2 understanding the stock market
TRANSCRIPT
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!