Chapter 10 Financial Markets PDF

CHAPTER 10 LEARNING OBJECTIVES FINANCIAL M ARKETS After studying this chapter, you should be able to: IDEA SEEKS TO CAPITALISE ON M ARKET M OMENTUM Ø explain the meaning of...

CHAPTER 10 LEARNING OBJECTIVES FINANCIAL M ARKETS After studying this chapter, you should be able to: IDEA SEEKS TO CAPITALISE ON M ARKET M OMENTUM Ø explain the meaning of Financial Market; With the explosive growth of their subscriber base, telecom companies are all looking at capital markets to Ø explain the meaning of Money raise funds to fuel their expansion Market and describe its major plan. Idea Cellular, the fifth largest Instruments; operator in the country and the flagship telecom venture of AV Birla Ø explain the nature and types of Group, has decided to enter the capital Capital Market; market to raise between Rs. 1,700 and Rs. 2,000 crore. The company has appointed J.M. Ø distinguish between Money Morgan Stanley, Merrill Lynch among Market and Capital Market; other as book-runners for the proposed Initial Public Offer (IPO), Ø explain the meaning and which is expected to be ready by functions of Stock Exchange; January end. Since, under SEBI norms, the minimum float size is 10 per cent, the Ø describe the functioning of NSEI company will divest between 10 and OTCEI; and and 12 per cent, “The last private placement made by the promoters is Ø describe the role of SEBI in at a market capitalisation of investor protection. Rs. 15,000 crore. The proposed float is expected to be at 10 to 20 per cent premium of the private placement price,” AV Birla Group recently divested 35 per cent stake in the company to a clutch of private equity firms. However, this is a fresh issue of shares, where the proceeds will be utilised by Ideal Cellular for capital expenditure. After the proposed issues, the promoters stake will come down to around 58 per cent. Source: www.hindustantimes.com 2015-16(21/01/2015)  BUSINESS STUDIES 268 INTRODUCTION sectors – households which save funds and business firms which invest these You all know that a business needs funds. A financial market helps to link finance from the time an entrepreneur the savers and the investors by makes the decision to start it. It needs mobilizing funds between them. In finance both for working capital doing so it performs what is known as requirements such as payments for an allocative function. It allocates or raw materials and salaries to its directs funds available for investment employees, and fixed capital into their most productive investment expenditure such as the purchase of opportunity. When the allocative machinery or building or to expand its function is performed well, two production capacity. The above consequences follow: example gives a fair picture of how companies need to raise funds from the The rate of return offered to capital markets. Idea Cellular decided households would be higher to enter the Indian capital market for Scarce resources are allocated to its needs of expansion. In this chapter those firms which have the highest you will study concepts like private productivity for the economy. placement, Initial public Offer (IPO) and There are two major alternative capital markets which you come across mechanisms through which allocation in the example of Idea Cellular. of funds can be done: via banks or Business can raise these funds from via financial markets. Households can various sources and in different ways deposit their surplus funds with through financial markets. This banks, who in turn could lend these chapter provides a brief description of funds to business firms. Alternately, the mechanism through which finances households can buy the shares and are mobilised by a business organisation debentures offered by a business for both short term and long term using financial markets. The process requirements. It also explains the by which allocation of funds is done institutional structure and the regulatory is called financial intermediation. measures for different financial markets. Banks and financial markets are CONCEPT OF FINANCIAL M ARKET competing intermediaries in the financial system, and give households A business is a part of an economic a choice of where they want to place system that consists of two main their savings. HOUSEHOLDS BUSINESS FIRMS BANKS FINANCIAL MARKETS SAVERS INVESTORS 2015-16(21/01/2015)  FINANCIAL MARKET 269 A financial market is a market for 1. Mobili s ation of S avings and the creation and exchange of financial C hanneling them into the most assets. Financial markets exist P roductive U ses: A financial market Financial System wherever a financial transaction facilitates the transfer of savings from occurs. Financial transactions could savers to investors. It gives savers the be in the form of creation of financial choice of different investments and thus assets such as the initial issue of helps to channelise surplus funds into shares and debentures by a firm or the the most productive use. purchase and sale of existing financial 2. Facilitat ing Price Discovery: You assets like equity shares, debentures all know that the forces of demand and and bonds. supply help to establish a price for a commodity or service in the market. In FUNCTIONS OF FINANCIAL M ARKET the financial market, the households are suppliers of funds and business firms Financial markets play an important represent the demand. The interaction role in the allocation of scarce between them helps to establish a price resources in an economy by performing for the financial asset which is being the following four important functions. traded in that particular market. 2015-16(21/01/2015)  BUSINESS STUDIES 270 3. Provid ing Liquidity to Financial Providing than one year are traded in the money Assets: Financial markets facilitate easy market. Instruments with longer purchase and sale of financial assets. maturity are traded in the capital In doing so they provide liquidity to market. financial assets, so that they can be easily converted into cash whenever M ONEY MARKET required. Holders of assets can readily The money market is a market for sell their financial assets through the short term funds which deals in mechanism of the financial market. monetary assets whose period of 4.Reduc ing the Cost of Transactions: 4.Reducing maturity is upto one year. These assets Financial markets provide valuable are close substitutes for money. It is a information about securities being market where low risk, unsecured traded in the market. It helps to save and short term debt instruments that time, effort and money that both are highly liquid are issued and buyers and sellers of a financial asset actively traded everyday. It has no would have to otherwise spend to try physical location, but is an activity and find each other. The financial conducted over the telephone and market is thus, a common platform through the internet. It enables the where buyers and sellers can meet for raising of short-term funds for meeting fulfillment of their individual needs. the temporary shortages of cash and Financial markets are classified on obligations and the temporary the basis of the maturity of financial deployment of excess funds for earning instruments traded in them. returns. The major participants in the Instruments with a maturity of less market are the Reserve Bank of India Classification of Financial Markets FINANCIAL MARKET MONEY MARKET CAPITAL MARKET Primary market Secondary Market Debt Equity Debt Equity 2015-16(21/01/2015)  FINANCIAL MARKET 271 (RBI), C ommercial Banks, Non- transferable by endorsement and Banking Finance Companies, State delivery with a fixed maturity period. It Governments, Large Corporate Houses is issued by large and creditworthy and Mutual Funds. companies to raise short-term funds at lower rates of interest than market rates. M ONEY M ARKET INSTRUMENTS It usually has a maturity period of 15 days to one year. The issuance of 1. Treasury Bill: A Treasury bill is commercial paper is an alternative to basically an instrument of short-term bank borrowing for large companies borrowing by the Government of India that are generally considered to be maturing in less than one year. They financially strong. It is sold at a discount are also known as Zero Coupon Bonds and redeemed at par. The original issued by the Reserve Bank of India on purpose of commercial paper was to behalf of the Central Government to provide short-terms funds for seasonal meet its short-term requirement of and working capital needs. For example funds. Treasury bills are issued in the companies use this instrument for form of a promissory note. They are purposes such as bridge financing. highly liquid and have assured yield Example: Suppose a company needs and negligible risk of default. They are long-term finance to buy some issued at a price which is lower than machinery. In order to raise the long their face value and repaid at par. The term funds in the capital market the difference between the price at which company will have to incur floatation the treasury bills are issued and their costs (costs associated with floating of redemption value is the interest an issue are brokerage, commission, receivable on them and is called printing of applications and advertising discount. Treasury bills are available etc.). Funds raised through commercial for a minimum amount of Rs 25,000 paper are used to meet the floatation and in multiples thereof. costs. This is known as Bridge Financing. Example: Suppose an investor 3. Call Money: Call money is short purchases a 91 days Treasury bill with term finance repayable on demand, with a face value of Rs. 1,00,000 for a maturity period of one day to fifteen Rs. 96,000. By holding the bill until the days, used for inter-bank transactions. maturity date, the investor receives Commercial banks have to maintain a Rs. 1,00,000. The difference of minimum cash balance known as cash Rs. 4,000 between the proceeds reserve ratio. The Reserve Bank of India received at maturity and the amount changes the cash reserve ratio from time paid to purchase the bill represents the to time which in turn affects the amount interest received by him. of funds available to be given as loans 2. Commercial Paper: Commercial by commercial banks. Call money is a paper is a short-term unsecured method by which banks borrow from promissory note, negotiable and each other to be able to maintain the 2015-16(21/01/2015)  BUSINESS STUDIES 272 cash reserve ratio. The interest rate paid credit is high. They help to mobilise a on call money loans is known as the call large amount of money for short rate. It is a highly volatile rate that varies periods. from day-to-day and sometimes even 5. Commercial Bill: A commercial from hour-to-hour. There is an inverse bill is a bill of exchange used to finance relationship between call rates and the working capital requirements of other short-term money market business firms. It is a short-term, instruments such as certificates of negotiable, self-liquidating instrument deposit and commercial paper. A rise in which is used to finance the credit sales call money rates makes other sources of firms. When goods are sold on credit, of finance such as commercial paper the buyer becomes liable to make and certificates of deposit cheaper in payment on a specific date in future. comparison for banks raise funds from The seller could wait till the specified these sources. date or make use of a bill of exchange. 4. Certificate of Deposit: Certificates The seller (drawer) of the goods draws of deposit (CD) are unsecured, the bill and the buyer (drawee) accepts negotiable, short-term instruments in it. On being accepted, the bill becomes bearer form, issued by commercial a marketable instrument and is called banks and development financial a trade bill. These bills can be institutions. They can be issued to discounted with a bank if the seller individuals, corporations and needs funds before the bill matures. companies during periods of tight When a trade bill is accepted by a liquidity when the deposit growth of commercial bank it is known as a banks is slow but the demand for commercial bill. Sterlite Industries Sterlite Industries, part of the London listed Vedanta Resources Group, is scheduled to be listed on the New York Stock Exchange through an initial public offering (IPO) of about $2 billion. The proceeds will be used to fund its $1.9 billion, Greenfield power project in Orissa and to expand its aluminium and copper facilities. The IPO is a part of an enabling resolution passed by Sterlite to raise upto 12,500 crores through American Depository Shares (ADS). Consequently, the company has increased its authorised capital from Rs 150 crore to Rs 185 crore by creating an additional 17.5 crore equity shares of Rs 2 each. The shares of Sterlite, which will be among the first metal firms from India to list on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSE on the day of the announcement. Source: The Economic Times 2015-16(21/01/2015)  FINANCIAL MARKET 273 C APITAL MARKET institutions, banks, corporate entities, foreign investors and The term capital market refers to facilities ordinary retail investors from and institutional arrangements through members of the public. Participation which long-term funds, both debt and in the money market is by and large equity are raised and invested. It undertaken by institutional consists of a series of channels through participants such as the RBI, banks, which savings of the community are financial institutions and finance made available for industrial and companies. Individual investors commercial enterprises and for the although permitted to transact in the public in general. It directs these savings secondary money market, do not into their most productive use leading normally do so. to growth and development of the (ii) Instruments: The main instruments economy. The capital market consists traded in the capital market are – of development banks, commercial equity shares, debentures, bonds, banks and stock exchanges. preference shares etc. The main An ideal capital market is one where instruments traded in the money finance is available at reasonable cost. market are short term debt The process of economic development instruments such as T-bills, trade is facilitated by the existence of a well bills reports, commercial paper and functioning capital market. In fact, certificates of deposit. development of the financial system is seen as a necessary condition for (iii) Investment Outlay: Investment in the economic growth. It is essential that capital market i.e. securities does not financial institutions are sufficiently necessarily require a huge financial developed and that market operations outlay. The value of units of are free, fair, competitive and securities is generally low i.e. Rs 10, transparent. The capital market should Rs 100 and so is the case with also be efficient in respect of the minimum trading lot of shares which information that it delivers, minimise is kept small i.e. 5, 50, 100 or so. This transaction costs and allocate capital helps individuals with small savings most productively. to subscribe to these securities. In the The Capital Market can be divided money market, transactions entail into two parts: a. Primary Market huge sums of money as the b. Secondary Market instruments are quite expensive. (iv) Duration: The capital market deals Distinction between Capital Market in medium and long term securities and Money Market such as equity shares and The major points of distinction between debentures. Money market the two markets are as follows: instruments have a maximum (i) Participants: The participants in the tenure of one year, and may even capital market are financial be issued for a single day. 2015-16(21/01/2015)  BUSINESS STUDIES 274 (v) Liquidity: Capital market securities PRIMARY MARKET are considered liquid investments because they are marketable on The primary market is also known as the stock exchanges. However, a the new issues market. It deals with share may not be actively traded, new securities being issued for the first i.e. it may not easily find a buyer. time. The essential function of a primary Money market instruments on the market is to facilitate the transfer of other hand, enjoy a higher degree investible funds from savers to of liquidity as there is formal entrepreneurs seeking to establish new arrangement for this. The Discount enterprises or to expand existing ones Finance House of India (DFHI) has through the issue of securities for the been established for the specific first time. The investors in this market objective of providing a ready are banks, financial institutions, market for money market insurance companies, mutual funds instruments. and individuals. (vi) Safety: Capital market A company can raise capital instruments are riskier both with through the primary market in the form respect to returns and principal of equity shares, preference shares, repayment. Issuing companies debentures, loans and deposits. Funds may fail to perform as per raised may be for setting up new projections and promoters may projects, expansion, diversification, defraud investors. But the money modernisation of existing projects, market is generally much safer mergers and takeovers etc. with a minimum risk of default. This is due to the shorter duration Methods of Floatation of investing and also to financial soundness of the issuers, which There are various methods of floating primarily are the government, new issues in the primary market : banks and highly rated 1. Offer through Prospectus: Offer companies. through prospectus is the most (vii) Expected return: The investment popular method of raising funds by in capital markets generally yield public companies in the primary a higher return for investors than market. This involves inviting the money markets. The possibility subscription from the public through of earnings is higher if the issue of prospectus. A prospectus securities are held for a longer makes a direct appeal to investors to duration. First, there is the scope raise capital, through an advertisement of earning capital gains in equity in newspapers and magazines. The share. Second, in the long run, the issues may be underwritten and also prosperity of a company is shared are required to be listed on at least one by shareholders by way of high stock exchange. The contents of the dividends and bonus issues. prospectus have to be in accordance 2015-16(21/01/2015)  FINANCIAL MARKET 275 with the provisions of the Companies market can be expensive on account of Act and SEBI disclosure and investor various mandatory and non- protection guidelines. mandatory expenses. Some companies, 2. Offer for Sale: Under this method therefore, cannot afford a public issue securities are not issued directly to the and choose to use private placement. public but are offered for sale through 4. Rights Issue: This is a privilege given intermediaries like issuing houses or to existing shareholders to subscribe stock brokers. In this case, a company to a new issue of shares according to sells securities enbloc at an agreed price the terms and conditions of the to brokers who, in turn, resell them to company. The shareholders are offered the investing public. the ‘right’ to buy new shares in 3. Private Placement: Private proportion to the number of shares placement is the allotment of securities they already possess. by a company to institutional investors 5. e-IPOs: A company proposing to and some selected individuals. It helps issue capital to the public through the to raise capital more quickly than a on-line system of the stock exchange public issue. Access to the primary has to enter into an agreement with the PRIMARY AND S ECONDARY MARKETS —A COMPARISON Primary Market Secondary Market (New Issue Market) (Stock Exchange) (i) There is sale of securities by new (i) There is trading of existing shares companies or further (new issues only. of securities by existing companies to investors). (ii) Securities are sold by the company (ii) Ownership of existing securities is to the investor directly (or through exchanged between investors. The an intermediary). company is not involved at all. (iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity) of investors, i.e. the primary market shares, i.e. the secondary market directly promotes capital formation. indirectly promotes capital formation. (iv) Only buying of securities takes (iv) Both the buying and the selling of place in the primary market, securities can take place on the securities cannot be sold there. stock exchange. (v) Prices are determined and decided (v) Prices are determined by demand by the management of the company. and supply for the security. (vi) There is no fixed geographical (vi) Located at specified places. location. 2015-16(21/01/2015)  BUSINESS STUDIES 276 stock exchange. This is called an Initial existing securities. It also contributes Public Offer (IPO). SEBI registered to economic growth by channelising brokers have to be appointed for the funds towards the most productive purpose of accepting applications and investments through the process of placing orders with the company. The disinvestment and reinvestment. issuer company should also appoint a Securities are traded, cleared and registrar to the issue having electronic settled within the regulatory framework connectivity with the exchange. The prescribed by SEBI. Advances in issuer company can apply for listing of information technology have made its securities on any exchange other trading through stock exchanges than the exchange through which it has accessible from anywhere in the offered its securities. The lead manager country through trading terminals. coordinates all the activities amongst Along with the growth of the primary intermediaries connected with the issue. market in the country, the secondary market has also grown significantly S ECONDARY MARKET during the last ten years. The secondary market is also known STOCK E XCHANGE as the stock market or stock exchange. It is a market for the purchase and sale A stock exchange is an institution of existing securities. It helps existing which provides a platform for buying investors to disinvest and fresh and selling of existing securities. As a investors to enter the market. It also market, the stock exchange facilitates provides liquidity and marketability to the exchange of a security (share, History of the Stock Market in India The history of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. In 1850 the Companies Act was introduced for the first time bringing with it the feature of limited liability and generating investor interest in corporate securities. The first stock exchange in India was set-up in 1875 as The Native Share and Stock Brokers Association in Bombay. Today it is known as the Bombay Stock Exchange (BSE). This was followed by the development of exchanges in Ahmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to note that stock exchanges were first set up in major centers of trade and commerce. Until the early 1990s, the Indian secondary market comprised regional stock exchanges with BSE heading the list. After the reforms of 1991, the Indian secondary market acquired a three tier form. This consists of: Regional Stock Exchanges National Stock Exchange (NSE) Over the Counter Exchange of India (OTCEI) 2015-16(21/01/2015)  FINANCIAL MARKET 277 1. Providing Liquidity and Market- ability to Existing Securities: The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market. 2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the Bombay Stock Exchange prices of securities are determined. Such a valuation provides important debenture etc.) into money and vice versa. Stock exchanges help instant information to both buyers and companies raise finance, provide sellers in the market. liquidity and safety of investment to the 3. Safety of Transaction: T h e investors and enhance the credit membership of a stock exchange is well- worthiness of individual companies. regulated and its dealings are well Meaning of Stock Exchange defined according to the existing legal framework. This ensures that the According to Securities Contracts investing public gets a safe and fair deal (Regulation) Act 1956, stock exchange means any body of individuals, whether on the market. incorporated or not, constituted for the 4. Contributes to Economic Growth: purpose of assisting, regulating or A stock exchange is a market in which controlling the business of buying and existing securities are resold or traded. selling or dealing in securities. Through this process of disinvestment Functions of a Stock Exchange and reinvestment savings get channelised into their most productive The efficient functioning of a stock investment avenues. This leads to exchange creates a conducive climate capital formation and economic growth. for an active and growing primary market for new issues. An active and 5. Spreading of Equity Cult: The stock healthy secondary market in existing exchange can play a vital role in securities leads to positive environment ensuring wider share ownership by among investors. The following are regulating new issues, better trading some of the important functions of a practices and taking effective steps in stock exchange. educating the public about investments. 2015-16(21/01/2015)  BUSINESS STUDIES 278 6. Providing Scope for Speculation: electronic and trading is done in the The stock exchange provides sufficient broker’s office through a computer scope within the provisions of law for terminal. A stock exchange has its main speculative activity in a restricted and computer system with many terminals controlled manner. It is generally spread across the country. Trading in accepted that a certain degree of healthy securities is done through brokers who speculation is necessary to ensure are members of the stock exchange. liquidity and price continuity in the Trading has shifted from the stock stock market. market floor to the brokers office. Every broker has to have access to TRADING AND S ETTLEMENT PROCEDURE a computer terminal that is connected to the main stock exchange. In this Trading in securities is now executed screen-based trading, a member logs through an on-line, screen-based on to the site and any information electronic trading system. Simply put, about the shares (company, member, all buying and selling of shares and etc.) he wishes to buy or sell and the debentures are done through a price is fed into the computer. The computer terminal. software is so designed that the There was a time when in the open transaction will be executed when a outcry system, securities were bought matching order is found from a counter and sold on the floor of the stock party. The whole transaction is carried exchange. Under this auction system, on the computer screen with both the deals were struck among brokers, parties being able to see the prices of prices were shouted out and the shares all shares going up and down at all sold to the highest bidder. However, times during the time that business is now almost all exchanges have gone transacted and during business hours of the stock exchange. The computer in the brokers office is constantly matching the orders at the best bid and offer price. Those that are not matched remain on the screen and are open for future matching during the day. Electronic trading systems or screen-based trading has certain advantages: 1. It ensures transparency as it allows participants to see the prices of all securities in the market while business is being transacted. They Electronic Trading System 2015-16(21/01/2015)  FINANCIAL MARKET 279 are able to see the full market and transferring shares can also be during real time. adopted. This electronic form is called 2. It increases efficiency of information dematerialised form. being passed on, thus helping in fixing prices efficiently. The Steps in the Trading and computer screens display Settlement Procedure information on prices and also It has been made compulsory to settle capital market developments that all trades within 2 days of the trade influence share prices. date, i.e., on a T+2 basis, since 2003. 3. It increases the efficiency of Prior to the reforms, securities were operations, since there is reduction bought and sold, i.e., traded and all in time, cost and risk of error. positions in the stock exchange were 4. People from all over the country settled on a weekly/fortnightly and even abroad who wish to settlement cycle whether it was delivery participate in the stock market can of securities or payment of cash. This buy or sell securities through system prevailed for a long time as it brokers or members without increased the volume of trading on the knowing each other. That is, they exchange and provided liquidity to the can sit in the broker’s office, log on system. However, since trades were to to the computer at the same time be settled on specified dates, this gave and buy or sell securities. This rise to speculation and price of shares system has enabled a large number used to rise and fall suddenly due to of participants to trade with each trading and defaults by brokers. A new other, thereby improving the system, i.e, rolling settlement, was liquidity of the market. introduced in 2000, so that whenever a trade took place it would be settled 5. A single trading platform has been after some days. Since 2003, all shares provided as business is transacted have to be covered under the rolling at the same time in all the trading settlement system on a T+2 basis, centres. Thus, all the trading meaning thereby that transactions in centres spread all over the country securities are settled within 2 days after have been brought onto one the trade date. Since rolling settlement trading platform, i.e., the stock implies fast movement of shares, it exchange, on the computer. requires effective implementation of Now, screen-based trading or on-line electronic fund transfer and trading is the only way in which you dematerialisation of shares. can buy or sell shares. Shares can be The following steps are involved in held either in physical form or an the screen-based trading for buying electronic book entry form of holding and selling of securities: 2015-16(21/01/2015)  BUSINESS STUDIES 280 1. If an investor wishes to buy or sell be given about the number of any security he has to first shares and the price at which the approach a registered broker or shares should be bought or sold. sub-broker and enter into an The broker will then go ahead with agreement with him. The investor the deal at the above mentioned has to sign a broker-client price or the best price available. An agreement and a client registration order confirmation slip is issued to form before placing an order to buy the investor by the broker. or sell securities. He has also to 4. The broker then will go on-line and provide certain other details and connect to the main stock exchange information. These include: and match the share and best price PAN number available. (This is mandatory) 5. When the shares can be bought or Date of birth and address. sold at the price mentioned, it will Educational qualification and be communicated to the broker’s occupation. terminal and the order will be Residential status (Indian/NRI). executed electronically. The broker will issue a trade confirmation slip Bank account details. to the investor. Depository account details. 6. After the trade has been executed, Name of any other broker with within 24 hours the broker issues whom registered. a Contract Note. This note contains Client code number in the client details of the number of shares registration form. bought or sold, the price, the date The broker then opens a trading and time of deal, and the brokerage account in the name of the investor. charges. This is an important 2. The investor has to open a ‘demat’ document as it is legally enforceable account or ‘beneficial owner’ (BO) and helps to settle disputes/claims account with a depository between the investor and the participant (DP) for holding and broker. A Unique Order Code transferring securities in the demat number is assigned to each form. He will also have to open a transaction by the stock exchange bank account for cash transactions and is printed on the contract note. in the securities market. 7. Now, the investor has to deliver the 3. The investor then places an order shares sold or pay cash for the with the broker to buy or sell shares bought. This should be done shares. Clear instructions have to immediately after receiving the 2015-16(21/01/2015)  FINANCIAL MARKET 281 contract note or before the day when delays and paperwork associated with the broker shall make payment or share certificates or debentures held in delivery of shares to the exchange. physical form. This is called the pay-in day. This is a process where securities 8. Cash is paid or securities are held by the investor in the physical delivered on pay-in day, which is form are cancelled and the investor is before the T+2 day as the deal has given an electronic entry or number so that she/he can hold it as an electronic to be settled and finalised on the balance in an account. This process of T+2 day. The settlement cycle is on holding securities in an electronic form T+2 day on a rolling settlement is called dematerialisation. For this, the basis, w.e.f. 1 April 2003. investor has to open a demat account 9. On the T+2 day, the exchange will with an organisation called a deliver the share or make payment depository. In fact, now all Initial Public to the other broker. This is called Offers (IPOs) are issued in the pay-out day. The broker then dematerialisation form and more than has to make payment to the 99% of the turnover is settled by investor within 24 hours of the pay- delivery in the demat form. out day since he has already The Securities and Exchange Board received payment from the of India (SEBI) has made it mandatory exchange. for the settlement procedures to take 10.The broker can make delivery of place in demat form in certain select shares in demat form directly to the securities. Holding shares in demat investor’s demat account. The form is very convenient as it is just investor has to give details of his like a bank account. Physical shares can be converted into electronic form demat account and instruct his or electronic holdings can be depository participant to take reconverted into physical certificates delivery of securities directly in his (rematerialisation). Dematerialisation beneficial owner account. enables shares to be transferred to some other account just like cash and Dematerialisation and ensures settlement of all trades Depositories through a single account in shares. All trading in securities is now done These demat securities can even be through computer terminals. Since all pledged or hypothecated to get loans. systems are computerised, buying and There is no danger of loss, theft or selling of securities are settled through forgery of share certificates. It is the an electronic book entry form. This is broker’s responsibility to credit the mainly done to eliminate problems like investor’s account with the correct theft, fake/forged transfers, transfer number of shares. 2015-16(21/01/2015)  BUSINESS STUDIES 282 Working of the Demat System in electronic form on behalf of the investor. In the depository a securities 1. A depository participant (DP), account can be opened, all shares can either a bank, broker, or financial be deposited, they can be withdrawn/ services company, may be sold at any time and instruction to identified. deliver or receive shares on behalf of the 2. An account opening form and investor can be given. It is a technology documentation (PAN card details, driven electronic storage system. It has photograph, power of attorney) no paper work relating to share may be completed. certificates, transfer, forms, etc. All 3. The physical certificate is to be transactions of the investors are settled given to the DP along with a with greater speed, efficiency and use dematerialisation request form. as all securities are entered in a book 4. If shares are applied in a public entry mode. offer, simple details of DP and In India, there are two depositories. demat account are to be given and National Securities Depositories the shares on allotment would Limited (NSDL) is the first and largest automatically be credited to the depository presently operational in demat account. India. It was promoted as a joint 5. If shares are to be sold through a venture of the IDBI, UTI, and the broker, the DP is to be instructed National Stock Exchange. to debit the account with the The Central Depository Services number of shares. Limited (CDSL) is the second depository 6. The broker then gives instruction to commence operations and was to his DP for delivery of the shares promoted by the Bombay Stock to the stock exchange. Exchange and the Bank of India. Both these national level depositories operate 7. The broker then receives payment through intermediaries who are and pay the person for the shares electronically connected to the sold. depository and serve as contact points 8. All these transactions are to be with the investors and are called completed within 2 days, i.e., depository participants. delivery of shares and payment The depository participant (DP) received from the buyer is on a T+2 serves as an intermediary between the basis, settlement period. investor and the Depository (NSDL or CSDL) who is authorised to maintain Depository the accounts of dematerialised shares. Just like a bank keeps money in safe Financial institutions, banks, clearing custody for customers, a depository corporations, stock brokers and non- also is like a bank and keeps securities banking finance corporations are 2015-16(21/01/2015)  FINANCIAL MARKET 283 permitted to become depository NSE has set up a nationwide fully participants. If the investor is buying automated screen based trading system. and selling the securities through the The NSE was set up by leading broker or the bank or a non-banking financial institutions, banks, insurance finance corporation, it acts as a DP for companies and other financial the investor and complete the intermediaries. It is managed by formalities. professionals, who do not directly or indirectly trade on the exchange. The N ATIONAL STOCK EXCHANGE OF INDIA trading rights are with the trading (NSE) members who offer their services to the investors. The Board of NSE comprises The National Stock Exchange is the senior executives from promoter latest, most modern and technology institutions and eminent professionals, driven exchange. It was incorporated in without having any representation from 1992 and was recognised as a stock trading members. exchange in April 1993. It started operations in 1994, with trading on the OBJECTIVES OF NSE wholesale debt market segment. Subsequently, it launched the capital NSE was set up with the following market segment in November 1994 as a objectives: trading platform for equities and a. Establishing a nationwide trading the futures and options segment in June facility for all types of securities. 2000 for various derivative instruments. b. Ensuring equal access to investors all Stock Market Index A stock market index is a barometer of market behaviour. It measures overall market sentiment through a set of stocks that are representative of the market. It reflects market direction and indicates day-to-day fluctuations in stock prices. An ideal index must represent changes in the prices of securities and reflect price movements of typical shares for better market representation. In the Indian markets the BSE, SENSEX and NSE, NIFTY are important indices. Some important global stock market indices are: Dow Jones Industrial Average is among the oldest quoted stock market index in the US. NASDAQ Composite Index is the market capitalisation weightages of prices for stocks listed in the NASDAQ stock market. S and P 500 Index is made up of 500 biggest publicly traded companies in the US. The S and P 500 is often treated as a proxy for the US stock market. FTSE 100 consists of the largest 100 companies by full market value listed on the London Stock Exchange. The FTSE 100 is the benchmark index of the European market. 2015-16(21/01/2015)  BUSINESS STUDIES 284 over the country through an (i) Whole Sale Debt Market Segment: appropriate communication network. This segment provides a trading c. Providing a fair, efficient and platform for a wide range of fixed transparent securities market income securities that include using electronic trading system. central government securities, d. Enabling shorter settlement cycles treasury bills, state development and book entry settlements. loans, bonds issued by public e. Meeting international benchmarks sector undertakings, floating rate and standards. bonds, zero coupon bonds, index Within a span of ten years, NSE has bonds, commercial paper, certificate been able to achieve its objectives for of deposit, corporate debentures which it was set up. It has been playing and mutual funds. a leading role as a change agent in (ii) Capital Market Segment: The capital transforming the Indian capital market. market segment of NSE provides an NSE has been able to take the stock efficient and transparent platform for market to the door step of the investors. trading in equity, preference, It has ensured that technology has been debentures, exchange traded funds as harnessed to deliver the services to the well as retail Government securities. investors across the country at the lowest cost. It has provided a nation wide screen OVER THE COUNTER EXCHANGE OF INDIA based automated trading system with a (OTCEI) high degree of transparency and equal The OTCEI is a company incorporated access to investors irrespective of under the Companies Act 1956. It was geographical location. set-up to provide small and medium MARKET SEGMENTS OF NSE companies an access to the capital market for raising finance in a cost The Exchange provides trading in the effective manner. It was also meant to following two segments. provide investors with a convenient, Some Common Stock Market Terms You would have often come across the following terms in magazines or newspapers when you read about the stock market. BOURSES is another word for the stock market BULLS and BEARS – The term does not refer to animals but to market sentiment of the investors. A Bullish phase refers to a period of optimism and a Bearish phase to a period of perssimism on the Bourses. BADLA – This refers to a carry forward system of settlement, particularly at the BSE. It is a facility that allows the postponement of the delivery or payment of a transaction from one settlement period to another. ODD LOT TRADING – Trading in multiples of 100 stocks or less. PENNY STOCKS – These are securities that have no value on the stock exchange but whose trading contributes to speculation. 2015-16(21/01/2015)  FINANCIAL MARKET 285 transparent and efficient avenue for takes place when a buyer or seller capital market investment. It is fully walks up to an OTCEI counter, taps on computerised, transparent, single the computer screen, finds quotes and window exchange ‘which commenced effects a purchase or sale depending trading in 1992. This exchange is on whether the prices meet their established on the lines of NASDAQ targets. There is no particular market (National Association of Securities place in the geographical sense. The Dealers Automated Quotations) the objectives of OTCEI are to provide OTC exchange in USA. It has been quicker liquidity to securities at a promoted by UTI, ICICI, IDBI, IFCI, LIC, fixed and fair price, liquidity for less GIC, SBI Capital markets and Can traded securities or that of small Bank Financial Services. companies, a simplified process of Over the counter market may be buying and selling and easy and defined as a place where buyers seek cheaper means of making public sale sellers and vice-versa and then attempt of new issues. However, the OTCEI has to arrange terms and conditions for now been withdrawn. purchase/sale acceptable to both the Advantages of OTC Market parties. It is a negotiated market place that exists any where as opposed to the 1. It provides a trading platform to auction market place, represented by smaller and less liquid companies the activity on securities exchanges. as they are not eligible for listing on Thus, in the OTC exchange, trading a regular exchange. SENSEX — The Bombay Stock Exchange Sensitive Index Have you counted the number of times newspaper headlines in the past few weeks have been discussing the SENSEX? It goes up and down all the time and seems to be a very important part of business and economic news. Has that made you wonder what the SENSEX actually is? The SENSEX is the benchmark index of the BSE. Since the BSE has been the leading exchange of the Indian secondary market, the SENSEX has been an important indicator of the Indian stock market. It is the most frequently used indicator while reporting on the state of the market. An index has just one job: to capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down. If the SENSEX rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates that investors expect better earnings from companies. It is also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too. The SENSEX, launched in 1986 is made up of 30 of the most actively traded stocks in the market. In fact, they account for half the BSE’s market capitalisation. They represent 13 sectors of the economy and are leaders in their respective industries. 2015-16(21/01/2015)  BUSINESS STUDIES 286 2. It is a cost effective method for discussed earlier, a stock exchange can corporates as there is a lower cost be set up as a corporate entity with of new issues and lower expenses different individuals (who are not of servicing the investors. brokers) as members or shareholders. 3. Family concerns and closely held BSE is one such exchange set up as a companies can go public through corporate entity with a broad OTC. shareholder base. It has the following objectives: 4. Dealers can operate both in new issues and secondary market at (a) To provide an efficient and their option. transparent market for trading in 5. It gives greater freedom of choice to equity, debt instruments, investors to choose stocks by derivatives, and mutual funds. dealers for market making in both (b) To provide a trading platform for primary and secondary markets. equities of small and medium 6. It is a transparent system of trading enterprises. with no problem of bad or short (c) To ensure active trading and deliveries. safeguard market integrity through 7. Information flows are free and more an electronically-driven exchange. direct from market makers to (d) To provide other services to capital customers since there is close market participants, like risk contact between them. management, clearing, settlement, market data, and education. BSE (BOMBAY STOCK EXCHANGE LTD.) (e) To conform to international standards. BSE Ltd (formerly known as Bombay Stock Exchange Ltd) was established Besides having a nation-wide in 1875 and was Asia’s first Stock presence, BSE has a global reach with Exchange. It was granted permanent customers around the world. It has recognition under the Securities stimulated innovation and competition Contract (Regulation) Act, 1956. It has across all market segments. It has contributed to the growth of the established a capital market institute, corporate sector by providing a called the BSE Institute Ltd, which platform for raising capital. It is known provides education on financial as BSE Ltd but was established as the markets and vocational training to a Native Share Stock Brokers Association number of people seeking employment in 1875. Even before the actual with stock brokers. The exchange has legislations were enacted, BSE Ltd about 5000 companies listed from all already had a set of Rules and over the country and outside, and has Regulations to ensure an orderly the largest market capitalisation in growth of the securities market. As India. 2015-16(21/01/2015)  FINANCIAL MARKET 287 S ECURITIES AND EXCHANGE BOARD OF unfair trading practices have eroded INDIA (SEBI) investor confidence and multiplied investor grievances. The Government The Securities and Exchange Board of and the stock exchanges were rather India was established by the helpless in redressing the investor’s Government of India on 12 April 1988 problems because of lack of proper as an interim administrative body to penal provisions in the existing promote orderly and healthy growth of legislation. In view of the above, the securities market and for investor Government of India decided to set-up protection. It was to function under the a separate regulatory body known as overall administrative control of the Securities and Exchange Board of Ministry of Finance of the Government India. of India. The SEBI was given a statutory Purpose and Role of SEBI status on 30 January 1992 through The basic purpose of SEBI is to create an ordinance. The ordinance was later an environment to facilitate efficient replaced by an Act of Parliament known mobilisation and allocation of resources as the Securities and Exchange Board through the securities markets. It also of India Act, 1992. aims to stimulate competition and Reasons for the Establishment of encourage innovation. This environment SEBI includes rules and regulations, institutions and their interrelationships, The capital market has witnessed a instruments, practices, infrastructure tremendous growth during 1980’s, and policy framework. characterised particularly by the increasing participation of the public. This environment aims at meeting This ever expanding investors the needs of the three groups which population and market capitalisation basically constitute the market, viz, led to a variety of malpractices on the the issuers of securities (Companies), part of companies, brokers, merchant the investors and the market bankers, investment consultants and intermediaries. others involved in the securities market. To the issuers, it aims to provide a The glaring examples of these market place in which they can malpractices include existence of self – confidently look forward to raising styled merchant bankers unofficial finances they need in an easy, fair private placements, rigging of prices, and efficient manner. unofficial premium on new issues, non- To the investors, it should provide adherence of provisions of the protection of their rights and Companies Act, violation of rules and interests through adequate, regulations of stock exchanges and accurate and authentic information listing requirements, delay in delivery and disclosure of information on a of shares etc. These malpractices and continuous basis. 2015-16(21/01/2015)  BUSINESS STUDIES 288 To the intermediaries, it should offer brokers and other players in the a competitive, professionalised and market. expanding market with adequate 2. Registration of collective investment and efficient infrastructure so that schemes and Mutual Funds. they are able to render better service 3. Regulation of stock brokers, portfolio to the investors and issuers. exchanges, underwriters and merchant bankers and the business Objectives of SEBI in stock exchanges and any other The overall objective of SEBI is to securities market. protect the interests of investors and to 4. Regulation of takeover bids by promote the development of, and companies. regulate the securities market. This 5. Calling for information by under- may be elaborated as follows: taking inspection, conducting 1. To regulate stock exchanges and enquiries and audits of stock the securities industry to promote exchanges and intermediaries. their orderly functioning. 6. Levying fee or other charges for 2. To protect the rights and interests carrying out the purposes of the Act. of investors, particularly individual 7. Performing and exercising such investors and to guide and educate power under Securities Contracts them. (Regulation) Act 1956, as may be 3. To prevent trading malpractices and delegated by the Government of achieve a balance between self India. regulation by the securities industry Development Functions and its statutory regulation. 1. Training of intermediaries of the 4. To regulate and develop a code of securities market. conduct and fair practices by 2. Conducting research and intermediaries like brokers, publishing information useful to all merchant bankers etc., with a view to making them competitive and market participants. 3. Undertaking measures to develop professional. the capital markets by adapting a Functions of SEBI flexible approach. Keeping in mind the emerging nature Protective Functions of the securities market in India, SEBI was entrusted with the twin task of 1. Prohibition of fraudulent and unfair trade practices like making mis- both regulation and development of the leading statements, manipulations, securities market. It also has certain price rigging etc. protective functions. 2. Controlling insider trading and Regulatory Functions imposing penalties for such 1. Registration of brokers and sub- practices. 2015-16(21/01/2015)  FINANCIAL MARKET 289 3. Undertaking steps for investor intermediaries and stock exchanges in protection. the concerned region. 4. Promotion of fair practices and code The SEBI also formed two advisory of conduct in securities market. committees. They are the Primary Market Advisory Committee and the The Organisation Structure of SEBI Secondary Market Advisory As SEBI is a statutory body there has Committee. These committees consist been a considerable expansion in the of the market players, the investors range and scope of its activities. Each of associations recognised by the SEBI the activities of the SEBI now demands and the eminent persons in the capital more careful, closer, co-ordinated and market. They provide important inputs intensive attention to enable it to attain to the SEBI’s policies. its objectives. Accordingly, SEBI has The objectives of the two been restructured and rationalised in Committees are as follows: tune with its expanded scope. It has decided its activities into five operational a. To advise SEBI on matters relating departments. Each department is to the regulation of intermediaries headed by an executive director. Apart for ensuring investors protection in from its head office at Mumbai, SEBI has the primary market. opened regional offices in Kolkalta, b. To advise SEBI on issues related to Chennai, and Delhi to attend to investor the development of primary market complaints and liaise with the issuers, in India. SEBI Violations SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’s Initial Public Offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large number of shares of the company. This is the second such incident, after a similar such violations were detected in the YES Bank’s IPO. SEBI said in IDFC’s IPO too four investors opened as many as 14,807 dematerialised accounts with Karvy-DP and ‘Strangely’, all these account holders have their bank accounts with Bharat Overseas Bank Ltd., Ahmedabad. SEBI order said: “Further probe is required for examining the systemic fault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd., and the lead managers Kotak Mahindra Capital Company Ltd., DSP Merrill Lynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out the benami applications.” Reference is being made to the RBI to examine the role of BOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and apparently funding them. Source: The Economic Times 2015-16(21/01/2015)  BUSINESS STUDIES 290 c. To advise SEBI on disclosure in the country. requirements for companies. The committees are however non- d. To advise for changes in legal statutory in nature and the SEBI is not framework to introduce bound by the advise of the committee. simplification and transparency in These committees are a part of SEBI’s the primary market. constant endeavor to obtain a feedback e. To advise the board in matters from the market players on various relating to the development and issues relating to the regulations and regulation of the secondary market development of the market. KEY TERMS Financial Market Money Market Treasury Bills Commercial Paper Call Money Certificate of Deposit Commercial Bill Money Market Mutual Fund Capital Market Primary Market Secondary Market Stock Exchange SEBI, NSE OTCEI SUMMARY Financial Market is a market for creation and exchange of financial assets. It helps in mobilisation and channelising the savings into most productive uses. Financial markets also helps in price discovery and provide liquidity to financial assets. Money Market is a market for short-term funds. It deals in monetory assets whose period of maturity is less than one year. The instruments of money market includes treasury bills, commercial paper, call money, Certificate of deposit, commercial bills, participation certificates and money market mutual funds. Capital Market is a place where long-term funds are mobilised by the corporate undertakings and Government. Capital Market may be devided into primary market and secondary market. Primary market deals with new securities which were not previously tradable to the public. Secondary market is a place where existing securities are bought and sold. Stock Exchanges are the organisations which provide a platform for buying and selling of existing securities. Stock exchanges provide continuous market for securities, helps in price discovery, widening share ownership and provide scope for speculation. The National Stock Exchange of India is the latest, most modern and technology driven exchange and was incorporated in 1992. OTCEI was incorporated in 2015-16(21/01/2015)  FINANCIAL MARKET 291 1992 to provide listing facility for small companies with paid up capital of less than 3 crores. Securities and Exchange Board of India was established in 1988 and was given statutory status through an Act in 1992. The SEBI was set-up to protect the interests of investors, development and regulation of securities market. EXERCISES Multiple choice questions 1. Primary and secondary markets: a. Compete with each other b. Complement each other c. Function independently d. Control each other 2. The total number of Stock Exchanges in India is: a. 20 b. 21 c. 22 d. 23 3. The settlement cycle in NSE is: a. T + 5 b. T+3 c. T+2 d. T+1 4. The National Stock Exchange of India was recognized as stock exchange in the year: a. 1992 b. 1993 c. 1994 d. 1995 5. NSE commenced futures trading in the year: a. 1999 b. 2000 c. 2001 d. 2002 6. Clearing and settlement operations of NSE are carried out by: a. NSDL b. NSCCL c. SBI d. CDSL 7. OTCEI was started on the lines of: a. NASDAQ b. NYSE c. NASAQ d. NSE 8. To be listed on OTCEI, the minimum capital requirement for a company is: a. Rs. 5 crores b. Rs. 3 crores c. Rs. 6 crores d. Rs. 1 crore 9. A Treasury Bill is basically: a. An instrument to borrow short-term funds b. An instrument to borrow long-term funds c. An instrument of capital market d. None of the above 2015-16(21/01/2015)  BUSINESS STUDIES 292 Short answer questions 1. What are the functions of a financial market? 2. “Money Market is essentially a Market for short term funds.” Discuss. 3. What is a Treasury Bill ? 4. Distinguish between Capital Market and Money Market. 5. What are the functions of a Stock Exchange? 6. What are the objectives of the SEBI? 7. State the objectives of the NSE. 8. What is the OTCEI? Long Long-- answer questions 1. Explain the various Money Market Instruments. 2. What are the methods of floatation in Primary Market? 3. Explain the recent Capital Market reforms in India. 4. Explain the objectives and functions of the SEBI 5. Explain the various segments of the NSE. Projects and Assignments 1. Collect the information about the companies that have recently mobilised resources through primay market. 2. Collect the information on various measures taken by SEBI to protect the interests of investors since its inception. 3. Send a group of students to a trading terminal in your city to gain first hand information on securities trading and prepare a report. 4. Collect data about the movements in SENSEX and NIFTY during the last one month. Find out whether the two move in same or opposite direction. 5. Collect information about the SEBI action for Investor Protection taken during last two years. 6. Collect information about e-IPO’s in the Indian Market in the last one year. TRY AND SOLVE THE CROSSWORD Clues to the Crossword Across 1. Commission Agent who transacts in securities on behalf of non members or members (6). 2. Changes in the price of securities in the stock market. (12) 4. Inclusion of securities in the official trade list of securities in stock market (7) 8. Place of trade I securities (6) 9. Result of selling shares at a price lower than the purchase price. (4) 2015-16(21/01/2015)  FINANCIAL MARKET 293 13. An independent dealer in securities (6) 15. Includes shares, scripts, bonds, debentures (10) 16. Speculator who expects the prices to go down (4) 17. Buying and selling of securities to manipulate the market (7) 18. Speculator who deals in new securities only (4) Down 1. Speculator expecting a rise in the prices (4) 3. Means ‘with’ (3) 5. Means a part or fraction of capital (6) 6. Fraction of profit paid to government (3) 7. Illegal, game based on chance (8) 9. Official statement of securities in the stock market (5) 10. Those who buy and sell securities with objective of profit (10) 11. Money invested in business (7) 12. Return on shares out of profits (8) 14. Instrument acknowledging a debt (9) 16. Govt. document acknowledging a debt (5) 19. Profit or yield (4) 2015-16(21/01/2015)  BUSINESS STUDIES 294 Case Problem I ‘R’ Limited is a real estate company which was formed in 1950. In about 56 years of its existence the company has managed to carve out a niche for itself in this sector. Lately, this sector is witnessing a boom due to the fact that the Indian economy is on the rise. The incomes of middle class are rising. More people can afford to buy homes for themselves due to easy availability of loans and accompanying tax concessions. To expand its business in India and abroad the company is weighing various options to raise money through equity offerings in India. Whether to tap equity or debt. market whether to raise money from domestic market or international market or Combination of both? Whe their to raise the necessary financé from money market or capital market. It is also planning to list itself in New York Stock Exchange to raise money through ADR’s. To make its offerings attractive it is planning to offer host of financial plans products to its stakeholders and investors and also expand it’s listing at NSE after complying with the regulations of SEBI. (i) What benefits will the company derive from listing at NSE? (ii) What are the regulations of SEBI that the company must comply with? (iii) How does the SEBI exercise control over ‘R’ Limited in the interest of investors? Case Problem II NSE Indices World Markets Index Current Prev. %CHG Index Current Prev. % Change S&P CNX Nifty 3641.1 3770.55 -3.43% NYSE Composite 8926.88 9120.93 -2.13% CNX Nifty Junior 6458.55 6634.85 -2.66% NASDAQ Composite 2350.57 2402.29 -2.15% CNX IT 5100.5 5314.05 -4.02% DOW Jones I. A. 12076 12318.6 -1.97% Bank Nifty 5039.05 5251.55 -4.05% S&P 500 1377.95 1406.6 -2.04% CNX 100 3519.35 3640.35 -3.32% Nikkei 225 16676.9 17178.8 -2.92% More Source: www.nseindia.com The above figures are taken from the website of national stock exchange of India. They illustrate the movement of NSE stock indices as well as world stock indices on the date indicated. Questions 1. What do you mean by a stock index? How is it calculated? 2. What conclusions can you draw from the various movements of NSE stock indices? 3. What factors affect the movement of stock indices? Elaborate on the nature of these factors. 2015-16(21/01/2015)  FINANCIAL MARKET 295 4. What relationship do you see between the movement of indices in world markets and NSE indices? 5. Give details of all the indices mentioned above. You can find information on the web or business magazines. (The teacher should help the students in answering these questions. They can look at the website mentioned above and also website of SEBI, i.e., www.sebi.gov.in for educational material. This exercise will help the students in understanding the stock markets clearly and also create interest therein.) Project Work 1. Study the wwebsite of Mumbai Stock Exchange, i.e., www.bseindia.com and compile information which you find useful. Discuss it in your class and find out how it can help you should you decide to invest in the stock market. Prepare a report on your findings with the help of your teacher. 2. Prepare a report on the role of SEBI in regulating the Indian stock market. You can get this information on its website namely www.sebi.gov.in. Do you think something else should be done to increase the number of investors in the stock market? Answers to the Crossword Across 1. Broker 2. Fluctuations 4. Listing 8. Market 9. Loss 13. Jobber 15. Securities 16. Bear 17. Rigging 18. Stag Down 1. Bull 3. Cum 5. Stocks 6. Tax 7. Gambling 9. Lists 10. Speculator 11. Capital 12. Dividend 14. Debenture 16. Bonds 19. Gain 2015-16(21/01/2015)