Module VI.pdf

8/7/2019 Module VI.pdf

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Amity Business School

MARKETING OFFINANCIAL SERVICES

Module VIIntroduction to Stock

& Commodity Markets

Ramesh Bagla


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Stock MarketStock market refers to a market placewhere investors can buy and sell stocks.

The price at which each buying and sellingtransaction takes is determined by themarket forces (i.e. demand and supply for

a particular stock).


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Stock Exchange In earlier times, buyers and sellers used toassemble at stock exchanges to make atransaction but now with the dawn of IT,

most of the operations are doneelectronically and the stock markets havebecome almost paperless.

Now investors don't have to gather at theExchanges, and can trade freely from theirhome or office over the phone or through

Internet.


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Major Functions of Stock Exchange

Provides liquidity

Determines economic value of securities

Provides marketability of stocks Provides safety and transparency in dealings

Promotes savings by providing opportunities

for investment in the stocks. Plays the role of a barometer of the health of

a nations economy


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Listing of Securities Listing of securities is the admission of

securities to trading privileges on the stock

exchange The listing agreement is an agreement

between a company and the stock exchange

containing terms and conditions of listing

including obligations and restrictions on the

company as a result of listing


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Advantages of Listing

Provides liquidity

Provides free negotiability

Enhances image of the company

Full disclosure of information on thecompany


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Type of Securities


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Type of Transactions


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Brokers Indian stock exchanges allow a member

broker to perform following activities:

Act as an agent,

Buy and sell securities for his clients andcharge commission for the same,

Act as a trader or dealer as a principal,

Buy and sell securities on his own accountand risk.


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Bombay Stock Exchange (BSE)

BSE is the oldest stock exchange in Asia.

Listing of securities: BSE has a separate listing

department to grant approval of listing ofsecurities of public limited companies, central orstate government securities.

Companies have been classified as large cap

companies mid cap and small cap companiesfor listing purposes.


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Main BSE Indices

BSE Sensitive Index (BSE-Sensex)

BSE National Index (later renamed as

BSE-100 index) BSE-200

DOLLEX 200

BSE-500

BSE-PSU index


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SENSEX Sensex is calculated using a market

capitalization weighted methodology.

As per this methodology, the level of index at

any point of time reflect the total market valueof 30 component stocks relative to a baseperiod.

The market capitalization of a company isdetermined by multiplying the price of its stockby the number of shares issued by thecompany


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BSE Online Trading System (BOLT)

The BSE provides an efficient and

transparent market for trading in equity

shares, debt instruments and derivatives.

The online trading system of the BSE,

Bombay Online Trading (BOLT) system, is a

proprietary system and BS 7799-2-2002

certified


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BSE Basket Trading System (BTS)

In BTS, investors can buy or sell all 30scrips of the Sensex in one transaction inthe proportion of their respective weightsin the Sensex


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Over The Counter Exchange of

India (OTCEI)

Traditionally, trading in Stock Exchanges inIndia followed a conventional style wherepeople used to gather at the Exchange andbids and offers were made by open outcry.


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OTCEI This age-old trading mechanism in the Indian stock markets used to

create many functional inefficiencies like:

Lack of liquidity and transparency,

Long settlement periods and

Benami transactions In order to overcome these inefficiencies, OTCEI was incorporated

in 1990 under the Companies Act 1956.

OTCEI is the first screen based nationwide stock exchange in India

created by Unit Trust of India, Industrial Credit and Investment

Corporation of India, Industrial Development Bank of India, SBICapital Markets, Industrial Finance Corporation of India, General

Insurance Corporation and its subsidiaries and CanBank Financial

Services.


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Futures

Futures contracts are contracts to deliver aspecific amount of a commodity or financialinstrument on a specific future date.

The buyer of the contract has the right to receivethe underlying instrument and locks in the price onthe purchase date.

The seller of a futures contract must deliver on thecontract date.

Futures contracts are controlled by buyers andsellers with a margin deposit that is 5 to 10percent of the value of the contract.


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Options Options are contracts that give the option

holder the right to buy---call options---orsell---put options---the underlying security

at a set price until a specific expirationdate.

Option buyers pay a premium for the right

and option sellers receive the premiumand have the obligation to sell or buy theunderlying security


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Futures vs. Options1. A future is a contract which is governed by apre-determined price for selling and buying at afuture period. In options, there is the right to sell or

purchase of underlying assets without anyobligation.2. A future trading has open risk. The risk in optionis limited.

3. The size of the underlying stock is usually hugein future trading. Option trading is of normal size.4. Futures need no advance payment. Optionshave the advance payment system of premiums.


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National Securities Clearing

Corporation Ltd (NSCCL) National Securities Clearing Corporation Ltd

(NSCCL), a wholly owned subsidiary of the

National Stock Exchange, was established inAugust 1995 with following objectives:

To bring and sustain confidence in clearingand settlement of trading

To provide counter party guarantee againstrisk

To operate a tight risk-containment system


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Commodity Markets

A commodity is any homogenous item whichmay be freely bought and sold. The termtypically refers to products such as coffee,

cocoa and soyabeans (soft commodities) orgold, aluminium and platinum (hardcommodities).

Commodities typically are bought and sold in

commodity markets where producerscombine with manufacturers and speculatorsto create a smoothly functioning market.


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Commodity Markets Commodities are traded on regulated

commodity exchanges, in which they arebought and sold in standardised contracts. Itis similar to an equity market, but instead of

buying or selling shares one buys or sellscommodities. The commodities markets are one of the

oldest prevailing markets in the humanhistory. In fact, derivatives trading started offin commodities with the earliest records beingtraced back to the 17th century when ricefutures were traded in Japan.


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Global Classification of Commodities

Precious Metals: Gold, Silver, Platinum, etc. Other Metals: Nickel, Aluminum, Copper,

Zinc, etc.

Agro-Based Commodities: Wheat, Rice,Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar, etc. Petrochemicals: Crude Oil, High Density

Polyethylene, Polypropylene. Live-Stock: Live Cattle, Pork Bellies, etc. Energy: Crude Oil, Natural Gas, Gasoline,

etc.


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Indian Commodity Market Commodity exchanges are regulated by the

Forward Markets Commission. Unlike the equitymarkets, brokers don't need to register themselveswith the regulator.

The FMC deals with exchange administration andwill seek to inspect the books of brokers only if foulpractices are suspected or if the exchangesthemselves fail to take action.

Thus commodity exchanges are more self-regulating than stock exchanges. But this couldchange if retail participation in commodities growssubstantially.


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Indian Commodity Market13.The East India Cotton Association, Mumbai14. The Central India Commercial Exchange Ltd., Gwalior15. The East India Jute & Hessian Exchange Ltd.16. First Commodity Exchange of India Ltd, Kochi

17. Bikaner Commodity Exchange Ltd., Bikaner18. The Coffee Futures Exchange India Ltd, Bangalore19. Esugarindia Limited20. National Multi Commodity Exchange of India Limited21. Surendranagar Cotton oil & Oilseeds Association Ltd

22. Multi Commodity Exchange of India Ltd23. National Commodity & Derivatives Exchange Ltd

24. Haryana Commodities Ltd., Hissar25. e-Commodities Ltd


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Indian Commodity Market MCX, NCDEX and NMCEIL are the major Commodity

Exchanges Multi commodity exchange of India Ltd (MCX) is an

independent exchange based in Mumbai. Establishedon 10th November, 2003, it is the third largest bullionexchange and fourth largest energy exchange in theworld. Recognized by the Government of India it dealsin numerous commodities and carries out onlinetrading, clearing and settlement processes forcommodities future market countrywide

MCX COMDEX is India's foremost and sole compositecommodity futures price index


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Indian Commodity Market National Multi-Commodity Exchange of India Limited (NMCEIL)

is an online exchange dealing in numerous commodities.

Incorporated on 20th December 2001, it is promoted and run by:

Central Warehousing Corporation

National Agricultural Cooperative Marketing Federation of IndiaLimited

Gujarat Agro Industries Corporation Limited

National Institute of Agricultural Marketing

Gujarat State Agricultural Marketing Board

Neptune Overseas Limited

The Commodity Exchanges with their extensive reach embrace new

participants, resulting in a powerful price discovery process.


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Segments in Commodities Market

Over the Counter (OTC) Market /Spot Market

- Here the participation is restricted to peoplewho are involved with that commodity say the

farmer, processor, wholesaler etc

Exchange Based Market.

- Here derivative trading takes place through

exchange-based markets with standardizedcontracts, settlements etc


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Derivatives A commodity futures contract is a type of derivative, or financial

contract, in which two parties agree to transact a set offinancial instruments or physical commodities for delivery at aparticular price at a later date.

If you buy a commodity contract, you are basically agreeing to

buy something, for a set price, that a seller has not yetproduced. But participating in the commodity market does not necessarily

mean that you will be responsible for receiving or deliveringlarge inventories of physical commodities,

Buyers and sellers in the futures market primarily enter into

futures contracts to hedge risk or speculate rather than delivery(which is the primary activity of the cash/spot market). That iswhy Commodities are used as financial instruments by not onlyproducers and consumers but also speculators.


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Players Involved in Commodities Trading

There are three different types of players in the commodity markets:

Commercials: The entities involved in the production, processing or

merchandising of a commodity. For example, both the corn farmer

and Kelloggs are commercials. Commercials account for most of

the trading in commodity markets. Large Speculators: A group of investors that pool their money

together to reduce risk and increase gain. Like mutual funds in the

stock market, large speculators have money managers that make

investment decisions for the investors as a whole.

Small Speculators: Individual commodity traders who trade on theirown accounts or through a commodity broker. Both small and largespeculators are known for their ability to shake up the commodities

market.


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Speculation & Arbitrage Speculation: Speculators are people who are

prepared to bear risks in anticipation ofearning profits. Markets are granted liquidityby speculators and it is hard to conceive of a

futures market devoid of speculators. Arbitrage: Arbitrage involves buying a

commodity at a low price and instantly sellingit for a higher price in another market. Thus,

traders can profit from arbitrage opportunitiesoccurring due to price differences betweentwo exchanges.

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