MAIN PPT Stock Exchange of India.pptmAT

ContentsContents• Definition of stock exchange• Meaning of stock market• Terms used in stock market• Market , limit & stop order• Types of operators• Bull & bear market • Trading• Buying & selling Procedures• 7 way to survive stock market correction• Conclusion

“More rational traders More Will be rational trading”

Definition of Stock Exchange

• The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as "an association, organization or body of individuals, whether incorporate or not, established for the purpose of assisting, regulating and controlling the business in buying, selling and dealing in securities".

Meaning of stock marketMeaning of stock market

• A Stock exchange or securities market is an organised market where listed securities are purchased & sold for investment or speculation.

“More rational traders More Will be rational trading”

In other words

• A stock exchange is an entity that provides "trading" facilities for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

STOCKS

• A stock is a certificate that certifies ownership of a certain portion of a firm.

• When a firm issues new shares of stock, it does not add to its debt. Instead, it brings in additional “owners” who supply it with funds.

BONDS

• To make a large purchase, a firm can borrow the funds from a bank, but it can also issue a bond.

• A bond is a document that formally promises to pay back a loan under specified terms and a given period of time.

Why do companies issue shares to the public?

• Most companies are usually started privately by their promoter(s). However, the promoters' capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a 'Public Issue'. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.

Equity vs. Debt

To start a new business, a company can raise money in two ways - by selling shares of equity or by incurring debt. If the owner invested all their own savings to buy the materials necessary to start the business, they made an equity investment in the company. Equity is simply ownership of a corporation. Typically, ownership units in a corporation are referred to as stock.

• However, if our owner did not have necessary funds to start their own business they could finance their operation in one of two ways:

• 1. Issue stock (or certificates of partial ownership in his company) to people who may be interested in helping their venture out in return for a proportional share of the profits that the company might generate.

• 2. Borrow money that will need to be paid back with interest.

Advantages of issuing stock: • 1. A Company can raise more capital than it could

borrow. • 2. A Company does not have to make periodic interest

payments to creditors. • 3. A Company does not have to make principal

payments.

Disadvantages of Issuing Stock: • 1. The principal owners have to share their ownership

with other shareholders. • 2. Shareholders have a voice in policies that affect the

company operations.

Initial Public Offerings (IPOs)

• The very first sale of stocks to the public is called an initial public offering (IPO), It is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer's securities. The sale of securities can be either through book building or through normal public issue.

Functions of a Stock Exchanges

1. Ready and Continuous Market

2. Bank Borrowing Facility

3. Promotes Capital Formation

4. Safety and Fair Dealing

5. Government Funding

6. Creation of Employment Opportunities

7. Evaluation of Securities

8. Industrial Development

9. Clearing House of Securities

10. Facilitates Flow of Capital

Terms used in stock marketTerms used in stock market

• Sensex• Nifty• Squaring off• Rally• Crash• Correction• Bonus shares• Dividend• Book closure date• IPO “More rational traders More Will be rational trading”

MARKET ORDER & LIMIT ORDER

• A market order is an order to buy or sell a stock as soon as possible at the best price available. In a fast market situation, a market order can be very risky.

• A limit order is the safest way to trade in a fast market because it's an order to buy or sell a stock only at the specified price (the limit price) or better.

STOP ORDER

• A stop order is an order to buy or sell a stock when the price reaches or passes a specified point (the stop price). When that happens, a stop order automatically becomes a market order and is executed at the best price available. In fast markets, however, after a stop order hits the stop price and becomes a market order, it can keep climbing or drop sharply - and ultimately be executed much higher or lower than originally specified.

Types of operatorsTypes of operators

• Brokers:1. Buys/sells on behalf of outsider

2. Charges Brokerage

3. Not specialize in particular security

• Jobbers: (Mumbai stock exchange-Tarawaniwala)

1. Buys/sells on his own behalf

2. Profit from price difference

3. Specializes in one security

4. Not prohibited from selling/buying securities on behalf of others

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What Broker-Dealers Are Not Allowed to Do

• Churning: Excessive trading of a client's discretionary account to increase the broker's commissions.

• Use deception or manipulation to trade securities, or failing to state material facts

• Recommending low-priced, speculative securities without determining whether they are suitable for the customer

• Make unauthorized transactions

• Guarantee that loss will not occur • Try to talk clients into buying mutual funds

inappropriate for their means and goals • Use fictitious accounts to disguise trades • State that the SEC has approved or judged

positively either the security or the broker • Not promptly transmitting the client's money or

securities

Bull & Bear Markets

Bull Markets

• bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low.

Bear Markets Bear markets are the opposite--stock prices

are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation. In either scenario, people invest as though the trend will continue. Investors who think and act as though the market will continue to rise are bullish, while those who think it will keep falling are bearish.

TradingTrading

• Open outcry system

1. Trading post

2. Jobber

• Screen-based system

1. Informational efficiency

2. Full view of market

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Buying sharesBuying shares• Procedure for buying shares:

1. Locating a Broker(Client registration form & member-constituent form)

2. Placement of order(Limit order or market order: -Day order -week order -month orderOpen order)

3. Execution of order (contract note)

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Selling sharesSelling shares• Procedure for selling shares:

1. Placement of order (Sale order ;limit order & market order)

2. Execution of order (contract note)

3. Internet Trading(ICICI Web trade)

“More rational traders More Will be rational trading”

Role of SEBI in monitoring the Stock Exchange

• SEBI stands for Securities and Exchange Board of India. It was set up in April, 1988, as a strong need was felt to protect the interest of the investors and to have a systematic and organized working of the securities market.

It started actually functioning when the SEBI Act was passed in 1992. The Act empowered SEBI with necessary powers to regulate the activities connected with marketing of securities and investment of Stock Exchanges, Portfolio Management, Stock Brokers, and Merchant Banking etc.

Objectives of Securities & Exchange Board of India

• There are three basic objectives of SEBI. They are as follows:-

(1) Towards Investors.(2) Towards Capital Issuers.(3) Towards Intermediaries.

Powers and Functions of SEBI

1. To protect investors Interest

2. Regulating Working of Mutual Funds

3. Regulates Merchant Banking

4. Take over and Mergers

5. Restriction on Insider Trading

6. Regulates Stock Brokers Activities

7. Research and Publicity

8. Guidelines on Capital Issues

9. Portfolio Management.

10. Other functions: There are some other functions also which are as follows:-

(i) It prevents unfair trade practices relating to the securities market.(ii) It gives training to intermediaries in the securities market.(iii) It promotes investor's education.(iv) It conducts audits of the stock exchanges.(v) It also conducts inquiries, and inspections.

What is stock market crash

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

What Happens When The Stock Market Crashes?

• Sometimes, stock markets crash because of a specific economic or political situation. For example, in 2002, the famous Enron scandal shook investor confidence and caused a downturn in the market. More often, however, crashes are caused by nothing more than panic. What we say that a market crashes, what we mean is that the value of stocks drops dramatically across the board. Rather than just one corporation being affected, the stocks of many or all corporations fall dramatically. This, in turn, causes investor panic and many people rush to sell their stocks. The more people try to sell their stocks lower stock value falls, making the problem worse.

Who Is Involved In A Stock Market Crash?

• Many people are involved in a stock market downturn. At the base level, it is shareholders or those who own stocks who are most involved. In many cases, it is investors themselves can contribute to a crash. Investors may borrow money to buy stocks or may invest in stocks without thoroughly understanding the stock market. Investors who are not disciplined and who do not understand the market may be among the first panic and try to sell their stock, pushing a temporary downturn into an actual crash.

Who Is Affected By A Crash?

• In short, everyone is affected by a crash. When the stock market takes a downturn, job loss, slow GDP growth, slow economic growth, and devastated consumer confidence are often the results. Investors and companies are making less money, companies are closing, and therefore people are buying less. This affects virtually every aspect of the economy and causes overall economic depression. Since the crash often follows a bull market, many people are panicked by the sudden economic downturn and may become even more cautious with their money, which can further hinder financial growth.

The Crash of October 1987

• The value of stocks in the United States fell by about a trillion dollars between August 1987 and the end of October 1987.

• If the multiplier is 1.4, the $1 trillion decrease in wealth in 1987 implies a $40 billion lower level of spending in 1988, or about 1.4 percent of GDP.

The Crash of October 1987

• However, as the life-cycle theory of consumption predicts, households smooth their consumption over time, which means that the decrease in wealth would not have reduced consumption in the current year by the full amount of the decrease in wealth, but by cutting consumption a little each year.

The Crash of October 1987

• The stock market crash of 1987 did not result in a recession in 1988 because households and business firms did not lower their expectations drastically.

• Since the initial decrease in wealth turned out to be temporary, the negative wealth effect was not as large as anticipated.

The Boom of 1995-2000

• The boom in the economy between 1995 and 2000 was fueled by the stock market boom.

• Estimates show that had there been no stock market boom the economy would not have looked historically unusual in the last half of the 1990s.

The Boom of 1995-2000

• The value of stocks increased by about $2.5 trillion per year during the boom. Assuming that a $1 increase in stock prices

leads to a $0.04 increase in consumption and investment, and a multiplier of 1.4, then:0.04 x $2.5 trillion x 1.4 = $140 billion increase in GDP, or 1.5% of GDP.

• The growth rate of GDP would have been around 2.8% instead of 4.5%

Stock Market Effects on the Economy

• An increase in stock prices causes an increase in wealth, and consequently an increase in consumer spending.

• Investment is also affected by higher stock prices. With a higher stock price, a firm can raise more money per share to finance investment projects.

Seven ways to survive a Stock Market Seven ways to survive a Stock Market

CorrectionCorrection

1. Stop Listening To Analysts

2. Stop Staring At Your Portfolio Every Thirty Minutes.

3. Be Patient

4. Speak To Actual Investors With Experience

5. Stop Following Crazy Tips

6. Understand Market Cycles

7. Follow The Guru“More rational traders More Will be rational trading”

Importance of stock marketImportance of stock market

• It provides necessary mobility to capital & directs the flow of capital into profitable & successful enterprise. It is the barometer of general economic progress in the country & exerts a powerful & significant influence as depressant or stimulant of business activity.

“More rational traders More Will be rational trading”

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