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INDIAN CAPITAL MARKETS

Primary Market
It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the capital formation of the country. The money collected from this market is generally used by the companies to modernize the plant, machinery and buildings, for extending business, and for setting up new business unit.

Secondary Market
The secondary market is that market in which the buying and selling of the previously issued securities is done. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.

If an individual has bought some security and he now wants to sell it, he can do so through the medium of stock . exchange to sell or purchase through the medium of stock exchange requires the services of the broker presently, their are 24 stock exchange in India.

What is a Stock?
An instrument- that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporations assets and profits. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company.

Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions

TWO MAJOR STOCK MARKETS IN INDIA

BSE
(BOMBAY STOCK EXCHANGE )

NSE
(NATIONAL STOCK EXCHANGE)

Securities and Exchange Board of India(SEBI)


The SEBI was constituted in 1988 by a resolution of GOI and it was made a statutory body by the Securities and and Exchange Board of India Act, 1992. The Act empowers the Central Government to supersede SEBI if on account of emergency, SEBI is unable to perform the functions and duties under any provision of the ACT. Objective: To protect the interests of investors in securities and to promote the development of and to regulate the securities market for matters connected therewith. Powers and Functions: Regulates the business in stock exchanges and any other securities market. Registering and regulating the working of stock brokers, sub-brokers etc. Registering and regulating the working of collective investment schemes Promoting and regulating self regulatory organizations Prohibiting fraudulent and unfair trade practices in securities market Promoting investor education and training of intermediaries in securities market Prohibiting insider trading in securities. Regulating substantial acquisition of shares and take-over by companies Conducting inspection and inquiries Levying fees or other charges Conducting research

Sensex
It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around onefifth of the market capitalization of the BSE.

Dematerialization
Dematerialization in short called as 'demat' is the process by which an investor can get physical certificates converted into electronic form maintained in an account with the Depository Participant. The investors can dematerialize only those share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories.

Benefits of investing in shares


Possibility of high returns Easy liquidity Unbeatable tax benefits Income from dividends

Functions of Stock Exchange


Promotes the savings Provide liquidity to investors Profitable activities for companies Permits for the investor to have a political power in the companies Possibility of diversifying your portfolio

The role of stock exchanges


Raising capital for businesses Mobilizing savings for investment Facilitating company growth Redistribution of wealth Corporate governance Creating investment opportunities for small investors Government capital-raising for development projects Barometer of the economy

Derivatives
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. A contract which derives its value from the prices, or index of prices, of underlying securities.

Derivatives are of two types -- exchange traded and over the counter.
Exchange traded derivatives, are traded through organized exchanges around the world. Some of the common exchange traded derivative instruments are futures and options. Over the counter (popularly known as OTC) derivatives are not traded through the exchanges. They are not standardized and have varied features. Some of the popular OTC instruments are forwards

PARTICIPANTS IN THE DERIVATIVES MARKETS


The following three broad categories of participants - hedgers, speculators, and arbitrageurs trade in the derivatives market.

Types of Trader Hedger:


An individual who enter into the hedging trades ( A strategy using derivatives to offset or reduce the risk resulting from exposure to an underlying asset).

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Arbitrageurs
Investors who seek discrepancies (Differences) in security prices in an attempt to earn risk less returns

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Speculator
An individual who is taking a positing in the market. Usually the individual is betting that the price of an asset will go up or that the price of an asset will go down.

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TYPES OF DERIVATIVES
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

Future Contract
Commodity and Futures contracts are similar as "Forward" Contracts. Early days "future" contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural Products. Now it is used for every metal. Future contract for commodity trading and for share trading is all different from one another.

Why derivatives emerged?


Initially as a hedging instrument.

DERIVATIVE PRODUCTS
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Features of forward contracts


They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. On the expiration date, the contract has to be settled by delivery of the asset.

LIMITATIONS OF FORWARD MARKETS


Lack of centralization of trading, Illiquidity, and Counterparty risk

Futures
Futures markets were designed to solve the problems that exist in forward markets.

Futures
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

The standardized items in a futures contract are:


Quantity of the underlying Quality of the underlying The date and the month of delivery Minimum price change Location of settlement

Distinction between futures and forwards


Futures
Trade on an organized exchange Standardized contract terms hence more liquid Requires margin payments Follows daily settlement

Forwards
OTC in nature Customised contract terms hence less liquid No margin payment Settlement happens at end of period

FUTURES TERMINOLOGY
Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one- month, two-months and three months expiry cycles which expire on the last Thursday of the month.

Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size

Initial margin Marking-to-market

Options
An option gives the holder of the option the right to do something.

OPTION TERMINOLOGY
Index options: These options have the index as the underlying. Some options are European while others are American. Like index futures contracts, index options contracts are also cash settled. Stock options: Stock options are options on individual stocks. A contract gives the holder the right to buy or sell shares at the specified price.

Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. Option price/premium: Option price is the price which the option buyer pays to the option seller.

The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the asset in the spot market is less than the strike price of the call. For eg: A bought a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call. Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of the asset in the spot market is more than the strike price of the call. For eg: B bought a put at a strike price of Rs 600. On expiry the price of the asset is Rs 619. A will not exercise his put option. Because he can sell the same asset in the market at Rs 619, rather than giving it to the seller of the put option for Rs 600.

Strike price: The price specified in the options contract is known as the strike price or the exercise price. In-the-money option At-the-money option Out-of-the-money option

Intrinsic value of an option: The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value.

Distinction between futures and Futures Options options


Exchange traded, with novation Exchange defines the product Price is zero, strike price moves Price is zero Linear payoff Both long and short at risk

Same as futures. Same as futures. Strike price is fixed, price moves. Price is always positive. Nonlinear payoff. Only short at risk.

COMMODITY MARKET
COMMODITY:-Something that has commercial value, which can be produced, bought, sold, consumed and has liquidity. COMMODITY MARKET:-A commodity market is an exchange where buyers and sellers come together to trade commodities.
There are three national(MCX,NCDEX,NMCE and 19 regional commodity exchanges in India.

List of Traded Commodity


Agricultural (Grains, and Food and Fiber) Livestock & Meat Energy Precious metals Industrial metals

MCX
Headquartered in the financial capital of India, Mumbai. It is a demutualised nationwide electronic commodity futures exchange set up by Financial Technologies (India) Ltd. with permanent recognition from Government of India for facilitating online trading, clearing & settlement operations for futures market across the country.

The exchange started operations in November 2003.

MCX has achieved three ISO certifications ISO 9001:2000 for quality management ISO 27001:2005 - for information security management systems ISO 14001:2004 for environment management systems

MCX offers futures trading in more than 40 commodities from various market segments including bullion, energy, ferrous and nonferrous metals, oil and oil seeds, cereal, pulses, plantation, spices, plastic and fibre

FACT FILE
MCX is India's No. 1 commodity exchange with 84% Market share in 2008($0.84 trillion) The exchange's competitor is National Commodity & Derivatives Exchange Ltd (NCDEX) Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading The crude volume touched 23.49 Million barrels on January 3, 2009 The highest traded item is gold with an average monthly turnover of Rs 1.42 Trillion ($29 Billion). MCX has 10 strategic alliances with leading commodity exchange across the globe MCX recorded its Highest Daily Turnover since inception of Rs. 51,626.51 crores on November 27, 2009 The average daily turnover of MCX is about US$ 2.4 billion MCX COMDEX is India's first and only composite commodity futures price index

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