FINANCIAL MARKET OPERATIONS (UNIT-3) STOCK MARKET (PART-2)

FINANCIAL MARKET OPERATIONS (UNIT-3) STOCK MARKET (PART-2) 1. INTRODUCTION Hello viewers! Welcome to the lecture series of financial market operations. Today we shall take up part 2 of the unit 3 rd. We have discussed in part one about the capital market. So we know that capital market is one of the fundamental constituents of the financial markets. So further moving our discussions on the capital markets let us learn the segment which is important under capital market that is secondary market part, which is called as stock market. We know that the capital market has two segments-primary market and secondary market. Another name of secondary market is stock exchange, where buying and selling of securities is being done. 2. STOCK MARKET Let us have an insight of the stock market. Stock market is the place where buying and selling of the stock takes place. Nowadays due to internet and advanced technologies, buying and selling of stocks takes place anywhere in India and also from foreign countries. There is no need to be physically present in the exchange like NSC and BSC means National Stock Exchange and Bombay Stock Exchange, which are the two major stock exchanges of India. Stock markets are perfect competitive markets. Now let us analyse the meaning of the stock exchange. This comes under the tertiary sector which provides service to stock brokers and traders to trade stocks, bonds and securities. Stock exchanges help the companies to raise the funds. Therefore, the companies need to list themselves in the stock exchange and the shares will be issued which is known as equity or ordinary share. So 1

whenever there is listing of any share, those shares of the corporate entity would be dealt in stock market. The implication of this analysis of stock market exchange is that whenever a company is going to list the stock market securities, they can trade their securities in the secondary market. There is a specific definition of stock exchange. Let us learn it. The securities regulation act of 1956 defines the stock exchange as, An association, organisation or an individual, which is established for the purpose of assisting, regulating and controlling business in buying selling and dealing of securities. So stock exchange can be association, organisation or an individual. The role or function which is done by this corporate body or association is that it deals with the business of buying selling and dealing of the business securities and the purpose is assisting and regulating that business. That is what we call as stock exchange. Now let us analyse the features of stock exchange: 1) It is an organised market. 2) It is a securities market that is securities are traded here. 3) It is an important constituent of capital market, that is, market for long term finance. Money market. As we know is the market for short term funding and stock exchange is a segment of capital market where long term financial needs are fulfilled. 4) It is a voluntary association of persons desirous of dealing in securities. So voluntarily people get associated to form the stock exchange for the purpose of assisting, regulating the business of buying selling and dealing in securities. Stock exchange is a voluntary association. Its membership is not open to everybody. The persons who are desirous of becoming of stock exchange need to take the certificate of membership as per the rules prescribed. 5) In a stock exchange, only members can deal in. That is, buy and sell securities. So only a registered stock exchange can buy and sell the securities on behalf of its clients. They are generally known as brokers. 6) The members of stock exchange can buy and sell securities either as broker or on behalf of their client. 2

7) The dealings in stock exchange are under certain accepted code of conduct. Code and conduct here means that there are certain rules and regulations for doing the transactions in the stock exchange. Important functions of stock exchange: 1) It provides central and convenient meeting place for sellers and buyers of securities. However with the advancement of technology, the transactions can be done online from any part of the world. 2) To increase the marketability and liquidity of security. The securities can be easily converted to cash by selling them, and they can be easily bought and sold in the market as this place provides the marketability to the securities 3) Contribute to the stability in the prices of securities. Equalisation of price of security is an important function of the stock exchange. It also smoothens price movements and helps the investors to know the worth of their holdings 4) It promotes the habit of saving and investments. As people are going to channelize their savings in the act of buying and selling the securities 5) It helps in the capital formation as the capital appreciation would again be going to be invested and in a way there will be capital formation. So investors would be getting a help in capital formation by channelizing their savings. 6) It helps companies and governments to raise funds from the investors and provides forecasting services also. If we look at the history of stock exchange, we can analyse that stock exchange was established by east India Company in 18 th century. In India, it was established in 1850 with 22 stock brokers opposite to town hall, Bombay. This stock exchange is known as oldest stock exchange of Asia. Now let us move ahead and learn another topic that is trading in stock exchange, that how trading shall be done in stock exchange market. The market regulator, Securities and Exchange Board of India, which is known as SEBI, has made it compulsory to open the Demat account if 3

you want to buy and sell the security. A person who wants to buys and sale the stocks in stock market had to first place his/her order with the broker or can do themselves using online trading system. The stock purchased will be sent to your demat account. This process is called rolling settlement cycle. What is demat account? Because the transaction is to be done first in the demat account, so we should know what is a demat account. Demat stands for Dematerialisation. It is a process in which physical paper shares are converted to computerise or paperless forms. In India, there are two depository accounts that is NSDL and CDSL which means National Security Depository Limited and Central Depository service of India Limited. They are the depository organisation where the Demat account will be taken care of. Brokers and banks provide facilities to open demat accounts. 3. IMPORTANT TERMS IN STOCK MARKET AND IN STOCK TRADING Now let us analyse the important terms in stock exchange and stock trading. Because now se are discussing about the stock dealing, we should know what are the terminologies which are technical in nature and which are used in the stock exchange. 1) Open: Open here means the stock price in the beginning of the day, that is. Morning price. 2) High: The stock price reach at the highest level in a day 3) Low: it is the lowest level of stock price in a day. 4) Close: It means the stock price at which it remains after the end of the market timing or the final price of the stock when the market closes for a day. So in a day there are so many prices: Open, low, high, close, that needs to be monitored for our transactions 5) Volume: volume here means the quantity. 6) Bid: the buying price is called the bid price 4

7) Offer Price: it means the selling price and in some of the derivatives it is called ask price 8) Short term trading: it is a term used for stock trading done from one week to couple of months. 9) Mid Term Trading: stock trading done from one month or couple of months to six to eight months is called midterm trading. 10) Long term trading: it is another term associated with investment period. Stock trading done from couple of months to couple of years is called lone term trading. Those companies whose fundamentals are good and have good future plans, then the stock of these companies are used for long term trading. Generally traders having good capital go for long term trading. 11) Brokers and jobber: we have already learnt in detail about broker and jobber in our previous lecture. So we will just have insight of these terms. Broker is one who acts as intermediary on behalf of the others. A broker in a stock exchange is a commissioned agent who transacts business in securities on behalf of non members while jobbers are not allowed to deal with the public directly; they deal with the brokers who are engaged with the investors. Thus the securities are brought by the jobbers from the members and sold to members who are operating on stock exchange as broker. Now there are the two terms which are often used in the stock market that is speculation and speculator. 12) Speculation: It is the transaction of members to buy and sell securities in stock exchange with a view to make profits to anticipate rise and fall in the price of security. So speculation is a transaction which is being done on the basis of anticipation of the rise and fall of the prices of security 13) Speculators: these are the persons or dealers. The dealers in the stock exchange who indulge in speculation are called speculators. That is, the one who is going to anticipate the price fall or price rise are known as speculators. They do not take delivery of the security purchased or sold by them but only pay or rescue the difference between the purchase price and sales 5

price. The different types of speculators are: Bull, bear, stag and lame duck. We will learn them in detail. 1) Bull: That is also known as tejiwala. He is a speculator who expects the future rise in the price of securities. He buys the securities to sell them at future date at higher prices. So under bullish approach, a speculator anticipates that in future the price will go high. So he buys the security to sell them at a higher price in the future. He is called as bull because his activities resemble that of a bull, as the bull tends to throw its victim up in the air through its horns. Similarly the bull speculator pays the price of securities by placing a big purchase order. So when a speculator is bullish in approach, he will buy large amounts of securities and when there is rise in price, he will throw them in the market 2) Bear: A bear or mandiwala expects future fall in price. He does an agreement to sell securities at future date at the price in market rate. So here, let us understand what the function of bear is. He does an agreement to sell the securities at future date at the present market rate. Because according to his anticipation, in the future, the prices are going to fall down. So he will sell those securities at future date at the present market rate. He is called as bear because his attitude resembles with that of bear. As the bear tend to stamp his victim down to earth through its paws, similarly the bear speculator forces the prices of securities to fall through his activities. 3) Stag: that is dear. He operates in new issue in market. He is just like a bull speculator. He applies large number of share in the issue market only by paying application money and allotment money. He is not a genuine investor because he sells the allotted securities at the premium and makes profit. Simply, he is cautious in his dealing; he creates an artificial rise in price of shares and makes profits. 4) Lame Duck: he is speculator when the bear operator finds it difficult to deliver the securities to the consumer on a particular day as agreed upon. He struggles as a lame duck and fulfils commitments. This happens when the price does not fall as expected by the bear and the other part is not willing to postpone the settlement to the next date. 6

Now let us understand the types of markets. 1) Normal Market: order traded in regular lot size. For forward size lot size is one share or lot market is used for limited physical market order not traded in similar lot size but both price and quantity should tally with each other 2) Spot market: different settlement prices depend on normal orders. Sale and purchase takes place on the same day. That is why it is called spot market, on the same day, the settlement is being done 3) Auction market: It is initiated by exchange on behalf of members for settlement related reasons like shortage and bad deliveries. Loss is recovered from members. 4. BIG STOCK MARKETS Now, let us see what are the exchanges of the market, in the world. They are: 1) New York stock exchange known as NYSE 2) NASDAQ America 3) DUJONS 4) SMP 500 5) Tokyo Stock Exchange 6) London stock exchange 7) Bombay stock exchange, India 8) National Stock Exchange, India Now the stock exchanges in India are, we already know, NSE and BSE are the dominating players of the stock exchange. Then Calcutta Stock Exchange, Cochin Stock Exchange, Multi commodity stock exchange, derivative stock exchange, OTC Exchange, Pune Stock Exchange and interconnect exchanges are there. Let us understand what London Stock Exchange is and when it came into existence. It was first stock exchange established by East India Company in 18 th century in London. The top gainer of LSE is blue chip shares. 7

Stock exchanges position in India: There are 23 stock exchanges in India but two of them are the biggest. NSE is the 9 th largest stock exchange in the world by market capitalisation, and largest in India, by daily turnover and number of trades for both equity and derivative trading. It was established by 21 leading financial institutions and banks like IDBI, ICICI, IFCI, LIC, SBI, etc. BSE is the oldest stock exchange in Asia, established in 1875, with a rich heritage of 137 years of existence. BSE is oldest and NSE turnover is the largest. There are certain data which are given in terms of the stock exchanges. BSE, situated in Mumbai, deals with SENSEX indices, SENSEX that is Sensitivity Index is the measuring term. It consists of 30 stocks, members are about 852, date of launch is January 3 rd, 1986 and base period is 78-79. So it takes the base period for devaluation as 78-79 and the index value is 100. The sectorial indices would be there and the timings are given for its working. Now one more important concept in relation to stock exchange is Over the Counter Exchange of India, also known as OTCEI. The OTCEI is the national ringless and computerised stock exchange. It was established in October 1990. It started its operation in September 1992. Features of OTCEI are: a) It is a nationwide stock exchange. Its operational area covers entire India. b) It is a ringless stock exchange. The trading ring that is the ring place commonly found in a traditional stock exchange is not found in OTCEI. c) It is a computerised stock exchange. The advantages of OTCEI are: a) It helps investors to have easy and direct access to the stock exchange. b) It helps investors to get fair price for their security. c) It provides safety to the investors. d) It also provides computerised trading system. 8

e) It also provides investors a convenient, efficient and transparent mode of investments. 5. HOW TO SEE THE VALUE OF SHARES IN STOCK EXCHANGE? Now, when we have learnt about stock exchange and all details of trading transactions, let us understand how we need to see the value of shares in the stock exchange. SENSEX is the indicator to checkout BSE and NIFTY is the indicator to check in NSE. So whenever here is an NSE outlay, the NIFTY would be presented over here. The transactions would be reflected in the form of the NIFTY. The graph would be a NIFTY presentation while when we talk about the BSE we say that SENSEX is falling down or SENSEX is rising. So how SENSEX is calculated, let us analyse its formula. The formula for calculating the SENSEX is, (Sum of free flow market capitalisation of 30 benchmark stocks) x Index factor Where, Index factor = 100/ (market cap value in 1978-79), because we are taking base year here as 78-79 We will take up an example where security of company is 300 stocks having value of 100 rupees each. 500 shares of another company and its price is 200 each. So this is the market capitalisation of these two securities. Adding them up they are getting 130000. Assume the market cap during 1978-79 was 25000. So as per our formula, this free flow cap would be divided by the index, that is, 100/ (market cap). So sum of free flow market capitalisation of 30 benchmark stock, right now we are having 2 benchmark stocks that is 130000. It needs to be multiplied by index factor. Index factor is 100 divided by market cap of 1978-79. The market cap of 78-79 is given as 25000. So our calculations would be coming as (130000x100)/25000. So SENSEX would be 520 here. This is the way computation of SENSEX is being done. 9

6. SUMMARY Now students we are going to summarise our discussions about stock exchange. In today s lecture we have detailed analysis of stock exchange that what do we mean by stock exchange. We have learnt that it is a place where transactions related to the stocks and shares takes place in the trading flow. We have also learnt the important concepts about Over the Counter stock exchanges. And we have learnt in detail about the terminologies used in trading that is prices related terminologies that is open, close, high and low. We have also learnt about bid and offer prices and the period of investment related terms as short term, mid and long term. We have learnt about the speculators and the types of speculators which are there in the market which are bull, bear, stag and lame duck. We have also learnt that how NSE and BSE are dealing with the securities and how the indices of them are being calculated. With this we are ending up our discussion on the stock exchange, thank you. 10