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PRESENTATION ON
SECONDARY MARKET
PRESENTED BY:
AMIT KUNAL
DEEPIKA MAHESHWARI
GAURAV SHARMA
GUNJIT KAPOOR
ILA MEHROTRA
KARUN DEV SINGH
NEHA JAITHLYA
NEHA KATIYAR
INTRODUCTION

The securities markets in India have witnessed several policy initiatives, which
have refined the market micro-structure, modernized operations and broadened
investment choices for the investors.

 Due to rapid changes in volatility in the securities market from time to time,
there was a need felt for a measure of market volatility in the form of an index
that would help the market participants.

 Other than the introduction of new products in the Indian stock markets, the
Indian Stock Market Regulator, Securities & Exchange Board of India (SEBI)
allowed the direct market access (DMA) facility to investors in India on April 3,
2008.

As a result of the gradual reform process undertaken over the years, the Indian
G-Sec market has become an active secondary market, electronic trading and
settlement technology ensures safe settlement with Straight through Processing
(STP).
SECURITIES MARKET AND FINANCIAL SYSTEM
The securities market has two interdependent and inseparable segments, the
new issues (primary market) and the stock (secondary) market.

PRIMARY MARKET
• The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; government as well as
corporates, to raise resources to meet their requirements of investment and/or
discharge some obligation.
•The primary market issuance is done either through public issues or private
placement.

SECONDARY MARKET
•Secondary market is the place for sale and purchase of existing securities. It
enables an investor to adjust his holdings of securities in response to changes in
his assessment about risk and return.
•It enables him to sell securities for cash to meet his liquidity needs. It
essentially comprises of the stock exchanges which provide platform for
trading of securities and a host of intermediaries who assist in trading of
securities and clearing and settlement of trades. The securities are traded,
cleared and settled as per prescribed regulatory framework under the
• The secondary market has further two components,
Over-the-counter (OTC) market
Exchange-traded market

• OTC is different from the market place provided by the Over The Counter
Exchange of India Limited. OTC markets are essentially informal markets where
trades are negotiated. Most of the trades in government securities are in the OTC
market.
• A variant of secondary market is the forward market, where securities are
traded for future delivery and payment.

•The versions of forward in formal market are futures and options. In futures
market, standardized securities are traded for future delivery and settlement.

•In case of options, securities are traded for conditional future delivery. There
are two types of options–a put option permits the owner to sell a security to the
writer of options at a predetermined price while a call option permits the owner
to purchase a security from the writer of the option at a predetermined price.
FUNCTIONING OF SECONDARY MARKET:-

• Secondary marketing is vital to an efficient and modern capital market. In the


secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be
highly liquid.
• As a general rule, the greater the number of investors that participate in a given
marketplace, and the greater the centralization of that marketplace, the more
liquid the market.
• Fundamentally, secondary markets mesh the investor's preference for liquidity
with the capital user's preference to be able to use the capital for an extended
period of time.
For example:-
A traditional loan allows the borrower to pay back the loan, with
interest, over a certain period. For the length of that period of time, the
bulk of the lender’s investment is inaccessible to the lender, even in
case of emergencies. In an emergency a partner in a traditional
partnership is only able to access his or her original investment if he
or she finds another investor willing to buy out his or her interest in
the partnership. With tradable stocks, the investor can sell, relatively
easily, his or her interest in the investment, particularly if the loan or
ownership equity has been broken into relatively small parts. This
selling and buying of small parts of a larger loan or ownership interest
in a venture is called secondary market trading.
CHANGE IN SCENARIO OF SECONDARY MARKET BEFORE AND
AFTER GOING ONLINE:-

• The trading on stock exchanges in India used to take place through open
outcry without use of information technology for immediate matching or
recording of trades.

BUT…….

• This was time consuming and inefficient.


• This imposed limits on trading volumes and efficiency.

In order to provide efficiency, liquidity and transparency, preventing unfair


trade practices and bringing the Indian market up to international standards, a
package of reforms consisting of measures to liberalize, regulate and develop
the securities market was introduced.
The secondary market overcame the geographical barriers by moving to
screen based trading (SBTS), where a member can punch into the computer
quantities of securities and the prices at which he likes to transact and the
transaction is executed as soon as it finds a matching sale or buy order from
a counter party.

NOW…..

• SBTS electronically matches orders on a strict price/time priority.


• Cuts down on time, cost and risk of error, as well as on fraud resulting in
improved operational efficiency.
• Traders enjoyed counter-party guarantee.
• It allows faster incorporation of price sensitive information into prevailing
prices, thus increasing the informational efficiency of markets.
•The trading cycle shortened to a day and trades are settled within 2
working days, while all deferral products were banned. Physical security
certificates almost disappeared.
• It enables market participants, irrespective of their geographical locations, to
trade with one another simultaneously, improving the depth and liquidity of the
market.

•It provides full anonymity by accepting orders, big or small, from members
without revealing their identity, thus providing equal access to everybody.

• It also provides a perfect audit trail, which helps to resolve disputes by


logging in the trade execution process in entirety.
HOW TRADING NETWORK WORKS:-

•NSE has main computer which is connected through Very Small Aperture
Terminal (VSAT) installed at its office.
•The main computer runs on a fault tolerant STRATUS mainframe computer at
the Exchange.
•Brokers have terminals installed at their premises which are connected through
VSATs/leased lines/modems.
•An investor informs a broker to place an order on his behalf. The broker enters
the order through his PC, which runs under Windows NT and sends signal to the
Satellite via VSAT/leased line/modem.
•The signal is directed to mainframe computer at NSE via VSAT at NSE's office.
A message relating to the order activity is broadcast to the respective member.
The order confirmation message is immediately displayed on the PC of the
broker.
•This order matches with the existing passive order(s) otherwise it waits for the
active orders to enter the system. On order matching, a message is broadcast to
the respective member.
•All orders received on the system are sorted with the best priced order getting the
first priority for matching i.e., the best buy orders match with the best sell order.

SOFTWARES

• National Exchange for Automated Trading (NEAT) SYSTEM


The NEAT system supports an order driven market, wherein orders match on the
basis of price and time priority. All quantity fields are in units and prices are
quoted in Indian Rupees. The regular lot size and tick size for various securities
traded is notified by the Exchange from time to time.

• BOLT SYSTEM (BSE On Line Trading System)


LISTING OF SECURITIES
Listing means admission of securities of an issuer to
trading privileges on a stock exchange through a formal
agreement. The prime objective of admission to dealings
on the Exchange is to provide liquidity and marketability to
securities, as also to provide a mechanism for effective
management of trading.
LISTING CRITERIA
As per SEBI directive, an unlisted company may make an
initial public offering (IPO) of equity shares or any other
security which may be converted into or exchanged with
equity shares at a later date, only if it meets all the
following conditions:
(c)The company should have net tangible assets of at least
Rs. 3 crore in each of the preceding 3 full years (of 12
months each), of which not more than 50% is held in
monetary assets;
(b) The company should have a track record of distributable
profits in terms of section 205 of the Companies Act, 1956,
for at least three (3) out of immediately preceding five (5)
years;
(c) The company should have a net worth of at least Rs. 1
crore in each of the preceding 3 full years (of 12 months
each);
(d) In case the company has changed its name within the last
one year, at least 50% of the revenue for the preceding 1 full
year is earned by the company from the activity suggested
by the new name; and
(e) The aggregate of the proposed issue and all previous
issues made in the same financial year in terms of size (i.e.
offer through offer document + firm allotment + promoters’
contribution through the offer document), does not exceed
five (5) times its pre-issue net worth as per the audited
balance sheet of the last financial year.
LISTING AGREEMENT

At the time of listing securities of a company on a stock


exchange, the company is required to enter into a listing
agreement with the exchange. The listing agreement
specifies the terms and conditions of listing and the
disclosures that shall be made by a company on a
continuous basis to the exchange for the dissemination of
information to the market.
SENSEX - Scrip Selection Criteria

The general guidelines for selection of constituents in


SENSEX are as follows:
4.Listed History: The scrip should have a listing history
of at least 3 months at BSE. Exception may be considered
if full market capitalization of a newly listed company
ranks among top 10 in the list of BSE universe. In case, a
company is listed on account of merger/ demerger/
amalgamation, minimum listing history would not be
required.
5.Trading Frequency: The scrip should have been traded
on each and every trading day in the last three months at
BSE. Exceptions can be made for extreme reasons like
scrip suspension etc.
3. Final Rank: The scrip should figure in the top 100
companies listed by final rank. The final rank is arrived
at by assigning 75% weightage to the rank on the basis
of three-month average full market capitalization and
25% weightage to the liquidity rank based on three-
month average daily turnover & three-month average
impact cost.

4. Market Capitalization Weightage: The weightage of


each scrip in SENSEX based on three-month average
free-float market capitalization should be at least 0.5% of
the Index.
5. Industry/Sector Representation: Scrip selection would
generally take into account a balanced representation of
the listed companies in the universe of BSE.

6. Track Record: In the opinion of the BSE Index


Committee, the company should have an acceptable
track record.
Listing of Securities on NSE
NSE plays an important role in helping Indian companies access equity
capital, by providing a liquid and well-regulated market. NSE has 1,381
(as on 31st March 2008) companies listed representing the length, breadth
and diversity of the Indian economy which includes from hi-tech to heavy
industry, software, refinery, public sector units, infrastructure, and
financial services. Listing on NSE raises a company’s profile among
investors in India and abroad. Trade data is distributed worldwide through
various news- vending agencies. More importantly, each and every NSE
listed company is required to satisfy stringent financial, public distribution
and management requirements. High listing standards foster investor
confidence and also bring credibility into the markets.
NSE lists securities in its Capital Market (Equities) segment and its
Wholesale Debt Market segment. NSE trading terminals are now situated
in 245 cities across the length and breadth of India. Securities listed on the
Exchange are required to fulfill the eligibility criteria for listing. Various
types of securities of a company are traded under a unique symbol and
different series.
DELISTING OF SECURITIES
SEBI (Delisting of Securities) Guidelines 2003 are
applicable to delisting of securities of companies and
specifically apply to:
(c)Voluntary delisting being sought by the promoters of a
company
(b) Any acquisition of shares of the company (either by a
promoter or by any other person) or scheme or
arrangement, by whatever name referred to, consequent to
which the public shareholding falls below the minimum
limit specified in the listing conditions or listing agreement
that may result in delisting of securities
(c) Promoters of the companies who voluntarily seek to de-
list their securities from all or some of the stock exchanges
(d) Cases where a person in control of the management is
seeking to consolidate his holdings in a company, in a
manner which would result in the public shareholding in
the company falling below the limit specified in the listing
conditions or in the listing agreement that may have the
effect of company being de-listed

(e) Companies which may be compulsorily de-listed by the


stock exchanges: provided that company shall not be
permitted to use the buy-back provision to delist its
securities.
MARKET INDEX
 There are three main types of indices, namely price index, quantity
index and value index
 The price index is most widely used. It measures changes in the
levels of prices of products in the financial, commodities or any
other markets from one period to another. The indices in financial
markets measure changes in prices of securities like equities,
debentures, government securities, etc
 The most popular index in financial market is the stock (equity)
index which uses a set of stocks that are representative of the
whole market, or a specified sector, to measure the change in
overall behavior of the markets or sector over a period of time.
IMPORTANCE OF STOCK INDEX
A stock index is important for its use:
 AS the lead indicator of the performance of the overall
economy or a sector of the economy: A good index tells us
how much richer or poorer investors have become.
 AS as a barometer for market behavior: It is used to monitor
and measure market movements, whether in real time,
daily, or over decades, helping us to understand economic
conditions and prospects.
 AS a benchmark for portfolio performance: A managed fund
can communicate its objectives and target universe by
stating which index or indices serve as the standard against
which its performance should be judged.
 AS an underlying for derivatives like index futures and
option. It also underpins products such as, exchange-traded
funds, index funds etc. These index-related products form a
several trillion dollar business and are used widely in
investment, hedging and risk management.
 AS it supports research (for example, as benchmarks for
evaluating trading rules, technical analysis systems and
analysts’)
INDIAN STOCK MARKET
 THE MOST POPULAR AND PRECISE BAROMETER OF THE INDIAN
STOCK MARKETS IS SENSEX.
 IT IS BEING CONSIDERED AS OLDEST STOCK MARKET INDEX,
WHICH IS CURRENTLY IN USE.
 ON APRIL 1, 1979,THE BASE VALUE OF THE SENSEX IS 100.AT
IRREGULAR INTERVALS, THE BOMBAY STOCK EXCHANGE
(BSE) AUTHORITIES REVIEW AND MODIFY ITS COMPOSITION
TO MAKE SURE IT REFLECTS CURRENT MARKET CONDITIONS.
 THE NATIONAL STOCK EXCHANGE OF INDIA WAS PROMOTED
BY LEADING FINANCIAL INSTITUTIONS AT THE BEHEST OF THE
GOVERNMENT OF INDIA, AND WAS INCORPORATED IN
NOVEMBER 1992 AS A TAX-PAYING COMPANY. IN APRIL 1993, IT
WAS RECOGNIZED AS A STOCK EXCHANGE UNDER THE
SECURITIES CONTRACTS (REGULATION) ACT.
INDICES
 The main Index of BSE is SENSEX while that of NSE is CNX Nifty. The
other indices at BSE are: BSE 500, BSE 100, BSE 200, BSE PSU, BSE
MIDCAP, BSE SMLCAP, BSE BANKEX, BSE Teck, BSE Auto, BSE
Pharma, BSE Fast Moving Consumer Goods (FMCG), BSE Consumer
Durables (SYMBOL: Cons Dura), BSE Metal, Dollex-30, Dollex-100 and
Dollex-200 are dollar-linked versions of SENSEX.
 NSE also set up as index services firm known as India Index Services &
Products Limited (IISL) and has launched several stock indices, including:
S&P CNX Nifty, CNX Nifty Junior, CNX 100 (= S&P CNX Nifty + CNX
Nifty Junior), S&P CNX 500 (= CNX 100 + 400 major players across 72
industries), CNX Midcap (introduced on 18 July 2005 replacing CNX
Midcap 200).
HOW TO CALCULATE BSE SENSEX
 BSE, SENSEX IS CONSIDERED TO BE AN INDICATOR OF THE
STOCKS. IT IS NECESSARY TO DEPICT WHETHER THE GRAPH
OF STOCKS ARE GOING UP OR DOWN.
 CALCULATION OF SENSEX IS MADE, TAKING INTO
CONSIDERATION, STOCK PRICES OF 30 DIFFERENT BSE
LISTED COMPANIES.
 IT IS CALCULATED ON THE BASIS OF FREE-FLOAT MARKET
CAPITALIZATION METHOD. IT IS ONE OF THE SUITABLE
METHODS FOR CALCULATING STOCK MARKET INDEX.
 THE METHODS TO CALCULATE STOCK MARKET INDEXES
KEEP ON FLUCTUATING FROM TIME TO TIME.
 SENSEX NEEDS TO BE AN ACCURATE INDEX SO AS TO
DEPICT THE BSE STOCKS PROPERLY. IT IS ESSENTIAL TO
UNDERSTAND HOW THE SENSEX IS CALCULATED FOR
WHICH IT IS REALLY NECESSARY TO UNDERSTAND THE
TERMS ‘FREE-FLOAT MARKET CAPITALIZATION’ METHOD
AND ‘MARKET CAPITALIZATION’ METHOD.
WHAT IS "MARKET
CAPITALIZATION"?
 Worth of the company in terms of its shares is called
market capitalization .If a new investor is looking to buy
some of the shares of a particular company, what amount
he need to pay for that? That particular amount is known
as market capitalization. Current value of share price
needs to be multiplied by number of shares issued by the
company for the calculation of market capitalization.
 The company can be either be ‘mid-capitalization’,
‘large-capitalization’ and ‘small- capitalization’ based on
the value of market capitalization. This question is asked
frequently that how to calculate market capitalization for
a particular company. Calculation of market
capitalization can be made only when the concept of
‘free float market cap’ is well understood.
WHAT IS "FREE-FLOAT MARKET
CAPITALIZATION"?
 Free-float methodology refers to an index construction
methodology that takes into consideration only the
free-float market capitalization of a company for the
purpose of index calculation and assigning weight to
stocks in the index.
 Free-float market capitalization takes into
consideration only those shares issued by the
company that are readily available for trading in the
market. It generally excludes promoters' holding,
government holding, strategic holding and other
locked-in shares that will not come to the market for
trading in the normal course.
 In other words, the market capitalization of each
company in a free-float index is reduced to the extent
of its readily available shares in the market.
 Complete report of shareholders along with company’s
total shareholdings is to be is to be submitted by the
each company to the BSE. On that basis, free float
factor is to be decided by BSE. When free float factor is
multiplied with market capitalization, it will depict the
“free-float market cap” which shows the value of
company shares in the open market. In other words,
the total costs of buying all the shares in the market is
called “free float market cap”.
 First: Evaluate the “free-float market cap” of all the 30
companies that constitutes the Sensex
 Second: Add free-float market capitalizations of all the
30 companies.
 Third: Make all this relative to the Sensex base. The
value you get is the Sensex value!
MAJOR ADVANTAGES OF FREE-FLOAT
METHODOLOGY
 A Free-float index reflects the market trends more rationally
as it takes into consideration only those shares that are
available for trading in the market.
 Free-float Methodology makes the index more broad-based
by reducing the concentration of top few companies in
Index.
 Free-float Methodology improves index flexibility in terms of
including any stock from the universe of listed stocks. This
improves market coverage and sector coverage of the
index.
 For example, under a Full-market capitalization
methodology, companies with large market capitalization
and low free-float cannot generally be included in the Index
because they tend to distort the index by having an undue
influence on the index movement. However, under the Free-
float Methodology, since only the free-float market
capitalization of each company is considered for index
calculation, it becomes possible to include such closely-held
companies in the index while at the same time preventing
their undue influence on the index movement.
 
CALCULATION OF FREE FLOAT
FACTOR
FREE FLOAT FACTOR
= No. of shares readily available for trading in
the market) / (Total number of shares
outstanding) As you know market
capitalization = No. of shares outstanding *
Market value of a share.
Now the market capitalization of a company
gets multiplied by the free-float factor to
arrive at free-float market capitalization.
Free-float market capitalization is calculated
for all index constituents and the index value
is calculated against a base value
considering total value of free-float market.
THE FORMULA FOR CALCULATING
THE SENSEX AND NIFTY
 FOR SENSEX: (Sum of free flow market cap
of 30 biggest stocks of BSE)*Index Value in
1978-79/Market Cap Value in 1978-79.
The base value (index value) of the Sensex is
100 on April 1, 1979, and the base year of
BSE-SENSEX is 1978-79
 FOR NSE: (Sum of free flow market cap of 50
biggest stocks of NSE)*Index Value in
1995/Market Cap Value in 1995.
Base year is 1995 and base value (index
value) is 1000.
EXAMPLE
 Suppose the Index consists of only 2 stocks: Stock A and
Stock B.
 Stock A has 1000 shares out of which 200 are held by the
promoters and only 800 shares are available for trading to
the general public. These 800 shares are the so-called ‘free-
floating’ shares.
 Similarly, Stock B has 2,000 shares out of which 1000 are
held by promoters and 1000 are available for trading (free-
floating).
 Assume price of Stock A is Rs.100. The total market
capitalisation of Stock A is Rs 1,00,000 (1,000 x 100) and its
free-float market capitalisation is Rs 80,000 (800 x 100).
 Assume price of Stock B is Rs.200. The total market
capitalisation of Stock B is Rs 4,00,000 (2,000 x 200) and its
free-float market capitalisation is Rs 2,00,000 (1000 x 200).
 Then sum of free float market cap of these 2 companies (A
& B) = (800*100+1000*200) = 80000+200000 = Rs.
280000
 Assume Market Cap during the year 1978-79 was Rs.50,000
 Apply formula
VS
PARAMETER BSE NSE

Bombay Stock National Stock


Name:
Exchange Exchange

Location: Mumbai Mumbai

Established in: 1875 1993

MR. VINU KOSHY,


Key people: MADHU KANNAN (CEO)
MANAGING DIRECTOR
Third largest stock
Oldest stock exchange
Claim to fame: exchange in the world
in Asia.
in terms of volumes.
National Stock
Bombay Stock
Owner: Exchange of India
Exchange Limited
Limited
Main Index: BSE Sensex S & P CNX Nifty

Website: www.bseindia.com www.nse-india.com

Geographical spread: Presence in 359 cities Presence in 1,486 cities


NO. OF LISTED 4930, april-2009 1587, AUG 2009
COMPANIES (http://www.bseindia.com/about/st_key/list_ca
www.nseindia.com

MARKET 2,282,021.78 RS Rs 47,01,923 crore


CAPITALISATION (CRORE)-FULL (2009 August)
1,097,674.78
RS(CRORE)-FREE FLOAT,
As on Thursday, August
20, 2009.
INDEX NUMBER www.bseindia.com
15,012.32 4453.45, As on
As on Thursday, August Thursday, August 20,
20, 2009. 2009.
Market capitalisation:

NSE: Stocks eligible for inclusion in Nifty must have a six monthly
average market capitalisation of Rs.500 crore or more during the last
six months.

BSE: Companies have been classified as large cap companies and small
cap companies. A large cap company is a company with a minimum
issue size of Rs. 10 crore and market capitalization of not less than Rs.
25 crore. A small cap company is a company other than a large cap
company.

• In respect to Large cap: The minimum market capitalization of the


Company shall be Rs. 25 crore

• In respect to Small cap: The minimum market capitalization of the


Company shall be Rs. 5 crore.
NSE :
“Impact cost represents the cost of executing a transaction in a given stock, for a specific
predefined order size, at any given point of time”.Impact cost is a practical and realistic
measure of market liquidity; it is closer to the true cost of execution faced by a trader in
comparison to the bid-ask spread.It should however be emphasised that :(a) impact cost is
separately computed for buy and sell(b) impact cost may vary for different transaction
sizes (c) impact cost is dynamic and depends on the outstanding orders(d) where a stock
is not sufficiently liquid, a penal impact cost is applied In mathematical terms it is the
percentage mark up observed while buying / selling the desired quantity of a stock with
reference to its ideal price (best buy + best sell) / 2.
: Order Snapshot
Book
Best Best Price Sell Sell Price
Quantity Quantity

1000 98 1000 99

2000 97 1500 100

1000 96 1000 101


BSE :
Calculation of mean impact cost
The mean impact cost is calculated in the following manner:
 
a. Impact cost is calculated by taking four snapshots in a day from the order book in the
past six months. These four snapshots are randomly chosen from within four fixed ten-
minutes windows spread through the day.

b. The impact cost is the percentage price movement caused by an order size of Rs.1 Lakh
from the average of the best bid and offer price in the order book snapshot. The impact cost
is calculated for both, the buy and the sell side in each order book snapshot
Floating Stock:
Under the 'full-market capitalization' methodology, the total market capitalization of a
company, irrespective of who is holding the shares, is taken into consideration for
computation of an index. However, if instead of taking the total market capitalization,
only the Free-float market capitalization of a company is considered for index
calculation, it is called the Free-float methodology.
Free-float market capitalization is defined as that proportion of total shares issued by the
company which are readily available for trading in the market. It generally excludes
promoters' holding, government holding, strategic holding and other locked-in shares,
which will not come to the market for trading in the normal course. Thus, the market
capitalization of each company in a Free-float index is reduced to the extent of its Free-
float available in the market.

NSE:
Companies eligible for inclusion in S&P CNX Nifty should have atleast 12% floating
stock. For this purpose, floating stock shall mean stocks which are not held by the
promoters and associated entities (where identifiable) of such companies.
eria,

ke up the Sensex!Second: Add all the “free-float market cap’s” of all the 30 companies!Third: Make
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