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MARKETING OF FINANCIAL SERVICES
Module V
Introduction to Stock & Commodity Markets Class of 2013
Ramesh Bagla
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Stock Market
Stock market refers to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock).
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Stock Exchange
In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors don't have to gather at the Exchanges, and can trade freely from their home 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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Historical perspective Stock market reforms Positive role of stock markets in mobilization of savings and investment Indian stock markets in international context
Role of Stock Markets in the 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 the company
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Disadvantages of Listing
Scope for price rigging Scope for rampant speculation Facilitates hostile takeovers
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Delisting
Delisting refers to the permanent removal of securities of a listed company from the stock exchange Routes for delisting
- Voluntary delisting - Compulsory delisting
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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 and charge commission for the same, Act as a trader or dealer as a principal, Buy and sell securities on his own account and 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 of securities of public limited companies, central or state government securities. Companies have been classified as large cap companies mid cap and small cap companies for 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 value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company
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Composition of SENSEX
ACC Bharti Airtel BHEL DLF Grasim Industries HDFC HDFC Bank Hindalco Hindustan Unilever ICICI Bank Infosys ITC JP Associates Larsen & Toubro(L&T) Mahindra & Mahindra(M&M) Maruti Udyog National Thermal Power Corporation(NTPC) Oil & Natural Gas Corporation(ONGC ) Ranbaxy Labs Reliance Communications Reliance Industries Reliance Infrastructure State Bank Of India(SBI) Sterlite Industries Sun Pharmaceuticals Tata Consultancy Services(TCS) Tata Motors Tata Power Tata Steel Wipro
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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 30 scrips of the Sensex in one transaction in the proportion of their respective weights in the Sensex
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BSE Trading and Settlement Cycle
Settlement of a trade means the payment of money and delivery of securities. Settlement of a trade can be done by a member-broker on his own account or on behalf of his client
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National Stock Exchange of India Ltd (NSE)
NSE was established at Mumbai in November 1992 Out of 23 stock exchanges in India NSE is the largest and most advanced exchange with 1016 companies listed and 726 trading members NSE is one of the few exchanges in the world trading all types of securities on a single platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital Market (CM), and Futures & Options (F&O) Market
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NSE Indices
S&P CNX NIFTY CNX NIFTY JUNIOR CNX IT BANK NIFTY S&P CNX DEFTY CNX 100 CNX 500 CNX MIDCAP NIFTY MIDCAP 50 CNX REALTY INDIA VIX CNX INFRA CNX ENERGY CNX FMCG CNX MNC CNX PHARMA CNX PSE CNX PSU BANK CNX SERVICE
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Composition of NIFTY
ABB ACC Ltd. Ambuja Cements BHEL BPCL Bharti Airtel Cairn India Cipla DLF Gail Grasim Industries HCL HDFC HDFC Bank Hero Honda Hindalco Industries Hindustan Unilever ICICI Bank Idea Cellular Infosys ITC L&T M&M Maruti Suzuki National Aluminium Company NTPC ONGC Power Grid Corporation Of India Punjab National Bank(PNB) Ranbaxy Labs Reliance Capital Reliance Communications Reliance Industrial Infrastructure Ltd. Reliance Industries Reliance Petroleum Reliance Power SBI Siemens Steel Authority Of India Ltd.(SAIL) Sterlite Industries Sun Pharmaceuticals Suzlon TCS Tata Communications Tata Motors Tata Steel Unitech Wipro Zee Entertainment Ltd.
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NSE: Reverse Book-Building
Reverse book-building is the mechanism provided for capturing sell orders on an online basis from the shareholders through respective bookrunning lead managers
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Over The Counter Exchange of India (OTCEI)
Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids 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, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.
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OTCEI
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Futures
Futures contracts are contracts to deliver a specific amount of a commodity or financial instrument on a specific future date. The buyer of the contract has the right to receive the underlying instrument and locks in the price on the purchase date. The seller of a futures contract must deliver on the contract date. Futures contracts are controlled by buyers and sellers with a margin deposit that is 5 to 10 percent 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---or sell---put options---the underlying security at a set price until a specific expiration date. Option buyers pay a premium for the right and option sellers receive the premium and have the obligation to sell or buy the underlying security
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Futures vs. Options
1. A future is a contract which is governed by a pre-determined price for selling and buying at a future period. In options, there is the right to sell or purchase of underlying assets without any obligation. 2. A future trading has open risk. The risk in option is limited. 3. The size of the underlying stock is usually huge in future trading. Option trading is of normal size. 4. Futures may not need any advance payment. Options have the advance payment system of premiums.
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The objective of MCX- SX is to create financial markets that are complete, globally competitive and technologically sound to revive faith of global and domestic investors in India. MCX-SX was granted the status of a recognized stock exchange by the Ministry of Corporate Affairs (MCA), Government of India on December 21, 2012. It received commencement certificate from the market regulator SEBI for trading in new segments such as Equity, Futures and Options on Equity, Interest Rate Derivatives and Wholesale Debt Market on December 19, 2012.
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The Equity and Equity Derivatives segment of MCX Stock Exchange (MCXSX) was inaugurated by Mr. P Chidambaram, Union Finance Minister, on February 9, 2013 Hallmark of MCX-SX will be its focus on growth and effective use of innovation and technology for encouraging true inclusion.
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SX- 40 is designed to measure the economic performance with better representation of various industries and sectors based on ICB, a leading global classification from FTSE. The stocks in SX- 40 have an industry cap at 20% +/- 2% band. The index allows fast entry for companies with better free float, market cap and liquidity. SX- 40 includes companies that have a minimum free float of 10% and is within the top 100 liquid companies
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Under the Capital Market Segment of MCX-SX, initially equity shares of 1116 companies shall be admitted for trading under "Permitted to Trade" Category with effect from February 11, 2013. Out of the 700 membership applications received by MCX-SX, 405 applications have been already registered by SEBI.
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The flagship index of MCX-SX SX40 will be a free-float based index of 40 largecap and liquid stocks, representingdiverse sectors of the economy. The base value of SX-40 will be 10,000 and with its base date being March 31, 2010.
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The flagship index of MCX-SX SX40 will be a free-float based index of 40 largecap and liquid stocks, representingdiverse sectors of the economy. The base value of SX-40 will be 10,000 and with its base date being March 31, 2010.
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OTCEI: Aims
To help entrepreneurs raise cost effective finance for new projects To provide transparent and efficient trading system
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OTCEI: Intermediaries
Members Dealers Sponsors
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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 in August 1995 with following objectives: To bring and sustain confidence in clearing and settlement of trading To provide counter party guarantee against risk To operate a tight risk-containment system
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S.A. Dave Committee Major Recommendations
All companies irrespective of their size be allowed to be listed on OTCEI Sponsors be permitted to give their appraised future projections All the bought-out deals be allowed the facility of an offer for sale, listing and trading Trading in derivatives on OTCEI be encouraged
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Commodity Markets
A commodity is any homogenous item which may be freely bought and sold. The term typically refers to products such as coffee, cocoa and soyabeans (soft commodities) or gold, aluminium and platinum (hard commodities). Commodities typically are bought and sold in commodity markets where producers combine with manufacturers and speculators to create a smoothly functioning market.
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Commodity Markets
Commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardised contracts. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities. The commodities markets are one of the oldest prevailing markets in the human history. In fact, derivatives trading started off in commodities with the earliest records being traced back to the 17th century when rice futures 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
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Indian Commodity Market
Commodity exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator. The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. Thus commodity exchanges are more selfregulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
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Indian Commodity Market
There are 25 Commodity Exchanges in India 1. Bhatinda Om & Oil Exchange Ltd., Batinda. 2. The Bombay Commodity Exchange Ltd., Mumbai 3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd 4. The Kanpur Commodity Exchange Ltd., Kanpur 5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut 6. The Spices and Oilseeds Exchange Ltd. 7. Ahmedabad Commodity Exchange Ltd. 8. Vijay Beopar Chamber Ltd., Muzaffarnagar 9. India Pepper & Spice Trade Association, Kochi 10. Rajdhani Oils and Oilseeds Exchange Ltd., Delhi 11. National Board of Trade, Indore 12. The Chamber Of Commerce, Hapur
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Indian Commodity Market
13.The East India Cotton Association, Mumbai 14. The Central India Commercial Exchange Ltd., Gwalior 15. The East India Jute & Hessian Exchange Ltd. 16. First Commodity Exchange of India Ltd, Kochi 17. Bikaner Commodity Exchange Ltd., Bikaner 18. The Coffee Futures Exchange India Ltd, Bangalore 19. Esugarindia Limited 20. National Multi Commodity Exchange of India Limited 21. Surendranagar Cotton oil & Oilseeds Association Ltd 22. Multi Commodity Exchange of India Ltd 23. National Commodity & Derivatives Exchange Ltd 24. Haryana Commodities Ltd., Hissar 25. e-Commodities Ltd
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MCX, NCDEX and NMCEIL are the major Commodity Exchanges Multi commodity exchange of India Ltd (MCX) is an independent exchange based in Mumbai. Established on 10th November, 2003, it is the third largest bullion exchange and fourth largest energy exchange in the world. Recognized by the Government of India it deals in numerous commodities and carries out online trading, clearing and settlement processes for commodities future market countrywide MCX COMDEX is India's foremost and sole composite commodity futures price index
Indian Commodity Market
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Indian Commodity Market
National Commodity & Derivatives Exchange of India Ltd (NCDEX) located in Mumbai, is a public limited company incorporated on 23rd April 2003. Promoted by national level establishments it is run by professional management. Regulated by the Forward Market Commission with reference to futures trading in commodities, it trades in various commodities online. The NCDEX is covered by: Companies Act Stamp Act Contracts Act Forward Commission (Regulation) Act
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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 India Limited 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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Leading Commodity Markets of World
New York Mercantile Exchange (NYMEX) London Metal Exchange (LME) Chicago Board of Trade (CBOT).
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Segments in Commodities Market
Over the Counter (OTC) Market /Spot Market - Here the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc Exchange Based Market. - Here derivative trading takes place through exchange-based markets with standardized contracts, 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 of financial instruments or physical commodities for delivery at a particular 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 yet produced. But participating in the commodity market does not necessarily mean that you will be responsible for receiving or delivering large 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 is why Commodities are used as financial instruments by not only producers and consumers but also speculators.
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A forward contract requires a buyer and a seller to take and make a delivery of a definite quantity of a particular commodity at a future specified date. Such contracts are traded on an exchange, which provides guarantee for all futures dealings, and parties can "hedge" at suitable levels. Hedging lessens risk since it involves the purchase or sale of a commodity with the intention of counterbalancing the profit or loss of another investment. Therefore, any loss on the previous investment will be hedged, or compensated, by a matching profit from the hedging instrument.
Forward Contract
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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 their own accounts or through a commodity broker. Both small and large speculators 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 of earning profits. Markets are granted liquidity by 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 selling it for a higher price in another market. Thus, traders can profit from arbitrage opportunities occurring due to price differences between two exchanges.
