1. basics of financial market

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Title

A Beginner s guideto Financial

Markets



Financial Market

F inancial Market is amechanism that allowspeople to easily buy andsell F inancial securities(stocks and bonds),Commodities (preciousmetals/agricultural goods),Currency & Derivatives



Role of Financial Intermediary

d F inancial Intermediaries, who play asignificant role in transfer of fundsfrom Individual having excess of fundsto Individuals who are in need of funds.

d F inancial Intermediaries can be:1. Banks;2. Government3. Building Societies;4. Credit Union

5.Financial adviser or Sub broker;

6. Insurance Companies;7. Mutual Funds; or Pension Funds.



Structure of Market



Primary Market

Primary market provides the channel for sale of new securities.Primary market provides opportunity to issuers of securities;Government as well as corporate, to raise resources to meet theirrequirements of investment and/or discharge some obligation.

They may issue the securities at face value, or at a discount /premium and these securities may take a variety of forms such asequity, debt etc.They may issue the securities in domestic market and/orinternational market (ADR or GDR)Issue can be IPO or F POIssue can be Public or Private



Secondary Market

d Secondary market refers to a market where securities aretraded after being initially offered to the public in the primarymarket and/or listed on the Stock Exchange.

d Secondary Market provides an Exit route to the Investord

They provide an Opportunity for Investmentd Majority of the trading is done in the secondary market.d Secondary market comprises of equity markets and the debt

markets.



Instruments

Instruments inMoney Market

Treasury Bills

Government

Securities

Bonds

Instruments inCapital Market

Equity Shares

Preference Shares

Debentures



Equity/ ShareTotal equity capital of a company isdivided into equal units of smalldenominations, each called a share.

For example, in a company the total equity

capital of Rs 2,00,00,000 is divided into20,00,000 units of Rs 10 each. Each suchunit of Rs 10 is called a Share.

The holders of such shares aremembers of the company and havevoting rights.



D ebt Instrumentd Debt instrument represents a contract

whereby one party lends money toanother on pre-determined terms withregards to rate and periodicity of interest,repayment of principal amount by theborrower to the lender.

d Normally Bond is used for debtinstruments issued by the Central andState governments and public sectororganizations and the term Debenture isused for instruments issued by privatecorporate sector.



Investmentd The money you earn is partly

spent and the rest is savedfor meeting future expenses.

d Instead of keeping yoursavings idle you can investthem in order to get higherreturns in future. This iscalled Investment.



W hen to start Investing

By investing early you allow your investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principal and the interest ordividend earned on it, year after year.

G olden Rule ± Invest early ± Invest regularly ± Invest for long term and not short term



Avenues for Investment

Securities

Equity

Derivatives

MutualFunds

ULIPs

PMS

DEBT

F Ds

Post OfficeSchemes

PF / PP F

Commodity

Real Estate

Gold / Silver

AgriCommodities



Structure of

Financial Market



Structure of Financial Market

Government &Various Ministries

SEBI

Stock

Exchanges

Depositories

Mutual F unds

RBI

Banks

NBFC

F MC

CommodityExchanges

DCA DEA IRDA

Life InsuranceCompanies

Non Life InsuranceCompanies



Structure of Capital Market

SEBI

StockExchanges

ClearingHouse Brokers

Sub Brokers

Investors

Depositories

NSDL & CDSL

DepositoryParticipants

Mutual F unds

TrusteeCompanies

AMCs

Registrars andShare Transfer

Agents

Lead Managersand Merchant

Bankers



SEBI and its RoleThe Securities and Exchange Board of

India (SEBI) protects the interests of investors in securities, promotes thedevelopment of the securities market andregulates the securities market.

d SEBI registers and regulates the working of stock brokers, sub-brokers etc.

d Promotes and regulates self-regulatoryorganizations

d SEBI also prohibits fraudulent and unfairtrade practices Calling for information from,undertaking inspection, conducting inquiriesand audits of the stock exchanges,intermediaries, self - regulatoryorganizations, mutual funds and otherpersons associated with the securitiesmarket.



Stock Exch anged A stock e xchange is a

corporation or mutualorganization which provides"trading" facilities for stock

brokers and traders, to tradein stocks and othersecurities.

d BSE, NSE, MCX and NCDEX

are the Major Exchanges inIndia.



D epository

d A depository is like a bankwherein the deposits aresecurities (viz. shares,debentures, bonds,government securities, unitsetc.) in electronic form.

d Angel Broking is RegisteredDP under CDSL

SEBI

NSDL


Investors

CDSL




D ematerializationd Dematerialization is the

process by which physicalcertificates of an investor areconverted to an equivalentnumber of securities in

electronic form and creditedto the investor s account withhis Depository Participant(DP).



D epository

d An analogy between a bank and a depository may bedrawn as follows:



InsuranceInsurance meets triple objectives of

Risk Coverage, Investment and TaxPlanning.It also provides assistance infinancial planning in order toachieve clients goals by offeringarray of individual life cover plans tomeet their Protection, Savings andRetirement needs.

Being an entry level product , ithelps to cater mass client baseThis product gives two incomestreams : Upfront and Trail



Mutual Fundd A Mutual F und is a body

corporate registered withSEBI that pools money fromindividuals/corporateinvestors and invests the

same in a variety of differentfinancial instruments orsecurities such as equityshares, Governmentsecurities, Bonds, debenturesetc.



D erivatives

Forwards

Swaps

Options

Futures

D erivatived Derivative is a product whose

value is derived from the value of one or more basic variables,called underlying.

d The underlying asset can beequity, index, foreign exchange(forex), commodity or any otherasset.

d Forwards, F utures, Options andSwaps are popular Derivatives



Types of D erivativesd Forwards : A forward Contract is a customized contract between

two entities, where settlement takes place on a specific date inthe future at today s pre agreed price

d Futures : A futures contract is an agreement between two partiesto buy or sell an asset at a certain time in the future at a certainprice. This contract expires on a pre-specified date which is calledthe expiry date of the contract. On expiry, futures can be settledby delivery of the underlying asset or cash. Cash settlementenables the settlement of obligations arising out of thefuture/option contract in cash.



d O ptions : An Option is a contract which gives the right, but not anobligation, to buy or sell the underlying at a stated date and at astated price. Options are of two types Calls and Puts options :

d Call give the buyer the right but not the obligation to buy agiven quantity of the underlying asset, at a given price on orbefore a given future date.

d Put give the buyer the right, but not the obligation to sell a

given quantity of the underlying asset, at a given price on orbefore a given future date.

Types of D erivatives Contd



W hat is meant by Commodity ?FCRA (Forward Contracts Regulation Act) 1952 defines goods as everykind of movable property other than actionable claims, money andsecurities . F utures trading is organized in such goods or commodities asare permitted by the Central Government. At present, all goods andproducts of agricultural (including plantation), mineral and fossil origin areallowed for futures trading under the auspices of the commodityexchanges recognized under the FCRA.

Commodity



W hat is Commodity Exchange?

A commodities e xchange is an exchange where various commoditiesand derivatives products are traded.

Most commodity markets across the world trade in agriculturalproducts and other raw materials (like wheat, sugar, maize, cotton,metals, etc.) and contracts based on them.These contracts can include spot prices, forwards, futures and optionson futures.

Commodity Exchange



d W hat is Commodity D erivatives Market?

Commodity derivatives market trade contracts for which the underlying asset iscommodity. It can be an agricultural commodity like wheat, soybeans etc orprecious metals like gold, silver etc.

d W hat is t he difference between Commodity and Financial derivatives?

The basic concept of a derivative contract remains the same whether theunderlying happens to be a commodity or a financial asset. However there aresome features which are very peculiar to commodity derivative markets.In case of financial derivatives, most of these contracts are cash settled. Even inthe case of physical settlement, financial assets are not bulky and do not needspecial facility for storage. The concept of varying quality of asset does not reallyexist as far as financial underlyings are concerned.However in the case of commodities, the quality of the asset underlying acontract can vary at times.

Commodity D erivatives Market



Currency Market

Currency markets are the markets in which the currency futuresare traded.Currency futures are foreign exchange derivative contracttraded on stock exchange to buy or sell one currency against

anotherAny Indian Resident or company including banks and financialinstitutions can participate in the Currency futures marketF IIs and NRIs are not permitted to participate

The Currency F utures are traded through a fully automatedscreen-based trading platform



Inde xd An Index shows how a specified portfolio of share prices are

moving in order to give an indication of market trends.d It is a basket of securities and the average price movement of

the basket of securities indicates the index movement, whetherupwards or downwards.

d

Sensex is a basket of 30 Stocks and Nifty is of 50 stocks



Inde xd A stock index is a measure of the

performance of underlying stocks.d Changes in the index reflect

changes in the value of the stocks.d Stock indices provide investors with

an easy way to determine if themarket is up or down for the dayd Stock indices are developed

scientificallyd E.g. : S&P CNX Nifty (Nifty) is a 50

stock index reflecting accuratelythe movement of the Indianmarkets

Sensex Base Year

1978-79

Base IndexValue

100

Date of Launch 01-01-1986

M ethod of calculation

Launched on full marketcapitalization method and

effective September 01, 2003,calculation method shifted to free -

float market capitalization .N umber of scrips

30

Indexcalculationfrequency

R eal Time

HistoricalValues of Index

Index , Price Earnings , Price toBook Value ratio and DividendYield %



Process Flow

K YC Documentation Allotment Of UCC Code

Limits Assigned Based OnDeposit Funds/Stock

Available Trade Execution By Investor

Pay In Of Funds/ Shares Payout Of Shares/Funds

Dispatch Of Welcome K it &Password

Dispatch Of Contract N otes



Trading Cycle

SecuritiesPay in

FundPayout

SecuritiesPay Out

FundPay In



Clearing & Settlementd Clearing Corporation: It is a part of an exchange or a separate

entity whichd Clears and Settles all transactions on the exchanged Provides financial guarantee for all transactions executed on

the exchanged provides risk management functions.

d Rolling Settlement:d Under rolling settlement all open positions at the end of the

day result in mandatory payment/delivery n days later.d Currently trades in rolling settlement are settled on T+2

basis where T is the trade day.



d Pay-in & Pay-out:

d Pay-in day is the day when the securities sold are deliveredto the exchange by the sellers and funds for the securitiesbought are made available to the exchange by the buyers.

d Pay-out day is the day the securities purchased are deliveredto the buyers and the funds for the securities sold are givento the sellers by the exchange.

At present the pay-in and pay-out happens on the 2nd workingday after the trade is executed on the stock exchange.

Clearing & Settlement



Corporate Actionsd Corporate Action: Any event initiated by a corporation which

impacts its shareholdersSome examples are dividends, stock splits, rights issues,bonus issues etc.

d D ividend: Dividend is the distribution of part of acompany's earnings to shareholders

d D ividend yield: Relationship between the current price of a stock and the dividend paid during the last 12 months.

D ividend yield = Aggregate of past year s D ividendCurrent Stock Price



d Stock Split: It is a corporate action which splits the existing

shares of a particular face value into smaller denominations sothat the number of shares increase. The total value howeverremains the same.Stock Split:-

brings the share price down to a more "attractive" level.Increases stock liquidity due to greater affordability

d Buy back of s hares: a method for company to invest in itself bybuying shares from other investors in the market.

Buyback:-Improves liquidity

Enhances shareholders wealth

Corporate Actions Contd .



d Auction:

Auctions result due to non delivery of securities by thetrading member on the pay-in day

Exchange purchases the requisite quantity in auction marketand gives them to the buying trading member.

d Book-closure/ Record date:It is the date after which the company will not handle anytransfer of shares requests until the benefits(dividends or

bonus issues) are transferred.Helps a company determine exactly the shareholders of acompany as on a given date.




d N o-delivery period:

W henever a company announces a book closure or recorddate, the exchange sets up a no-delivery period for thatsecurity.

During this period only trading is permitted in the security.

However, these trades are settled only after the no-deliveryperiod is over.

d Ex-date: The first day of the no-delivery period is the ex-date.

d Ex-dividend D ate: The date on or after which a security beginstrading without the dividend included in the price.




Thank You

Publishedin FY I 2009. © Angel Broking 2009-10.

Angel Broking All rights reserved. corporate Off: 612, Acme Plaza, M.V. Road, opp sangam cinema, Andheri east, Mumbai 400059, India.Tel.: +(91) 022 39527100/ 4000 3600

This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation forthe purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and AngelBroking and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. W e haveexercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete.Angel Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from anyinadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. Angel Broking and/or itssubsidiariesand/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.

1. basics of financial market

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