Understanding the Stock Market

The Financial System

Van Horne defined the financial system as, “the

system to allocate savings efficiently in an economy

to ultimate users either for investment in real assets

or for consumption.”

Subsystems of the Financial System

Financial System

Institutions Instruments Markets

Direct Indirect Derivatives Money Capital Market Market

MINISTRY OFFINANCE

NBFCs

SEBIRBI

Banks

IRDA

InsuranceCompanies

Mutual Funds

•Stock Exchanges•Underwriters•Stock Brokers•FIIs •Retail Investors

Pension,Provident

Funds

Financial Institutions

Term Lending

IDBI, IFCI,ICICI

SectoralEXIM, TFCI,

NHBNABARD

State Level

SFC,SIDC

Stock Market

A stock market is a public market (a loose network

of economic transactions not a physical facility or

discrete entity) for the trading of company stock and

derivatives at an agreed price; these are securities

listed on a stock exchange.

Primary and Secondary Markets

Primary market is the new issue market dealing in

securities which are not previously available but are

offered to the investors for the first time.

Secondary market deals in already issued securities. It

performs the essential function of providing liquidity and

marketability to investors.

SEBI • The Securities and Exchange Board of India was

established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

• The basic functions of the Securities and Exchange Board of India are to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.

Investors

The ones who invest money in the market by buying

shares of companies are called the investors. They

purchase securities with an expectation to earn

capital gains as well as dividends.

Why do investors invest?

• Dividends- Dividends are payments made by a

corporation to its shareholder members. It is the portion

of corporate profits paid out to stockholders.

• Capital Appreciation - A rise in the value of an asset

based on a rise in market price.

Categories of Investors

• Qualified Institutional Investors (QIB)

• Retail Individual Investors (RII)

• High Net-worth Individuals (NII)

Portfolio

• The term portfolio refers to

any collection of financial

assets such as stocks, bonds

and cash held by individual

investors and/or managed

by financial professionals,

banks and other financial

institutions.

The Traders

There is another category of market participants - the

traders. They are the ones who buy and sell

securities within a short period of time.

Why do traders invest?

Their prime motive is to use the rise and fall of

prices of securities on the stock exchange to

make money.

Equity and Derivatives Market

• The market in which shares are issued and traded is

the equity market. It is one of the most vital areas of

a market economy because …………………………………

• The derivatives market is the financial market for

derivatives, financial instruments like futures

contracts or options, which are derived from other

forms of assets.

Types of Issues

Prospectus

In finance, a prospectus is a document that describes a

financial security for potential buyers. A prospectus

commonly provides investors with material information about

mutual funds, stocks, bonds and other investments, such as a

description of the company's business, financial statements,

biographies of officers and directors, detailed information

about their compensation, any litigation that is taking place, a

list of material properties and any other material information.

Draft Offer Document

Draft Offer document' means the offer document in

draft stage. The draft offer documents are filed with

SEBI, at-least 21 days prior to the filing of the Offer

Document with ROC/SEs.

Book Building

Book Building is basically a process used in primary

market for efficient price discovery. It is a

mechanism where, during the period for which the

IPO is open, bids are collected from investors at

various prices, which are above or equal to the floor

price. The offer price is determined after the bid

closing date.

Red -herring prospectus

"Red-herring prospectus" means a prospectus, which

does not have complete particulars on the price of

the securities offered and quantum of securities

offered.

Abridged prospectus

'Abridged Prospectus' is a shorter version of the

Prospectus and contains all the salient features of a

Prospectus. It accompanies the application form of

public issues.

IPO Grading

IPO grading is the grade assigned by a Credit Rating

Agency registered with SEBI, to the initial public

offering (IPO) of equity shares or other convertible

securities.

Minimum Subscription Clause

If the company does not receive the minimum

subscription of 90% of the issued amount on the

date of closure of the issue, or if the subscription

level falls below 90% after the closure of issue on

account of cheques having being returned unpaid or

withdrawal of applications, the company shall

forthwith refund the entire subscription amount

received.

FV/IP/MP/BP

• Face Value

• Issue price

• Market Price

• Book Value

Stock Exchange

The stock exchanges provide a trading platform

where buyers and sellers can meet to transact in

securities. The trading platform provided by NSE/BSE

is an electronic one and there is no need for buyers

and sellers to meet at a physical location to trade.

They can trade through the computerized trading

screens.

Major Stock Exchanges

• The largest stock market in the United States is the New York

Stock Exchange (NYSE). The NASDAQ is the second-largest

stock exchange

• In Canada, the largest stock market is the Toronto Stock

Exchange.

• Major European examples of stock exchanges include the

Amsterdam Stock Exchange, London Stock Exchange, Paris

Bourse, and the Deutsche Börse (Frankfurt Stock Exchange).

Major Stock Exchanges

• In Africa, examples include Nigerian Stock Exchange, JSE

Limited, etc.

• Asian examples include the Singapore Exchange, the Tokyo

Stock Exchange, the Hong Kong Stock Exchange, the Shanghai

Stock Exchange, and the Bombay Stock Exchange.

• In Latin America, there are such exchanges as the BM&F

Bovespa and the BMV.

The National Stock Exchange

• The National Stock

Exchange (NSE) is a stock

exchange located at

Mumbai, Maharashtra ,

India.

• The NSE's key index is the

S&P CNX Nifty.

The Bombay Stock Exchange (BSE)

• The Bombay Stock Exchange

(BSE) is a stock exchange

located on Dalal Street,

Mumbai and is the oldest

stock exchange in Asia.

• The BSE SENSEX, also called

"BSE 30", is a widely used

market index in India and Asia.

Dalal Street

Dalal Street in downtown

Mumbai, India is the address

of the Bombay Stock

Exchange (in the Phiroze

Jeejeebhoy Towers) and

several related financial

firms and institutions. It is

the busiest street in the city.

Online Trading

Online Trading is a service offered on the Internet

whereby one can access the broker’s website

through his Internet enabled PC and place orders for

purchase / sale of securities through the broker’s

Internet based trading platform.

Accounts

• Demat Account• Trading Account• Bank Account

Dematerialization

• Dematerialization is the process by which a client can

get physical certificates converted into electronic

balances.

The Depositories Act,1996The Depositories Act,1996

• Introduction of Depository system in India.

• Issue, hold & transact in securities through

depositories.

• Two depositories operational i.e. NSDL & CDSL.

• Securities dematerialized at time of issue or

subsequently.

Entities Involved

• Depository

• Depository Participant (DP)

• Stock Exchange

• Broker

• Clearing House

• SEBI

Fundamental analysis

Fundamental analysis of a business involves

analyzing its financial health through:

• Economic analysis

• Industry analysis

• Company analysis

Technical analysis

• Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.

• Support and resistance

Stop loss

An order in a stock market, bond market, commodity

market or financial derivative market or an

instruction from customers to brokers to buy or sell

on the exchange. The purpose is to limit the loss.

Factors affecting share prices

• Demand and Supply

• News

• Market Sentiment

• Earning Per Share

• Price/Earning Ratio etc

Market sentiment-Bulls and Bears

• Market sentiment is the

general prevailing attitude

of investors as to

anticipated price

development in a market.

• Bullish or bearish?

PE ratio

The P/E ratio (price-to-earnings ratio) of a stock is a

measure of the price paid for a share relative to the

annual net income or profit earned by the firm per

share. The P/E ratio can therefore alternatively be

calculated by dividing the company's market

capitalization by its total annual earnings.

Derivatives

A security whose price is dependent upon or derived

from one or more underlying assets. The most common

underlying assets include stocks, bonds, commodities,

currencies, interest rates and market indexes. Most

derivatives are characterized by high leverage.

Futures/Forwards

• Futures/Forwards are contracts to buy or sell an

asset on or before a future date at a price specified

today.

Options

Options are contracts that give the owner the right,

but not the obligation, to buy (in the case of a call

option) or sell (in the case of a put option) an asset.

Thank-you!