sancheeta roy.pptx

Slide 1

CAPITAL MARKET

Market where investment instruments like bonds, equities and mortgages are traded is known as the capital market.

Primal role is to make investment from investors who have surplus funds to the ones who are running a deficit Offers both long term and overnight funds.

The different types of financial instruments that are traded in the capital markets are: > equity instruments > credit market instruments, > insurance instruments, > foreign exchange instruments, > hybrid instruments and > derivative instruments.

Importance of Capital MarketsHelp firms and governments raise cash by selling securitiesAllow investors with excess funds to invest and earn a return Channel funds from savers to borrowersAllocate resources optimally (i.e., provide funds to those who can make the best use of them)Help allocate cash to where it is most productiveHelp lower the cost of exchangeSecondary markets, where investors trade existing securities, assures investors that they can quickly sell their securities if the need arises

Types of capital marketThere are two types of capital market:Primary market, Secondary market

Primary market

The primary markets deal with the trading of newly issued securities.

The corporations, governments and companies issue securities like stocks and bonds when they need to raise capital.

The investors can purchase the stocks or bonds issued by the companies. The primary market is also called NEW ISSUE 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.

Features of Primary MarketIt Is Related With New IssuesIt Has No Particular PlaceIt Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer

Secondary MarketThe 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. The secondary market is that part of the capital market that deals with the securities that are already issued in the primary market.The secondary market needs to be transparent and highly liquid in nature as it deals with the already issued securities.

Features of Secondary MarketIt Creates LiquidityIt Has A Particular PlaceIt Encourage New InvestmentsAids in financing the industryEnsures safe & fair Dealing( MEDIA BROADCASTING)Provides regular information about the value of security.Helps to observe prices of bonds and their interest rates.Offers to investors liquidity for their assets.Secondary markets bring together many interested parties.It keeps the cost of transactions low

What is the difference betweenPrimary Market and Secondary Market?Primary Markets

The market where new securities are issued by the company that wishes to obtain capital and is sold directly to the investorSecondary Markets

Where securities that have already been issued are traded. Instruments that are usually traded on the secondary market include stocks, bonds, options and futures.In the primary market, the company is directly involved in the transactionIn the secondary market the company does not involved in transaction since transaction is done between investorsThe Process of collecting funds is different from secondary marketProcess of collecting funds is different from primary market

Book Building Process

Book building

A price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.

FEATURES OF BOOK BUILDING

The allotment is normally on proportionate basis to the retail investors

About 15% to retail investors

15% to non-institutional bidders and.,

50% to qualified institutional bidders

Retail bidders to pay the bid money along with application

To register the bid through an online terminal of nse or bse at an authorised bid centerThe issuer comes out with an issue without finalizing the issue priceThe floor price and the cap price are announced just before the opening of the issueThe issuer has the liberty to revise the offer price upward or downward

The Process:The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band.

Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the issuer decide the final price at which the securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders. the rest get refund orders.

RED HERRING PROSPECTUSA document submitted by a company (issuer) as part of apublic offeringof securities Contains most of the information pertaining to the companys operations and prospects, but does not include key details of the issue such as its price and the number of shares offered. The term red herring is derived from the bold disclaimer in red on the cover page of the preliminary prospectus.

CONTENTThered herring statementcontains

purpose of the issue;disclosure of any option agreement;underwriter's commissions and discounts;promotion expenses;net proceeds to the issuing company (issuer);balance sheet;earnings statementsfor last 3 years, if available;names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock;copy of the underwriting agreement;legal opinion on the issue;copies of thearticles of incorporationof the issuer.

TRADINGFor trading in Indian stock market, three types of mechanisms are carried out:-Cash TradingSpot TradingForward, future (derivative trading) The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system.It is on line and nationwide trading system.It adopts the principle of an order driven marketIn this system a member can punch into the computer quantities of securities and prices at which he likes to transact.The transaction is executed as soon as it finds a matching sale or buy order from a counter party

Trading MechanismA single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country.The book stores only limit orders, which are orders to buy or sell shares at a stated quantity and stated price.The limit orders are executed only if the price quantity conditions match.The trading system provides tremendous flexibility to the issuers in terms of kinds of orders that can be placed on the system.Several time related (Good-till-Cancelled, Good-till-Day, Immediate-or-Cancel), andPrice-related (buy/sell limit and stop-loss orders) conditions can be easily built into an order

Stop-loss ordersIt is an order placed with a broker to sell once the stock reaches a certain price. A stop-loss is designed to limit an investor's loss on a security position.Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.For example, let's say you just purchased ACC at Rs50 per share. Right after buying the stock you enter a stop-loss order for Rs45. This means that if the stock falls below Rs45, your shares will then be sold at the prevailing market price.

Clearing and Settlement Process at NSE

Clearing and settlement ProcessTrade details from Exchange to NSCCL NSCCL notifies the consummated trade details to custodians who affirm back. Based on the affirmation, NSCCL determines obligations.Download of obligation and pay-in advice of funds/ securities.Instructions to clearing banks to make funds available by pay-in-time.Instructions to depositories to make securities available by pay-in- time.Pay-in of securities (NSCCL advises depository to debit pool account of custodians and credit its account and depository does it).pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians and credit its account and clearing bank does it).Pay-out of securities (NSCCL advises depository to credit pool account of custodians and debit its account and depository doesit).Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians and debit its account and Clearing Banks does it).Depository informs custodians Clearing Banks inform custodians

Settlement Cycle

Rolling SettlementAt NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded.Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

A tabular representation of the settlement cycle for rolling settlementActivityDay

TradingRolling Settlement TradingT

clearingCustodial ConfirmationT+1 working days

settlementSecurities and Funds pay in

Securities and Funds pay outT+2 working days

T+2 working days

25

Evaluation of Initial Public Offering (IPO)Aninitial public offering(IPO) orstock market launchis a type ofpublic offeringwhere shares ofstockin a company are sold to the general public, on asecurities exchange, for the first time. Through this process, aprivate companytransforms into apublic company. Initial public offerings are used by companies to raise expansion capital, to possiblymonetizethe investments of early private investors, and to become publicly traded enterprises.Here are a few things to look out for-No HistoryThe Lock-Up PeriodAvoid the HypePRICE DISCOVERYMarket sentiments

No historyIt's hard enough to analyze the stock of an established company. An IPO company is even trickier to analyze since there won't be a lot of historical information. Your main source of data is the red herring, so make sure you examine this document carefully. Look for the usual information, but also pay special attention to the management team and how they plan to use the funds generated from the IPO.Successful IPOs are typically supported by bigger brokerages that have the ability to promote a new issue well.

The Lock-Up PeriodWhen a company goes public, the underwriters make companyofficialsand employees sign a lock-up agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can range anywhere from three to 24 months.When lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price.

Avoid the hypeIt's important to understand that underwriters are salesmen. The whole underwriting process is intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But many end up selling below their offering prices within the year. One should not buy a stock only because it's an IPO one should do it because it's a good investment.

Price discoveryAn attractively priced IPO often gets good response from investors as the chances of listing gains become higher. Conversely, if an IPO is "over-priced", it may not be able to list attractively.IPO pricing is done in two ways-by book-building or through a fixed-price offer. Book-built pricing gives investors the opportunity to take a call on the price they are willing to pay. The underwriters generally specify the 'floor price' and 'cap price' (called a price band) and investors must choose a price within the given range.

The most popular price among the investors is selected as the offer price (also called the 'cut-off price'). Shares are allotted to anyone who bids over the cut-off price, proportionately given the size of the issue.A comparison of the price of an IPO with the share price of its peers which are already trading can give an idea whether a new offer is overvalued or undervalued

Market sentimentsApart from pricing, success of an IPO also depends a lot on the market sentiments at the time of listing. Those who are looking to make short-term gains must invest in the new offers only when the markets are bullish, say experts.Moods make markets that applies to stock markets in general, but even more so for IPO activity on the so-called primary market. Thats because the way companies and their consortium banks evaluate the market determines whether they will venture going public. Additionally, whether investors will participate in and IPO depends on their expectations regarding the development of the new issue.

Group MembersMaria Boltwala-06Urvi Panchal-27Avinanash Dawra-70Taruna Manwani-71Joyti Solanki-72Sagar Hukamani-76