Analysis of Stock Market and

Analysis of Stock Market and Derivatives Market in India Presented by: RAJESH KUMAR MBA(Finance), ACS, AIII

STOCK MARKET:Astock marketorequity marketis a public entity for the trading of company stock(shares) andderivativesat an agreed price.These aresecuritieslisted on astock exchangesas well as those only traded privately.The stocks are listed and traded on stock exchanges which are entities of a corporation ormutual organization.The size of the world stock market was estimated at about $36.6trillion at the beginning of October 2008.WHAT ARE STOCKS?At some point, just about every company needs to raise moneyIn each case, they have two choices:Borrow the money, or Raise it from investors by selling them a stake (issuing shares of stock) in the companyWhen you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done. Nevertheless, it's that ownership structure that gives a stock its value.STOCK EXCHANGE:A market in which securities are bought and sold: "the company was floatedon the Stock Exchange".The initial offering of stocks and bonds toinvestorsis by definition done in theprimary marketand subsequent trading is done in thesecondary market. A stock exchange is often the most important component of astock market. Supply and demand in stock markets are driven by various factors that, as in allfree markets, affect the price of stocks.

ROLE OF STOCK EXCHANGERaising capital for business:- common forms of raising capital-

Mobilizing savings for investments.Creating investment opportunities for small companies.Government capital rising for development projects.Facilitates company growth. Going to publicLimited partnershipVenture capitalCorporate companiesSOME INDIAN STOCK EXCHANGESEXCHANGEBOMBAY STOCK EXCHANGENATIONAL STOCK EXCHANGEJAIPUR STOCK EXCHANGEUP STOCK EXCHANGE ASSOCIATIONMADRAS STOCK EXCHANGECOCHIN STOCK EXCHANGEBANGLORE STOCK EXCHANGEGAUHATI STOCK EXCHANGELUDHIANA STOCK EXCHANGECALCUTTA STOCK EXCHANGELOCATIONMUMBAIMUMBAIJAIPURKANPURCHENNAICOCHINBENGULURUGAUHATHILUDHIANAKOLKATANSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.OTHER STOCK EXCHANGES

ECONOMYSTOCK EXCHANGEUS & EUROPENYSEUS & EUROPE (NORTH)NASDAQJAPANTOKYO STOCK EXCHANGEUNITED KINGDOMLONDON STOCK EXCHANGEEUROPEEURONEXTCHINASHANGHAI STOCK EXCHANGEHONG KONGHONGKONG STOCK EXCHANGECANADATORONTO STOCK EXCHANGEBRAZILBM&F BOVESPAECONOMYSTOCK EXCHANGEAUSTRALIAAUSTRALIAN SECURITIES EXCHANGEGERMANYDEUTSCHE BORSESWITZERLANDSIX SWISS EXCHANGECHINASHENZHEN STOCK EXCHANGESPAINBME SPANISH EXCHANGESINDIABOMBAY STOCK EXCHANGESOUTH KOREAKOREA EXCHANGEINDIANATIONAL STOCK EXCHNGERUSSIAMICEX RTSSOUTH AFRICAJSE LIMITED

BSE BUILDING; BSE DISPLAYS SENSEX ; PEOPLE TRADING ATTHE BOMBAY STOCK EXCHANGEBOMBAY STOCK EXCHANGE Established in 1875, the Bombay Stock Exchangeis Asia's first stock exchange.BSE Limited formerly known as Bombay Stock Exchange (BSE) , is the oldest stock exchange in Asia. It is a stock exchange located on Dalal Street, Mumbai. The equity market capitalization of the companies listed on the BSE was US$1 trillion (or Re :5526,99,93,920.3007) as of December 2011.It the 6th largest stock exchange in Asia and the 14th largest in the world.

The BSE has the largest number of listed companies in the world.As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scrip's on the stock exchange, the Bombay Stock Exchange has a significant trading volume. The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia.Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India.While both have similar total market capitalization (about USD 1.6 trillion), share volume in NSE is typically two times that of BSE.

NATIONAL STOCK EXCHANGE , MUMBAI.

NATIONAL STOCK EXCHANGEThe National Stock Exchange (NSE) is stock exchange located at Mumbai, India.It is the 16th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.NSE has a market capitalization of around US 985 billion and over 1,646 listings as of December 2011.NSE and BSE are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalisation.NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities.There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. In 2011, NSE was the third largest stock exchange in the world in terms of the number of contracts (1221 million) traded in equity derivatives. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

Stock tradingStock trading is not just buying and selling stocks at the stock market, there are so many other factors that need to be taken care of for successful stock trading.Anyone who invests in the stock market wishes to make profit from the investments. To ensure that you get significant return from your investment you have to pick up the right stocks at the right time.If you have decided to trade in stocks the first thing that you need to decide is the stock market where you will trade.

There are mainly two major stock exchanges in India

The Bombay Stock Exchange or BSE The National Stock Exchange or NSE. BSE is the largest stock exchange in the country and it is the biggest in world in terms of number of listed companies.The NSE is the virtual exchange where you can only trade online. Both these exchanges have their benefits and limitations.List of stock market crashes

Source: Wikipedia18Stock brokers An agent that charges a fee or commission for executing buy and sell orders submitted by an investor. (OR) The firm that acts as an agent for a customer, charging the customer a commission for its services.You can either opt for a conventional broker or you can choose to trade online.If you are trading online you can get the broking service from the banking or non banking organisations offering online trading facilities who will provide you with the DP account and act as your broker.

DEMAT Account A demat account is opened on the same lines as that of a Bank Account. Prescribed Account opening forms are available with the DP, needs to be filled in.Standard Agreements are to be signed by the Client and the DP.In case of Corporate clients, additional attachments required are - true copy of the resolution for Demat a/c opening along with signatories to operate the account and true copy of the Memorandum and Articles of Association is to be attached

Derivatives Market in IndiaThederivatives marketis thefinancial marketforderivatives,financial instrumentslike futures contracts or options, which are derived from other forms ofassets.The market can be divided into two, that forexchange-traded derivativesand that forover-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Why Do We Call Them Derivatives?They owe their existence to the presence of a market for an underlying asset or portfolio of assets, which may be considered as primary securities.Consequently such contracts are derived from these underlying assets, and hence the name.Thus if there were to be no market for the underlying assets, there would be no derivativesSize of Derivatives MarketThetotalworld derivatives market has been estimated at about $791trillion face or nominal value,11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms ofnotional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to anactual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the eventnotoccurring). Many such relatively illiquid securities are valued asmarked to model, rather than an actual market price.

Valuation

Total world derivatives from 1998 to 2007compared to total world wealth in the year 2000

24Broad Categories of DerivativesForward ContractsFutures ContractsOptions ContractsSwapsForward ContractA forward contract is an agreement between two parties that calls for the delivery of an asset on a specified future date at a price that is negotiated at the time of entering into the contract.Every forward contract has a buyer and a seller.The buyer has an obligation to pay cash and take delivery on the future date.The seller has an obligation to take the cash and make delivery on the future date

Futures ContractA futures contract too is a contract that calls for the delivery of an asset on a specified future date at a price that is fixed at the outset.It too imposes an obligation on the buyer to take delivery and on the seller to make delivery.Thus it is essentially similar to a forward contract.

Forward Contracts v/s Futures Contracts ForwardFuturesPrivate contract between two partiesTraded on an exchangeNot standardizedStandardizedUsually one specified delivery dateRange of delivery datesSettled at end of contractSettled dailyDelivery or final settlement usualUsually closed out prior to maturitySome credit riskVirtually no credit risk2.28OptionsAn options contract gives the buyer the right to transact on or before a future date at a price that is fixed at the outset.It imposes an obligation on the seller of the contract to transact as per the agreed upon terms, if the buyer of the contract were to exercise his right.We have said that an option holder acquires a right to transact.There are two possible transactions from an investors standpoint purchases and sales.Consequently there are two types of options Calls and Puts.

..ContinueA Call Option gives the holder the right to acquire the asset.A Put Option gives the holder the right to sell the asset.If a call holder were to exercise his right, the seller of the call would have to make delivery of the asset.If the holder of a put were to exercise his right, the seller of the put would have to accept delivery.We have said that an option holder has the right to transact on or before a certain specified date.

ContinueCertain options permit the holder to exercise his right only on a future date. These are known as European Options.Other types of options permit the holder to exercise his right at any point in time on or before a specified future date.These are known as American Options.

Rights What is the difference between a Right and an Obligation.An Obligation is a binding commitment to perform.A Right however, gives the freedom to perform if desired.It need be exercised only if the holder wishes to do so.In a transaction to trade an asset at a future date, both parties cannot be given rights.For, if it is in the interest of one party to go through with the transaction when the time comes, it obviously will not be in the interest of the other.

.ContinueConsequently while obligations can be imposed on both the parties to the contract, like in the case of a forward or a futures contract, a right can be given to only one of the two parties.Hence, while a buyer of an option acquires a right, the seller has an obligation to perform imposed on him.

Longs & ShortsThe buyer of a forward, futures, or options contract is known as the Long.He is said to have taken a Long Position. The seller of a forward, futures, or options contract, is known as the Short.He is said to have taken a Short Position.In the case of options, a Short is also known as the option Writer.

Comparison of Futures/Forwards versus OptionsInstrument

Nature of Longs Commitment

Nature of Shorts Commitment

Forward/Futures Contract

Obligation to buy

Obligation to sellCall Options

Right to buy

Obligation to sell

Put Options

Right to sell

Obligation to buy

SwapsA swap is a contractual agreement between two parties to exchange specified cash flows at pre-defined points in time.There are two broad categories of swaps Interest Rate Swaps Currency SwapsInterest Rate SwapsIn the case of these contracts, the cash flows being exchanged, represent interest payments on a specified principal, which are computed using two different parameters.For instance one interest payment may be computed using a fixed rate of interest, while the other may be based on a variable rate such as LIBOR.There are also swaps where both the interest payments are computed using two different variable rates For instance one may be based on the LIBOR and the other on the Prime Rate of a country.Obviously a fixed-fixed swap will not make sense.

..ContinueSince both the interest payments are denominated in the same currency, the actual principal is not exchanged.Consequently the principal is known as a notional principal.Also, once the interest due from one party to the other is calculated, only the difference or the net amount is exchanged.

Currency SwapsThese are also known as cross-currency swaps.In this case the two parties first exchange principal amounts denominated in two different currencies. Each party will then compute interest on the amount received by it as per a pre-defined yardstick, and exchange it periodically.At the termination of the swap the principal amounts will be swapped back.In this case, since the payments being exchanged are denominated in two different currencies, we can have fixed-floating, floating-floating, as well as fixed-fixed swaps.

Assets Underlying Futures ContractsTill about two decades ago most of the action was in futures contracts on commodities.But nowadays most of the action is in financial futures.Among commodities, we have contracts on agricultural commodities, livestock and meat, food and fibre, metals, lumber, and petroleum products.Historically most of the action has been in stock options.Commodity options do exist but do not trade in the same volumes as commodity futures.Options on foreign currencies, stock indices, and interest rates are also available.

Mechanics of Future A future contract is a contract for delivery of a standard package of a standard commodity or financial instrument at a specific date and place in future but at a price that is agreed when the contract is taken out.The future price = Spot price + cost carryingCost of carrying includes: Storage Insurance Transport cost Finance costPrice Earning Ratio as a Predictor of 20 Years Return

Source: Wikipedia42Premium in Stock Option

.Continue

Margin:A margin is cash or marketable securities deposited by an investor with his or her broker.The balance in the margin account is adjusted to reflect daily settlement.Margins minimize the possibility of a loss through a default on a contract.

Example of a Futures TradeAn investor takes a long position in 2nd December gold futures contracts on June 5thcontract size is 100 oz.futures price is US$400margin requirement is US $2,000/contract (US$4,000 in total)maintenance margin is US $1,500/contract (US$3,000 in total)2.47A Possible Outcome

2.48DailyCumulativeMarginFuturesGainGainAccountMarginPrice(Loss)(Loss)BalanceCallDay(US$)(US$)(US$)(US$)(US$)400.004,0005-Jun397.00(600) (600) 3,4000..................13-Jun393.30(740) (1,340) 2,6601,340 .................19-Jun387.00(1,260) (2,600) 2,7401,260 ..................26-Jun392.301,060 (1,540) 5,0600+=4,0003,000+=4,000