Security market

Arti pradhan MBA -4sem

Topics for Discussion

Primary market

Secondary market

Working of secondary market

Stock markets in India

Stock market indices

Primary market or new issue market is that market where first hand securities or new securities are traded. The issuer may be new company or existing company.

1. Managers to the issue or Lead Managers

2. Registrar of the issue3. Underwriters 4. Bankers to the issue 5. Advertising agencies 6. The Financial Institutions7. Government and statutory

agencies 8. Collection centers

Responsible for most of IPO processing Also known as book running lead managers

or co-book running lead managers Example-DSP Merrill Lynch Ltd, ICICI

Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd

Main function is to keep record of the issue and ownership of company shares.

Investors can contact the Registrar to the Issue in case of any pre-Issue or post-Issue related problems

Enam Securities Private Limited Karvy Computershare Private Limited

Commercial or investment banks responsible for underwriting IPO's

work as intermediaries for Issuer Company and the buyers

Members of Syndicate deposit all the money received from investors to the Escrow Account opened by the Issuer Company.

The Bid cum Application Form along with other supporting documents are then send to the registrar of the issue for further processing.

Through prospectus Bought out deals/Offer for sale Private placement Right issue Book Building

Draft offer document to SEBI Offer document to registrar of the issue

and stock exchange Red Herring Prospectus

Issuer Company - IPO Process Initialization

Lead Manager's - Pre Issue Role - Part 1

SEBI – Prospectus Review Lead Manager - Pre Issue Role - Part

2 Investor – Bidding for the public issue Lead Manager – Price Fixing Registrar - Processing IPO

Applications Lead manager – Stock Listing

Fixed Price Book Building Process – floor price, cut-

off price

Retail Individual Investor (RII) (35%) High Networth Individual (HNI) Non-institutional bidders (15%) Qualified Institutional Bidders

(QIB's) (50%)

Promoters Credibility Efficiency of the management Project Detail Product Financial data Pending litigation Risk factors Auditor’s Report Statutory Clearance

permit trading in outstanding issues Proceeds of sale don’t go company but

to the current owner

1. Regulators2. Depositories3. Stock Exchanges4. Custodians5. Mutual Funds6. Brokers and sub brokers

Main purpose is to provide free and fair environment for trading

In India, the regulatory bodies are1. Ministry of Finance – recognition to stock

exchanges, regulation of operations2. SEBI- statutory status in 1992, main

functions are to protect the interest of investors, development and regulate security markets

3. Governing Board- elected members, govt. nominees, public representatives, main function is to orderly function of security market

Facilitates holding of securities in electronic form and along with depository participants, maintain the records.

Beneficiary owner opens an demat account with DP and operates through it.

2 depositories and 390 DP registered with SEBI

1. National Securities depository Limited (NSE)

2. Central Depository Services (I) Limited (BSE)

stock exchanges are the place, exclusively meant for the trading of the securities

In India, these are broadly divided into three categories,

1. National Level – NSE, BSE2. Regional Stock Exchanges3. OTCEI

Largest in terms of value of trading in equity, debt and derivatives

Incorporated in 1992 and recognized in April 1993

NEAT system Trading in all the three segments- equity,

wholesale debt and F&O

Established in 1875 under the name of "The Native Share & Stock Brokers Association"

1956, became recognized exchange under Securities Contracts (Regulation) Act, 1956

Earlier it was Association of persons and now demutualised in 2005 under BSE (Corporatisation and Demutualisation) Scheme, 2005

Started in 1992 on the models of NASDAQ and JASDAQ

It means trading across the counter in scrips

financial institution responsible for safeguarding a firm's or individual's financial assets

Their role is to execute the demand of their clients

Orders Margins Settlement

Trading in the stock exchange takes place through orders.

Types of Orders (in terms of price)-1. Limit order- maximum price in case

of purchase and minimum price in case of sale

2. Market order3. Stop Loss order In terms of time-1. Day order – valid for a day.2. Immediate or cancel order (ICO)

Best buy (Highest Bid) order is matched with best sell (Lowest ask) order

An order can be executed against multiple pending orders (an order can create multiple trades)

The matching of the orders is generally done on the price-time priority basis in the sequence of best price and then, within the price, by time priority basis.

Unmatched orders are known as “passive orders” and matched ones are known as “active orders”

First market orders are executed and then the limit orders, which remain in the list till that market rate is achieved.

Limit orders remain in “Limit Order Book”

It is the trading with borrowed funds or securities

Corporate brokers with Rs. 3 crore networth are eligible for margin trading (by SEBI)

Brokers further provide this to clients but a client can have this facility from one broker at a time

Single client can not have more than 10% of gross exposure of a broker

Initial margin is 50% and maintenance margin is 40%

Broker has to maintain scrip wise record for each client in case of margin trading

Categorization of securities in groups based on liquidity and impact cost for imposition of margin.

Group I Group II Group III

Liquidity Trading 80% of time in last 6 months

Trading 80% of time in last 6 months

Rest Others

Impact cost <1% >1%

VaR based margining system.   Specification of mark to Market margins  Specification of Intra-day trading limits and Gross

Exposure Limits Real time monitoring of the Intra-day trading

limits and Gross Exposure Limits by the Stock Exchanges

Specification of time limits of payment of margins  Collection of margins on upfront basis  Index based market wide circuit breakers Automatic de-activation of trading terminals in

case of breach of exposure limits

contd..

 VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market.

Additional margins have also been specified to address the balance 1% cases.

Collection of margins from institutional clients on T+1 basis

Daily margin is calculated to the gross exposure position (net of exposure on each single scrip)

If net of any single scrip is zero and difference of buy and sell price is taken into consideration

Daily margin is based on three types of margins:

1. Value at Risk Margin (VaR)2. Mark to Market Margin (MTM)3. Extreme Loss Margin (ELM)

Security Buy Value Sell Value Buy Value – Sell Value

A 20,00,000 10,00,000 +10,00,000

B 10,00,000 30,00,000 -20,00,000

GE = S (| 10,00,000| + | -20,00,000| )= 30,00,000

The difference between the close price and the price at which the trade was executed (trade price) multiplied by the cumulative buy and sell open position in each security gives the Mark to Market Profit/loss in each security.

Mark to market profit/loss can be calculated using the formula given below:

MTM Profit/Loss = [(Total Buy Qty * Close price) – Total Buy Value] + [Total Sell Value – (Total Sell Qty * Close price)]

Sr. No.

Security

Buy Quantity

Buy Price

Sell Quantity

Sell Price

Close Price

Mtm Profit/Loss Per Security

1 A 1000 50000.00 2000 90000.00 56.00 -16000

2 B 1600 64000.00 1800 73800.00 36.00 2600

3 C 600 3000.00 300 1500.00 5.00 0

4 D 0 0.00 2000 30000.00 14.00 2000

5 E 1000 6300.00 0 u0.00 5.00 -1300

6 F 800 32000.00 500 19250.00 35.00 -2250

VaR is calculated based on exponentially weighted moving average (EWMA)

Based on statistical analysis, 94% weight is assigned to volatility on T-1 day and 6% weight is given to T day returns

For example, XYZ share has volatility of 0.0314 on T-1 day and the closing price be Rs 360 and on T day it is Rs. 330

Volatility on day T= ln(closing price on t-1day/CP on T day)

Volatility=sqrt(0.94*0.0314*0.0314+0.06*0.0807*0.0807)

=3.7%

For Group I shares, VaR margin = higher(3.5 times of volatility, 7.5% of value)

For Group II shares, VaR margin = higher(3.5 times of volatility, 3.0 times volatility of index)

The number obtained above is multiplied by sqrt(3)

For group III shares, it is always 5 times the volatility of index multiplied by sqrt(3)

It is 5% or 1.5 times the standard deviation of daily logarithmic returns of the scrip price for last 6 months

Fixed Settlement Rolling Settlement

Before 2002 this system was prevalent BSE had settlement cycle from Monday

to Friday NSE had settlement cycle from

Wednesday to Tuesday

Rolling Settlement Settlement on T+X days where T is the

trade day and X is day after the trade day

In India, T+2 cycle is prevalent

Rolling settlement makes shares closer to money

Rolling settlement makes the equity market more robust

Rolling settlement yields cleaner prices

Measures the average performance of group of stocks

Source: bseindia.com

Source: nse-india.com

Helps to recognize the broad trends in market

Can act as an benchmark for performance Reflect the market and economic

sentiment Used by technical analysts to predict the

future movement of the market

main factors that differentiate one index from the other are

1. The number of the component stocks

2. The composition of the stocks 3. The weights 4. Base Year

For example, there are three scrips A,B and C at period N

 

Let Index at period N= 100 (Base Year)Index at period N+1 = 24250 * 100 /18000

= 134.72

Scrip Par Value Volume Market Price Market Capitalization Volume Market Price Market CapitalizationA 10 100 20 2000 150 25 3750B 10 200 30 6000 200 40 8000C 10 250 40 10000 250 50 12500Aggregate Market Capitalization 18000 24250

Period N Period N+1

Started in 1986 Earlier calculated on “Market

capitalization –Weight methodology 30 companies in the index Base year is 1978-79 Since 1st sept 2003, sensex is being

calculated on free float market capitalization methodology (this is taking into consideration only those shares issued by the company that are readily available for trading in the market)

Selection criteria – 1. Listed history – atleast 3 months2. Trading frequency- each and every

day in last 3 months3. Final rank-should figure in top 100

companies where in 75% weight age is given to last 3 months average full market capitalization and 25% weight age is given to liquidity rank based on daily turn over and impact cost

4. Industry/sector representation5. Track record

SENSEX Composition Revised From 6-Dec-10Free-Float Adjustment Factor revised from 15-Nov-10

Code Name Sector Adj. Factor532977 Bajaj Auto Limited Transport Equipments 0.50500103 Bharat Heavy Electricals Ltd. Capital Goods 0.35532454 Bharti Airtel Ltd. Telecom 0.35500087 Cipla Ltd. Healthcare 0.65532868 DLF Ltd. Housing Related 0.25500180 HDFC Bank Ltd. Finance 0.80500182 Hero Honda Motors Ltd. Transport Equipments 0.50500440 Hindalco Industries Ltd. Metal,Metal Products & Mining 0.70500696 Hindustan Unilever Ltd. FMCG 0.50500010 HDFC Finance 0.90532174 ICICI Bank Ltd. Finance 1.00500209 Infosys Technologies Ltd. Information Technology 0.85500875 ITC Ltd. FMCG 0.70532532 Jaiprakash Associates Ltd. Housing Related 0.55532286 Jindal Steel & Power Ltd. Metal,Metal Products & Mining 0.45500510 Larsen & Toubro Limited Capital Goods 0.90500520 Mahindra & Mahindra Ltd. Transport Equipments 0.75532500 Maruti Suzuki India Ltd. Transport Equipments 0.50532555 NTPC Ltd. Power 0.20500312 ONGC Ltd. Oil & Gas 0.20532712 Reliance Communications Limited Telecom 0.35500325 Reliance Industries Ltd. Oil & Gas 0.55500390 Reliance Infrastructure Ltd. Power 0.60500112 State Bank of India Finance 0.45500900 Sterlite Industries (India) Ltd. Metal,Metal Products & Mining 0.50532540 Tata Consultancy Services Limited Information Technology 0.30500570 Tata Motors Ltd. Transport Equipments 0.65500400 Tata Power Company Ltd. Power 0.70500470 Tata Steel Ltd. Metal,Metal Products & Mining 0.70507685 Wipro Ltd. Information Technology 0.25