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Capital Market Capital Market and and
DerivativesDerivatives
Types of Financial market in Types of Financial market in IndiaIndia
Capital MarketCapital Market
Money MarketMoney Market
Derivatives marketDerivatives market
Foreign Exchange marketForeign Exchange market
Commodity MarketCommodity Market
Insurance MarketInsurance Market
Mutual Fund MarketMutual Fund Market
What is Capital Market?What is Capital Market?
A capital market is simply any market where a government or A capital market is simply any market where a government or a company can raise money (capital) to fund their operations a company can raise money (capital) to fund their operations and long term investment. Selling bonds and selling stock are and long term investment. Selling bonds and selling stock are two ways to generate capital, thus BOND MARKET and STOCK two ways to generate capital, thus BOND MARKET and STOCK MARKET are considered capital markets.MARKET are considered capital markets.
Capital Market is characterized as the provider of long-term Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative are equity instruments, insurance instruments, derivative instruments and bonds. instruments and bonds.
Other examples of capital market instruments include equity, Other examples of capital market instruments include equity, floating rate bonds, convertible bonds, asset backed floating rate bonds, convertible bonds, asset backed securities, mortgage backed securities, and interest rate securities, mortgage backed securities, and interest rate swaps.swaps.
What is Capital Market?What is Capital Market?
A capital market is simply any market where a government or A capital market is simply any market where a government or a company can raise money (capital) to fund their operations a company can raise money (capital) to fund their operations and long term investment. Selling bonds and selling stock are and long term investment. Selling bonds and selling stock are two ways to generate capital, thus BOND MARKET and STOCK two ways to generate capital, thus BOND MARKET and STOCK MARKET are considered capital markets.MARKET are considered capital markets.
Capital Market is characterized as the provider of long-term Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative are equity instruments, insurance instruments, derivative instruments and bonds. instruments and bonds.
Other examples of capital market instruments include equity, Other examples of capital market instruments include equity, floating rate bonds, convertible bonds, asset backed floating rate bonds, convertible bonds, asset backed securities, mortgage backed securities, and interest rate securities, mortgage backed securities, and interest rate swaps.swaps.
Why Capital Markets ExistWhy Capital Markets Exist
Capital markets facilitate the transfer of capital Capital markets facilitate the transfer of capital ((i.e.i.e. financial) assets from one owner to another. financial) assets from one owner to another.
They provide liquidity.They provide liquidity.– Liquidity refers to how easily an asset can be Liquidity refers to how easily an asset can be
transferred without loss of value.transferred without loss of value.
A side benefit of capital markets is that the A side benefit of capital markets is that the transaction price provides a measure of the value transaction price provides a measure of the value of the asset.of the asset.
Indian Capital Market - Indian Capital Market - Historical perspectiveHistorical perspective
Stock Market was for a privileged fewStock Market was for a privileged few
Lack of Transparency - High tones costsLack of Transparency - High tones costs
No use of TechnologyNo use of Technology
Outdated banking systemOutdated banking system
Volumes - less than Rs. 300 cr per dayVolumes - less than Rs. 300 cr per day
Indian Capital Market - Indian Capital Market - Historical perspectiveHistorical perspective
Stock Market was for a privileged fewStock Market was for a privileged few
Lack of Transparency - High tones costsLack of Transparency - High tones costs
No use of TechnologyNo use of Technology
Outdated banking systemOutdated banking system
Volumes - less than Rs. 300 cr per dayVolumes - less than Rs. 300 cr per day
Indian Capital markets - Indian Capital markets - ChronologyChronology
1994-Equity Trading commences on NSE1994-Equity Trading commences on NSE 1995-All Trading goes Electronic1995-All Trading goes Electronic 1996- Depository comes in to existence1996- Depository comes in to existence 1999- FIIs Participation- Globalisation1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form2000- over 80% trades in Demat form 2003- T+2 settlements in all stocks2003- T+2 settlements in all stocks
Factors contributing to growth Factors contributing to growth of Indian Capital Market of Indian Capital Market
Establishment of Development banks & Industrial Establishment of Development banks & Industrial financial institution.financial institution.
Legislative measuresLegislative measures Growing public confidence Growing public confidence Increasing awareness of investment opportunities Increasing awareness of investment opportunities Growth of underwriting businessGrowth of underwriting business Setting up of SEBISetting up of SEBI Mutual Funds Mutual Funds Credit Rating Agencies Credit Rating Agencies
Capital Markets - ReformsCapital Markets - Reforms Each scam has brought in reforms - 1992 / 2001Each scam has brought in reforms - 1992 / 2001
Screen based Trading through NSEScreen based Trading through NSE
Capital adequacy norms stipulatedCapital adequacy norms stipulated
Dematerialization of Shares - risks of fraudulent paper Dematerialization of Shares - risks of fraudulent paper eliminatedeliminated
Entry of Foreign InvestorsEntry of Foreign Investors
Introduction of Derivative products - Index / Stock Futures & Introduction of Derivative products - Index / Stock Futures & OptionsOptions
Margin Lending Margin Lending
Capital Market v/s Money Capital Market v/s Money MarketMarket
Extends beyond one year Extends beyond one year
Term loans and financial Term loans and financial leases, leases,
corporate equities, and corporate equities, and bonds.bonds.
Fixed Capital Requirement.Fixed Capital Requirement.
Instruments have Primary Instruments have Primary as as
well as secondary marketwell as secondary market
Formal place for Formal place for transactionstransactions
e.g.. Stock markete.g.. Stock market
Upto One year or less.Upto One year or less.
Federal agency securities, Federal agency securities,
commercial papercommercial paper
Working Capital Working Capital Requirement.Requirement.
Instruments have only Instruments have only Primary Primary
marketmarket
No Formal place for No Formal place for
transactions transactions
Indian Capital Market
Market Instruments Intermediaries
Primary Secondary
Equity Debt
Regulator
•Brokers •Investment Bankers •Stock Exchanges•Underwriters
SEBI
Players
Corporate IntermediariesCRABanks/FI FDI /FIIIndividual
Functions Of SEBIFunctions Of SEBI Regulates Capital Market.Regulates Capital Market.
Checks Trading of securities.Checks Trading of securities.
Checks the malpractices in securities market.Checks the malpractices in securities market.
It enhances investor's knowledge on market by providing It enhances investor's knowledge on market by providing education.education.
It regulates the stockbrokers and sub-brokers.It regulates the stockbrokers and sub-brokers.
To promote Research and InvestigationTo promote Research and Investigation
Instruments in Secondary Instruments in Secondary MarketMarket
DebentureDebenture
EquityEquity
Giltz securitiesGiltz securities
DerivativesDerivatives
Hedge fundsHedge funds
FCCBFCCB
What is a Share or a Stock?What is a Share or a Stock?
In financial markets, a In financial markets, a shareshare is a unit of account for various is a unit of account for various financial instruments including stocks (ordinary or financial instruments including stocks (ordinary or preferential).preferential).
In simple Words, a In simple Words, a share or stockshare or stock is a document issued by is a document issued by a company, which entitles its holder to be one of the a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or owners of the company. A share is issued by a company or can be purchased from the stock market.can be purchased from the stock market.
The common feature of all these is equity participation & The common feature of all these is equity participation & limited in the case of preference shares . limited in the case of preference shares .
Investment Bankers & UnderwritersInvestment Bankers & Underwriters
RegistrarRegistrar
Issue of ProspectusIssue of Prospectus
Price BandPrice Band
AllotmentAllotment
ListingListing
IPO & It’s Important IPO & It’s Important TerminologyTerminology
Book building processBook building process Appointment of book runner i.e. merchant bankerAppointment of book runner i.e. merchant banker Preparation and submission of draft documents to SEBI Preparation and submission of draft documents to SEBI
and obtaining of an acknowledgement card.and obtaining of an acknowledgement card. A specified price band (range) is to be determined by A specified price band (range) is to be determined by
issuer and book runnerissuer and book runner Different price levels are invited from syndicate Different price levels are invited from syndicate
members .Adv. Should mention opening and closing members .Adv. Should mention opening and closing dates for the bids dates for the bids
Issuer arrives at a final cut-off rate & final allocation in Issuer arrives at a final cut-off rate & final allocation in consultation with book runner and lead managerconsultation with book runner and lead manager
Issuer and book runner may impose restrictions on Issuer and book runner may impose restrictions on number of number of
shares that can be allotted to each clientshares that can be allotted to each client Final prospectus is filed with the (ROC) along with Final prospectus is filed with the (ROC) along with
procurement procurement agreementagreement Placement portion opens for subscription Placement portion opens for subscription Placement portion closes a day before the opening of Placement portion closes a day before the opening of
public public issue portionissue portion
The role of the stock The role of the stock exchange exchange
• Creates investment opportunities for small investors
• Government raises capital for development projects
• Barometer of the economy
Stock Exchanges in INDIA Stock Exchanges in INDIA Mangalore Stock Exchange Mangalore Stock Exchange Hyderabad Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Uttar Pradesh Stock
ExchangeExchange Coimbatore Stock Coimbatore Stock
ExchangeExchange Cochin Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Saurashtra Kutch Stock
Exchange Exchange Pune Stock Exchange Pune Stock Exchange National Stock Exchange National Stock Exchange OTC Exchange of India OTC Exchange of India Calcutta Stock Exchange Calcutta Stock Exchange Inter-connected Stock Inter-connected Stock
Exchange (NEW)Exchange (NEW) Madras Stock ExchangeMadras Stock Exchange
Bombay Stock Exchange Bombay Stock Exchange Madhya Pradesh Stock Madhya Pradesh Stock
Exchange Exchange Vadodara Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock The Ahmedabad Stock
Exchange Exchange Magadh Stock Exchange Magadh Stock Exchange Gauhati Stock ExchangeGauhati Stock Exchange Bhubaneswar Stock Bhubaneswar Stock
ExchangeExchange Jaipur Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Delhi Stock Exchange
Assoc Assoc Ludhiana Stock Exchange Ludhiana Stock Exchange
National Stock Exchange (NSE) National Stock Exchange (NSE) NIFTY50NIFTY50
An Index representing top 50 companies of IndiaAn Index representing top 50 companies of India
Has about 3200 odd listed companiesHas about 3200 odd listed companies
Ranks third in the world in terms of number of transactionsRanks third in the world in terms of number of transactions
It is also a fastest growing exchange with a recorded It is also a fastest growing exchange with a recorded growth of 16.6%growth of 16.6%
Has various other Index for sub-classification of stocks of Has various other Index for sub-classification of stocks of other companies.other companies.
Nifty 50Nifty 50COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
ABB Ltd.ABB Ltd. ELECTRICAL EQUIPMENTELECTRICAL EQUIPMENT0.60%0.60%
ACC Ltd.ACC Ltd. CEMENT AND CEMENT PRODUCTSCEMENT AND CEMENT PRODUCTS0.64%0.64%
Ambuja Cements Ltd.Ambuja Cements Ltd. CEMENT AND CEMENT PRODUCTSCEMENT AND CEMENT PRODUCTS0.63%0.63%
Axis Bank Ltd.Axis Bank Ltd. BANKSBANKS1.47%1.47%
Bharat Heavy Electricals Ltd.Bharat Heavy Electricals Ltd. ELECTRICAL EQUIPMENTELECTRICAL EQUIPMENT2.86%2.86%
Bharat Petroleum Corporation Bharat Petroleum Corporation Ltd.Ltd. REFINERIESREFINERIES
0.51%0.51%
Bharti Airtel Ltd.Bharti Airtel Ltd. TELECOMMUNICATION - SERVICESTELECOMMUNICATION - SERVICES4.11%4.11%
Cairn India Ltd.Cairn India Ltd. OIL EXPLORATION/PRODUCTIONOIL EXPLORATION/PRODUCTION0.89%0.89%
Cipla Ltd.Cipla Ltd. PHARMACEUTICALSPHARMACEUTICALS1.00%1.00%
DLF Ltd.DLF Ltd. CONSTRUCTIONCONSTRUCTION1.20%1.20%
GAIL (India) Ltd.GAIL (India) Ltd. GASGAS1.18%1.18%
Grasim Industries Ltd.Grasim Industries Ltd. CEMENT AND CEMENT PRODUCTSCEMENT AND CEMENT PRODUCTS1.44%1.44%
COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
Hindalco Industries Ltd.Hindalco Industries Ltd. ALUMINIUMALUMINIUM 0.90%0.90%
Hindustan Unilever Ltd.Hindustan Unilever Ltd. DIVERSIFIEDDIVERSIFIED 2.13%2.13%
Housing Development Finance Housing Development Finance Corporation Ltd.Corporation Ltd. FINANCE - HOUSINGFINANCE - HOUSING
4.87%4.87%
I T C Ltd.I T C Ltd. CIGARETTESCIGARETTES 4.64%4.64%
ICICI Bank Ltd.ICICI Bank Ltd. BANKSBANKS 6.55%6.55%
Idea Cellular Ltd.Idea Cellular Ltd. TELECOMMUNICATION - SERVICESTELECOMMUNICATION - SERVICES1.00%1.00%
Infosys Technologies Ltd.Infosys Technologies Ltd. COMPUTERS - SOFTWARECOMPUTERS - SOFTWARE 7.99%7.99%
Jindal Steel & Power Ltd.Jindal Steel & Power Ltd. STEEL AND STEEL PRODUCTSSTEEL AND STEEL PRODUCTS 0.61%0.61%
Larsen & Toubro Ltd.Larsen & Toubro Ltd. ENGINEERINGENGINEERING 7.20%7.20%
Mahindra & Mahindra Ltd.Mahindra & Mahindra Ltd. AUTOMOBILES - 4 WHEELERSAUTOMOBILES - 4 WHEELERS 1.34%1.34%
Maruti Suzuki India Ltd.Maruti Suzuki India Ltd. AUTOMOBILES - 4 WHEELERSAUTOMOBILES - 4 WHEELERS 1.49%1.49%
NTPC Ltd.NTPC Ltd. POWERPOWER 1.44%1.44%
NALCONALCO ALLUMINIUMALLUMINIUM 0.22%0.22%
Oil & Natural Gas Corporation Ltd.Oil & Natural Gas Corporation Ltd. OIL EXPLORATION/PRODUCTIONOIL EXPLORATION/PRODUCTION3.13%3.13%
HCL Technologies Ltd.HCL Technologies Ltd. COMPUTERS - SOFTWARECOMPUTERS - SOFTWARE 0.50%0.50%
COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
HDFC Bank Ltd.HDFC Bank Ltd. BANKSBANKS 4.87%4.87%
Hero Honda Motors Ltd.Hero Honda Motors Ltd.AUTOMOBILES - 2 AND 3 AUTOMOBILES - 2 AND 3 WHEELERSWHEELERS
1.06%1.06%
Power Grid Corporation of India Ltd.Power Grid Corporation of India Ltd. POWERPOWER 0.48%0.48%
Punjab National BankPunjab National Bank BANKSBANKS 0.71%0.71%
Ranbaxy Laboratories Ltd.Ranbaxy Laboratories Ltd. PHARMACEUTICALSPHARMACEUTICALS 0.39%0.39%
Reliance Capital Ltd.Reliance Capital Ltd. FINANCEFINANCE 0.78%0.78%
Reliance Communications Ltd.Reliance Communications Ltd. TELECOMMUNICATION - SERVICESTELECOMMUNICATION - SERVICES1.38%1.38%
Reliance Industries Ltd.Reliance Industries Ltd. REFINERIESREFINERIES 11.18%11.18%
Reliance Infrastructure Ltd.Reliance Infrastructure Ltd. POWERPOWER 1.26%1.26%
Reliance Power Ltd.Reliance Power Ltd. POWERPOWER 0.46%0.46%
Siemens Ltd.Siemens Ltd. ELECTRICAL EQUIPMENTELECTRICAL EQUIPMENT 0.61%0.61%
State Bank of IndiaState Bank of India BANKSBANKS 3.52%3.52%
Steel Authority of India Ltd.Steel Authority of India Ltd. STEEL AND STEEL PRODUCTSSTEEL AND STEEL PRODUCTS 0.75%0.75%
Sterlite Industries (India) Ltd.Sterlite Industries (India) Ltd. METALSMETALS 1.69%1.69%
COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
Tata Motors Ltd.Tata Motors Ltd. AUTOMOBILES - 4 WHEELERSAUTOMOBILES - 4 WHEELERS0.910.91
Tata Power Co. Ltd.Tata Power Co. Ltd. POWERPOWER1.671.67
Tata Steel Ltd.Tata Steel Ltd. STEEL AND STEEL PRODUCTSSTEEL AND STEEL PRODUCTS
1.821.82
Unitech Ltd.Unitech Ltd. CONSTRUCTIONCONSTRUCTION1.131.13
Sun Pharmaceutical Industries Ltd.Sun Pharmaceutical Industries Ltd. PHARMACEUTICALSPHARMACEUTICALS0.70%0.70%
Suzlon Energy Ltd.Suzlon Energy Ltd. ELECTRICAL EQUIPMENTELECTRICAL EQUIPMENT
0.44%0.44%
Tata CommunicationTata Communication TELECOMMUNICATION - SERVICESTELECOMMUNICATION - SERVICES
0.27%0.27%
Tata Consultancy Services Ltd.Tata Consultancy Services Ltd. COMPUTERS - SOFTWARECOMPUTERS - SOFTWARE
2.01%2.01%
Bombay Stock Exchange (BSE) Bombay Stock Exchange (BSE) Sensex30Sensex30
It is an index of 30 stocks representing 12 major sectorsIt is an index of 30 stocks representing 12 major sectors
BSE is the world's number 1 exchange in terms of the BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in number of listed companies and the world's 5th in transaction numberstransaction numbers
Market capitalization as on December 31, 2007 stood at Market capitalization as on December 31, 2007 stood at $1.79 trillion$1.79 trillion
An investor can choose from more than 4,700 listed An investor can choose from more than 4,700 listed companiescompanies
For easy reference, Shares are classified into A, B, S, T and For easy reference, Shares are classified into A, B, S, T and Z groupsZ groups
Sensex 30Sensex 30COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
ACC Ltd.ACC Ltd. Housing RelatedHousing Related 0.71%0.71%
Bharat Heavy Electricals Ltd.Bharat Heavy Electricals Ltd. Capital GoodsCapital Goods 3.15%3.15%
Bharti Airtel Ltd.Bharti Airtel Ltd. TelecomTelecom 4.76%4.76%
DLF Ltd.DLF Ltd. Housing RelatedHousing Related 1.47%1.47%
Grasim Industries Ltd.Grasim Industries Ltd. DiversifiedDiversified 1.56%1.56%
HDFCHDFC FinanceFinance 5.25%5.25%
HDFC Bank Ltd.HDFC Bank Ltd. FinanceFinance 4.47%4.47%
Hero Honda Motors Ltd.Hero Honda Motors Ltd. Transport EquipmentsTransport Equipments 1.36%1.36%
Hindalco Industries Ltd.Hindalco Industries Ltd. Metal,Metal Products & MiningMetal,Metal Products & Mining 1.23%1.23%
Hindustan Unilever Ltd.Hindustan Unilever Ltd. FMCGFMCG 2.30%2.30%
ICICI Bank Ltd.ICICI Bank Ltd. FinanceFinance 7.60%7.60%
Infosys Technologies Ltd.Infosys Technologies Ltd. Information TechnologyInformation Technology 9.32%9.32%
ITC Ltd.ITC Ltd. FMCGFMCG 4.86%4.86%
Jaiprakash Associates Ltd.Jaiprakash Associates Ltd. Housing RelatedHousing Related1.46%1.46%
COMPANIESCOMPANIES SECTORSECTOR WEIGHTAGEWEIGHTAGE
Larsen & Toubro LimitedLarsen & Toubro Limited Capital GoodsCapital Goods 7.07%7.07%
Mahindra & Mahindra Ltd.Mahindra & Mahindra Ltd. Transport EquipmentsTransport Equipments 1.50%1.50%
Maruti Suzuki India Ltd.Maruti Suzuki India Ltd. Transport EquipmentsTransport Equipments 1.92%1.92%
NTPC Ltd.NTPC Ltd. PowerPower 2.08%2.08%
ONGC Ltd.ONGC Ltd. Oil & GasOil & Gas 4.02%4.02%
Reliance Communications Reliance Communications LimitedLimited TelecomTelecom
1.79%1.79%
Reliance Industries Ltd.Reliance Industries Ltd. Oil & GasOil & Gas 13.36%13.36%
Reliance Infrastructure Ltd.Reliance Infrastructure Ltd. PowerPower 1.47%1.47%
State Bank of IndiaState Bank of India FinanceFinance 4.95%4.95%
Sterlite Industries (India) Ltd.Sterlite Industries (India) Ltd. Metal,Metal Products & MiningMetal,Metal Products & Mining 2.31%2.31%
Sun Pharmaceutical Industries Sun Pharmaceutical Industries Ltd.Ltd. HealthcareHealthcare
0.81%0.81%
Tata Consultancy Services Tata Consultancy Services LimitedLimited Information TechnologyInformation Technology
2.31%2.31%
Tata Motors Ltd.Tata Motors Ltd. Transport EquipmentsTransport Equipments 1.20%1.20%
Tata Power Company Ltd.Tata Power Company Ltd. PowerPower 1.76%1.76%
Tata Steel Ltd.Tata Steel Ltd. Metal,Metal Products & MiningMetal,Metal Products & Mining 2.60%2.60%
Wipro Ltd.Wipro Ltd. Information TechnologyInformation Technology 1.35%1.35%
BSE- Sectoral IndicesBSE- Sectoral Indices POWER AUTOPOWER AUTO
IT OIL&GASIT OIL&GAS
BANKEX CDBANKEX CD
FMCGFMCG
PSUPSU
METALMETAL
REALTYREALTY
CGCG
Cash Market v/s Future MarketCash Market v/s Future Market
Risk Involved is lessRisk Involved is less Has no ExpiryHas no Expiry Can buy any number of Can buy any number of
SharesShares Need to pay full amount of Need to pay full amount of
purchasepurchase Can trade only in Equity Can trade only in Equity
sharesshares Can trade in more than Can trade in more than
5000 listed shares5000 listed shares Cannot buy or sell Index Cannot buy or sell Index
Eg-Reliance, Tata Steel, Eg-Reliance, Tata Steel, Bharti Airtel, etcBharti Airtel, etc
High Risk InvolvedHigh Risk Involved Has an definite ExpiryHas an definite Expiry Need to buy in fixed Lot Need to buy in fixed Lot
sizessizes Need to pay margin Need to pay margin
amount for purchaseamount for purchase Can trade all Instruments Can trade all Instruments
of financial marketof financial market Option available here is Option available here is
less than 500 sharesless than 500 shares Can buy or sell Index alsoCan buy or sell Index also
Eg-Nifty50 futures, Bankex Eg-Nifty50 futures, Bankex futures, Reliance futuresfutures, Reliance futures
Basic Terminologies Before Basic Terminologies Before Trading Trading
CapitalCapital Trading AccountTrading Account Depository ParticipantDepository Participant Broker & Sub-BrokerBroker & Sub-Broker BrokerageBrokerage Script CodeScript Code Script NameScript Name Intra-day & DeliveryIntra-day & Delivery Bid Quantity & Bid PriceBid Quantity & Bid Price Ask Quantity & Ask PriceAsk Quantity & Ask Price Block DealBlock Deal Short TradeShort Trade ADR & GDRADR & GDR
Open, High, Low & Close PriceOpen, High, Low & Close Price Last Traded Price & QuantityLast Traded Price & Quantity Stop LossStop Loss Hedge FundsHedge Funds P/E RatioP/E Ratio E.P.S.E.P.S. Top LineTop Line Bottom LineBottom Line 52-week High/Low52-week High/Low Circuit LimitCircuit Limit Nifty Premium & DiscountNifty Premium & Discount Futures ContractFutures Contract Options ContractOptions Contract
How to Start Trading?How to Start Trading?
REGISTER DEPOSIT CAPITAL
CALL BROKER
SELL SHARES PROFIT or LOSS
BUY SHARES
Why share prices fluctuate?Why share prices fluctuate?
Demand & SupplyDemand & Supply:: Speculation or Insider TradingSpeculation or Insider Trading
ResultsResults
FDIFDI
Political InterferencePolitical Interference
Change in PolicyChange in Policy
Change in ManagementChange in Management
Volatility Index (VIX)Volatility Index (VIX) Volatility Index is a measure of market’s expectation of Volatility Index is a measure of market’s expectation of
volatility over the near term.volatility over the near term. Is described as the “rate and magnitude of changes in Is described as the “rate and magnitude of changes in
prices” prices” In finance often referred to as risk.In finance often referred to as risk. India VIX is a volatility index based on the Nifty 50 Index India VIX is a volatility index based on the Nifty 50 Index
Option prices.Option prices. India VIX is calculated based on the bid-offer prices of the India VIX is calculated based on the bid-offer prices of the
near and mid month Nifty 50 Index Options.near and mid month Nifty 50 Index Options. India VIX is a premier barometer of investor consensus of India VIX is a premier barometer of investor consensus of
market volatility expressed through option pricing.market volatility expressed through option pricing. The Chicago Board of Options Exchange (CBOE) was the first The Chicago Board of Options Exchange (CBOE) was the first
to introduce the volatility index for the US markets in 1993.to introduce the volatility index for the US markets in 1993.
VIX for week ended 25/09/09VIX for week ended 25/09/09
DateDate OpenOpen HighHigh LowLow CloseClose Prev. Prev. CloseClose
ChangeChange % % Change Change
22/9/09 22/9/09 25.8625.86 27.8627.86 25.8625.86 26.8026.80 25.8625.86 0.940.94 3.633.63
23/9/0923/9/09 26.8026.80 27.5027.50 25.8825.88 26.5126.51 26.826.8 -0.29-0.29 -1.08-1.08
24/9/0924/9/09 26.5126.51 28.7628.76 24.2924.29 24.3624.36 26.5126.51 -2.15-2.15 -8.11-8.11
25/9/0925/9/09 26.4326.43 26.4326.43 24.4324.43 26.1126.11 24.3624.36 1.751.75 7.187.18
Effects of Inflation on Indian Effects of Inflation on Indian Stock MarketStock Market
RBI Increasing RatesRBI Increasing Rates
Lack of LiquidityLack of Liquidity
Poor results of CorporatePoor results of Corporate
Real Estate Leading the down-fallReal Estate Leading the down-fall
Banking sector the under-performerBanking sector the under-performer
Financial Aspects of Capital Financial Aspects of Capital MarketMarket
Average Daily Turnover of Rs. 60,000 Crores.Average Daily Turnover of Rs. 60,000 Crores.
Contribution of Cash Market = 20% of Total Turnover.Contribution of Cash Market = 20% of Total Turnover.
80% comes from Derivatives side.80% comes from Derivatives side.
About 30% of Total Turnover comes from FII’s.About 30% of Total Turnover comes from FII’s.
Next 50% comes from FI’s, Insurance Companies, A.M.C.’s, Next 50% comes from FI’s, Insurance Companies, A.M.C.’s, Mutual Funds and other Institutional Investors.Mutual Funds and other Institutional Investors.
Sector Wise FDI Limits in Sector Wise FDI Limits in IndiaIndia
Hotel & Tourism sector – 100%Hotel & Tourism sector – 100%
Non-Banking Financial Companies (NBFC) – 49%Non-Banking Financial Companies (NBFC) – 49%
Insurance Sector – 26%Insurance Sector – 26%
Telecommunication – 49%Telecommunication – 49%
Trading – 51% to 100%Trading – 51% to 100%
Power – 100%Power – 100%
Drugs & Pharmaceuticals – 100%Drugs & Pharmaceuticals – 100%
Roads, Highways, Ports and Harbors – 100%Roads, Highways, Ports and Harbors – 100%
Role Of Credit Rating AgenciesRole Of Credit Rating Agencies
Their main function is to grade the different sector and Their main function is to grade the different sector and companies in terms of performance and offer solutions for companies in terms of performance and offer solutions for up gradation. up gradation.
The credit rating agencies in India offer varied services like The credit rating agencies in India offer varied services like mutual consulting services, which comprises of operation mutual consulting services, which comprises of operation up gradation, risk management. up gradation, risk management.
The have special sections to carry on research and The have special sections to carry on research and development work of the industries. development work of the industries.
CRISIL & ICRA the two top tier Rating Agencies in IndiaCRISIL & ICRA the two top tier Rating Agencies in India Helps the Stock Exchanges in classifying the stocks in Helps the Stock Exchanges in classifying the stocks in
various groups. Eg- A, B, T, Z, etc.various groups. Eg- A, B, T, Z, etc. Ratings use by investment banks and broker-dealers, Ratings use by investment banks and broker-dealers,
government regulators, etcgovernment regulators, etc
Impact of various events on Impact of various events on capital marketcapital market
October 30, 2006October 30, 2006 The Sensex crossed the magical figure of The Sensex crossed the magical figure of 13,000 and closed at 13,024.26 points. It took 135 days 13,000 and closed at 13,024.26 points. It took 135 days
December 5, 2006December 5, 2006 The Sensex crossed the 14,000-mark to The Sensex crossed the 14,000-mark to touch 14,028 points. It took 36 daystouch 14,028 points. It took 36 days
July 6, 2007July 6, 2007 The Sensex crossed the magical figure of 15,000 to The Sensex crossed the magical figure of 15,000 to touch in afternoon trade. It took seven months for the Sensex to touch in afternoon trade. It took seven months for the Sensex to move from 14,000 to 15,000 pointsmove from 14,000 to 15,000 points
September 19, 2007September 19, 2007 The Sensex scaled yet another milestone The Sensex scaled yet another milestone during early morning trade, rising by 450 points from the previous during early morning trade, rising by 450 points from the previous close it took 53 days to reach 16,000 from 15,000. Nifty also close it took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at 4659, up 113 points.touched a new high at 4659, up 113 points.
September 26, 2007September 26, 2007 The Sensex scaled yet another height The Sensex scaled yet another height during early morning trade crossing the 17,000-mark . Some profit during early morning trade crossing the 17,000-mark . Some profit taking towards the end, saw the index slip into red to 16,887 - taking towards the end, saw the index slip into red to 16,887 - down 187 points from the day's high. The Sensex ended with a down 187 points from the day's high. The Sensex ended with a gain of 22 points at 16,921.gain of 22 points at 16,921.
October 9, 2007October 9, 2007 The BSE Sensex crossed the it took just 8 The BSE Sensex crossed the it took just 8 days to cross 18,000 points. The index zoomed to a new all-days to cross 18,000 points. The index zoomed to a new all-time intra-day high of 18,327. time intra-day high of 18,327.
October 15, 2007October 15, 2007 The Sensex crossed the 19,000-mark, The Sensex crossed the 19,000-mark, the index gained the last 1,000 points in just four trading the index gained the last 1,000 points in just four trading days. The Nifty closed 242 points to close at 5,670.days. The Nifty closed 242 points to close at 5,670.
October 29, 2007October 29, 2007 The Sensex crossed the 20,000. The The Sensex crossed the 20,000. The index took only 10 trading days to gain 1,000 points after index took only 10 trading days to gain 1,000 points after the index crossed the 19,000-mark on October 15. The NSE the index crossed the 19,000-mark on October 15. The NSE Nifty rose to a record high 5,922.50 pointsNifty rose to a record high 5,922.50 points
January 8, 2008January 8, 2008 The sensex peaks. It crossed the 21,000 The sensex peaks. It crossed the 21,000 mark in intra-day trading after 49 trading sessionsmark in intra-day trading after 49 trading sessions
January 21 & 22, 2008 January 21 & 22, 2008 The sensex Losses nearly 3000 The sensex Losses nearly 3000 points to end above 16000 odd. Touching 15500 in intra-day points to end above 16000 odd. Touching 15500 in intra-day trade trade
June 13, 2008June 13, 2008 The sensex closed below 15,200 mark, The sensex closed below 15,200 mark, Indian market suffer with major downfall from January Indian market suffer with major downfall from January 21,200821,2008
June 25, 2008June 25, 2008 The sensex touched an intra day low of The sensex touched an intra day low of 13,731 during the early trades, then pulled back and ended 13,731 during the early trades, then pulled back and ended up at 14,220.up at 14,220.
July 2, 2008July 2, 2008 The sensex hit an intra day low of 12,822.70 The sensex hit an intra day low of 12,822.70 on July 2, 2008. This is the lowest that it has ever been in on July 2, 2008. This is the lowest that it has ever been in the past year.the past year.
Oct 6, 2008Oct 6, 2008 The sensex closed at 11801.70 hitting the The sensex closed at 11801.70 hitting the lowest in the past 2 yearslowest in the past 2 years
Oct 10, 2008Oct 10, 2008 The Sensex today closed at 10527,800.51 The Sensex today closed at 10527,800.51 points down from the previous day having seen an intraday points down from the previous day having seen an intraday fall of as large as 1063 pointsfall of as large as 1063 points
May 18, 2009May 18, 2009 After the result of 15th Indian general After the result of 15th Indian general election Sensex gained 2110.79 points from the previous election Sensex gained 2110.79 points from the previous close of 12173.42 these creates a new history in Indian close of 12173.42 these creates a new history in Indian MarketMarket
Impact of Slowdown on Impact of Slowdown on markets markets
Indian IT sector Indian IT sector
PowerPower
Banking Banking
Real-estateReal-estate
ConstructionConstruction
Sensex from 2008-2009Sensex from 2008-2009
State of Capital Market State of Capital Market
Foreign Capital coming back to IndiaForeign Capital coming back to India
It Sector Leading the wayIt Sector Leading the way
Crude helping market’s up-moveCrude helping market’s up-move
Real-Estate still under-pressureReal-Estate still under-pressure
Banks full of LiquidityBanks full of Liquidity
Investor confidence helping Stock MarketInvestor confidence helping Stock Market
Basic Trading StrategiesBasic Trading Strategies
Develop a winning strategy and trade often. A small daily Develop a winning strategy and trade often. A small daily profit can provide a large annual return profit can provide a large annual return
Trade only stocks with the highest growth probabilities Trade only stocks with the highest growth probabilities
Be sure that expected return is larger than the transaction Be sure that expected return is larger than the transaction cost cost
Avoid risk as much as possible Avoid risk as much as possible
Diversification is the only way to survive in the market Diversification is the only way to survive in the market
Capital of Rs 10k
Invest 2k in one sector
2k in another sector
Invest 3k in Mutual Fund or FD’s
Retain 20% for contingencies
Dow TheoryDow Theory
The market has three movements The market has three movements
Market Trends have three phases Market Trends have three phases
The stock market discounts all news The stock market discounts all news
Stock market averages must confirm each other Stock market averages must confirm each other
Trends are confirmed by volume Trends are confirmed by volume
Trends exist until definitive signals prove that they have Trends exist until definitive signals prove that they have ended ended
What Are...What Are...Derivatives?Derivatives?
DERIVATIVESDERIVATIVES
A A Financial Instrument Financial Instrument That Derives Its Value That Derives Its Value From An Underlying From An Underlying
Security Security
Derivatives Derivatives ExplanationExplanation
An easy way to think of derivatives is as a “side bet” on interest rates, exchange rates, commodity prices, and practically ANYTHING that you can think of.
Why Derivatives?Why Derivatives? Not to raise capitalNot to raise capital Buy or sell to protect against Buy or sell to protect against
adverse changes in external adverse changes in external factorsfactors
Conventional Conventional Securities MarketSecurities Market
0
10,000
20,000
Am
ount
in
B
illio
ns
of $
Bonds Cash Stocks
Types
Traditional Securities
Types of DerivativesTypes of Derivatives
ForwardsForwards FuturesFutures OptionsOptions SwapsSwaps
ForwardsForwards
Forwards ContractsForwards Contracts
The agreement to pay for and pick up, “Something” at a pre-determined date and or time, for a pre-determined price. Usually traded off of the trading floor between two firms.
TermsTerms Taking DeliveryTaking Delivery: Physical reception of : Physical reception of
item.item. Deliverable InstrumentDeliverable Instrument: The item to be : The item to be
delivereddelivered Making DeliveryMaking Delivery: Turning over the item.: Turning over the item.
Forwards are Forwards are notnot options, they are options, they are obligations and should be considered obligations and should be considered as a “cash transaction.”as a “cash transaction.”
ForwardsForwards
0
2,000
4,000
6,000
8,000
Am
ount
in
Bill
ions
of $
Interest-RateFutures
Stock-IndexFutures
Currency Futures
Types
Exchange Traded Derivatives "Forwards"
Forwards “OTC”Forwards “OTC”
Over-The-Counter Derivatives "Forwards"
Currency Contracts72%
Interest-Rate Contracts
28%
A Modest ExampleA Modest Example
An agreement on Monday to buy a book, (Fin 374c) from a bookstore on Friday for $1000.00. On Friday, you return to the bookstore and take delivery of the book and pay the $1000.00.The contract is actually the agreement.
FuturesFutures
FuturesFutures
Similar to forwards in length of time. However, profits and losses are recognized at the close of business daily, “Mark-to-market.” Transactions go through a clearinghouse to reduce default risk. 90% of all futures contracts are delivered to someone other than the original buyer.
Futures ExampleFutures ExampleOn Monday we enter into a futures contract to buyour book on Friday. We are required to place a deposit for the book of 50% ($500.00). We are told that if the book appreciates in value we may be required to increase the deposit. If the book depreciates in value, we may take back some of the money. Wednesday the book goes to $1500.00. We must deposit another $250.00. On Thursday the bookdrops to $750.00. We can collect $375.00. On Fridaythe book value is $800.00, therefore we owe $425.00on the remaining balance.
OptionsOptions
OptionsOptionsOptions come in many flavors. To name a few: collar, cylinder, fence, mini-max, zero-cost tunnel and straddle. These are all newer forms of options. The most common options discussed are put and call.An OPTION is the right, not the obligation to buy or sell an underlying instrument.
Option TermsOption Terms Put: the right to Put: the right to sellsell @ a certain price @ a certain price Call: the right to Call: the right to buybuy @ a certain price @ a certain price Long: to Long: to purchasepurchase the option the option Short: to Short: to sellsell or or writewrite the option the option Bullish: feel the value will increaseBullish: feel the value will increase Bearish: feel the value will decreaseBearish: feel the value will decrease Strike/Exercise Price: Price the option Strike/Exercise Price: Price the option
can be bought or sold. can be bought or sold.
Option MarketOption Market
0 500 1,000 1,500 2,000 2,500 3,000 3,500
In Billions of $
Interest-Rate Options
Currency Options
Stock-Index Options
Individual Stock Options
Typ
es
Exchange Traded Derivatives "Options"
Options ContinuedOptions Continued
Over-The-Counter Derivitaves "Options"
OTC Interest-Rate Options
71%
OTC Currency Options
29%
CallsCallsLong a call. Person buys the right (a contract) to buyan asset at a cretin price. They feel that the price in the future will exceed the strike price. This is a bullish position.
Short a Call. Person sells the right (a contract) to someone that allows them to buy a asset at a cretinprice. The writer feels that the asset will devalueover the time period of the contract. This person isbearish on that asset.
PUTSPUTSLong a Put. Buy the right to sell an asset at a pre-determined price. You feel that the asset will devalue over the time of the contract. Thereforeyou can sell the asset at a higher price than is the current market value. This is a bearish position.
Short a Put. Sell the right to someone else. This will allow them to sell the asset at a specific price. They feel the price will go down and you do not. This is a bullish position.
SwapsSwaps
SWAPSSWAPS
New in the market, late 70’s early New in the market, late 70’s early 80’s80’s
Two Types: Interest Rate & Two Types: Interest Rate & Currency Currency
SwapsSwaps
Over-The-Counter Derivatives "Swaps"
Interest-Rate Sw aps88%
Currency Sw aps12%
Swap UseSwap Use To smooth out interest rate payments To smooth out interest rate payments
in a cyclic environment.in a cyclic environment. To secure and level out future To secure and level out future
interest payments.interest payments. To secure foreign currency for loans To secure foreign currency for loans
when you are a visitor in that country when you are a visitor in that country and it would be too difficult to secure and it would be too difficult to secure credit or the cost is prohibitive.credit or the cost is prohibitive.
Derivative SecuritiesDerivative Securities
Mortgage Backed Securities: Mortgage Backed Securities: Fanny Mae, Freddie MacFanny Mae, Freddie Mac
Structured Notes: Sally MaeStructured Notes: Sally Mae
Derivative SecuritiesDerivative Securities
0
500
1000
Mortgage Derivatives Structured Notes
Derivitave Securities
ExplanationExplanation
Freddie Mac & Fanny Mae: Both are derivative instruments used to pool Home Mortgage loans. This creates a secondary market which allows banks to sell the loans, therefore reducing their risk. It also reduces default risk for the holder. These are also known as pass through instruments.
Cont’d ExplanationCont’d Explanation
Sally Mae: Same principal as the previous example except they use student loans. All of these also help to keep interest rates for the underlying asset low by keeping default risk down.
Pass ThroughPass Through
0
500
1000
Mortgage Derivatives Structured Notes
Derivitave Securities
Standard SecuritiesStandard Securities StocksStocks BondsBonds CashCash
Standard SecuritiesStandard Securities
0
10,000
20,000
Am
ou
nt
in
Bill
ion
s o
f $
Bonds Cash Stocks
Types
Traditional Securities
Total MarketTotal Market
The standard market is what most people think of when they think of the market. The truth is that derivatives are the fastest growing sector of the market. In fact, they are the largest section of the market. We did not consider mutual funds in this presentation. There are more mutual funds in the market than there are stocks. Again, the next graph does not account for mutual funds.
Total MarketTotal Market
Total Market: Traditional & Derivative
Total Derivatives43%
Total Traditional57%
Thank YouThank You
