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STOCK MARKET

History of stock market and exchange in India:

The first stock exchange in India was started in 1875 at Bombay (BSE) by Premchand Roychand and the other major being NSE was founded in 1992. There are many other regional exchanges in India like; Delhi stock exchange, Madras stock exchange, Kolkata stock exchange etc., they were started prior to NSE but traded very less volume compared to that of other 2 major exchanges.

Most of the trading in Indian Stock Market takes place in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).BSE is the oldest stock exchange in the country and even in Asia with a more than 5000 companies listed and it has a record of highest number of companies listed in the world. NSE is a relatively new exchange as compared to that of BSE and with listed companies of around 2000. Both exchanges follow the same trading mechanism, trading hours, settlement process which are regulated and controlled by the Ministry of Finance and Security Exchange Board of India (SEBI).

Once stocks listed in the exchange trading happens soon after the process of IPO (primary market) that is in the secondary market. Buyers and sellers come together to conduct transactions electronically with registered Stock brokers to initiate the transaction.

Sensex:  It is an Indicator of top 30 major companies listed in BSE.1978-79 is the base year for Sensex and with base value 100

Nifty:  It is an indicator of top 50 major companies listed in NSE. 1995 is the base year for Nifty with base value 1000

  • The Sensex almost reached 3500 points by the time Nifty had started.

Meaning of Stock Market?

A Stock market is an everyday term we use to talk and is most popular in television and newspapers where stocks and bonds are traded (bought & sold). Many people come with a prefixed view of it as a gambling. Stock market is purely science but, players speculate shares to be highly volatile in day trading and give retail investors a wrong thought. Hold the stocks for a greater period and sell them when you get good returns as per your targets.

 “I never attempt to make money on the stock market. I buy on the assumption that the market could close the next day and not reopen for it for five years”.  — Warren Buffet

In Emerging countries like India, investing in the stock market is a good sign for getting better returns in future. Currently, only a very low percentage of the Indians are participating in the domestic stock market, but with GDP growing average of 5% to 7% for the last 10 years and stable financial reforms, we might see more people will join the race and chance of huge money to pump in markets. Meanwhile India started permitting outside investors: foreign direct investors (FDI) and foreign portfolio investors (FPI) only in the 1990s this resulted in globalization.

Any person who transact in the stock market is called a market participant, it could be an individual or corporations from various backgrounds. Irrespective of the market participant, everyone’s agenda is to make money in the stock market. Making money from different investors will depend on his greed and strategy they apply. Some of the market participants are:

  • Foreign Institutional Investors (FII’s),
  • Domestic Institutional Investors (DII’s),
  • Retail participants

Although there are a wide range of financial securities available in the markets among them “Money markets and Capital markets “are most important.

Money market includes mainly short-term, marketable, liquid, low-risk debt securities i.e., which can be easily liquidated and encash money in short term.

  • Older investors living on a fixed income often use the money markets because of the safety associated with these types of investments. Unlike capital markets are considered low risk, risk averse investors are willing to access them with the anticipation that liquidity is readily available.

Capital market includes long term and riskier securities which compose of equities and bonds.

  • The buyers of securities in the capital market with a view of longer-term investment usually take risk to get higher returns when compared to that of short-term (money market).
  • Many investors access the capital markets to save for marriage, children education, retirement etc as long as the investors have a long time horizon.
  • Equities also have a wide range of derivative instruments that are traded in the capital markets.

Derivatives: Derivatives are financial instruments that the value is derived from an underlying asset or group of assets. They are contracts between two or more parties. Instead of transacting the actual assets, an agreement is made between parties within a specific time frame. As the value underlying asset changes the derivative value follows the same path. Derivatives are of 4 types:

  1. Forward contracts
  2. Futures contracts
  3. Options
  4. Swaps

Forward contracts: These are agreements to exchange an underlying security at an agreed rate on a specific date. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a ‘long position’, vice versa the party that agrees to sell the asset in a future date is referred to as a short investor and is called a ‘short position’. Forward contracts can be negotiated between two parties, traded outside a regulated stock exchange and suffer from counterparty risk and liquidity.

Future contracts: These are also agreements to buy and sell an asset for a certain price at a future time. But as in the case of forwards the contracts are standardized and are traded on recognized stock exchanges. They are standardized in terms of contract size, lot size, and settlement procedures. Since future contracts are traded through exchanges, the settlement is guaranteed by the exchanges.

Options: Like forwards and futures, options are also derivative instruments that provide the opportunity to buy and sell an underlying asset on a future date. An option is contract that conveys the buyer a right but not an obligation to either buy (call option) or sell (put option) a particular asset at a specific price in the future.

    • Call options: A buyer of a call option expects the market price of the stock to rise.
    • Put options: A buyer of put options would expect the market to fall.
    • In case of call option, the option buyer has a right to buy and in case of put option, the option buyer has a right to sell the security at the agreed strike price.
    • Options can be used for hedging as well as for speculation. The maximum loss an option buyer (call/put) suffers is up to the premium he pays to enter into contract. The payment collected is called the “premium”.

Swaps: These are also same as forward contracts where agreement is made between two parties to exchange future cash flows such as interest rate payments. But, swaps do not derive values from an underlying asset.

Equity markets can be further classified into the Primary market and Secondary market

Primary market: The process of raising capital from investors by issuing new securities/bonds by issuer (company). When a particular security is offered to the public for the first time, it is called an Initial Public Offer (IPO). The primary market acts as the channel for creation and sale of new securities.

  • Whole process of IPO will be 3days for subscription. Once the subscription period is completed the process of allotment and listing of shares in the secondary market will take place after 1 week.
  • Most of the analyst says that investing in IPO is a better option rather than participating in the secondary market, if the company fundamentals are good for the past 3 to 5 years with increase in profits YOY (year on year) expected returns will be bagged in just after listing or maximum in 1month.
  • Since the time 75% of the companies have given positive return soon after listing in the exchanges
  • Recently we have seen many IPO’s like D-mart, IRCTC, Happiest Minds, Route mobiles etc. Almost 100% return on listing day or within a week.
  • If the company wants to issue securities later on which already exist in the market, it is said to as “Follow-up offerings”.

Secondary Market: It is also called “After market”. The financial market where shares are traded and help in bringing potential buyers and sellers for a particular security together and helps in transfer of securities between the parties.

  • In case of secondary market shares are transferred from hand to hand and raise in share value depends on demand and supply of the share which is based on many external and internal factors.
  • Primary market facilitates capital formation in the economy and the Secondary market provides liquidity of the securities.

There is another market place which is widely referred to as the third market in the investment world. It is also called Over the Counter market (OTC). The OTC market refers to that all transactions in securities may or may not be traded on a recognized stock exchange.

  • Trading in the OTC market is generally open to all recognized broker dealers.
  • There may be some regulatory restrictions on trading some products in the OTC market.

In addition to these, there is DSPP (Direct Stock Purchase Plan) in an investment service that allows individuals to purchase a stock directly from a company or through a transfer agent. The benefit of using a DSPP for investors is the ability to avoid commission by not going through brokers.

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