CANARA FIRST GRADE COLLEGE,MANGALORE

SEPTEMBER 21, 2011

Stock Market Dynamics-B.V.Raghunandan, SVS College, Bantwal

Meaning & Definition

Stock Exchange is,

” an organised market for second-hand corporate and government securities”

A More Inclusive Definition

Stock Exchange is a regulated market for second-hand corporate securities, government securities, commodities, and foreign exchange

Characteristics of Stock Exchange

Organised Market

Securities Market

Secondary market

Part of Capital Market

Listed Securities

Restricted Membership

Dealing only by Members

Standardised Practices

FacilitatorSpeculation

Role and Functions of a Stock Exchange

Ready MarketLiquidity for

SecuritiesEvaluationPrice StabilityCapital FormationPromoting Saving

HabitsInvestor ProtectionCorporate

Governance

Public FinanceGrowth of Joint

Stock CompaniesEnabling Book-

Building RouteCapital MobilityForeign FundsTechnical AnalysisEconomic

Development

Members of a Stock Exchange: Jobber & His Characteristics

DealerSpecialistStability in the Market

Dealing with Brokers

Jobber’s Profit

Equalising Quantity

SpeculationTwo-way QuotesMatching Demand

and SupplyCompany

Sponsorship

Brokers & Their Characteristics

AgentGeneralistConduit between Jobber and the Public

Income in the form of Commission

Derivatives: Meaning

” a financial asset that derives its value from an underlying security”-used extensively for risk management attributed to holding and trading in securities”

Instruments of Financial Derivatives

Stock DerivativeIndex DerivativeInterest

DerivativeForeign Currency

Derivative

Types of Dealings in a Stock Exchange

Dealings in Cash Market

Dealings in Futures & Options Market

Cash MarketRolling Settlement

T+2 Settlement

Trading Day

Pay-In Day

Pay-Out Day

Futures & Options MarketMeant for Risk

Management Arising Out of Dealings in Cash Market

Exchange TradedBig Investors and

Institutions Take Positions

For Protecting the Value of Holding

Providing for the Risks Arising Out of Trading

Futures: Characteristics

Standardised FeaturesCounter-Party is the Clearing

HouseMargin RequirementTime SpreadThree Contracts for Settlement

Futures: Trading Mechanism

Trading Strategies

Uses: -Hedging -Speculation -ArbitrageTypes of Futures:

Stock Future and Index Future

HedgingA transaction in the cash

market is accompanied by a contra transaction in the futures market

Buyer in cash market protects against subsequent fall in the price through sale in the futures market

A seller in the cash market protects against subsequent increase through buying in the futures market

Objective is to maintain asset purchased at the latest value

Buyer in the Cash MarketBuys 1000 shares of L&T in cash market @ Rs.1,500He can protect against fall in price upto three

monthsIf he chooses protection for one month, he sells

1000 shares of L&T in September future. (Protection for two months, sell October future-for three months, sell November future)

Settlement of September future on the last Thursday of September i.e 29-09-2011

Around 27th, the price in the cash market is Rs.1400. He buys 1000 shares in the cash market and settles the September future sale at Rs. 1,500, making a profit of Rs. 100

Position of the Buyer on September 29th

Value of original purchase = Rs 1, 40,000Cost of original purchase = Rs.1,50,000Sale of September Future = Rs. 1, 50,000Purchase to settle = Rs. 1, 40,000--------------------------------------------------------------Value of Holding on September 29 th = 1, 40,000Cash at Bank (Profit) = 10,000 --------------- 1,50,000 --------------

Where the Price goes up to Rs. 1, 600

At any time before 29th September, Price of L&T goes upto Rs.1600

Cost of His original Purchase= 1500 x 100 = 1, 50,000Value of the original Purchase=1,600 x 100 =

1,60,000Sale of September Future = 1, 50,000Purchase for Sept Future = 1, 60, 000Loss on the Future Sale = 10,000--------------------------------------------------------------------- Value of Holding on 29th = 1, 60,000(-) Loss on September Future = (10,000) Net Value in Hand = 1,50,000

SpeculationOriginal purchase will not

be there in the cash market

A bull buys the September future

A bear sells the September future

Profit made the bull when the price goes up or loss is incurred when the price comes down

Profit made by bear when the price comes down and vice versa

ArbitrageBuying in low priced

market and selling in high-priced market

Between one stock exchange to another

Between cash market and futures market

Between future of one month and other months

Between future market and a call market

OptionA contract to buy or

sell without an obligation

European Option and American Option

Call Option and Put Option

Uses of Options: -Hedging -Speculation -Arbitrage

Advantages of OptionNo Big Investment

No Margin as in Futures

No Obligation

No Marked-to-Market

More Gain than Risk

Premium paid alone is the Disadvantage

Listing of Shares:: Procedure

Initial Public OfferSize of Public Offer: Not Less than 25% of Issued Capital & Post Issue Paid Up Capital is not less than Rs.10 CroreFiling Application: MA, AA, Prospectus, Directors Report, Specimen Copies of Share Certificates and Debenture Certificates-Wide Distribution of Shares: 5 for Each Rs.1 Lakh cap-Dividend & Bonus in the Past 10 years-Brief History of the Company-Management Pattern

Listing Procedure ….Continued

Payment of Listing Fees

Signing Listing Agreement

Screening the Application

Listing the Shares

THANK YOU