MARKETING OF SECURITIES

Presented to : mam nisha aggarwal

What is marketing of security ?

It is a procedure to approach a large number of investors to invest their funds or savings in the shares or debentures of a company.

What are securities ?

Securities are a form of ownership that can be easily traded on a secondary market.

Securities allow investors to own the underlying asset without taking possession.

Defined as financial instruements that have some financial value, and they can be traded amongst investors, government and private enterprises.

Characteristics of securities

Risk

Liquidity

Return on Investment

1) Risk

All investments carry some degree of risk. Higher the risk , Higher are the profits.

And vice- versa. Many people stake a significant fraction of

their money in stock markets when they are aware of the risks ! If their estimate works, they earn many times their investments but if it fails, they go bankrupt.

So risk in securities is another factor which promotes its buying and selling.

Types of Risk

Product knowledge and risk tolerance

Counter Party

risk

Price and

liquidity risk

Product knowledge and risk tolerance

Before trading in any security, investors should carefully read the most up-to-date prospectuses/listing documents, financial statements, announcements and other information published either on the issuer’s websites.

Investors should not trade any security unless it suits their investment objectives, financial resources and risk tolerance.

Price and liquidity risks: Price of any security may go up or down so there is

an inherent risk that losses may be incurred as a result of buying and selling securities .

Securities Price may also fluctuate due to various market factors, and investors exposure to risk may vary according to type of orders they input , the way the transaction is financed and the nature of the security concerned.

Liquidity of securities may also fluctuate, resulting in situations where an investor may not be able to buy or sell the security in a timely manner at their preferred price range if the turnover volume were to drop significantly.

Counterparty Risk

Some securities such as structured products and Exchange Traded Funds may carry exposure to counterparty risk of financial intermediaries involved in structuring or managing the products concerned or providing liquidity to support trading of the securities.

2) Liquidity Liquidity of a financial product or asset or

financial instruements is the ease with which it is traded in the market.

It means that there are lots of potential buyers and sellers who are interested in that particular security and so, it can be traded frequently, thereby, increasing the scope of negotiation in price of the security .

Generally, investors prefer to have assets with high liquidity.

Return on Investments It’s a human habit to calculate the gains

or losses incurred in a transaction.ROI is a factor that motivates people to buy and sell securities.

Before investing in securities an investor always determine the rate of return associate with company in which securities he/she wants to invest.

ROI = Gain from investment –Cost of investment Cost of investmentGain from investment refers to the proceeds

obtained from selling the investment of interest.

Higher ROI then the investment should be made.

Marketable Securities

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

Money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

Money market securities consist of negotiable certificate of deposits, treasury bills, commercial paper etc,.

Money market Securities

Types of money market securities

A market in which individuals and institutions trade financial securities.

In such securities, the maturity period is greater than one year and for some securities, there is no definite maturity period.

Capital Market Securities

Fixed income Securities Bonds Treasury Notes and Bonds Federal agencies securities Municipal Bonds Corporate Bonds Common Stocks

Types of capital market securities

Derivatives

Options FuturesRights and Warrants

OPTIONS

An option is contract that gives the holder the right to buy or sell underlying assets at some fixed time in the futures. It is completely an option to the holder weather to buy or sell the assets or not.

Important Terminology

• UNDERLYING - The specific security / asset on which an options contract is based.

• OPTION PREMIUM - This is the price paid by the buyer to the seller to acquire the right to buy or sell.

•STRIKE PRICE OR EXERCISE PRICE - The strike or exercise price of an option is the specified/ pre-determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day.

• EXPIRATION DATE - The date on which the option expires is known as Expiration Date. On Expiration date, either the option is exercised or it expires worthless.

What are Call Options?A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.

The seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.

Example: An investor buys One European call option on Infosys at the strike price of Rs. 3500 at a premium of Rs. 100. If the market price of Infosys on the day of expiry is more than Rs. 3500, the option will be exercised.

The investor will earn profits once the share price crosses Rs. 3600 (Strike Price + Premium i.e. 3500+100).

Suppose stock price is Rs. 3800, the option will be exercised and the investor will buy 1 share of Infosys from the seller of the option at Rs 3500 and sell it in the market at Rs 3800 making a profit of Rs. 200 { (Spot price - Strike price) - Premium}.

In another scenario, if at the time of expiry stock price falls below Rs. 3500 say suppose it touches Rs. 3000, the buyer of the call option will choose not to exercise his option. In this case the investor loses the premium (Rs 100), paid which shall be the profit earned by the seller of the call option.

What are Put Options?A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date.

The seller of the put option (one who is short Put) however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell.

Example: An investor buys one European Put option on Reliance at the strike price of Rs. 300/-, at a premium of Rs. 25/-. If the market price of Reliance, on the day of expiry is less than Rs. 300, the option can be exercised as it is 'in the money'.

The investor's Break even point is Rs. 275/ (Strike Price - premium paid) i.e., investor will earn profits if the market falls below 275.

Suppose stock price is Rs. 260, the buyer of the Put option immediately buys Reliance share in the market @ Rs. 260/- & exercises his option selling the Reliance share at Rs 300 to the option writer thus making a net profit of Rs. 15 {(Strike price - Spot Price) - Premium paid}.

In another scenario, if at the time of expiry, market price of Reliance is Rs 320/ - , the buyer of the Put option will choose not to exercise his option to sell as he can sell in the market at a higher rate. In this case the investor loses the premium paid (i.e Rs 25/-), which shall be the profit earned by the seller of the Put option.

FUTURES

So, a futures contract is an agreement between two parties: a short position - the party who agrees to deliver a commodity - and a long position - the party who agrees to receive a commodity. In the above scenario, the farmer would be the holder of the short position (agreeing to sell) while the bread maker would be the holder of the long (agreeing to buy). We will talk more about the outlooks of the long and short positions in the section on strategies, but for now it's important to know that every contract involves both positions. 

In every futures contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. The "price" of a futures contract is represented by the agreed-upon price of the underlying commodity or financial instrument that will be delivered in the future. 

The only difference between the options contract and the futures contract is – The buyer has to fulfill the obligation he has created by the way of futures contract while the other provides just an option to buy or sell , which may or may not happen.

Stock rights are instruments issued by companies to provide current shareholders with the opportunity to preserve their fraction of corporate ownership. A single right is issued for each share of stock, and each right can typically purchase a fraction of a share, so that multiple rights are required to purchase a single share. The underlying stock will trade with the right attached immediately after the right is issued, which is referred to as “rights on”. Then the right will detach from the stock and trade separately, and the stock then trades “rights off” until the rights expire. Rights are short-term instruments that expire quickly, usually within 30-60 days of issuance. The exercise price of rights is always set below the current market price, and no commission is charged for their redemption.

RIGHTS

Warrants are long-term instruments that also allow shareholders to purchase additional shares of stock at a discounted price, but they are typically issued with an exercise price above the current market price. A waiting period of perhaps six months to a year is thus assigned to warrants, which gives the stock price time to rise enough to exceed the exercise price and provide an intrinsic value. Warrants are usually offered in conjunction with fixed income securities and act as a “sweetener”, or financial enticement to purchase a bond or preferred stock. A single warrant can usually purchase a single share of stock, although they are structured to purchase more or less than this in some instances. Warrants have also been used on rare occasions to purchase other types of securities such as preferred offerings or bonds. Warrants differ from rights in that they must be purchased from a broker for a commission and usually qualify as marginable securities.

WARRANTS

Rights and warrants differ from market options in that they are initially issued only to existing shareholders, although a secondary market typically springs up that allows other buyers to acquire these securities. Shareholders who receive rights and warrants have four options available to them. They can:

1)Hold their rights or warrants for the time being2)Purchase additional rights or warrants in the secondary market3)Sell their rights or warrants to another investor4)Simply allow their rights or warrants to expire

The final option listed here is never a wise one for investors. If the current market price of the stock exceeds the exercise price, then investors who do not wish to exercise them should always sell them in the secondary market to receive their intrinsic value.Tax Treatment

Rights and warrants are taxed in the same manner as any other security. The difference between the exercise and sale prices of these securities is taxed as a long- or short-term gain. Any gain or loss realized from trading rights or warrants in the secondary market is taxed in the same manner (except that all gains and losses will be short-term).ConclusionRights and warrants can allow current shareholders to purchase additional shares at a discount and maintain their share of ownership in the company. However, neither of these instruments is used much today, as stock and market options have become much more popular.

INVESTORS

Classification of investor

s

Joint Stock

Company

Individuals Institution

al Buyers

INDIVIDUAL INVESTORSREAL INVESTORS

SPECULATORS

AFF. TO COMPANIES*

*INDIVIDUALS WHO ARE AFFILIATED WITH ISSUING COMPANY

REAL INVESTORS• Invest past surplus income for future income• Take minimum risk• Want to earn fair, regular, stable returns• Invest in liquid and easily marketable • Capital appreciation and growth• Lesser tax burden• Favourable denomination and period of maturity• Pride of ownership • Preference varies as per age, income, habits, education etc.

SPECULATIVE INVESTORS

• Are not real investors.• Aim is to sell the securities and make capital gains through fluctuations.

BULLS

BEARS

Ups and Downs

The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks

• The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned

INDIVIDUALS AFFILIATED WITH

THE ISSUING COMPANYExisting companies usually prefer to sell their fresh issues to its customers, employers, creditors and existing shareholders etc. This category of individuals investing in securities includes those persons who are affiliated with the issuing company in one way or the other.

The major advantage of selling securities to customers include:• Wide distribution of securities• Reduces chances of speculation • lesser costs and easier price fixation etc.

DRAWBACKS1) Lacks flexibility. 2) Company has to maintain satisfactory relations and prestige with customers , for that it has to pay a minimum fixed dividend or interest .

JOINT STOCK COMPANIES

• These are corporations or partnerships of two or more persons that own shares of stocking company .

• CERTIFICATES OF OWNERSHIP are issued by the company in return for each financial contribution .

• Share holders are free to transfer their ownership interest any time by selling their shareholding.

INSTITUTIONAL INVESTORS

Private Ins. investors

Public Financial Ins.

Foregin Ins. investors

PRIVATE INSTITUTIONAL INVESTORSThese incl. One hand Ins. Such as life insurance corporations, investment trusts, U.T.I, Commercial banks, P.P.Fs etc.

Invest their own funds.

They also invest on the behalf of their clients or their own funds for short term.

The other type of private ins. Investors includes Underwriters, Issue Houses, Issue Investment ,Bankers and Trustee companies.

PUBLIC INSTITUTIONS

These various government agencies engaged in promotion and financing Of business enterprises. These include IDBI, NIDC, I.F.C, ICICI, SIDC, SIICs.

HOW TO START TRADING

AT EXCHANGE

1. GET A BROKERPeople like you and me cannot just go to a stock exchange and buy and sell shares.Only the members of the stock exchange can. These members are called brokers and they buy and sell shares on our behalf.So, if you want to start investing in shares, you can do it only through a broker.Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator.You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).The Bombay Stock Exchange directory or the National Stock Exchange Web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.If you want an online broker, you can start by looking at the Web sites of some well-known online players:Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.

2. GET A DEMAT ACCOUNTGone are the days when shares were held as physical certificates.Today, they are held in an electronic form in demat accounts.Demat refers to a dematerialised account.Let's say your portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC.They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account.Periodically, you will get a demat statement telling you what shares you have in your demat account.How to get a demat accountTo get a demat account, you will have to approach a Depository Participant.A depository is a place where an investor's stocks are held in electronic form.There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.To get a list of the registered DPs, visit the NSDL and CDSL Web sites.

How to get a demat account ?To get a demat account, you will have to approach a Depository Participant.A depository is a place where an investor's stocks are held in electronic form.There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.To get a list of the registered DPs, visit the NSDL and CDSL Web sites.

Get a PANThe taxman demands that you get yourself a Permanent Account Number.This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman's database.

 Check if you need a UINThis depends on how much you plan to invest.The Unique Identification Number is the identification an investor needs to buy and sell shares or mutual fund units.It is part of the Security and Exchange Board of India's attempt to create a database of all Market Participants and Investors, called MAPIN.

Who needs a UIN?An investor who is involved in a single transaction of Rs 1,00,000 or more will have to quote his/ her UIN.If you plan to be a prominent stock market player or a mutual fund investor and expect to deal with such huge amounts in the near future, you should get a UIN.

METHODS OF MARKETING SECURITIES

• 1)Over the counter Placement

• 2)Right issue & 3) Bonus share

• 9) Red Herring Prospectus

• 8) Book building process

4) Public issue by

prospectus

5) Offer for sale

6) Tender method

Public issue by prospectus:

Most popular method of raising capital or marketing of securities for the public limited companies.

A Public Ltd. Co. issues a document, called prospectus, containing information about the company and inviting public to apply for shares or debentures of the companies.

Company may issue a prospectus inviting applications direct from the public or through some intermediaries such as brokers, investment bankers and underwriters, etc.

Thus, this method includes :

A) •Direct Selling Of Securities

B) •Sale through Investment intermediaries

c) •Underwritten placement

Direct selling of securities

This method can be successfully employed if the company wants to approach only a small number of institutional or other large investors.

This method is economical as it saves expenses and commission or profit of the intermediaries.

But if company wants to approach a large number of small investors, direct saving of securities may not be a sufficient method.

Sales through investment intermediaries

To remove the difficulties of direct selling a company may take help of intermediaries and specialized agencies in marketing of securities.

There are brokers, merchant bankers and others who provide specialized services and help company in selling its securities on commission basis.

These agencies may not guarantee the issue of securities or invest their own funds in purchase of securities but attract investors for the company.

Underwritten Placement:

A company may approach a firm of underwriters who guarantee the issue of securities for a fixed commission payable to them.

In case a company is not able to sell its securities in full, the underwriters purchase the unsubscribed securities out of their own funds.

2)Offer of Sale: Adopted in case of large issue of companies. The issuing company sells or agrees to sell the

securities for sale to certain issue houses or the specialized financial institutions at a fixed price.

The issue house or the financial institutions then issue advertisements making offer for sale of such securities at a price higher than the price at which they obtain the securities.

Company Promoter

Investment

Dealers

Public

3) Placement Method:

The securities are sold by the issuing companies to certain intermediaries such as brokers, issue houses or financial institutions , etc.

Cheap way of marketing securities as it saves in issuing costs but the securities are sold to only a selected group of investors.

4) Tender Method:

The issue price is not pre determined like the other usual methods of public issues.

The company announces the public issue without indicating the issue price inviting bids from various interested parties. The parties participating in the tender submit their maximum offers they are willing to pay as well as the number of shares they are interested to buy.

The company, after receiving various offers, may decide about the price in such a manner that the entire issue is fairly subscribed or sold to the parties participating in the tender.

5) Rights issue:

It is an invitation to the existing shareholders to subscribe for further shares to be issued by a company.

A right simply means an option to buy certain privileged price within a certain specific period.

Section 81 of the Companies Act 1956 has provided a pre emptive to the existing shareholders of a company to purchase shares in further issues of the company.

6) Bonus issue

A company having free reserves built out of genuine profits or share premium collected in cash may issue bonus shares to its existing shareholders

The companies which have huge accumulated profits and reserves but not so good liquidity position prefer to capitalize profits by the issue of bonus shares.

Bonus issue does not bring in fresh capital for the company, it only enables a company to restructure its capital.

7)Over the Counter Placement:

It permits smaller companies to raise funds. A company may place its issue through OTC Exchange. The procedure involved under this method is that the company wishing to raise funds through OTC Exchange appoints a member of OTCEI as a sponsor. The sponsor appraises the project and values the share of the company.

The sponsor ensures the success of the issue even if it has to subscribe to all the shares by itself.

8) Book building:

Book Building is the process of determining the price at which an Initial Public Offering will be offered.

SEBI guidelines, 1995 defined book-building as “a process undertaken by which a demand for the securities proposed to be issued by a body of corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document”.

Book building is actually a price discovery method. In this method, the company doesn't fix up a

particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed.

The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

The price at which the shares are allotted is known as cut off price .

Book building Process in India

9) Red Herring Prospectus: It is the preliminary registration submitted to Securities

and Exchange Commission by the companies intending public offerings of securities.

It outlines the important information about the new issue, including proposed price range and balance sheet and other relevant information about the company.

Red herring prospectus means a prospectus that does not have complete particulars of the price of the securities offered and quantum of securities offered.