FINANCIAL MARKETS & INSTITUTIONS

STOCK MARKET INDEX

AKANSHA TOPANI
HITESH KUMAR
PRANJAL GUPTA
SAMARTH MEHROTRA
SARTHAK PRANAMI
10/15/2020 SIDDHANT GARG
Role of Intermediaries
Stock Market Indices
Index: Barometer to measure market behaviour. NIFTY 50,NIFTY 100,NIFTY MID CAP -
NSE
Market Behaviour: SENSEX- BSE

NIFTY BANK
• Public Sentiments NIFTY AUTO INDIA
NIFTY ENERGY
• State of economy NIFTY FMCG
NIFTY IT
• State of sectors, industry
Dow Jones
• Future expectations NASDAQ USA
S&P
• Change in Stock prices FTSE – London
CAC- Paris Europe
• Comparison of global economies
https://www.niftyindices.com/indices/equity/sectoral-indices Hang Seng, SSE- China
10/15/2020 Nikkei- Japan
Index Constituents & Type

Mkt. Capitalisation
Category Companies
( in Rs. Crores)
Large-Cap >20000 RIL, WIPRO, ITC, CIPLA
Mid-Cap 5000-20000 NIIT, VOLTAS, TVS
Small-Cap <5000 Blue Star, SPARC, NETWORK 18
10/15/2020
Methods for calculating the Index:
(I) Full Market capitalization: Number of Shares X CMP of Co’s share
e.g. NIFTY 50 (earlier), S&P 500 (USA)
(II) Free-Float Market capitalization: Free-Float = % of shares freely available for purchase.
Freely available: Excludes strategic investments i.e. Mkt cap=10Lac shares X Rs.10=100 lacs
1. By Government 40% promoter owned
Free float = 60 lacs
2. Company’s Management
CIL Mkt cap= Rs. 1.8 Lac cr
3. Promoters
Free float= Rs.35600 cr (High Govt. holding)
4. Locked shares
e.g. BSE SENSEX, NIFTY 50, FTSE (London)
(III) Modified Capitalization weighted: limit on % weight of largest stock e.g. Reliance
Others: Price weighted Index e.g. Dow Jones (USA)
Equal weighted Index
10/15/2020
 NIFTY 50 (2007-2020) 20.08.202 %
14000.00 Symbol Name 0 change
12000.00 ^BSESN BSE SENSEX 38,309.58 -0.79%

10000.00 ^NSEI Nifty 50 11,333.45 -0.66%

8000.00 ^VIX CBOE Volatility Index 22.54 4.79%

6000.00 ^DJI Dow 27,692.88 -0.31%

4000.00 ^IXIC Nasdaq 11,146.46 -0.57%
2000.00 ^N225 Nikkei 22,878.34 -1.01%
De-Mon. CRUDE COVID 19
0.00 2008 ^HSI HANG SENG INDEX 24,668.05 -2.03%

Economi ^AXJO S&P/ASX 200 6,115.60 -0.84%

c crisis ^TWII TSEC weighted index 12,370.71 -3.19%

SENSEX (2007-2020) ^STI STI Index 2,510.53 -1.97%
45000
000001.SS SSE Composite Index 3,369.20 -1.14%
40000
35000 399001.SZ Shenzhen 13,335.35 -1.08%
Component
30000
Jakarta Composite
25000 ^JKSE 5,272.81 -0.42%
Index
20000
KOSPI Composite
15000 ^KS11 2,285.64 -3.17%
Index
10000
5000
^GSPC S&P 500 3,374.85 -0.44%
0 S&P/TSX Composite
^GSPTSE 16,577.38 -0.29%
07 07 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 13 14 14 14 15 15 15 16 16 16 17 17 18 18 18 19 19 19 20 20 index
a n- ay- ep- an- ay- ep- an- un- ct- eb- un- ct- eb- un- ct- ar- Jul- ov- ar- Jul- ov- ar- Jul- ec- pr- ug- ec- pr- ug- ec- ay- ug- an- ay- ep- an- ay- ep- an- un-
-J M -S -J M -S -J -J -O -F -J -O -F -J -O M 4- -N -M 5- -N -M 3- -D 3-A -A -D 5-A -A -D -M -A 1-J -M 4-S 0-J -M 0-S 7-J 3-J
10 17- 13 16 22- 19 30 10 9 23 25 22 23 27 31 2- 7 12 1 19 20 2 3 1 11 16 2 23 27 2 31 7 1 20 2 2 ^FTSE FTSE 100 6,111.98 0.58%
10/15/2020
Listing categories of the stocks
There are different types of categories in both stock exchange of India
• NSE categories
• BSE categories

NSE Categories
Market capitalization is the primary factor for categorically dividing the listed stocks at the stock
exchanges all over the world. Basically market capitalization is calculated by multiplying the present
market price of the stock with the number of outstanding stocks in the market.

Primarily stocks are listed in stock exchange are divide into three parts:

• Large cap
• Mid cap
• Small cap
Large Cap Stocks – These are stocks that represent the biggest and most reputed companies among all
the listed companies in the stock exchange. The stocks of these companies are categorized as the large
cap stocks

Mid Cap Stocks – The mid size businesses with moderate market capitalization are considered to be
mid cap companies. The stocks of these companies are categorized as the mid cap stocks.

Small Cap Stocks – The small cap companies are relatively new companies that have got listed at the
stock market. Investing in the small cap stocks are have more risk as these companies take too long to
rise in the market.

There are of course other categories like the Microcap and the penny stocks. While the microcap
segment has companies with less than $ 300 million market capital,

The penny stocks are low priced stocks. Besides the division that is made on the basis of the market
capitalization, the stocks at the National Stock Exchange are also categorized on the basis of the sectors
of the companies.
BSE Categories:
Bombay Stock Exchange or the BSE is the largest stock exchange in India in terms of highest number of
companies listed with the stock exchange. If you consider the market capitalization of the companies
listed with BSE even, then the stock exchange is the largest in the country

SEBI - Securities and Exchange Board of India is the governing body for all the stock exchanges in India
and they frame the rules and regulations for the stock exchanges.

Starting right from the listing of the companies,

issuing of securities, trading of stocks at the stock market, everything is controlled by the Securities and
Exchange Board of India or SEBI.

Other factors like the number of years of listing of the company are considered for determining the
authenticity of the company and the business potential of the company. The equity capital of the
company and the asset of the companies are also considered for examining the financial potential of the
company.
Primarily there are five groups in which the listed stocks are divided, and they are A, B, T, Z, and F.

1. The ‘A’ group comprises stocks that have fairly good growth rate. These companies offer dividend to the
investors and have good capital appreciation over the time.

2. The category ‘B’ is basically a subset of all the listed stocks and the stocks listed in this category have greater
market capitalization that the rest of the stocks.

3. The trading of the stocks that are listed in the ‘T’ category needs to be settled on the very trading day and the
deals can not be carried forward.

4. This is done by BSE to restrict any unwanted movement in these scripts.

5. The stocks in the ‘Z’ group are marked for not complying with the rules and regulations of the stock exchange
and these stocks are often suspended from trading.

6. The ‘F’ group is reserved for the stocks listed at the debt market.
A group stocks – highly liquid stocks

• The stocks fall in the category of A ‘Group’ are the most liquid counters among all the stocks listed on the
BSE.
• The market rates group A stocks as excellent in all aspects and they also show comparatively high traded
volume during trading.
• Settlement of group A stocks trades is done under the normal rolling settlement process.

T group stocks – the stocks in trade-to-trade

• The stocks fall under T group follows trade-to-trade settlement system of the exchange.
• Each trade in this group is seen as a separate transaction and there is no netting-out of trades as in the rolling
system
• The traders who buy shares of this category or sell the script of this group, have to pay the amount or
deliver the shares by T+2 days.
• For example, you bought 100 shares of T Group and sold another 100 shares on the same day. Then, the
shares you have bought, you will have to pay the price of those shares in two days. And for the shares you
have sold, you will have to make the delivery of shares by T+2 days, so that Exchange can make the
settlement on time.
• Stocks of T group are regularly moved in and out of trade-to-trade settlement depending on the speculative
interest that governs them.
S group stocks – small and medium stocks

The stocks of ‘S Group’ fall under the BSE’s Indonext segment.

• The BSE Indonext comprises small and medium companies that have a listing in the regional Stock
Exchange.
• Generally, the turnover of S grade companies is rupees 5 crore and tangible assets of rupees 3 crore.
• Apart from the small size of the company, the other risk that comes with investing in them is low
liquidity.

TS group stocks – it is a mix of T & S groups

• TS group is the combination of T & S group of shares.

• It consists of stocks in the “BSE-Indonext” segments also.
• These category stocks settle on a trade-to-trade basis as a surveillance measure.

B group stocks – stocks that are left behind

• B Group comprises stocks that don’t fall in any of the other groups.
• These counters see normal volumes and settle under the rolling system.
Z group stocks – caution to retail investors

• The companies of Z grade stocks have not complied with the exchange’s listing requirements that have failed to
redress investor’s complaints.
• This grade also includes stocks of companies that have dematerialization arrangement with only one of the two
depositories – CDSL and NSDL.
• The stocks of Z category are the riskiest scripts. Not much information is available to such companies in the
public domain.
• These companies have low media coverage that keeps them relatively hidden from public scrutiny that makes
such scripts more vulnerable to insider trading.
• Z Group companies already have a poor score in redressing investor complaints.

SLB group stocks

• SLB stands for Securities Lending & Borrowing and is a scheme introduced by SEBI in 2007 for short sellers.
• This scheme facilitates the borrowing of securities by a short seller in the market and helps in the settlement
process.
• In short selling, you can sell stocks without actually holding them.
• A total of 207 companies is there in SLB group. Both the retailer and institutional investor participates in short
sell and SLB scheme.
• it is advisable that whenever you choose stocks to invest, be aware of the category in which the stock falls.
 NSCCL-National Securities Clearing
• Subsidiary of NSE
Corporation Ltd.
• Commenced in 1996
• Responsible for clearing and settlement of all trades executed on NSE and deposit
and collateral management and risk management functions.

Objectives
• To bring and sustain confidence in clearing and settlement of securities;
• To promote and maintain, short and consistent settlement cycles;
• To provide counter-party risk guarantee;
• To operate a tight risk containment system.
Source: https://www.nscclindia.com/NSCCL/clr_sett/nsccl_cm_sett_cycle.htm
Eligibility Norms For Clearing Member
• Net worth of at least Rs.300 lakhs. The net worth requirement for a CM
who clears and settles only deals executed by him is Rs. 100 lakhs.

• Deposit of Rs. 50 lakhs to NSE Clearing which forms part of the security
deposit of the CM

• Additional incremental deposits of Rs.10 lakhs to NSE Clearing for each

additional TM(trading member) in case the CM undertakes to clear and
settle deals for other TMs.
Clearing and Settlement Process
Steps:
1. Trade Details from Exchange to NSCCL
2. NSCCL notifies the consummated trade details
to CMs/custodians.
3. Download of obligation & Instruct the clearing
banks to make funds available by pay-in time.
4. Instructions to depositories to make securities
available by pay-in-time.
5. Pay-in of funds & Pay-out of securities.
6. Depository informs custodians/CMs through
DPs Clearing Banks inform custodians/CMs
Risk Management
Risks in clearing and settlement are majorly categorized into 3 types:
• Third party risk: Risk of failure by a settlement bank or other intermediary
• Operational risk: Risk of breakdowns in the clearing and settlement operational
system.
• Counterparty risk: Settlement failure by individual participants in clearing and
settlement
Given the three sources of risks, counterparty risk can be further classified
into:

• Replacement cost risk

• Principal risk
• Liquidity risk. Source: https://www.nscclindia.com/NSCCL/clr_sett/nsccl_cm_sett_cycle.htm
Other Stock Exchanges in India
 OTCEI
• Over-the-Counter Exchange of India was founded in in 1990 under The Companies Act.
• The purpose of OTCEI was to enable small companies to raise capital which they cannot do
through national stock exchanges.
• There are 60 companies listed on OTCEI and all are small and mid cap companies.
• No central place of exchange, all trading occurs through electronic networks.

ICSEI
• Inter-Connected Stock Exchange of India is a national level exchange which was incorporated by
SEBI in Nov 1988.
• ISE was launched with an objective of converting small, fragmented and illiquid markets into large,
liquid national-level markets.
• It was promoted by 14 regional stock exchanges apart from NSE, BSE and OTCEI.
Other Stock Exchanges in India
RSE
• Regional Stock Exchanges started clustering from the year 1894 in 21 different cities of India.
• The purpose was to facilitate the trading for investors as NSE and BSE did not have a very
good reach in early times.
• First RSE was Ahmedabad Stock Exchange followed by Calcutta Stock Exchange.

INDOnext
• BSE INDOnext has been formed in Jan 2005 to benefit small companies that were listed on
RSE’s.
• It has been set up as a separate trading platform under the present BSE Online Trading (BOLT)
system of the BSE.
• A total of 350 scrips are being traded on INDOnext which were listed on RSE but not on BSE.
Importance of other exchanges
• Helps SME’s raise capital which have less paid up capital and cannot be
listed on BSE and NSE.

• Helps investors who can invest in small companies allocate their savings.

• Create more liquidity for investors.

• Increases the reach of financial markets.

• Increase revenues for government.

• Industrial Growth
 Risk of Index
• Volatility
• Economic Events
• Geopolitical Events
• Inflation.
• Timing
• Overconfidence
• Failure to Recognize Your Biases
• Too Much Concentration in a Single Stock or Industry
• Excessive Leverage
Challenges of Index
• Insider trading

• Price rigging

• Unpredictable moves of FII’s

• Global effects

• Co-location servers and Algo Trading

Stock Market
Advantages
• Access to additional equity capital to consolidate or develop business
• Facilitating owner managers and other investors in the realization of their investment by access to trading in a
liquid market
• Higher public profile for the company
• Providing incentives to employees by granting share options
• Providing added reassurance to customers and suppliers
• Improving the ability to acquire other businesses by issuing shares as well as cash.

Disadvantages
• High cost of listing and subsequent higher costs of compliance with specific regulation
• Uncertain timing of listing
• Burden of additional regulatory requirements and compliance with strict standards of corporate governance
• Loss of control over the company, which may eventually be taken over
• Possible loss of management focus following listing, due to dealing with investors
• Shift of focus from owner-manager objectives to interests of other shareholders
• Possible demotivation of employees who are not offered shares.