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Primary and secondary market

by Jagannath and Santosh (R.N.S.I.T coll)


Primary market
Meaning
The primary market is also called as new
issue market deals with the new securities
which are issued to the public for the first
time.

by Jagannath and Santosh (R.N.S.I.T coll)


Features
• 1.The primary market deals with new
securities which are issued for the first time
for public subscription.
2.It always concentrate on capital formation.
3.It ensures capital adequacy to the
corpSorate entities.
4.It is concerned with the issue of securities
such as equity,pref,deb’re etc…..
5.It consists of intermediaries like banker,
under writers, brokers etc….
by Jagannath and Santosh (R.N.S.I.T coll)
Classification.
Primary market can be classify as follows-
1)Market where firms go to public for the
first time through initial public offering.
2)Market where firms which are already
trading raise additional capital through
seasoned equity offerings.

by Jagannath and Santosh (R.N.S.I.T coll)


Functions.
1)Organizing or origination.
2)Underwriting-full, partial, joint, syndicate,
firm ,sub, outright.
3) Distribution.

by Jagannath and Santosh (R.N.S.I.T coll)


Players of primary
market
1)Lead manager
2)Underwriters
3)Banker to an issue
4)Registrar to an issue
5)Debenture trustee
6)Broker to an issue
7)Portfolio managers

by Jagannath and Santosh (R.N.S.I.T coll)


Instruments traded in primary market

 Zero interest convertible debenture


 Deep discount bonds
 Secured premium notes
 Non convertible debenture with equity warrants
 Equity with 100% safety net
 Cumulative convertible preference shares
 Convertible bonds
 Debt with equity warrants
 Dual currency bonds
 Flip flop notes

by Jagannath and Santosh (R.N.S.I.T coll)


Basically there are 4 ways in which a
company may raise equity capital
1)Public issue-procedure,bookbuilding
2)Rights issue
3)Private placement
4)Preferential allotment

by Jagannath and Santosh (R.N.S.I.T coll)


Secondary market
• It is a market where existing
securities are traded nothing
but already issued securities
by the company.
• It is also called as stock
exchange in India there are
23 stock exchanges BSE and
NSE are some important
exchange boards.
by Jagannath and Santosh (R.N.S.I.T coll)
Functions of
secondary market
1)Liquidity and Marketability of
securities
2)Safety of funds
3)Supply of long term funds
4)Motivation for improved
performance
5)Helps to raise new capital
6)Listing of securities
7)It reflects the business cycle.

by Jagannath and Santosh (R.N.S.I.T coll)


Players in secondary
market
Client brokers
 Floor brokers
 Jobbers
 Badla financiers
 Arbitragers
 Bulls
 Bears
 Stags
 Wolves
 Lame ducks
 Brokers
 FII’S
 Merchant bankers
 Custodians

by Jagannath and Santosh (R.N.S.I.T coll)


Stock market
• Definition
According to Securities
contract(Regulation)1956
``Stock exchange means any body of
individuals, whether incorporated or not,
constituted for the for the purpose of listing,
regulating and controlling the business of
buying & selling in Securities’’.

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Bruges, Belgium

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New York stock exchange

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Shanghai stock exchange

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National association of
securities dealers
automated quotation

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London stock exchange

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Type Stock Exchange
Location Mumbai, India
Bombay/Mumbai Stock
Owner
Exchange Limited
Key people Mahesh L. Soneji (CEO)
Currency INR
No. of listings 4,700
US$ 1.79 trillion (Dec 31,
Market Cap
2007)
Volume US$ 980 billion (2006)
Indexes BSE Sensex
Website www.bseindia.com

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Type Stock Exchange
Location Mumbai, India
National Stock Exchange of
Owner
India Limited
Mr. Ravi Narain Managing
Key people
Director
Currency INR
No. of listings 1587
MarketCap US$ 1.46 trillion (2006)
S&P CNX Nifty
Indexes CNX Nifty Junior
S&P CNX 500
Website www.nse-india.com
by Jagannath and Santosh (R.N.S.I.T coll)
Commodity markets
Commodity markets are markets where raw
or primary products are exchanged. These raw
commodities are traded on regulated
commodities exchanges, in which they are
bought and sold in standardized contracts.

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by Jagannath and Santosh (R.N.S.I.T coll)
Introduction
Money market is a very important segment of
the Indian financial system.
It is the market for dealing in monetary
assets of short-term nature.
Short-term funds up to one year and for
financial assets that are close substitutes for
money are dealt in the money market.

by Jagannath and Santosh (R.N.S.I.T coll)


Features
o The money market is a wholesale market i.e.,
the volume of transaction is very large and
generally transactions are settled on daily basis.
o Trading in the money market is conducted over
the telephone followed written conformation
from both the borrowers and lenders.
o There are large no. of participants in the
money market: commercial banks, mutual
funds, investment institutions, financial
institutions, and finally RBI.
o The money market can obtain funds from the
central bank either by borrowing or sale of
securities
o A well developed money market contributes to an
effective implementation ofcoll)the monetary
by Jagannath and Santosh (R.N.S.I.T
Indian money market
Indian money market was segmented and
highly regulated and lacked depth till the
late eighties
It was characterized by a limited no. of
participants.
The instruments were limited to call(over
night) and short notice (up to 14 days)
money, inter bank deposits and
commercial bills
Efforts for developing and deepening the
money market were made only after the
by Jagannath and Santosh (R.N.S.I.T coll)
TYPES OF MONEY MARKET
INSTRUMENTS
The money market comprises of :
b)Call money ( which is over night and short
notice up to 14 days)
c)Treasury bills
d)Certificate of deposits
e)Commercial paper
f) Banker’s acceptance
g)Repo

by Jagannath and Santosh (R.N.S.I.T coll)


TYPES OF MONEY
MARKET
a) Call/Notice money market:
The call/notice money market was
predominantly an interbank market until
1987.
o The Discount and Finance House of
India(DFHI) was set up on 1988 and
Securities Trading Corporation of
India(STCI) was set up in 1994
o in order to provide reasonable access to
users of short term money and to provide an
active secondary market in govt. securities
by Jagannath and Santosh (R.N.S.I.T coll)
TYPES OF MONEY
MARKET
 Treasury Bills: The Treasury bills are short-
term money market instrument that
mature in a year or less than that.
o The purchase price is less than the face
value. At maturity the government pays the
Treasury Bill holder the full face value.
o The Treasury Bills are marketable, affordable
and risk free.
o The security attached to the treasury bills
comes at the cost of very low returns.

by Jagannath and Santosh (R.N.S.I.T coll)


Treasury bills in India
Type of Treasury Bills:
At present, RBI issues T-Bills for three different
maturities: 91 days, 182 days and 364 days.
The 91 day T-Bills are issued on weekly auction
basis while 182 day T-Bill auction is held on
Wednesday preceding non-reporting Friday and
364 day T-Bill auction on Wednesday preceding the
reporting Friday
Advantages of investing in Treasury Bills:
• No Tax Deducted at Source (TDS)
• Zero default risk as these are the liabilities of
GOI
• Liquid money Market Instrument
• Active secondary market thereby enabling
holder to meet immediate
by Jagannath fundcoll)requirement
and Santosh (R.N.S.I.T
TYPES OF MONEY
MARKET
c) Certificate of Deposit: The certificates of
deposit are basically time deposits that are
issued by the commercial banks with
maturity periods ranging from 3 months to
five years.
o The return on the certificate of deposit is
higher than the Treasury Bills because it
assumes a higher level of risk.

by Jagannath and Santosh (R.N.S.I.T coll)


Cont..
Advantages of Certificate of Disadvantages of Certificate of
Deposit as a money market deposit as a money market
instrument instrument:
1. Since one can know the 1. As compared to other
returns from before, the investments the returns
certificates of deposits are is less.
considered much safe. 2. The money is tied along
2. One can earn more as
compared to depositing with the long maturity
money in savings account. period of the Certificate of
3. The Federal Insurance Deposit.
Corporation guarantees
the investments in the
certificate of deposit.

by Jagannath and Santosh (R.N.S.I.T coll)


TYPES OF MONEY
MARKET
 Commercial Paper: Commercial Paper is
short-term loan that is issued by a
corporation use for financing accounts
receivable and inventories.
o Commercial Papers have higher
denominations as compared to the Treasury
Bills and the Certificate of Deposit.
o The maturity period of Commercial Papers
are a maximum of 9 months.
o They are very safe since the financial
situation of the corporation can be
by Jagannath and Santosh (R.N.S.I.T coll)
TYPES OF MONEY
MARKET
 Banker's Acceptance: It is a short-term
credit investment. It is guaranteed by a bank
to make payments.
o The Banker's Acceptance is traded in the
Secondary market.
o The banker's acceptance is mostly used to
finance exports, imports and other
transactions in goods.
o The banker's acceptance need not be held
till the maturity date but the holder has the
option to sell it off in the secondary market
whenever he finds it suitable.
by Jagannath and Santosh (R.N.S.I.T coll)
TYPES OF MONEY
MARKET
 Repos: The Repo or the repurchase
agreement is used by the government
security holder when he sells the security to
a lender and promises to repurchase from
him overnight.
o Hence the Repos have terms raging from 1
night to 30 days. They are very safe due to
government backing.

by Jagannath and Santosh (R.N.S.I.T coll)


by Jagannath and Santosh (R.N.S.I.T coll)
FOREIGN EXCHANGE
MARKET
MEANING
 The foreign exchange market (currency,
forex, or FX) is where currency trading takes
place.

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 It is where banks and other official
institutions facilitate the buying and selling of
foreign currencies.
 FX transactions typically involve one party
purchasing a quantity of one currency in
exchange for paying a quantity of another.
BACKGROUND
 The foreign exchange market that we see
today started evolving during the 1970s when
world over countries gradually switched to

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floating exchange rate from their erstwhile
exchange rate regime, which remained fixed
as per the Bretton Woods system till 1971.
 Presently, the FX market is one of the largest
and most liquid financial markets in the
world, and includes trading between large
banks, central banks, currency
speculators, corporations,
governments, and other institutions.
PARTICIPANTS
 Individuals:tourists, migrants
 Firms: importers and exporters
 Banks

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 Governments/ monetary authorities
 International agencies
 Two tier market:
 First
tier: ultimate customer and banker
 Second tier: between banks
 Arbitrageurs: profit seeking from
variations in rates in different markets
 Speculators: profit seeking from
movements in exchange rates
TRADING CENTERS
 The main trading center is London, but
New York, Tokyo, Hong Kong and

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Singapore are all important centers as
well.
FEATURES
 liquidity: the market operates the enormous
money supply and gives absolute freedom in
opening or closing a position in the current

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market quotation.
 availability: a possibility to trade round-the-
clock; a market participant need not wait to
respond to any given event.
 flexible regulation of the trade
arrangement system: a position may be
opened for a pre-determined period of time
in the FOREX market, at the investor’s
discretion, which enables to plan the timing
of one’s future activity in advance.
CONT..
 one-valued quotations: with high market
liquidity, most sales may be carried out at
the uniform market price, thus enabling to

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avoid the instability problem existing with
futures and other forex investments where
limited quantities of currency only can be
sold concurrently and at a specified price;
 margin: the credit “leverage” (margin) in
the FOREX market is only determined by an
agreement between a customer and the
bank or the brokerage house that pushes it
to the market and is normally equal to 1:100.
DETERMINANTS OF FX RATES
 Economic factors
1. Government budget deficits or surpluses

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• The market usually reacts negatively to
widening government budget deficits, and
positively to narrowing budget deficits. The
impact is reflected in the value of a country's
currency.
2. Balance of trade levels and trends
• The trade flow between countries illustrates
the demand for goods and services, which in
turn indicates demand for a country's
currency to conduct trade.
CONT..
3. Inflation levels and trends
• Typically a currency will lose value if there is

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a high level of inflation in the country or if
inflation levels are perceived to be rising
4. Economic growth and health
• Reports such as GDP, employment levels,
retail sales, capacity utilization and others,
detail the levels of a country's economic
growth and health.
 Political conditions

• Internal, regional, and international political


conditions and events can have a profound
effect on currency markets.
FINANCIAL INSTRUMENTS
1. Spot
• A spot transaction is a two-day delivery
transaction (except in the case of the

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Canadian dollar and the Mexican Nuevo Peso,
which settle the next day), as opposed to the
futures contracts, which are usually three
months.
• Currency arbitrage: buying a currency at
cheaper rate in one market and selling at a
higher rate in another market
• Currency speculation: buying and holding
a currency for sale at a higher rate in the
near future
• Spot transactions has the second largest
turnover by volume after Swap.
FINANCIAL INSTRUMENTS
2. Forward
• In this transaction, money does not actually

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change hands until some agreed upon future
date.
• A buyer and seller agree on an exchange rate
for any date in the future, and the
transaction occurs on that date, regardless of
what the market rates are then.
• The duration of the trade can be a one day, a
few days, months or years. Usually the date
is decided by both parties
FINANCIAL INSTRUMENTS
3. Swap
• The most common type of forward

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transaction is the currency swap.
• In a swap, two parties exchange currencies
for a certain length of time and agree to
reverse the transaction at a later date.
• These are not standardized contracts and are
not traded through an exchange
FINANCIAL INSTRUMENTS
4. Option
• A foreign exchange option (commonly

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by Jagannath and Santosh (R.N.S.I.T
shortened to just FX option) is a derivative
where the owner has the right but not the
obligation to exchange money denominated
in one currency into another currency at a
pre-agreed exchange rate on a specified
date.
• The FX options market is the deepest, largest
and most liquid market for options of any
kind in the world.
FOREX VS. STOCKS

Advantage Forex Market Stock Market

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Trade Around the Clock Yes Limited

Pay No Commissions Yes Limited

Unlimited Short-selling Yes    No

Market Information Easily


Yes    Yes
Available
STRUCTURE

 Decentralized 'interbank' market


 Main participants: Central Banks, commercial

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by Jagannath and Santosh (R.N.S.I.T
and investment banks, hedge funds,
corporations & private speculators
 The free-floating currency system arose from
the collapse of the Bretton Woods agreement
in 1971
 Online trading began in the mid to late
1990's
SIZE
 One of the largest financial markets in the world
 $3.2 trillion average daily turnover, equivalent to:

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 More than 10 times the average daily turnover
of global equity markets1
 More than 35 times the average daily turnover
of the NYSE2
 Nearly $500 a day for every man, woman, and
child on earth3
 An annual turnover more than 10 times world
GDP4
 The spot market accounts for just under one-third
of daily turnover
by Jagannath and Santosh (R.N.S.I.T
coll)
AVERAGE DAILY TURNOVER BY
GEOGRAPHIC LOCATION

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ISO 4217 code % daily share
Rank Currency
(Symbol) (April 2007)
1  United States dollar USD ($) 86.3%
2  Euro EUR (€) 37.0%
3  Japanese yen JPY (¥) 17.0%
4  Pound sterling GBP (£) 15.0%

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5  Swiss franc CHF (Fr) 6.8%
6  Australian dollar AUD ($) 6.7%
7  Canadian dollar CAD ($) 4.2%
8-9  Swedish krona SEK (kr) 2.8%
8-9  Hong Kong dollar HKD ($) 2.8%
10  Norwegian krone NOK (kr) 2.2%
11  New Zealand dollar NZD ($) 1.9%
12  Mexican peso MXN ($) 1.3%
13  Singapore dollar SGD ($) 1.2%
14  South Korean won KRW (₩) 1.1%
Other 14.5%
Total 200%
by Jagannath and Santosh (R.N.S.I.T
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THANK YOU