Wealth Insight

FINANCIAL MARKETS
FINANCIAL SYSTEM

Comprises
 Financial institutions
 Financial instruments

 Financial markets

 regulators

The above interact to facilitate the flow of funds

through the financial system
FINANCIAL MARKETS

 The matching principle

 Primary and secondary markets
 Direct and intermediated financial flow
markets
 Wholesale and retail
 Money markets
 Capital markets
FINANCIAL MARKETS

 Classified according to duration

 Short term money markets
 Long term capital markets
 Equity capital
 Debt capital
FINANCIAL MARKETS

 Classified according to asset categories

 Equity
 Fixed income securities
 Commodities
 Foreign Exchange
FINANCIAL MARKETS

 Classified according to settlement date

 Spot market – settlement is T+2
 Futures market – settlement is beyond T+2
FINANCIAL MARKETS

 Classified according to product features

 Exchange traded
 Over the Counter market
FINANCIAL MARKETS

 Classified according to funding

 Primary markets
 Secondary markets
EQUITY

 From corporate point of view, capital can be raised

either through debt or through equity
 Debt is contractual obligation
 Equity is proportionate ownership
 From investor point of view:
 Fixed income securities offer:
 Regular interest payments
 Possible capital appreciation
 Equities offer:
 Possible dividends
 Possible capital appreciation
 Therefore on the risk returns parameter, fixed
income securities are less risky and therefore
offer limited returns
 Equities are riskier and therefore the upside is
higher
STAGES OF EQUITY

 Private placement of equity

 Public issue of equity
 Secondary market trading of equity
PRIVATE PLACEMENT OF EQUITY

 Company’s equity is in the hands of limited

owners:
 Promoters contribution
 Angel investors
 PE / VC firms
 Seed capital:
 Contributed by promoters
 Angel investors:
 Aid the initial growth of the company
 VC funds:
 Bring about substantial expansion of company
 IPO:
 Public investors contribute to capital of company
 FPO:
 Incremental capital raised from the public after initial
listing
Equity

CAPITAL MARKETS
WHAT IS MEANT BY STOCK EXCHANGE?
The SCRA of 1956 defines
Stock Exchange as
 any body of individual,
whether incorporated or not,
 constituted for the purpose of
assisting, regulating or
controlling the business of
buying selling or dealing in
securities.
EQUITY SHARE

Total Equity capital of a company is divided into

equal units of small denominations, each called a
share
CHARACTERISTICS
 ES other than non voting shares, have voting
rights at all general meetings of the company.
 ES have right to share profits in the form of
dividend and bonus shares.
 During the wound up, the payment to ES holders
will be only after payment of claims of all
creditors and PS capital.
RIGHTS OF ES HOLDERS
 Right of pre-emption in the matter of fresh issue
of capital.
 Right to apply to court to set aside variations of
their rights to their detriment.
 Right to receive a copy of the statutory report
before the holding of the statutory meeting by the
public companies.
CONTD…
 Right to apply to central Government to call for
the Annual General Meeting, if the company fails
to call such meeting.
 Right to receive annual accounts along with the
auditors report, directors report and other
information.
SECURITIES
As per SCRA 1956 Securities includes
instruments such as shares, bonds, scripts, stocks
or other marketable securities of similar nature in
or of any incorporate company or body corporate,
government securities or any other instrument so
declared by the Central Government.
FUNCTIONS OF SECURITIES MARKET
 Ensures transferability of
securities.
 Ensures Liquidity.
 Ensures Diversification of
risk.
 Ensures linkage between the
savings and the investments
across the entities.
WHY DOES SECURITIES MARKET NEED REGULATOR ?

 To protect the interests of investors in securities.

 Promote the development of securities market.
 Regulate the Securities market.
SEBI
 SEBI Act was passed in
1992 to ensure effective
regulation of securities
market.
 SEBI Consists:
 A Chairman.
 Two members from amongst
the officials of Ministries of
Central Government dealing
with Finance and Law.
CONTD….
 One member from amongst the officials of RBI.
 Two other members , to be appointed by the central
Government.
PARTICIPANTS IN THE SECURITIES
MARKET
 Issuers of Securities.
 Investors in Securities.
 Intermediaries.
ROLE OF PRIMARY MARKET
 PM also known as New Issues Market, provides
channel for sales of new securities.
 PM creates and offers the merchandise for the
secondary market.
 Securities may be issued in domestic and
international markets.
MARKET CAPITALIZATION
 The total dollar market value of all of a company's
outstanding shares. Market capitalization is calculated by
multiplying a company's shares outstanding by the
current market price of one share. The investment
community uses this figure to determining a company's
size, as opposed to sales or total asset figures.

Frequently referred to as "market cap".

PUBLIC ISSUE V/S PRIVATE PLACEMENT
 When an issue is made not only to a set class of
people but is open to general public and any other
investor at large.
 If the issue is made to a selected set of people it is
private placement.
 As per Companies Act 1956

 Public Issue : Allotment to >50 Persons.

 Private Placement : Allotment to <50 Persons.

IPO
The first sale of stock by a private company to the public. IPOs are
often issued by smaller, younger companies seeking the capital to
expand, but can also be done by large privately owned companies
looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting

firm, which helps it determine what type of security to issue
(common or preferred), the best offering price and the time to
bring it to market.
SECONDARY MARKET
A market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The
Stock exchanges – NSE, BSE, NYSE, NASDAQ, London Stock
Exchange etc are secondary markets.

Secondary markets exist for other securities as well, such as when

funds, investment banks, or entities such as Fannie Mae purchase
mortgages from issuing lenders. In any secondary market trade,
the cash proceeds go to an investor rather than to the underlying
company/entity directly.
ROLE OF SECONDARY MARKET
 Provides efficient platform for trading securities.
 Monitors and controls conduct.
 Enables implementation of incentive based
management contracts.
 Aggregates information that guides management
decision.
SCREEN BASED TRADING
In order to ensure efficiency, liquidity and transparency
screen based trading system are used where a member
can punch into the computer the quantities of a security
and the price at which he would like to transact. The
transaction is executed as soon as a matching sale or buy
order from a counterparty is found.
NEAT
 National Exchange for Automated Trading.
 NSE is first in the world to use satellite
communication technology for trading.
 NEAT is a state-of-art client server based
application.
CONTD…
 At the server end all trading information is stored
in an in-memory database to achieve
 Minimum response time.
 Maximum system availability for users.
 It has uptime record of 99.7% for all trade
entered to NEAT system.
 There is uniform response time of less than one
second.
HOW TO PLACE ORDERS WITH BROKERS??
EQUITY TRADING
 Fundamentals
 Emotions
 Technical
LISTED EQUITY

 In india there are two major exchanges:

 BSE
 NSE
 Shares are traded between buyers and sellers
without any intervention by the company
 Financial intermediaries such as brokers
facilitate this electronic exchange of shares
WHY STOCK EXCHANGE?

 Clearing mechanism
 Funds settlement
 Dematerialisation of equity
FANCY TERMS OF TRADERS
 Long:
 Buy a stock
 Short:
 Sell a stock
 Square :
 Reversing the earlier transaction
 For eg Shah buys 500 shares of L&T(long), he sells
500 shares of L&T (short), he is now square on L&T
 Square off, squaring positions, squaring operation
BULL, BEAR & OTHER WILD ANIMALS

 Bull:
 A trader who is optimistic and extremely positive
of the future, therefore he buys shares
 Related terms : Bullish trends, Bullish sentiments,
Bullish phase, Bull market, bull charge
BEAR

 Bear
 A trader who is quite negative and pessimisstic
about the future, and hence sells stocks in the spot
and futures market
 Related terms : Bearish trends, Bearish sentiments,
Bearish phase, Bearish market, bear charge
STOCKS

 Dividends
 Stock splits
 Bonus issues
 Rights issues
 Buy back of equity
 Delisting equity
Features Forward Futures

Operational Not traded on exchange Exchange traded

Mechanism

Contracts Are customised Are standardised

Counteparty Exists Non existent

risk

Liquidity Poor liquidity Highly liquid

Price discovery Not a fair price Fair price

WHAT DRIVES THE STOCK MARKET?
THE QUESTION
 A simple answer to the question that gets asked many times – and will
continue to be asked, despite this simple answer – is, what drives stock
market fluctuations?
 Is it the fundamentals?
 Or is it emotion?
 The simple answers is: It is emotions that rule in the short term, but
fundamentals take over when it comes to long term
 Research of the figures for four decades has confirmed this hypothesis,
but recently – over the last 10 years – the theory has been shaken by
irrational behavior seen in the marketplace that has little relevance to
fundamentals
 Seeing several unreasonable booms and busts behaviorists have come to
believe that stock market behavior has no correlation to economy and
industry growth/profitability
THE RAMIFICATIONS OF THE ‘NEW WAVE’
 This is merely not an academic dissertation but has far-reaching consequences
affecting major strategic business decisions
 But it can be said with assurance that fundamentals will have the last word, as
far as stock prices go
 What are the conditions in which market behavior is out of whack with
economic fundamentals?
 Irrational investor behavior
 Systematic (and not one-time) patterns of investor decisions
 Limits to arbitrage in financial markets [when irrational buying is done, for
example, sensible investors don’t always step in to take short positions, as the cost
is too high]
 We see two specific market deviations quite often:
 Long-term reversals
 Short-term momentum
MARKET DEVIATIONS
 Long-term deviations:
 Is this to be blamed only on irrational investors? Not fully
 It could also be caused by business cycles or misjudgment of the risk premium of a
stock
 Short-term deviations
 This again could be because of systematic under-reaction to market information by
cautious investors
 Two other situations reflecting persistent mispricing:
 Carve-outs, when a company is carved out of another, but the newborn company’s
stock is traded at fancy prices
 Dual-listed companies, when rational investors don’t exploit the arbitrage
opportunity immediately but wait for definitive information
 The conclusion still is: mispricing is very special, circumstantial and not long-
lasting
THE FINAL TRUTH AND ITS IMPLICATIONS
 One great piece of evidence from the analysis of over 35 years of
stock price movements is that long-term returns on capital and
capital appreciation have been remarkably consistent and steady,
despite major booms and busts occurring through the period
 What this means to the corporate manager, in terms of action
points:
 Understand your stock’s intrinsic value
 Exploit deviations, through apt timing of strategic decisions like rights
issues, stock repurchases, payment for acquisitions by stock or cash,
divestiture etc.
 Do not make strategic decisions of the kind mentioned above based purely
on stock mispricing: only adjust the timing of such decisions in line with
such mispricing
INVESTMENT AVENUES
&
ATTRIBUTES
AVENUES
 What are the equity linked products available in
the current market scenario ?
AVENUES
 Online Trading Account
 Offline Trading Account
 Mutual Funds
 Structured Products
 FMPs
ONLINE TRADING ACCOUNT
 OTA is a software registered by the dealer under
SEBI .
 The Client installs the software on his Computer
and does the trading
 The trading is based on real time configuration
with BSE/NSE
OFFLINE TRADING ACCOUNT
 The account is opened by the client with the
broker
 The broker trades on behalf of him with a POA
signed.
 Client has to be informed and a contract note has
to be generated for every transaction
MUTUAL FUNDS
 What Constitutes mutual funds ?

 Mutual funds is constituted by

 Trustee
 Sponsor
 AMC
DIFFERENT SCHEMES
 Equity – Growth / Dividend
 Balanced
 Index
 Income
 Aggressive Equity
 ELSS
 Debt
DIFFERENT SCHEMES
 Liquid
 Liquid Plus
 Sectoral
 Theme Based Funds
 Midcaps
WHAT IS A MUTUAL FUND
 A mutual fund is a pool of money contributed by
individuals who have similar financial goals. The
money collected is then invested in various
securities such as equities, debentures/bonds
and/or money market instruments. 
 A group of funds managed under one umbrella.
The most basic fund family would include a
stock, bond and money market-portfolio,
although many funds have variants like sector
funds, balanced funds.
NAV
 The price or value of one unit of a fund
 Calculated by summing the current market values
of all securities held by the fund, adding in cash
and any accrued income, then subtracting
liabilities and dividing the result by the number
of units outstanding
 Most open-ended funds companies compute
NAVs once a day based on closing market
prices. 
FUND PORTFOLIO
 A group of securities held by the mutual fund
 A portfolio could be a mixture of stocks, bonds
and cash.
PORTFOLIO TURNOVER
 Is a measure of the amount of buying and selling activity
in a fund.
 Turnover is defined as the lesser of securities sold or
purchased during a year divided by the average of
monthly net assets
 A turnover of 100 percent, for example, implies positions
are held on average for about a year. 
GROWTH INVESTING
 A popular investment style whereby fund managers
identify companies showing promise of above-average
earnings. Stocks are held primarily for price appreciation
as opposed to dividend income
 Growth investors (or managers) are willing to pay a
premium to acquire a stock if they feel it has the right
prospects
 For instance, buying an over-valued software stock
would be the part of a growth manager’s investment
strategy. 
VALUE INVESTING
 As opposed to growth investors, value investors
(or managers) focus on identifying under-priced
stocks
 Value investors look out for stocks selling at low
prices, but which have the potential to give
attractive returns in future. 
Thanks

Rohan Bhate
Director
Wealth Insight P Ltd