22nd Aug Stock Market

8/6/2019 22nd Aug Stock Market

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Financial Markets

Veena Vishwanathan



2

Indian Share Market

Stock exchanges play a very vital role in the

economic development of a country.

NSE and BSE are two national stockexchanges.

Mostly regional stock exchanges (24 of them)

are now defunct.

SEBI (Securities Exchange Board of India)is

the regulatory body.



3

Market Barometer

Most visible & tracked parameter of any stock

market is the movement of the stock index

Stock indices ± proxies for the market they

exist in



4

Market Barometer Sensex, Nifty & Many more

How Sensex is Calculated?

How the sample companies are chosen?

How to read index quotations?



5

How Is an Index Calculated?

By tracking the share prices of its constituent

member companies

Eg., Sensex ± comprises of 30 company stocks

, while Nifty consists of 50 company stocks



6

How Is an Index Calculated?

Sensex & Nifty ± calculated using Market

Capitalisation Weighted method



7

Sensex

Calculate the Market capitalization of a company

For Example if company A has issued 1950 lakh shares

and its closing price on BSE on say May 10, 2004 was

Rs 350 per share, then company A¶s market

capitalization on that date is 1950 lakh * Rs. 350 =

Rs. 6825 crore.



8

Sensex

Calculate sum of market cap for all companies

Suppose the total market capitalization on

May 9, 2004 was Rs. 393715.56 core and the

index value was 5632.19.

So the index value of May 10, 2004 is calculated

as 5632.19 * 354291.35 / 393715.56 =

5608.21





10

Base Year

Sensex : 1st April 1979

Nifty : 1st April 1995

Sensex & Nifty assumed to be 100 on these

respective base dates. All subsequent indices

originate from this 1st seed



11

Sensex

Calculate sum of market cap for all companies

Suppose the total market capitalization on

May 9, 2004 was Rs. 393715.56 core and theindex value was 5632.19.

So the index value of May 10, 2004 is calculated

as 5632.19 * 354291.35 / 393715.56 =

5608.21



12

Choice of Representative

CompaniesSample is selected on the basis of 3 criteria:

Proper industry representation

Maximum coverage of market capitalization

Highest possible liquidity



13


CompaniesEvery stock exchange - Index Tracking Cell ,

which selects companies

that represent stock market movement ingeneral

that represent a cross-section of industries



14


Companies S&P500 is managed by Standard & Poor¶s ±

credit rating company with a sample size of

500 companies

50 companies ± Nifty selected from over 1350

companies listed on NSE, with a total traded ±70% of the stocks traded in NSE



15


Companies

6th June 2005, Sensex replaced Zee

Telefilms & Hindustan Petroleum

Corporation Ltd with NTPC & TCS



16

Free FloatI

ndex All indices are now free float in nature -

implies taking into a /c shares that are readily

available for trading

Exclude promoters¶ holdings, govt of FI

holdings & other locked-in shares, not available

for trading in the market

Since September 1, 2003, SENSEX is being

calculated on a free-float market capitalization

methodology



17

Free FloatI

ndex Previous eg,. Mkt capitalisation was Rs. 6825

cr as it had issued 1950 lakh shares with stock

quoting at Rs. 350

Of these, 750 lakh shares are avaialble for

trading, then mkt cap of free floating stock

would be (350*750 lakh) = 2625 cr



18

Other indices

BSE -100 Natex ± BSE National Index comprising

100 companies listed at 5 major stock exchanges in

India is broad based index(Jan µ89)

BSE Dollex ± BSE Sensex in US $ terms

Dollex = [Index Value (In local currency) * Base

rupee-US$ rate] / Current rupee-US$ rate



19

Other indices BSE ± 500 ± Broad based BSE Index

comprising 500 companies (µ99) - represents

nearly 93% of the total market capitalization on

BSE. It covers all 20 major industries of the

economy

S&P CNX Nifty Junior ± Comprises next rung of

liquid securities after S&P CNX Nifty



20

Other indices S&P CNX Defty ± S&P CNX Nifty measured in

US$ terms

ET - Mindex ± Comprises 30 companies media

& information technology sectors & calculated

by the Economic Times



21

Index Review Frequency

Index Committee meets every quarter to

discuss index related issues

In case of a revision in the Index constituents,

the announcement of the incoming and

outgoing scrips is made 6 weeks in advance of the actual implementation of the revision of the

Index



22

How to read stock quotations in afinancial daily?

Name ± of the company

Previous close± closing price at the end of

each previous day «« Open ± price at which 1st trading occurs on a

day ± Opening price

High - highest price at which an order was

executed on that day



23


Low ± lowest price at which an order is

executed on that day

Close± closing price on the trading day, it is

NOT the last traded price which is the price at

which the last order is executed before the stock

exchange closes at 3.30 pm



24


Closing price is the weighted avg of prices of

all trades that were transacted during a specific

period of time before the closure of the

exchange (BSE ± last 15 minutes, NSE ± last

30 minutes of the trading session)



25


Volume ± total volume or total number of shares

that were traded on that day

Value± total rupee value of shares traded on that

day

Trades - total number of times, orders have been

executed for trading the volume mentioned earlier



26


P/E ± Price earning multiple i,e the share is

quoting at that many times its EPS

M-Cap± total number of shares issued by a

company as on that date*day¶s closing price

52-Wk-H/L ± the highest & lowest price of the

share during the preceding 52 weeks & highlights

the range of the price movement of the share Dividend%(Yr) ± dividend declared in % terms of

par value



27

Dematerialisation



28

Dematerialisation

Demat is the process by which physical share

certificates, in paper form, are converted to an

equivalent number of securities in electronic form

Benefits ± risk of bad deliveries, postal delays,

handling problems, loss in transit, forgery,

counterfeiting, loss due to fire, theft, mutilation etc

- investors do not have to pay stamp duty

on transfer of shares & can be transferred

instantaneously





30

Dematerialisation - process

- Investor ± a depository a /c with DP

(banks,FIs,brokers), where investor has to fill DRF

± Depository (NSDL, CDSL) & R TA ( Registrar &

Transfer agent) & STA ( Share Transfer Agent of

the concerned company)

- RTA /STA confirms, DP destroys physical certificates

- Registers the depository as the holder of securities

& confirms this to depository



31

Dematerialisation - process

- Although shares are owned by investors, they

are registered in the name of depository, in

company¶s records so that information on all

the shares issued by the company is available

in e-format in 1 location



32

Rematerialisation

- To convert electronic shareholding into physical share

certificates

- Promoters wish to do so, since they do not intend to

trade their shares

- Shareholder ± RRF to the DP ± intimates depository &

submits RRF to STA

- The Depository confirms remat request to STA -

records, prints share certificates & informs depository



33

Rematerialisation

- The depository updates records & forwards

details to DP electronically & the STA

dispatched share certificates directly to

shareholder



34

Bonus Issues: How much are

they worth?



35

Bonus Issue

When retained earnings of a firm become quite

large, often several times the original share

capital, the management may decide to

transfer some amount from the reserves a /c to

the share capital by making a book entry.



36

Bonus Issue

This has the effect of decreasing (debiting) the

reserves in the balance sheet of the firm &

increasing (crediting) the share capital.

Thus the firm, is said to have made a bonus

issue.



37

Bonus Issue

Assume a company declares a 1:2 bonus issue,

the shareholders receive 1 additional share for

every 2 shares held.

If the original share capital was Rs. 100 M (10M

shares* Rs. 10), the bonus issue increases

share capital to Rs. 150 M (implying 15 M

shares*Rs. 10) & the reserves decrease by Rs.

50 M, though the sum of Capital & Reserves

remain constant.



38

Bonus Issue ± Benefit to Shareholder

Pre & Post Bonus Issue Balance Sheet (Partial) R s. M

Liabilities Assets Liabilities Assets

Share Capital 100

(10M shares*Rs. 10)

Reserves 200

«.

«..

Share Capital 150

(15M shares*Rs. 10)

Reserves 150

«.

«..



39

Bonus Issue

Since it is only a book entry & there is no

change in the fortunes of the business, the ex-

bonus price (the market price after bonus issue)

of the 3 shares = cum-bonus price (the price

before bonus issue) of the original 2 shares



40

Bonus Issue - Reasons

By not issuing them, market price of a firm may

increase to extremely high levels over a period of

time ± difficult to trade

The retained earnings > share capital, it feels

exposed to the charge of making enormous

profits at the cost of investor



41

Trading in Stock Exchanges





43

How are shares traded?

On-line trading system of BSE ± BOLT

On line trading system of NSE ± NEAT

Use satellite communication for trading, usingV-SAT

In India, investors may trade in equity shares

using 2 different methods ± cash account (orcash market) or margin trading



44

What is trading in the cash market?

Trading is either delivery based or non-delivery

based transactions

Delivery based transaction happens in the

trade-to-trade segment

Non-delivery based trading is known as day

trading



45


An open position implies a bought or sold

position.

Reversal of a position implies that the originalopen position is nullified by a reverse position

so that if one has bought a position for 100

shares of a stock, by selling 100 shares of the

same stock, this can be reversed & one is in a

neutral position vis-à-vis that stock.



46


In delivery based trading in the cash market,

shares are traded with the intention to deliver

(or take possession of)

In the case of day trading, positions are

squared off within the day



47


In India, day trading accounts for almost 80%

of cash market equity trading in terms of

volume of trade

Main feature ± The total value of the shares

bought or the total number of shares sold, has

to be delivered on or before the settlement

date



48

How exactly does one engage in trading incash market?

Requirement ± total value of shares one

intends to buy has to be deposited with the

broker & only those shares that one owns can

be sold

Broker sends the order to buy /sell a particular

stock along with the quantities & price to the

trading system of the stock exchange

(BOLT /NEAT)



49


The system puts the order into the order book

& generates a unique number for each trade

The system processes the order by finding amatch among the pending orders in the order

book

The electronic book contains the bid & offerprices & quantities for all stocks being traded



50


The system continuously matches the best buy

orders with the best sell orders in the order

book

The best buy order has the highest price & the

best sell order has the lowest price

The entries in the order book change on a real-time basis with every new order



51

What are the different types of orders onemay place while trading in shares?

Time related conditions

Price ± related conditions

Quantity ± related conditions



52

Time ± Related Condition

Day Order

GTC (Good till Cancelled)

GTD (Good till Date)

IOC (Immediate or Cancel)



53

Price ± Related Condition

Limit Price Order

Market Price Order

Stop loss order



54


Limit Price Order ± specifies limiting price

For a buyer, limit price is the ceiling price i,e

order will be executed at any price=<

limitprice

For a seller, limit price is the floor price i,e

order will be executed at any price => limitprice





56


Stop loss Order

- Placed with the broker with instructions to

buy or sell when the stock reaches /passes

through a certain price

- Investor specifies two prices at the time of

communicating the order ± trigger price & limitprice



57

Price ± Related Condition ± Stop loss

Trigger Price

Is the price at which the buying / selling must

commence Limit Price

Is the price beyond which the buying / selling

should stop



58

Stop Loss Order - Contd«.

Until trigger price is activated, stop loss orders

are maintained in stop loss book

Once the trigger price is reached, order is

transferred to regular-lot order book





60

How exactly are transactions settled?

Settlement is the process that involves transfer

of money from the buyer to the seller & the

transfer of securities from the seller to the

buyer on the settlement date.



61


Settlement at BSE & NSE is currently based on

T+2 rolling settlement cycle. (2001)

Under rolling settlement system, trades

completed on a particular day are settled after

a given number of business days.



62


In BSE & NSE it is after 2 days & hence called

T+2 settlement, implying trading date + 2

days.

Monday¶s trade, settled on Wednesday as so

on.

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22nd Aug Stock Market

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