SECURITIES MARKET

What is a market
 A market is the means through which buyers and sellers are
brought together to aid in the transfer of goods and/or
services.
 It doesn’t need to have a physical location
 A market can deal in any variety of goods and services.
 Timely and accurate information on past transaction and
prevailing buy and sell orders indicate good market.
 Liquidity and price continuity also define good market.
 Low transaction cost
 Informational efficiency.
Primary Capital Market
 The primary market is where new issues of bonds,
preferred stock, or common stock are sold by
government units or companies who want to acquire
new capital.
 IPO and FPO
 Private Placement
Role of Investment banker
 Advisor to the issue
 Gets necessary paper work done for regulatory
requirement
 Sets up structure for application distribution,
collection, payment processes, allocation of securities,
refunds etc.
 “Best effort basis” Service
 Underwriting
Underwriting Structure
Secondary Market
 Secondary markets permit trading in outstanding
issues; that is, stocks or bonds already sold to the
public are traded between current and potential
owners.
 The proceeds from a sale in the secondary market do
not go to the issuing unit but rather to the current
owner of the security.
 Provides liquidity to those who already own the
security.
 Helps in price discovery.
Market Indices
 Index values are used to compute total return and risk
measure for a an aggregate market or some component
of a market over a specified period of time.
 It acts as benchmark to judge performance of a
portfolio.
 Index funds and ETF (Exchange Traded Funds)
emulate Index.
 Aggregate market index is used as a proxy for the
market portfolio of risky assets. Risk associated with
index is “Systematic Risk”.
Types of Indices
 A price weighted index
 A market value weighted index
 A free float based weighted index
 Unweighted index or equal value index
 A fundamental weighted index –Sales, earning etc.

Homework
Price weighted index
30
Index = Σ Pit
i=1 D
adj

Dadj - Dividend Adjustment factor

Value Weighted index
Indext = Σ Pt Qt * Beginning value
Σ Pb Qb

Indext = index value on day t

Pt = ending prices for stocks on day t
Qt = number of outstanding or freely floating shares on day t
Pb = ending price for stocks on base day
Qb = number of outstanding or freely floating shares on base day
Value weighted index

aStocksplit two-for-one during the year.

bCompany paid a 10 percent stock dividend

during the year.

Equal Weighted index
All stocks carry equal weights.
Arithmatic Mean/Geometric mean of percentage change of stocks calculated.
HPR obtained by using AM/GM of change is multiplied to the beginning value to
calculate index value for the period.
Fundamental Weighted Index
 Calculate value of fundamental parameters of
companies in a sample.
 Fundamental parameters can include 1. sales 2. profits
3. Dividend 4. net assets etc
 Calculate weighted size of each parameter for the
companies relative to total.
 Now average the weights of each parameters across
trailing 5 years to adjust for cyclicality. Weight of a
company in index is determined by its aggregate score
over these four weighted parameters.
Exercise
 You are given the following information regarding
prices for a sample of stocks.

a. Construct a price-weighted index for these three stocks, and compute

the percentage change in the index for the period from T to T + 1.
b. Construct a value-weighted index for these three stocks, and compute
the percentage change in the index for the period from T to T + 1.
Homework
 Make a list of SENSEX Stocks
 Find out their respective weights in the index on free
float basis.
 What will be the weights of stocks in SENSEX if
weightings were assigned on full market cap basis
rather than free float?