class_01_introduction to capital market final

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Beginners’ finance

Capital market

Primary market

Secondary market

Stock trading

Macroeconomics


Fundamental research

Introduction

Qualitative & quantitative factors

Financial statement analysis

Ratio analysis

Valuation

Case studies


Derivatives

Introduction

Futures & forward

Option

Option premium

Option strategies

Option greeks

Open interest


Technical research

Introduction

Charts

Dow theory

Trends

Indicators

Patterns


Commodity

Introduction

Market participants

Agri commodities

Metal commodities

Energy commodities

Tracking price movements

Inter asset relationships


Currency

Introduction

Economic significance

Currency future

Macroeconomics

Discussion of INR


Introduction

What is capital market

Market institutions

Basic terminology


What do we mean by Financial Market?


What is this?


Or this?


What is a market?

An actual or virtual place where forces of demand and supply operate, and where buyers

and sellers interact (directly or through intermediaries) to trade goods, services, or

contracts or instruments, for money or barter.*

In simple terms market is a platform which enables buyers and sellers to interact and

transact

13*Source: businessdictionary.com

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Markets

Physical Markets

Online Market

Telephonic Market

Who are the buyers of capital?


Who are the sellers of capital?


The intermediaries


Overall structure of capital marketBuyers Intermediaries Sellers

- Entrepreneurs through financial institutions like banks in the form of loan

- Entrepreneurs/Corporates in the form of equity from stock market

- Entrepreneurs in the form of loan from debt market

- Government in the form of loan from debt market

- Banks

- Banks and other FIs to channelize savings

- Exchanges to facilitate equity/debt sale

- Brokers to facilitate transaction in stock exchanges

- Investment bankers/ merchant bankers to facilitate the complete process

- Credit Rating Agencies- Registrar & Transfer Agents,

DPs

- Retail investors directly

- Institutional Investors (Mutual funds, Insurance, PF) as a collective investment scheme)

- Banks

- Foreign Institutional Investors


REGULATORS – SEBI, RBI, FMC, Govt. Ministries etc

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FINANCIAL MARKETmarket of capital and credit

Capital market Money market

relatively long term (greater than one year)

short term borrowing(less than one year)


What is a financial market?

It is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), etc.

It facilitates - ‒ The raising of capital (in the capital

markets)‒ The transfer of risk (in

the derivatives markets)‒ The transfer of liquidity (in

the money markets)‒ International trade (in the currency

markets)‒ Interaction between those who

want capital to those who have it


Types of financial markets

Capital market Equity (Stocks)

Debt (Bonds)

Equity

Debt


Owner of the business with all the risks and rewards of the business

An obligation to pay with interest for a specified time. A Basic Loan is the simplest form of Debt

Financialisation of Assets

Commodities market

Currency market

Real Estate


Financial markets continued……

Financialisation of

current Assets

Financialisation of Risk

More to Come…..


Credit Risk, Default Risk (MBO, CDO)

Securitization of Car Loan, Home Loan, Recievables

CAPITAL MARKET

Primary market Secondary market

Newly formed securitiesex: IPO, Bonds, NCDs issue

Existing securities sold by investors

Investor Company Investor Investor


A quick question

Which of the following is the

largest market of all?

‒ Stocks

‒ Bonds

‒ Commodities

‒ Currency (Forex)


Phases in market

Phases in market

Bull market When economic indicators point to a

healthy and growing economy, companies are making money, future looks good, and people have more money to invest.

Bear market When the economy is shrinking,

businesses are not making as much money, and people are losing their jobs and have less money left over, stock prices on the whole will be falling.

Sideways markets‒ Price movement in the markets are

uncertain and there is no established trend to arrive at a conclusion


Market is a jungle

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The terms "bull" and "bear" to describe the markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. Thus the terms “Bear” and “Bull” are metaphorically used.


Animals in the capital market

Bulls ‒ Market participants who have no qualms

in buying securities above the prevailing stock prices.

‒ Supposed to be aggressive and jack up the prices when the trend is in their favour

Bears‒ Market participants who wish that the

prices would decline for them to buy.

‒ Typically aggressive in battering down prices when the trend supports them

Herd‒ Market participants who lap up a trend

with very little regard to the fundamental reasons of the trend


Who is the bigger fool?


Behavioral Biases

Cognitive Bias Emotional Bias

•Confirmation Bias

•Gamblers' Fallacy

•Status Quo Bias

•Negativity Bias

•Loss-Aversion Bias

•Overconfidence Bias

•Endowment Bias


Market capitalization

Market capitalization (often market cap) is a measurement of value of a business enterprise which is equal to the share price times the number of shares outstanding (shares that have been authorized, issued, and purchased by investors)

‒ So today if you want to purchase a company like Reliance Industries Ltd, what you have to do is to BUY ALL the shares of the company and PAY the market price for each share

‒ If Reliance has 100 shares and price per share is Rs.1000, then you will have to shed Rs.1,00,000 to BUY the company


We use market capitalization to classify the companies in order of their market value:‒ Large Cap: Sensex comprises companies with

MCAP > 16,000 crores

‒ Mid Cap: Bse Mid Cap Index comprises companies with MCAP of Rs 13,000 -1,000 crores

‒ Small Cap: BseSmall Cap Index comprises companies with MCAP < 2,000 crores

The rupee amounts used for the

classifications, "large cap", mid cap", or

"small cap" are only approximations that

change over time.

Among market participants, their exact

definitions may vary

Market capitalization contd.


Large cap


Mid cap


Small cap


Free float market cap

Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market

It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course

Thus, if someone wants to buy the Reliance Industry, she can buy only those shares which are freely traded in market and not the ones which Mukesh Ambani holds


Index

An Index is simply the barometer of the overall stock market performance

It is the report card of all the stock listed on the index which shows the performance of all the stocks


Index computation

Let us assume that the day Nifty started, it had only 3 companies with their market price/share, total number of shares and the market cap being-

Now assume that a day later based on the market forces, the share prices of all the three companies changes and the new ones are:

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Company No. of Shares Price / Share Market Cap.

Reliance 200 5 1000

Infosys 100 3 300

ICICI 250 2 500

Market Capitalization of Nifty 1800

Company No. of Shares Price / Share Market Cap.

Reliance 200 6 1200

Infosys 100 4.5 450

ICICI 250 2.2 550

Market Capitalization of Nifty 2200


Index

Indexing simply means Anchoring or Fixing

So what we assume here further is that 1800 is indexed or fixed or assumed to be 1000

This 1800, the value of Index the day it started, is also known as the Base Market Capitalization

And so when the market cap of the Index changes to 2200, we get a new Index Value (earlier one being 1000):

1800 is equivalent to : 1000

1 is equivalent to : 1000/1800

2200 is equivalent to : 1000/1800 * 2275 = 1222


Free float market cap weighted index

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Free Float methodology means that the index will be computed on the market cap represented by openly held market shares of the company only

The index will be computed by reducing promoters ’ share from overall market cap of the company. We do it by multiplying the market cap with the free float factor for the company

A company might have a higher market cap but with low public holding; it would have a lesser weight in indices e.g. TCS, ONGC and NTPC

In case of companies with less promoters holding/strategic holding, market cap and free float market cap would be the same e.g. ITC, ICICI Bank

Company Price No. of Shares (crores)

Mkt cap (Rs/crore)

Free float (%)

Free cap (Rs/crore)

Index weight (%)

ITC322.7 790 254,992 70% 178494.5 11.18

Reliance871 324 281,898 55% 155043.9 9.71

Infosys2955.5 57 169,713 85% 144255.7 9.03

Total3,093,418 1,597,033


WHICH IS LARGEST MARKET CAPITALISATION COMPANY IN INDIA

What is circuit breaker

In order to control the speculations that is causing the stock or index to enter in a circuit, SEBI has formed rules (different for index and stocks) which help in controlling the situation

Exchanges implement on a quarterly basis, the index based market wide circuit breaker system i.e., the percentages are calculated on the closing index value of the quarter

The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%

These circuit breakers when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide

The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier


Circuit breaker – contd.

The exchange has fixed circuit filters for the Sensex:

‒ If the index moves by 10% up/down:

Before 1 PM , trading would be halted for one hour

Between 1-2:30 PM, trading to be halted for half an

hour

After 2:30 PM, no halt in trading

‒ If in case index moves by 15% up/down:

Before 1 pm, trading to be halted for 2 hours

Between 1-2 PM, trading to be halted for one hour

After 2 PM, trading to be halted for rest of the day‒ In the case of 20% up/down movement in the index,

trading to be halted for the rest of the day

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Circuit breaker


Circuit for individual stocks

The reason behind such a move is heavy speculation – either about the economy or about a particular stock

There are two directions of movement (up and down), therefore there are two types of circuits possible – upper circuit and lower circuit

If on any day the stock prices increases/decreases by 5 - 20% (% defined by SEBI for each share) of the previous day price, then the stock is said to be in upper/lower circuit

A price band is essentially the price range within which a stock is permitted to trade during a day

Usually a daily price band of 2%, 5%, 10% , 20% (either way) is applicable on securities‒ No price bands are applicable on: F&O stocks

‒ A price band of 20% (either way) on products other than stocks including debentures, preference shares, warrants, etc


With circuit

Circuit view

Without circuit


Summary

Introduction to the class Financial marketMarket participants Kinds of Financial Market - Equity/DebtMarket phasesMarket capitalization Indices Free float Circuits


Thank You


class_01_introduction to capital market final

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