TRIANGLES. The newer form of interpretation is INDICATOR ANALYSIS. include can be categorized as TREND-FOLLOWING include Common or Popular trend-following RSI and RATE indicators MOVING oscillators AVERAGES. Some bullish and SHOULDERS. This "crowd" tends to develop known characteristics that repeat themselves over and over again. Trend-following indicators react much more slowly than oscillators. RECTANGLES. Pattern analysis gains its power from the tendency of charts to repeat the same bar formations over and over again.
Plotting moving averages in stock charts reveals how well current price is behaving as compared to the past. Additionally. Commons moving average settings for daily stock charts are 20 days for short. When below. MOVING AVERAGES The most popular technical indicator tool for studying stock charts is the has many important uses for MOVING AVERAGE. INTERMEDIATE and LONG-TERM trends. conditions are "bearish". These occur when two moving averages . In other words. A moving average can be displayed by re-computing this result daily and plotting it in the same graphic pane as the price bars. if price starts to move sharply upward or downward. 5. Current price will always be above or below any moving average computation.interpretation using these two important analysis tools uncovers growing stress within the crowd that should eventually translate into price change. For this reason. using multiple moving averages that reflect these characteristics assist important decision making. This creates an average price for that stock in that period of time. Investors and traders find them most helpful when they provide input about the SHORT-TERM. One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. it will take some time for the moving average to "catch up". The power of the moving average line comes from its direct interaction with the price bars. versatile Take the sum of any number of previous CLOSE prices and then divide it by that same number. This investors and traders. conditions are "bullish". 50 days for intermediate and 200 days for long-term.term. When it is above. This adds another visual dimension to a stock analysis. They can be computed for any period of time. Moving averages LAG price. moving averages will slope upward or downward over time. Moving averages define STOCK TRENDS.
Support and resistance are created because price has memory. when a short-term average crosses BELOW a long-term one. In an uptrend. When price pushes above resistance. Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling. that level becomes resistance. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants when price again returns to that level. These tend to be very slow. For example. Conversely. Support and resistance play different roles in uptrends and downtrends. By giving more weight to the current changes in price rather than those many bars ago. Moving averages can be "speeded up" through the application of further math calculations. Fortunately all common stock chart programs. support and resistance defines natural boundaries for rising and falling prices.representing different trends. price tends to thrust forward sharply as . Support defines that level where buyers are strong enough to keep price from falling further. a BUY signal is 6. resistance is where a pullback from a decline should end. Many technicians favor the EMA over the SMA. a faster EXPONENTIAL or EMA moving average can be created. online and offline do the difficult moving average calculations but plot price perfectly. When a level of support or resistance is penetrated. a SELL signal is generated. support is where a pullback from a rally should end. when a generated. Resistance defines that level where sellers are too strong to allow price to rise further. short-term crosses ABOVE the long-term. it becomes a new support level. In a downtrend. Common averages are known as SIMPLE or SMA. When price falls below support. SUPPORT AND RESISTANCE The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts. Buyers and sellers are constantly in battle mode.
Everywhere in the world capital markets have originated as the new issues markets. Also. the first editor of the Wall Street Journal. debt for subscription by the public. But trend lines at various angles represent support and resistance as well. Support and resistance come in all varieties and strengths. The public limited and government companies are the issuers and individuals. the weakness of that level. Support and resistance exist in all time frames and all markets. form the basis of technical analysis today. The primary market allows for the formation of capital in the country and the accelerated industrial and economic development. Levels in longer time frames are stronger than those in shorter time frames. Primary market is a market for raising fresh capital in the form of shares. The behavior patterns that he observed apply to markets throughout the world. When a level is penetrated but does not attract a crowd of buyers or sellers. Once industrial companies are set up in a big number and with them a considerable volume of business comes into existence a market for outstanding issues develops. The strength or weakness determines how much buying or selling interest will greater volume traded at any level. PRIMARY MARKET Primary market is the place where issuers create and or hybrid instruments issue equity. it often falls back below the old support or resistance. This failure is known as a FALSE BREAKOUT. companies that are desirous of raising capital funds through the issue of securities approach this market. In the absence of . The ideas of Charles Dow. The length of time that a support or resistance level exists determines the strength or be required to break the level.the crowd notices the BREAKOUT and jumps in to buy or sell. institutions and mutual funds are the investors in this market. the secondary Public limited market enables the holders of securities to trade them. the stronger that level will be. They most often manifest as horizontal price levels.
It is quite normal to obtain the assistance of underwriters. technology. merchant banks or special agencies to look after these aspects. the company has to fulfill various requirements and decide upon the appropriate timing and method of issue. the details about project. The company has to appoint brokers and underwriters to sell the minimum number of shares and it has to fix the date of opening and closing of subscription list. PUBLIC ISSUE: A public limited company can raise the amount of capital by selling its shares to the public. address.secondary market or the stock exchange. auditors and bankers. For this purpose it has to prepare a 'Prospectus'. paralyzed. A prospectus is a document that contains information relating to the company such as name. directors. It also includes location. the capital market will be This is on account of the reason that the business enterprises borrow money from the capital market for a very long period but the investors or savers whose savings are canalized through the capital market generally wish to invest only for a short period. Managing Director. In order to sell securities. the shares can keep on changing hands. registered office and names and addresses of company promoters. plant products. legal advisors. . Thus. company secretary. collaboration. managers. METHODS OF MARKETING IN PRIMARY MARKET 1. export obligations etc. It enables the investors to sell their shares for money whenever they wish to do so. Therefore. Existence of the stock exchange provides a medium through which these two ends can be reconciled. it is called public issue of shares or debentures. the business enterprises keep the possession of permanent capital.
It also promotes confidence of investors through transparency and non-discriminatory basis of allotment. Public issue is a popular method of raising capital. However. PRIVATE PLACEMENT: A Company makes the offer of sale to individuals and institutions privately without the issue of a prospectus. 2. legal. brokerage. The securities may be issued at par. A minimum of 49 per cent of the amount of the issue at a time is to be offered to public. The prospectus should be approved by SEBI. They can create artificial scarcity and increase the prices of shares temporarily and then sell the shares in the stock market and mislead the common and small investors.The new issue of shares or debentures of a company are offered for exclusive subscription of general public. It provides wide distribution of ownership securities. There is no practice of selling shares at a discount in India. This method is less expensive and time saving. and other administrative costs. However. The securities are placed at higher prices to individuals and institutions. This method also deprives the common investors of an opportunity to subscribe to the issue of shares. An existing company may sell the shares at a premium. It satisfies compliance with the legal requirements. the private placement helps to concentrate securities in the few hands. The company makes a direct offer to the general public to subscribe the securities of a stated price. . This saves the cost of issue of securities. This method can be used when the stock market is bull. The cost of raising capital is also very high due to underwriting. at discount or at a premium. commission. This has become popular in recent days. Institutional investors play a very important role in the private placement. publicity. It is suitable for small companies as well as new companies. the issue of securities through prospects is time consuming because there are various formalities to be completed by the company. The company has to complete a very few formalities.
The general publics get the shares at a higher price the middlemen are more benefited in this process. the company makes an offer for sale of its securities to the terms and conditions. Initially. The sale price is finalized through negotiations between the issuing company and the purchasers. The intermediaries have to bear the expenses of this issue. There is an agreement in which an outright sale of a chunk of equity shares is made to a single sponsor or the lead sponsor. These shares are sold at over the Counter Exchange of India or at a recognized stock exchange. Bought out deals are in the nature of fund-based activity where the funds of the merchant bankers are locked in for at least for a minimum period. sponsors and co-sponsors. Listing takes place when the company gets profits and performs well. reputation of the promoters. sponsors are merchant bankers and cosponsors are the investors. This is known as an offer for sale method. current market sentiments etc. It is influenced by various factors such as project evaluation. The investor-sponsors make profits . The intermediaries stating the price and other intermediaries can make negotiations with the company and finally accept the offer and buy the shares from the company. OFFER FOR SALE: A Company sells the securities through the intermediaries such as issue houses. The object of this issue is to save the time. There are three parties involved in the bought out deals. Then these securities or shares are re-sold to the general investors in the stock market normally at a higher price in order to get profit. cost and get rid of complicated procedure involved in the marketing of securities. The promoters of the company.3. BOUGHT OUT DEALS: A Company makes an outright sale of equity shares to a single sponsor or the lead sponsor and such deals are known as bought out deals. The issues can also be underwritten in order to ensure full subscription of the issue. 4. and stockbrokers.
INITIAL PUBLIC OFFER: When a company makes public issue of shares for the first time. This method saves time and avoids complicated procedure of issue of shares. Performance. He can sell these shares in the market afterwards and make profit. The company has to appoint underwriters in order to guarantee the minimum subscription. The underwriter agrees to pay the company a certain price and buy a minimum number of shares. There may be two or more underwriters in case of large issue.because the shares are listed at higher price. before making an IPO investment: Promoter. The share certificate are delivered to the investors or credited to their demat accounts through the depository. 5. it is called Initial Public Offer. there is greater need to exert caution and pick the best IPO investments. The company has to issue a prospectus giving full information about the company and the issue. The securities prospectus are sold through the issue of to successful applicants on the basis of their demand. A good promoter or management team is important for any business success. It has to issue share application forms through the brokers and underwriters. An underwriter is generally an investment banking company. if they are not subscribed by the public. The brokers collect orders from their clients and place orders with the company. Check Promoter Standing This by far is the most important factor in any investment decision. The underwriter charges some commission for this work. . Prospects and Price. The company then makes the allotment of shares with the help of stock exchange. Following four critical factors should be studied in an IPO offer document. With more and more companies coming out with tempting IPO or additional offers.
would mean poor performance on the stock exchange. Are the numbers in line with the similar companies in the industry? Is there any sudden improvement in the numbers just before the issue. of the the other he has in the industry. While businesses may have their ups and downs. Check the objects. they would be constantly looking at new business opportunities. a good management will take all necessary steps to ensure profitable performance. Poor numbers say the sales. Study Company Performance The share price is the reflection of the operational performance of the company. Look at the loans given to group companies. Are they paying reasonable interest? Is the loan likely to be repaid? Understand Future Prospects The future prospects of the Company and the industry would play an important role in the performance of the scrip on the stock exchange. we are reasonably certain that the company money will not be deliberately misused or siphoned off to the detriment of the look at the promoter’s background. How will they impact the future prospects? How will the . Thirdly. profit.especially over long periods. Therefore. his track record. the performance shareholders. Look for any window dressing. thereby ensuring regular growth in the company. Read the risk factors very carefully especially those pertaining to the promoter/management. Ensure that there are no dubious transactions. See whether the company is a defaulter to the banks/FIs and the reason thereof. EPS etc. without any justifiable reasons? Also look at the performance of the group companies and the inter-company transaction within the group. Check for any serious litigation against the promoter or the company. Secondly. it is important that the company has a track record of good operational performance. experience companies promoted by him. Therefore. investor complaints etc.
Again look for fair valued or undervalued scrip. it is known as Rights Issue. Rights issue is obligatory for a company where increase in subscribed capital is necessary after two years of its formation or after . a high price is likely to reduce the prospects of appreciation at the exchange. the Company will not benefit from an offer for sale. Therefore. Even if the above 3 Ps were favorable. which will add to the bottom-line of the company? If its’ an offer-for-sale. The amounts raised from the issue will not go to the Company. there may not be much listing gain or loss. Therefore. Issues which are overvalued such issues tend to quote below issue price over a period of time and it may be prudent to enter then. Buy value nor price. thereby defeating your purpose of investing. For follow-on issues the price is more or less known. then one can consider investing. it means the existing shareholders are selling a part of their stake in the Company. Look at the average industry PE and the companies’s EPS and try to estimate the fair price. A little time spent in reading the offer document and analyzing the IPO on the above factors will help you to make right investment decisions and prevent you from ending-up holding a dud stock.funds raised be utilized? Will it additionally benefit the company? Is the money being raised for a new project. 6. Look At The Price Finally of course every product/scrip has a right price based on its’ fundamentals and industry prospects. Compare this with the issue price to see if it is undervalued or overvalued. than at the IPO stage. If the purpose of the issue is to list the company on the stock exchange and the 4 Ps are positive. RIGHT ISSUE: When an existing company issues shares to its existing shareholders in proportion to the number of shares held by them.
Accordingly. The company has to make the appointment Registrar but underwriting is optional. The company has to make an agreement with the depository for materialization of securities to be issued in demat form.one year of its first issue of shares. Issue of bonus shares does not affect the total capital structure of the company. BONUS ISSUE: Bonus shares are the shares allotted by capitalization of the reserves or surplus of a company. It is simply a capitalization of that portion of shareholders equity which is represented by reserves and surplus. only a listed company can make right issue. No reservation is allowed for rights issue of fully or partly convertible debentures. whichever is earlier. The issues of bonus shares are issued subject to certain rules and regulations. Rights issue can be made only in respect of fully paid up shares. Letter of offer should contain disclosures as per SEBI requirements. Bonus shares are issued to the equity shareholders in proportion to their holdings of the equity share capital of the company. Issue of bonus shares reduces the market price of the company's shares and keeps it within the reach of ordinary investors. The company can retain earnings and satisfy the desire of the shareholders to receive dividend. and maximum up to 60 days. It has also to appoint category I Merchant Bankers holding a certificate of registration issued by SEBI. Issue of bonus shares results in conversion of the company's profits or reserves into share capital. Therefore. A minimum subscription of 90 per cent of the issue should be received. 7. SEBI has issued guidelines for issue of right shares. The rights issue should be open for minimum period of 30 days. it is capitalization of company's reserves. The company has to make announcement of rights issue and once the announcement is made it cannot be withdrawn. A no complaints certificate is to be filed by the Lead Merchant Banker with the SEBI after 21 days from the date of issue of offer document. Issue of bonus .
Book-Building facility is available as an alternative to firm allotment. However in this system the issuer is not able to ascertain the price that the market may be willing to pay for the shares. The initial minimum size of issue through book-building process was fixed at Rs. investors are not involved in determining the offer price. This method is also known as the price discovery method. issue of any size was allowed since 1996. which are otherwise eligible to make issue of capital to the public. This is a mechanism whereby the price is determined on the basis of actual demand as evident form the offers given investors and the underwriters. 100 crores/-. Book-Building method helps in evaluating on the intrinsic worth of basis of which it an can by the various institutional instrument and the company's credibility in the eyes of the investor. Since the issue price after the issue marketing there is flexibility in the issue size and the price of the shares. In these cases companies decide the size of the issue and also the price at which the shares are to be offered to the investors. 8. However. that can be reserved for firm allotment. In the actual public offer process. BOOK-BUILDING: Companies generally raise capital through public issue. The company also gets firm commitments the . The option of book building is available to all body corporate. Receipt of bonus shares as compared to cash dividend generally results in tax advantage to the shareholder. A Company can opt for book-building process for the sale of securities to the extent of the percentage of the issue. whereas in book building pricing is determined on the basis of investor feedback which assures investor demand. This is where book building can come to their aid.shares is generally an indication of higher future profits. before launching the issue.
(9) Opening bank accounts for collection of application money. (7) Mandatory underwriting. (5) Intimation of aggregate orders to the book-runner. The following stages are involved in the bookbuilding process: (1) Appointment of book-runners. (11) Allotment of shares. (2) Drafting of prospectus and getting approval from SEBI. (3) Circulating draft prospectus. INTERMEDIARIES IN PRIMARY MARKET 1. (8) Filing copy of prospectus with registrar of companies. (12) Payment schedule and listing of shares.decide whether to go or not to go for a particular issue of securities. Book-Building process also provides reliable allotment procedure and quick listing of shares on the stock exchanges. MERCHANT BANKERS: - . (10) Collection of applications. There is no price manipulation because the price is determined on the basis of bids received' from the investors. (6) Bid analysis. (4) Maintaining offer details.
drafting of prospectus. appointment of brokers and bankers to issue. They are required to get separate registration with SEBI as portfolio managers. They should also employ experts having professional qualifications. Category III merchant bankers can act as underwriters. brokers. allotment letters. They are also known as lead managers to an issue. UNDERWRITERS: The issuing company has to appoint underwriters in consultation with the merchant important bankers in or lead manager. Category II merchant bankers can act as consultants. appointment of registrars for handling share applications and transfer. They get commission for their services. issue management etc. They have to carry out the work relating to new issue such as determination of security mix to be issued. portfolio managers and co-managers. investment companies’ commercial banks and term lending institutions.Merchant bankers carry out the work of underwriting and portfolio management. The underwriters play an The full role the development of the primary market. 3. BANKERS TO THE ISSUE: - . advisors and consultants and category IV merchant bankers can act only as advisers or consultants to a public issue. making arrangement for underwriting placement of shares. Underwriting can be done without any additional registration. get underwriters are the institutions or agencies. Merchant bankers have to fulfill the prescribed minimum capital adequacy norms in terms of net worth and they should have adequate and necessary infrastructure. application forms. Only body corporate with a net worth of Rs. which provide a commitment to take up the issue of securities in case the company fails to The underwriting services are provided by the subscription from the public. making publicity of the issue. advisers.5 crores are allowed to work as category I merchant bankers. 2.
refund orders. Registrar and share transfer agents are of two categories. 4. REGISTRARS AND SHARES TRANSFER AGENTS: Registrar is an intermediary which carries out functions such as keeping a proper record of applications and money received from investors. Share Transfer Agents are also intermediaries who carry out functions of maintaining records of holders of securities of the company for and on behalf of the company and handling all matters related to transfer and redemption of securities of the company. A company is not authorized to collect the application money. an issuing company has to appoint bankers to collect money on behalf of the company. The Companies Act. Category II carries out the activity fielder of a registrar to an issue or as a share transfer agent. assisting the companies in determining the basis of allotment of securities as per stock exchange guidelines and in consultation with stock exchanges assist in the finalization of allotment of securities and processing and dispatching of allotment letters. They also function as Depository Participants. provides that the money on account of issue of shares and debentures should be collected through the banks. 1956. Therefore. They collect applications for shares and debentures along with application money from investors in respect of issue of securities. They also refund the application money to the applicants to whom securities could not be allotted on behalf of the issuing company.The bankers play an important role in the working of the primary market. They assist in . Category I carry out the activities of both registrars to an issue and of share transfer agents. BROKERS TO AN ISSUE: Brokers are the middlemen who provide a vital connecting link between the prospective investors and the issuing company. 5. share certificates and other documents related to the capital issues.
. SECONDARY MARKET A market. The brokers should have an expert knowledge. market from essentially comprises of stock exchanges.5 per cent in case of private placement. Secondary India. is called as secondary market. However. which provide platform for purchase and sale of securities by investors. Brokers get their commission from the issuing company according to the provisions of the Companies Act and rules and regulations. there are exchanges like the National Stock Exchange (NSE). who provide nation wide trading facilities with terminals all over the country. They have to obtain consent from the stock exchange to act as a broker to the issuing company.5 per cent of the capital raised in case of public issue and 0. In apart the Regional Stock Exchanges established in different centers. which deals in securities that have been already issued by companies. canvassing and all other expenses relating to the subscription of the issue.the subscription of issue by the public. For the efficient growth of the primary market a sound secondary market is an essential requirement. professional competence and integrity in order to carry out the overall functions of an issue. The names and addresses of the brokers to the issue are disclosed in the prospects by the company help the investors to make a choice of the company for making their investments. The brokerage covers the cost of mailing. The maximum brokerage rate is 1. The secondary market offers an important facility of transfer of securities activities of securities. It is also known as stock market. There is an agreement between the brokers and the issuing company. appointment of brokers is not mandatory. It is the base upon which the primary market is depending.
9. 16. The trading volume. the year 2003-04 saw a turnaround in the total trading volumes on the exchanges. 28.689. There are three important stock exchanges in Bombay namely the Bombay Stock Exchange. There are at present 24 Stock Exchanges in India. The trading volumes on exchanges have been witnessing phenomenal growth over the past decade. which offer screen based trading system.204. The first organized stock exchange was established in India at Bombay in 1887. There were 9. It increased sharply to 52. 13. recognized by the government. only 7 stock exchanges were recognized.368 trading members registered with SEBI as at end March 2004 (Table 1-10). which reflects the volume of trading in relation . The activities of buying and selling of securities in a market are carried out through the mechanism of stock exchange. The turnover ratio.There are 23 exchanges in the country.The trading platform of stock exchanges is accessible only through brokers and trading of securities is confined only to stock exchanges. The market capitalization ratio defined as the value of listed stocks divided by GDP is used as a measure of stock market size. fell substantially to Rs.187. Corporate Securities .977 million. The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange.5% in the previous year. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk.900 million in 2000-01.953 million at the end of March 2004. There has been a substantial growth of capital market in India during the last 25 years. The all India market capitalization is estimated at Rs. The trading system is connected using the VSAT technology from over 357 cities.809. When the Securities Contracts (Regulation) Act was passed in 1956. However.093 million in 2002-03. which peaked at Rs.3% in 2003-04 against 28. It registered a volume of Rs. National Stock Exchange and over the Counter Exchange of India.
increased by segment of NSE in total manifold over a period of time. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade.090 dated million. Government Securities . However. REASONS FOR TRANSITING IN .88% of turnover.9%.6% in 2003-04. The share including of WDM treasury bills. The aggregate trading in central and state government 26. increase in FIIs inflows. The index movement economic has been the changes the government’s policies. Top 5 stock exchanges accounted for 99.12% during 2003-04 (Table 1-11).14% for 2003-04.to the size of the market.89% in 2003-04(Table 1-10). wherein it registered its all time high in January 2004 of 2014. During 2003-04 it reached a level of Rs. securities. the year 2003-04 witnessed a favorable movement in the Nifty. However. The turnover ratio for the year 2003-04 accounted at 122. the share of WDM segment of NSE in the total of Non-repo government securities increased marginally from 74. The point-to-point return of Nifty was 80. while the rest 18 exchange for less than 0. is presented responding to in Chart in 1-1. The increase in turnover took place mostly at the big exchanges. has been increasing by leaps and bounds after the advent of screen based trading system by the NSE. the most widely used indicator of the market.The trading in government securities exceeded the combined trading in equity segments of all the exchanges in the country during 2003-04.01% in 2002-03 to 74. turnover for government securities decreased marginally from 52% in 200203 to 47. etc. The movement of the S&P CNX Nifty. The NSE yet again registered as the market leader with more 85% of total turnover (volumes on all segments) in 2003-04. About ten exchanges reported nil trading volume during the year.792.65.
g.. transact in the Liquidity secondary market because they are currently in a position of either excess or insufficient liquidity. as a result of an inheritance) will buy securities. INFORMATION MOTIVATED REASONS: motivated investors believe that they have superior Information information about a particular security than other market participants. and investors with access to such information will want to buy the security. Investors with surplus cash holdings (e. 2.g. FUNCTION OF THE SECONDARY MARKET 1. To facilitate liquidity and marketability of the outstanding equity and debt instruments. LIQUIDITY MOTIVATED REASONS: motivated investors. If the information is good. the security will be currently overpriced and such investors will want to sell their holdings of the security. to purchase a Car) will sell securities. this suggests that the security is currently under-priced. on the other hand. On the other hand. To contribute to economic growth efficient channel through the through allocation of funds to the process of disinvestments to most reinvestment.SECONDARY MARKET There are two main reasons why individuals transact in the secondary market: 1. . if the information is bad. where as investors with insufficient cash (e. This information leads them to believe that the security is not being correctly priced by the market. 2..
Thus. Securities are required to be listed under Section 9 of the Securities Contract (Regulation) Act. Such valuation facilitates the measurement of the cost of capital and the rate of return of the economic entities at the micro level. The listed shares appear on the official list of securities for the purpose of trading security listing is a step that is required to register and to place on record the security of a company with the appropriate authority i. The issuer wishing to have trading privileges for its securities satisfies listing requirements prescribed in the relevant statutes and in the listing regulations of the Exchange. 4. 1956. company-wide and industry wide factors). price To ensure a measure of safety and fair dealing to protect investors’ at the stock exchanges reflects the performance and this market interest.3. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis.e. It is a permission to quote shares and debentures officially on the trading floor of the stock exchange. limited companies and Private Limited companies cannot get listing facility. To induce companies to improve performance since the market price is readily available to investors. listing simply means the inclusion of any security for the purpose of trading in a recognized stock exchange. They shall first convert themselves into public their Articles of Association shall contain prohibitions as laid down in the listing agreement and as applicable to public limited companies. The prices at which the securities are traded in the stock exchange are published in the . the recognized stock exchange. Only public companies are allowed to list their securities in the stock exchange. All the issuers who list their securities have to satisfy the corporate governance requirement framed by regulators. To provide instant valuation of securities caused by changes in the internal environment (that is. LISTING Listing is a process involved in listing something with some one.
The company can make an Central Government may either grant or refuse to grant the permission for listing and the decision of the Central Government would be informed to the stock exchange concerned that shall act in conformity with such a . Registration and recording is done for the purpose of trading by the registered members of the stock exchange and for the official quotation of the security price for the benefit of the public and the investors. any failure to comply with the Section 21 of the Securities Contracts (Regulation) Act attracts penalty to the parties. The recognized stock exchange has to give approval and then make an agreement stating the terms and conditions. illegal. Any allotment of securities made in the absence of listing or refusal of listing is held to be void i. Investors are able to know these price trends from such publications. The within 15 days with the reasons for refusal. Compared to listed securities the trading of unlisted securities is difficult. Listing is mandatory for a public company. It is to be completed before the offer of securities to the the Registrar Companies. LISTING PROCEDURE: The listing procedure involves making a simple application by the by the respective of company and payment of listing fees as public and registration of prospectus prescribed with stock exchange.e.newspapers. The company has to continue listing by paying renewal fees from time to time. which intends to offer its securities to the public by issue of prospectus and which wishes to provide facilities to the securities being offered to the public. Again. The authority of the of the stock exchange may refuse listing of the securities appeal to a company. The authorities should intimate the company Central Government within a prescribed period. The price trends in respect of unlisted securities are seldom known to the investors and the contract between the seller and buyer takes places mostly on one to one basis.
The stock exchange is empowered to suspend or withdraw an admission to dealing in securities of company for breach or noncompliance with the listing provision on giving an opportunity of being heard in writing. These requirements defer from exchange to exchange. Failure to comply with the requirements invites suspension of trading. the company may appeal to the SEBI who may either vary or set aside the decision of the stock exchange. on which the securities of the companies and Mutual Funds are going to be listed. small LISTING AGREEMENT: All companies seeking listing of their securities on the Exchange are required to enter into a listing agreement with the Exchange.decision. if listing is to take place in a very the listing requirements may be lenient. or withdrawal/delisting. The agreement specifies all the requirements to be continuously complied with by the issuer for continued listing. in addition to penalty under the Securities Contracts (Regulation) Act. since the listing norms would be uniformly applied as against the current practice where the norms could exchange where be flouted. CENTRAL LISTING AUTHORITY: The compliance with the listing requirements was being hitherto seen by each stock exchange on which the securities of the company are proposed to be listed. 1956. The Exchange monitors such compliance. to list the securities at an early date. SEBI has initiated steps to set up of a central listing authority. The central listing authority would ad as a check on the fly by night operators who float public issues. . This approval would enable all the stock exchanges. In an eventuality where any withdrawal or suspension exceeds 3 months. The agreement is being increasingly used as a means to improve corporate governance. which would accord approval.
LISTING FOR RIGHTS ISSUE: When companies whose securities are listed on the stock exchange issue securities to existing shareholders on rights basis. it has to list such issue with the stock exchange. such shares are also required to be listed on the concerned stock exchange.TYPES OF LISTING Listing of securities falls under 5 groups – INITIAL LISTING: If the shares or securities are to be listed for the first time by a company on a stock exchange is called initial listing. LISTING OF BONUS SHARES: Shares issued. as a result of capitalization of profit through bonus issue shall list such issues also on the concerned stock exchange. CHARACTERISTICS OF LISTING The following are the characteristics of listing of securities: AGREEMENT: - . LISTING FOR MERGER OR AMALGAMATION: When an amalgamated company issues new shares to the shareholders of the amalgamating company. it has to list such rights issues on the concerned stock exchange. LISTING FOR PUBLIC ISSUE: When a company whose shares are listed on a stock exchange comes out with a public issue of securities.
official quotation and liquidity in the trading of listed securities is also ensured. of performance and continued good performance of the BENEFITS OF LISTING Listing of securities is beneficial to company as well as to investors: 1. It is important that the securities are listed at least on the regional stock exchange. In addition. The stock exchange is a recognized stock exchange where the securities are listed for trading.Listing agreement is made between the respective stock exchange and the company. The company enjoys concessions under Direct Tax Laws as such are known as companies in which public are substantially companies . INVESTOR PROTECTION: Listing offers a measure of protection to the investors. TO THE COMPANY: 1. PURPOSE: The purpose of listing is to ensure free transferability of securities so as to facilitate clear transparency and open disclosure of information relating to the affairs of the company whose securities are listed. It is a barometer company. The company offers or issues the securities to the public through the issue of offer document like prospectus or a letter of offer. RESTRICTION: A company is free to have its securities listed in any number of stock exchanges.
there is no secrecy of the price realization of securities sold by the investors. Rights entitlement in respect of further issues can be disposed of in the market.interested resulting in low rate of income tax payable by them. 3. 4. The company gains national and international importance by share value quoted on stock exchanges. Since the securities are officially traded. Official quotations of the securities on the stock exchanges corroborate the valuation taken by the investors for the purpose of assessment under Income Tax Act. 5. liquidity of investment by the investors is well ensured. . Listed securities are well preferred by the bankers for extending loan facilities. It helps the company to mobilize resources from the shareholders through ' Right Issue' for programs of expansion and modernization without depending on the financial institutions in line with the government policies. It ensures wide distribution of shareholding thus avoiding fears of easy takeover of the organization by others. Since securities are quoted. TO THE INVESTORS: 1. The rules of stock exchange protect the interest of the investors in respect of their holding. 3. 6. 2. 5. 2. 4. 2. Financial institution and banks extend term loan facilities in the form of rupee currency and foreign currency loan. Wealth Tax Act etc.
It safeguards general public interest by ensuring equitable allotment. Easy evaluation of the real worth of securities. 7. 2. easy transfer. High collateral value for bank loans. 8. 6. DELISTING . There is a safety in dealing of securities. Takeover offers concerning the listed companies are to be announced to This will enable the investing public to exercise their discretion the public. Listed companies are obliged to furnish unaudited financial results on quarterly basis. 10. Providing activities of quick transfer registration and company information. 3. Tax incentives are available to listed securities. Provides an assurance of an existence of good faith or an absence of fraud with regard to the issue of securities. Easy marketability and liquidity which also ensures easy rising of capital. Higher status and reputation for the company by enjoying the confidence of the investing public. and disclosure of proper information. OTHER BENEFITS 1. 8. Hence. on such matters. 9. The said details enable the investing public to appropriate financial results between the financial periods. provides assurance of genuineness of securities. management pattern and business prospects. 4.7. Listing is made through analysis of a company's capital structure. 5.
The securities listed can be de-listed from the Exchange as per the SEBI (Delisting of Securities) Guidelines. 2003 in the following manner: 1. 4. Any promoter of a company which desires to de-list from the stock exchange shall also determine an exit price for delisting of securities in accordance with the book building process. COMPULSORY DE-LISTING OF COMPANIES: The stock exchanges may de-list companies which have been suspended for a minimum period of six months for non-compliance with the listing agreement. Make an application to the delisting exchange in the form specified by the exchange. The prior approval of shareholders of the company by a special resolution passed at its general meeting. 3. Make a public announcement in the manner provided in these guidelines. The exchange shall provide a time period of 15 days within which person who may be aggrieved by the proposed delisting representation to the exchange. any may make TRADING The act of buying and selling of securities on a stock exchange is known as . 2. VOLUNTARY DE-LISTING OF COMPANIES: Any promoter or acquirer desirous of delisting securities of the company under the provisions of these guidelines shall obtain: 1. The stock exchanges have to give adequate and wide public notice through newspapers & also give a show cause notice to a company. 2. Comply with such other additional conditions as may be specified by the concerned stock exchanges from where securities are to be de-listed.
He is a generalist. Dematerialization is a unique process of trading the shares in the electronic form rather then the vulnerability of the physical delivery of the shares. Dematerialization is a process by which the shares. DEMAT: Demat is “dematerialization” on shares. debentures etc in the physical form get converted into the electronic form and are Earlier there used to stored be the in the computers by the depository. hectic procedure of physical delivery of shares. The cost and time spent by the brokers for rectification of these bad deliveries tends to be higher. Jobbers and brokers are the two categories of dealers in the stock exchange. that is fixed by the stock exchange. A jobber gives two quotations as a dealer in securities. The difference between the two quotations is his remuneration. A jobber is a dealer in securities while a broker is an agent or seller of securities. The introduction of NEAT and BOLT has increased the reach of capital market manifolds. He gets commission from his clients’. The double quotation of a jobber assures fair-trading in the market. A broker is merely an agent to buy or sell on behalf of his clients.Stock Exchange Trading. and with the things are of introduction dematerialization process the stock exchange has expanded its business at a tremendous speed. It also ensures smooth and prompt execution of transactions. Every year a member has to decide and declare in advance whether he proposes to act as a jobber or a broker. In this technological world needed to move at a faster pace. lower quotation for buying and higher one for selling. . The increase in number of investors participating in the capital market has increased the probability of being hit by a bad delivery. This system enables specialization in the dealings and each jobber specializes in a certain group of securities. Broker has to negotiate terms and conditions of sale or purchase and safeguard his client's interest.
etc 3. This could result in a saving of about 0.5%. The DP will also give the investor a statement of holdings. DP name is the bank’s name. an investor needs to submit his DP Id (depository participant’s Id). shares will be directly transferred into his A/c by the broker after the payment. 4. mutilation. you save 0. Easy liquidity 2. . DP name and Client Id to his broker. A depository transfers securities as per the investor's instructions without actually handling securities. forgery. and Client Id is the number given by the bank to the person who opens a demat A/c. the shares will directly be transferred to the brokers A/c and he will get the payment after the scripts have reached on the counter side. theft.5% in stamp duty. In case of transfer of electronic shares. For this. and if he is selling the shares.ADVANTAGES OF DEMAT: 1. if he is buying the shares. through the electronic mode. The DP will maintain the account balances of securities bought and sold by the investor from time to time. This DP Id is the bank’s Id. so that. which is similar to a passbook. Basically the holding of a Demat Account is similar to holding a Current Account in the bank. and Trading in demat segment benefits elimination of bad deliveries all risks associated with physical certificate such as loss. 5. You also avoid the cost of courier/ notarization/ the need for further follow-up with your broker for shares returned for company objection KNOW-HOW OF THE DEMAT ACCOUNT: A person need to have a Demat Account in banks possessing demat units (depository participants services).25% to 1. You can also expect a lower interest charge for loans taken against demat shares as compared to the interest for loan against physical shares.
big or small. anonymous. the details of his order such as the quantities and prices of securities at which he desires to transact. irrespective of their geographical locations. which are orders to buy or sell shares at a stated quantity and stated price. resulting in improved operational efficiency. This has resulted in a considerable reduction in time spent. is also provided. Thus. SEBI has allowed the use of internet as an order . allows for faster incorporation of price sensitive information It into prevailing prices. the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB). provides equal access to all the investors. known as the National Exchange for Automated Trading (NEAT) system. order driven. on a real time basis. This increases informational efficiency and makes the market more transparent. from members without revealing their identity. the system allows a large number of participants. but also from the personal computers of the investors through the Internet and from the handheld devices through WAP. A single consolidated order book for each stock displays. The member inputs. which helps to resolve disputes by logging in the trade execution process in entirety. The book stores only limit orders. The transaction is executed as soon as it finds a matching sale or buys order from a counter party. are executed only if the price quantity conditions match. The trading platform of the CM segment of NSE is accessed not only from the computer terminals. screen-based trading system.TRADING PROCEDURE: NSE was the first stock exchange in the country to provide nationwide. improving the depth and liquidity of the market. as the market participants can see the full market on real time basis. Thus. All the orders are electronically matched on a price/time priority basis. Further. which ensures full anonymity by accepting orders. to trade with one another simultaneously. A perfect audit trail. buy and sell orders originating from all over the country. cost and risk of error. in the NEAT system. as well as frauds.
telex/ fax.routing system for communicating investors’ orders to the exchanges through the registered brokers. Where the order is to be executed by the broker at the best price. and letter or in person. There are different types of orders. The orders originating from the PCs of investors are routed through the internet to the trading terminals of the designated brokers with whom they have relations and further to the exchange. NSE is the only exchange to provide access to its order book through the hand held devices. NSE became the first exchange in the country to provide web-based access to investors to trade directly on the Exchange followed by BSE in March 2001. The following are the steps involved in the trading of securities at a stock exchange: 1. SEBI has also allowed trading through wireless medium or Wireless Application Protocol (WAP) platform. such an order is called 'Best Rate Order'. This particularly helps those retail investors. who are mobile and want to trade from any place. An order can be placed by telegram. the transaction is executed and the investors get the confirmation directly on their PCs. When in the order the client places a limit on the price of the security it is called limit order. 2. telephone. In February 2000. These brokers should obtain the permission from their respective stock exchanges. which use WAP technology. After these orders are matched. When the client does not fix any price limit or time limit on the execution of the order and relies on the judgement of the broker is called 'Open Order'. TRADE EXECUTION: - . PLACING ORDER: An order is to be placed by an investor with the broker either to buy or sale of certain number of securities at a certain specified price.
by the transferor (seller) and is authenticated by a witness. The clearinghouse makes the payment and delivers the security certificates to the members on the payout day. ICICI Web Trade. On the date of settlement cheques/ drafts and securities are exchanged as per the delivery order. The broker may negotiate with other parties in order to execute the orders. The order is executed as per requirements of the client.The broker has to execute the order placed by his client during the trading hours. brokerage etc. 4. Delivery and clearing of security takes place through a clearance house. the broker prepares a contract note. It contains the details of the transferee. DELIVERIES AND CLEARING: Delivery of shares takes place through the instrument known as transfer deed. Particulars such as price. names of the parties. Delivery and payment may be completed after 14 days as specified at the time of negotiation. quantity of securities. ONLINE TRADING: Online trading in shares and securities has already been started in India. selling etc. The transfer stamp of the deed is signed broker. It has been made possible due to introduction of demat. CONTRACT NOTE: - When the order is executed. Each broker settles the account with every client by taking delivery or giving delivery of securities certificates and receipts or payment of cheques. 3. 5. . SETTLEMENT: The procedure adopted for the settlement of transactions varies depending upon the kind of securities. date of transaction. It is the basis of the transaction. are entered in the contract note.
HDFC Securities. 6. There are three accounts opened into one place. The investors can carry out buying and selling of securities while sitting in the house or office. The investors have to open an account with these institutions that provide online trading. Fill in the client broker agreement on stamp paper. Stock Holding Corporation of India and many other institutions have started the online trading system. The market watch page shows real time data. 3. Register yourself as a client. Trade shares directly by entering the symbol of securities. 2. Internet connection is required for this purpose. The broker's server will check the limit on-line and the demat account for the number of shares execute the trade. Investors can carry out buying and selling securities at BSE and NSE during normal trading hours. Usually the order is executive in about 20 seconds and you get the confirmation. Margin Trading. A password is given to each investor who is secret. 4. Log on the broker's site using secure user ID and password. HOW TO TRADE ONLINE: 1. 7. 9. mail. The broker will send one e-mail confirmation and printed contract by . Demat Account. Log on to the Broker's website. 8. Bank Account and Online Trading Account. The settlement is done automatically with the program of the computer. Options and Futures Trading are also possible in this method. 5.
EMPOWERMENT: Since all decision-making is with the investor. and chasing brokers for . CONVENIENCE: The share broking account integrates with the investors banking.10. the investor can be assured of the execution of the transaction placed. thereby having complete control over the trades. with sufficient and relevant information on his stocks. the investor is empowered to take decisions based on his own judgment. SPEED: The speed of executing the transaction is more as compared to a phonebased trade. 3. BENEFITS OF ONLINE TRADING: Online trading offers the investors the following benefits: 1. This enables the investor to trade in shares without cycles. SETTLEMENT: going through the hassles of tracking settlement writing cheques and transfer instructions. broking and the share depository accounts. REACH: The reach of online trading spans to all areas where internet connectivity is available. 2. 4. On the settlement day the demat and bank accounts will automatically get debited and credited. 5. refund cheques. CONTROL: With online trading.
The main functions of Clearing Corporation are to work out: (a) What counterparties owe and (b) Why counterparties are due to receive on the settlement date. After successful implementation of rolling settlement on T+5 basis. etc. due to multiple problems faced by the secondary market like the open out cry system. The main advantage of this T+1 settlement cycle is that as the trades spread across all trading days. the trades should be settled by delivery of securities and payment of monies within three business days after the trade day. fine-tuned risk management system. But in India. the Indian equity market has reduced the settlement cycle to T+2 basis w. India could not implement the G30 recommendations within the stipulated time frame. this reduces undue concentration of payment of monies and delivery of securities on a single day.f.e. though many of these are yet to permeate the whole market. in 1989.e. each exchange has a Settlement Guarantee meet with any unpredictable situation.The clearing and settlement mechanism in Indian securities market has witnessed significant changes and several innovations during the last decade. In addition. In 1999. As the settlement is spread across evenly. 1st April. trades are guaranteed by the National Clearing Corporation. To carry the reforms further in this area. (BOISL). i.. Clearing Corporation Houses of NSE and BSE respectively. inadequate banking and depository infrastructure. which had got an effect from December 2001. the group of 30 had recommended that all secondary markets across the globe should adopt a rolling settlement cycle on T+3 basis by 1992. (NSCCL). India Ltd. 2003. shorter settlement cycle. settlement of securities in physical form. Furthermore.. it results in efficiency utilization of infrastructure and system capacity. The Clearing Corporation exchanges assumes the counterparty risk of each member Fund to of the and . wide geographical coverage. and Bank of India Shareholding Ltd. In order to bring settlement efficiency and reduce settlement risk. rolling settlements were introduced in select scrips on a T+5 basis. SEBI moved the settlement to T+3 basis with effect from April 2002. These include use of the state-of-art information technology. emergence of clearing corporations to assume counterparty risk. dematerialization and electronic transfer of securities.
transfer of funds in India still takes two to three days. in a rolling system. payments are quicker than in the weekly settlement. It also ensures the financial settlement of trades on the appointed day and time irrespective of default by members to deliver the required funds and/or securities with the help of a settlement guarantee fund. It is only now that India has adequate facilities for electronic delivery of shares. earlier because India did Rolling settlement could not be not have depositories. The National Stock Exchange was the first to introduce rolling settlement in the country. However. ADVANTAGES OF ROLLING SETTLEMENT: In rolling settlement. Rolling introduced settlement necessarily requires electronic transfer of funds and demat facilities in respect of securities being traded. INTERMEDARIES IN SECONDARY MARKET: 1. STOCK BROKER: A Stock Broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter in to a transaction. which facilitates trading and clearing large volumes on a daily basis. Thus. For example.guarantees settlement through a fine-tuned risk management system and an innovative method of online position monitoring. The buyer and seller may be either a broker or a client. investors’ benefits from increased liquidity. This is because handling large volumes of paper on a daily basis is extremely difficult for the clearinghouses of stock exchange. They get commission on these transactions. investors would receive the payments on the fifth day after the sale. About one fourth of the members of the stock exchange are specialist known as . A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyer and the seller).
ODD LOT DEALER: These are specialists who handle the odd lots. sell or deal in securities. 6. a stockbroker means a member of a recognized stock exchange. customers. 1992. JOBBER: A jobber is a specialist and independent dealer in securities. No stockbroker is allowed to buy. TARANIWALA: A jobber who makes an orderly and continues auction in the stock market of their is called Taraniwala. Each jobber specializes in a certain group of securities. Odd lot He ensures that the transactions are carried out smoothly and promptly. The standard trading unit for listed stock is called ‘lot’. The margin is narrow when there is keen competition. According to Rule 2 (e) of SEBI (Stock-Brokers and Sub-Brokers) Rules. He He is a localized dealer who handles in the stock market even for small transactions on a commission basis for other brokers who act on behalf trades differences in price and helps to maintain liquidity in the stock market. His margin is fixed by competition among themselves as dealers. The shares are normally traded in the lots of 5. He gives lower quotation for buying and higher quotation for selling the securities. a member of the stock exchange has to decide and declare in advance whether he proposes to act as a jobber or a broker. The double quotation of . 100 etc. But all the listed stocks are not compulsorily in the demat form. Every year. the minimum lot has become 1 due to dematerialization. unless he or she holds a certificate of registration granted 4. A jobber has to give two quotations as a dealer in securities. 50. However.market makers. jobber assures fair-trading to investors. 5. Jobber deals only with the brokers and not with the investors.
7. want to buy. The person who holds a demat account is a beneficiary owner. The odd lot dealer earns his profit on the difference between the purchase and sales price. the account holders will be beneficiary holders of that joint account. DEPOSITORIES: A depository is an entity where the securities of an investor are held in electronic form. 9. He carries out these transactions with a good communication system and telephonic and tele-printer facility. The price of odd lots is determined by the round lot transactions. Depositories help in the settlement of the dematerialized securities.dealers buy odd lots. Each transaction has to be separately negotiated. In case of a joint account. Their role is restricted by the participation of LIC and Commercial Banks. SECURITY DEALER: The members who purchase and sale government securities on the stock exchange are known as Security Dealers. They take risk in ready purchase and sale of securities for current requirements. The dealers should have information about the several kinds of government securities. which other members wish to sell for their customers and sell odd lots which others. 8. He should have ability to get the prices from different centers before other members trading in the stock market. Each custodian/clearing member is required to maintain a clearing pool account with the depositories. ARBITRAGEUR: An arbitrageur is a specialist in dealing with securities in different stock exchange centers at the same time. He is required to make available the . He makes the profit by difference in the prices prevailing in different centers of market activity.
10. the exchange is The Board made up of a Board of Governors generally selected by the members. He studies the market and adjusts the investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns there from. S. It was entrusted with a wide range of responsibilities in regulating the activities of almost all the players in the capital market. 1988 on the basis of the recommendations of the highpowered committee on the stock Exchange Reforms headed by G. Exchange usually assigns a number of seats to brokers SEBI (SECURITIES & EXCHANGE BOARD OF INDIA) Government of India set up the Securities and Exchange Board of India (SEBI) on April 12. Any person who pursuant to a contract or arrangement with a client. customs and relations among institutions.required securities in the designated account on settlement day. Typically. trade practices. which is chosen to represent the interests of seat holders. mutual funds and merchant bankers. then employees an executive officer. PORTFOLIO MANAGERS: - A Portfolio Manager is a professional with experience and expertise in the field. The . It has developed a proper infrastructure for facilitating automatic expansion and growth of business of brokers. as the case may be is a portfolio manager. STOCK EXCHANGES: A stock exchange or securities exchange is a marketplace where stocks offered for sale are listed and exchanged. advises or directs or undertakes on behalf of the client whether as a discretionary portfolio manager or otherwise the management or administration of a portfolio of securities or the funds of the client. It was given a legal status under the ordinance of 1992. It aimed at creating a proper and conducive environment required for the raising money from the capital market through rules. jobbers. regulation. investors and companies. 11. brokers. Patel. It also aimed at endeavoring to restore and safeguard the trust of the investors. particularly the interest of small investors. to manage the Exchange.
A Chairman. as it thinks fit. sub-brokers. which exercises all powers and do all acts and things which may be exercised or done by SEBI. The general superintendence. share transfer agents. (b) Registering and regulating the working of stock brokers. namely: 1. FUNCTIONS OF SEBI: SEBI has been obligated to protect the interests of the investors in securities and to promote and development of. . The Chairman and the other members are from amongst the persons of ability. The head office of SEBI is in Mumbai. bankers to an issue. and to regulate the securities market by such measures. trustees of trust deeds. Five other members of whom at least three shall be whole time members to be appointed by the Central Government. accountancy. in the opinion of the Central Government. SEBI consists of the following members. shall be useful to SEBI. direction and management of the affairs of SEBI vests in a Board of Members. 5. administration or in any other discipline which. 4. economics.CONSTITUTION OF SEBI: The Central Government has constituted a Board by the name of SEBI under Section 3 of SEBI Act. One member from amongst the officials of the Reserve Bank of India. 2. SEBI may establish offices at other places in India. The measures referred to therein may provide for: (a) Regulating the business in stock exchanges and any other securities markets. 1956. Government dealing with Finance and administration of Companies Act. Two members from amongst the officials of the Ministries of the Central 3. finance. integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law.
registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; (c) Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf; (d) Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds; (e) Promoting and regulating self-regulatory organizations; (f) Prohibiting fraudulent and unfair trade practices relating to securities markets; (g) Promoting investors' education and training of intermediaries of securities markets; (h) Prohibiting insider trading in securities; (i) Regulating substantial acquisition of shares and take-over of companies; (j) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organizations in the securities market; (k) Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board; (l) Performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government; (m) Levying fees or other charges for carrying out the purpose of this section; (n) Conducting research for the above purposes; (o) Calling from or furnishing to any such agencies, as may be specified by SEBI, such information as may be considered necessary by it for the efficient discharge of its functions; (p) Performing such other functions as may be prescribed.
INVESTORS: The investors in the past have suffered at the hands of insufficient stock exchanges and greedy unprofessional brokers. This was one of the reasons why SEBI was created. The investor today can look forward to redress of his grievances through SEBI. Normally investors have complaints of following nature: 1. Delays in refund of application money. 2. Delay in receipt of dividend and / or interest warrants. 3. Delay in receiving the maturity value of fixed deposits or debentures on
redemption. 4. Delay in receipt of share and debenture certificates after allotment. Major part of the liberalization process was the repeal of the Capital Issues (Control) Act, 1947, in May 1992. With this, Government’s control over issues of capital, pricing of the issues, fixing of premium and rates of interest on debentures etc. ceased, and the office which administered the Act was abolished, the market was allowed to allocate resources to competing uses. However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted to establish 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. SEBI receives many such complaints regularly and tries to redress all such grievances. SEBI has from time to time pulled up companies against whom the complaints are received and has also initiated action against the defaulting companies. SEBI has encouraged the registration of investors associations in various parts of the country to organize investors into an effective force for protection of their own interests. Some of the actions taken by SEBI can be summarized as below: 1. The introduction of screen based trading. 2. The ban on BadIa.
3. The dematerialization of shares. 4. The method of postal ballots so that small investors views are heard. 5. The book building process in buy-back of shares by the companies. 6. The capital adequacy norms for brokers. SEBI may, for the protection of investors, 1. specify, by regulations, a) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and b) the manner in which such matters, shall be disclosed by the companies and 2. by general or special orders, a) prohibit any company from issuing of prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities, specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited may be issued.
FIIs & INDIAN EQUITY MARKET Investors worldwide tend to stay away from undertaking international investments. But the fact is, by avoiding cross country investment, investors are actually causing the rise in the risk of their portfolios. Cross-border investing develops asset classes with very low correlation to the domestic holdings, in turn, contributing to a lesser volatility for investments. This premise of investment theory has led to an increasing trend of FII investments across the globe. India being an emerging economy with a capital market at its peak, foreign investments have been a regular feature here. Such investments flood in a country with sound macroeconomic and operational procedures in place. Steps taken by India in these fronts have been commendable, but what is the key to attracting a substantial slice of the cake and how can we sustain the pace? The era of FIls investments in India originated in 1993 and the net
investment during the year was $827.20 million. FIls of different countries, mainly the US, started operating in India. The number of FIls in India has grown over the year to nearly 500. The big names include Morgan
Truly. creating new jobs and triggering all positive things that come as a surprise gift. This trend of Indian equity markets to that of FIIs investment though encouraging. has to be treated cautiously. They have been an incredible source of money ever since. Warburg. as FIls usually pull back portfolio investments at the slightest hint of trouble in the host . As evident. From the Central Bank's point of view. FIls. As per the definition of RBI. a FIl is an institution established or incorporated outside India. They are required to register with RBI and the SEBI before they commence their operations. Foreign Institutional Investors (FIls) during the last one-decade have become an integral part of Indian equity markets. Portfolio flows are notoriously volatile compared to other forms of capital flows. The authority of these institutions is evident from the very fact that by the mere news of their arrival it is sufficient for the market to supplement itself with a double-digit growth. The clout of the FIls is such that the market players anticipate their arrival with breathless anxiety.Stanley. Templeton. investments impart confidence to the economy by providing cushion in the form of forex reserves. Performance of the secondary market brings cheer to the new issues market thus allowing companies to raise fresh capital. Although the investments have provided with the much needed liquidity and depth in the markets. This reputation of the FIls is a well-earned status. Such institutions have been permitted to invest in Indian securities markets starting from September 1992 when the then authorities issued suitable guidelines. Capital International. The FIls are subject to stringent monitoring. the FIls have emerged as a masculine unit in recent times. a healthy FII activity helps fund new projects and expansions. CDC. which proposes to make investments in Indian securities. and JFAM. the role played by the fly-by-night operators in creating panic is some of the Asian economies do Indian markets face a risk. FIls support the markets by unlocking their chests and rejuvenating the secondary markets.
Also. liquidity. top down is the preferred approach as their portfolios consist of securities across many markets. The share of top 10 most active index stocks in turnover is about 57% in India markets. FIls have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness. Ranbaxy. CONCENTRATION AND LIQUIDITY:The biggest concern plaguing Indian markets is that of concentration and liquidity. Infosys. Reddy's have given consistently excellent performance over the years and this has encouraged FIls to invest in the stocks of these companies which holds a major weightage in sensex. HLL. For global fund managers. While in developed economies this ratio is to the promoters' holdings are high which hampers . Despite an over burdened economy and infrastructure bottlenecks. CHALLENGES FACING FIIs IN INDIA: 1. However. while it is in the range of 11 to 27% for countries including China. 2. which is quite low at 32%. RBI and SEBI has been prudent enough in enforcing strict guidelines for FIls entering India and controlling the repatriation of the investment. Indian markets are concentrated in very few stocks in terms of volumes turnover. HDFC. the market has moved nowhere between 1993 and now.country often leading to disastrous consequences to its economy. There are only a handful of stocks that have the kind of liquidity for foreign investors to take significant positions. Thailand. Taiwan and Korea. MARKET CAPITALIZATION TO GDP RATIO:The second major concern is market-cap to GDP ratio in India. This implies that only a small fraction of Indian business is captured in stock markets and some of the major businesses are not even available for investing. and Dr. companies like RIL. which make it too cumbersome to follow a bottom-up strategy in each market. Ever since they entered India in 1993.
For a fund manager managing funds from his headquarters in the US. the quantum of investment in Indian companies may not really justify the costs of monitoring them on a regular basis. Macroeconomic stability and fiscal stability are basic hygiene factors to attract foreign investors.specific factors momentum. India Posts. TJ>ere are major private players. which are closely held and unless all these come into the stock market fold. 4.extent of 120%. 3. CORPORATE GOVERNANCE AND DISCLOSURE NORMS:There are concerns on the corporate governance standards as well. with their size and business credentials can ignite a lot of investor interest. much more favorably. opportunities will be limited. foreign investors do feel quite insecure. FIIs are paying more attention than ever to country. For example. Indian Railways. The global . MACRO-ECONOMIC PARAMETERS:Selection of the right country is the main objective for FIls like reform investments rather than stitching together sector themes. This is because of increased government ownership in various segments. Unlike domestic fund managers who feel reasonably confident because of their regular interaction with the management. Despite accounting scandals in the US. Korea and Taiwan have a ratio of more than 50%. Stocks trading at PE multiple of 2 or 3 in spite of their steady financial performance raises suspicion about the quality of management and in this respect global investors look at emerging markets like Korea and Taiwan. global investors have more faith in the US regulatory system and corporate governance standards. State Road Transport Corporations. Asian countries like Hong Kong. The cost of rescuing government-owned financial institutions such as UTI and IFCI will effect the fiscal situation. China. local political situation and macro-economic ratios.
particularly on its export prospects. finally . With the US market heading for a recession and the global economy for a slowdown. This will definitely have an impact on India. This experience has helped the domestic players to strengthen their overseas businesses as well. Though the fall was continuous on each of these days.222. which shows no signs of easing. remain consistent or surge? With large global investment banking entities reporting poor results of late. Inflows from FIIs stood at US$ 17 billion in 2007. Also. through surge in investment income. interest rates have already peaked. If they fall steeper from the current levels. 21 January turned to be a typical Black Monday as the market went down intra-day by 2. too.rating agency Standard & Poor downgraded India's local currency rating to junk grade from investment grade 1S definitely worrying global investors. particularly PSU banks. the cream of growth has been investment-driven. 2007 A YEAR TO REMEMBER Year 2007 started on a strong note. These factors provide strong support for sustained acceleration in the domestic economy. FII inflows are bound to reduce from such entities for now. so have many agri and other commodity prices at a time when the global economy is none to strong.1 points in six consecutive trading sessions between 14 and 21 January 2008. In the past few years. The US Federal Reserve has cut rates thrice. The surge on the Indian stock markets was powered by foreign institutional investors (FIIs). A majority of this was received in the later part of the year. This has led to a surge in forex inflows into emerging markets like India and into commodities. will foreign portfolio investment decline. And how! The Bombay Stock Exchange (BSE) Sensitive Index (Sensex) shaved off 3. The US sub prime crisis is far from over. The main reason was the cutting of rates by the US Federal Reserve.2 points. India is also witnessing one of the lengthiest capital expenditure cycles. Domestic inflation has moderated and is below 4%. but is ending on a mixed note. and can drag the US economy into recession. India is more of an internal-consumption-driven economy. Fortunately. though local fund managers are more bothered about ground realities such as corporate profitability and growth prospects. 2008 has begun with a bang. it could revive the auto sector and boost the profitability of the banking sector. Crude prices have surged.062.
six markets — Luxembourg.408. India lost 16. .291 points. the index shot up to a historic high of 21.closing with 1. Fortunately.33 on 8 January 2008. Sub-prime crisis is just a symptom of the weaknesses in the US economy. In the year to 21 January 2008.207 points on 10 January 2008 and then crashed like a pack of card on fears of a US recession and huge write-offs by almost all global banks and financial institutions on account of defaults in the sub-prime mortgage market. Still the market is nearly 22% lower from its peak. The carnage was not unique to India but was spread across the globe. A US recession will slow down the global economy due to its global linkages. After closing at a historical high of 20. Jordan and Nigeria. Thirty. Starting the December 2007 quarter at a level of 17. When the December 2007 quarter results started pouring in. Poland. only three of the 52 global equity markets gave positive returns in dollar terms.873.2% in dollar terms in this period.809.seven markets had a double-digit dip. Iceland and Turkey — witnessed over 20% fall.29 on 28 March 2008. while six markets witnessed single-digit decline. there was a relief rally. There was sustained and heavy selling by foreign institutional investors (FIIs) in January 2007 as well as in February till date.371. Norway. the markets are now suffering from excessive FII selling. Lessons From Recent Meltdown Investors realize how lonely they are during a market meltdown. Innovations in dissemination of information ensure that the markets never sleep.35 points off. the BSE Sensex tumbled by over 29% to 14. This took a heavy toll on the Indian markets also. Brazil. according to the Broad Market Index provided by Standard & Poor’s/Citigroup Global Equity Indices. the BSE Sensex kept on rising (with many corrections) throughout the quarter and was up over 17% at the end of the quarter. which talked up the Sensex past the 16. the Indian markets have managed to fare much better compared with other markets on good inflows from domestic institutional investors. These were Morocco.49 on 17 March 2008. From excessive inflows.000 levels to 16. It is becoming increasingly clear that the global economy is set to slow down. On the other extreme. Nevertheless.
how are retail investors to know that the chattering class. The crux is success of reforms hinge on liquidity. Though considerably less than the average 9% recorded in FY 2007. investors are either propelled on euphoria emanating at one end or swept aside on a wave of pessimism stemming from another. Liquidity liability: India’s economy is expected to clock about 8% growth in the fiscal ending March 2009. Here are some: Moody markets: If the US Federal Reserve has the power to boost markets around the world by cutting its lending rates. Money moves: As funds flow from markets with low interest rates to those with high interest rates. preoccupied by the credit crunch back home. Not any more. why should the bursting of the US housing bubble pull down India’s stock market? The bottom line: there is no predicting what could please or upset the markets. Despite the availability of sophisticated trading instruments to cushion risks. it is an attractive rate and comparable with other emerging economies. Merrill Lynch and other blue-chip US investment banks were writing off huge amounts of their exposure to paper backed by sub prime mortgages. If an aggressive investor such as Bear Stearns. Slowdown in capital inflows could hamper the expansion plans of Indian companies and in turn slow the growth rate further. Yet. propounding the theory of ‘decoupling’ of emerging markets such as India and China even as Citigroup. monetary authorities have to calibrate their responses keeping in mind not only local conditions but also the international environment. Institutional investors. went the conventional wisdom. In the process. allegedly sitting on a pile of cash just 100 hours before its hasty rescue. why should domestic policies such as the Left parties’ threat to torpedo the Indo-US nuclear deal and increase in short-term capital gain tax from 1 April 2008 still stun the market? If domestic consumption is driving the economies of emerging markets. collectively determine the course of the markets. money regulators are in the danger of losing their . could not foresee its fate. were as clueless as they were? Each crisis brings to the table its own lessons. foreign funds have turned net sellers.Somewhere a market is reeling under the impact of events unfolding in another part of the globe. The Bear Stearns bailout and the efforts of the Union Budget 2008-09 to cap foreign portfolio investment to blunt inflation indicate central banks and central governments have to increasingly coordinate policies with each other.
Risk factors: As the markets become global. the collapse of the US property market shows that in the race to the top even the sturdiest companies can throw caution to the wind. Many of these companies are blaming banks derivatives products that were suppose to insulate for mis-selling foreign from exchange fluctuations but may result in huge black holes in the balance sheets.000 level of the Sensex appears taken as a measure to gauge the soundness of the stock. Fatal attraction: Till recently. The flip side is an equally quick slump in prices if foreign investors pull out on panic.downs by leading global investment banks have unearthed their reckless exposure to exotic derivatives to maximize profit. The recent write. in holdings only by overseas investors were with good at the 15. Even a stock available at a deep discount expensive in view of the uncertainty. The picture changes when the situation reverses. operations of Indian companies are turning more complex.generation vehicles to hedge against volatility. Valuation mirage: When the markets are buzzing. New. Seven years after the end of the dot-com era. can . The logic was that foreign funds would invest financial track records or those companies with credible promoters empowered to tap future potential.autonomy. thus. Raw materials are sourced from one continent. valuation becomes a relative term as liquidity chases sound stocks.000 level compared with the 20. Many companies raised the cap on foreign holdings to earn better valuation. The positive fallout is balanced monetary and fiscal policies. and the finished product sold in a third. Sometimes even a richly priced IPO in a hot market can re-rate the entire sector comprising established players with better track records. processed in another. Race to riches: More competition means companies have to not only protect and increase market shares but reward shareholders with higher return.
CONCLUSION Equity capital is a high risk-high reward. So. the stock exchanges must disregards the emotional component of trading by making investors decisions based upon chart formations. The setting up of the National Stock Exchange of India Limited has revolutionized the face of the stock market. According to economic times. ban of the badla system. permanent source of long term finance for corporate enterprises and short term earning for shareholders.transform into sources of in stability. The specific factor. return and control associated with ownership of companies would invest in equity capital. NSE is the only stock exchange which covers majority equity investments every day. So investor first has to analyze and invest and not speculate in shares. assuming that prices reflect both facts and emotion. price of share) is mainly because of FORECASTING MIND SET OF EQUITY INVESTORS. Today. the research states the major reason behind the irregularities of market (up and down in sale and purchase. The introduction of on-line trading system. In this technological world things are needed to move at a faster pace. dematerialization. and with the introduction of METHODS OF MARKETING SECURITIES IN THE EQUITY MARKET. which influences equity market. Also equity capital market encourages capital formation in the country. the Indian Equity Market is one of the most technologically developed in the world and is on par with other developed markets abroad. who desire to share the risk. The introduction of online trading has given a much-needed impetus to the Indian equity markets. and introduction of rolling settlement have facilitated quick trading and settlements which lead to larger volumes. the stock exchange has expanded its business at a tremendous speed. The investors. And . is the investor’s sentiment towards the stock market as a whole.
A developed and vibrant secondary market can be an engine for the revival and growth of the primary market. . which an investor wishes to buy) among the investors to avoid the irregularities while trading. So. to encourage Indian investment and face international competition every Indian stock exchange has to stress on innovation and sustained investment in technology to remain ahead. the stock exchanges should strive to increase transparency. These stock exchanges will have to plan strategic tie-ups with their foreign counterparts to get an international platform. So to increase the volume of equity investment. provide more value-added services to investors. strictly enforce corporate governance norms. and take steps to increase investor confidence.also by creating the awareness of fundamental analysis (Fundamental analysis is a method of finding out the future price of a stock.