CHAPTER – 1 – Understanding of securities market
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in-dept of securities market please click on the below link
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1.
Securities market
Securities “The term
“securities” has been defined in Section 2 (h) of the Securities Contracts
(Regulation) Act, 1956”
Securities includes
Shares, Scrips, Stocks, Bonds, Debentures, derivatives, govt securities and
other marketable securities in nature.
The security represents
the terms exchange of money b/w 2 parties, security is issued by companies,
financial institutions and govt.
“The market in which securities are
issued, purchased by investors and subsequently transferred among the
investors”
2.
The
securities include the following list of products
- shares,
scrips, stocks, Bonds, Debentures or other marketable securities
- Derivative
- Instrument
issued by any collective investment scheme
- Mutual
funds
- Pooled
investment instruments
- CD’s
and other debt receivables
- Government
securities
- Instruments
issued by central government
3.
Features of securities
- Security
represents the exchange of money between 2 parties to meet their financial
obligations
- Issuance of
security allows the borrow to raise the money for business operations, which
allowing the investors to convert their savings into financial assets
- Issuer of the
security sets the terms and condition of the contract on which capital is being
raised.
- The investor has
right in company decision based on type of security he holds in the
organization.
- Investment in
security has high risk which is associated with high return.
4.
Security market structure
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Security Market
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Primary
market
|
Secondary
Market
|
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New issue
IPO
|
Shares
Stock
|
5.
Security Market participants
|
Security Market Participants
|
|
Primary
market
|
Secondary
Market
|
|
Merchant
banker
Mutual funds
Financial
institutions
Foreign
portfolio investors (FPIs)
Insurance
companies
|
Stock
exchanges
Stock brokers
AMCs
Individual
investors
Brokers
DP
|
6.
Security market issuers and investors
|
Security Market
|
|
Issuers
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Investors
|
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Companies
Government
Financial institution
Banks
Public sector
Mutual fund
houses
Investment trust
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Individual investors
Retail investors
Institutional investors
|
7.
Security market intermediaries
- AMC
- Portfolio managers
- Merchant bankers
- Stock brokers
- Underwriters
- Clearing
corporation
- Trading members
- DPs
- Custodian of
securities
- Trustees
- Credit rating
agencies
- Investment
advisors
1.
Asset management companies (AMC’S) > AMCs are firms which pool funds from various
individual investors and invest in securities with the objective of making good
returns and in exchange fee the charged based on the volume of investment made
by each investor.
Some of AMCs are
Ø Franklin Templeton Mutual fund
Ø Motilal oswal mutual fund
Ø Blackrock mutual fund
Ø DSP mutual fund
Ø Invesco mutual fund
How are funds managed by AMCs?
When the investors invest in AMCs, they except good
returns on their investment, to ensure AMCs meet the investors requirement.
The AMCs follow below
methods:
1.
Market research and analysis – it includes research on market trends, macro-economic,
micro-economic, political aspects.
2.
Asset allocation
– funds should be allocated as per the market research conducted.
If its debt-oriented
fund, 20% in Equity & 80% in debt to keep the risk level low.
if its equity
oriented 70% in equity and 30% in debt to gain the maximum return.
If its Balance
fund – 60% in equity and 40% in debt to balance the return and risk level.
3.
Creating portfolio
– the Asset manager creates a portfolio on the basis of market findings. Here he
decides the type of security to buy, sell, or hold for a period.
4.
Performance review-
by having regular review of portfolio funds is necessary for the asset manager
to make critical decision on whether to sell/buy or hold the securities to gain
the returns.
Every AMCs need to
provide the regular updates to investor regrading sales, repurchases, NAV,
return on risk, portfolio changes and factors affecting their portfolio to
investors.
Bodies governing AMCs operations
Governed by SEBI & AMFI
|
SEBI
|
AMFI
|
|
Securities exchange
board of India is the Indian capital market regulator which regulates and
controls every AMC in India.
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The association
of mutual funds is a statutory board formed by mutual fund houses. AMFI
formed with the vision of transparent and ethic driven in financial industry.
|
2.
Portfolio managers > a financial professional who makes investment decisions
for individual and institutional investors.
They develop investment strategies and
manage the day to day trading of a portfolio.
Types of portfolio managers
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Active
Portfolio Manager
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Passive
Portfolio Manager
|
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Approach
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Frequent buying and selling
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Index fund management
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Management
style
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Hands-on approach
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Hands-on approach
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Experience
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Very experienced
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Low to high level of experienced
|
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Goal
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Outperform benchmark, index, or market returns
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Match benchmark, index, or market returns
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Difference between MACs & Portfolio
managers
|
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AMCs
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Portfolio
managers
|
|
Role
|
Manage large scale investments, includes mutual
funds, hedge funds and pension plans
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Focus on researching and analyzing the investment opportunities,
making recommendations and executing trades.
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Clients
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Individual investors and large institutions
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Banks, Hedge funds and other financial institutions
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Compensation
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Fee is charged on services
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Salary and performance-based bonus.
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3.
Merchant bankers – also
known as issue managers, investment bankers or lead managers. They act as
advisory in evaluating the company’s capital needs, set the pricing of the security
for issuing in the market to the investors.
they also perform the underwriting activities
i.e. they Buyback the shares which is not sold in new issue or ipo by the
investors.
4.
Stock brokers – Registered
trading members of stock exchanges. They act has intermediaries between by
buyer and seller of the stocks in the share market through there specialized
trading platform.
they should be registered under SEBI act
and abide by the rules and regulation of SEBI.
5.
Underwriters
– a person or financial institution that evaluates and assumes the risk for
insurance companies, banks and investment houses and charges fees usually in
the form of a commission, premium, spread or interest.
*SPREAD the difference between the buy (offer) and sell (bid) prices
quoted for an asset*
6.
Clearing corporation
– an organization that manages the confirmations, settlement and delivery of stock
exchange transactions for the exchanges.
7.
Trading members – member
of stock exchanges who can trade on their own account or behalf of their client.
They are registered under SEBI.
8.
Depositary participants – it enables the investor or financial institutions to
hold and transact securities in dematerialized form.
9.
Custodian – they
work along with institutional investors, they act as custodian for individuals
or financial institutions in holding securities and bank account.
10.
Trustees –
they are appointed when the beneficiaries may not able to directly supervise whether
it’s their wealth or investment.
11.
Credit rating agencies (CRA)– They evaluate creditworthiness of individuals,
companies and countries by using the rating scale to determine if the borrowers
is legible to render the credit services or not. They include all factors in evaluating
such as financial statements, debt and repayment history etc.
12.
Investment advisors – an individual or financial institution that makes investment
recommendations or analysis the security and charges fees or commission return
for the services rendered.
8.
Regulators of securities markets
9.
Role of securities market
- Channelize for transfer
of funds.
- Liquidity
- Transparency
- Information signaling
through prices – decline in the stock prices
10.
Cyber security and resilience
CHAPTER – 2 – Types of security
market, features and concepts of asset allocation
Security market is
broadly classified into primary market and secondary market. But there are mainly
2 type of securities that are issued for the investor’s perspective.
Equity
Debt
When business is in need
of capital, it raises the fund either by issuing one of the above securities
for expansion.
Equity
– it’s also widely knows has owner capital, the more the share capital one owns
the higher the decision-making power in the organization. Equity share holder
has the voting rights and during the winding up of the company the reserves is
received by the equity shareholders only.
Features of Equity Shares.
- Ownership
- Voting rights
- Dividend income
- Capital gains
- Reserves of the company
- Risk and Return
- Transferability
Types of Equity Capital
2. Debt security
- A debt security is a
financial asset that represents borrowed money that must be repaid with interest
and premium.
Characteristics and role of debt securities
Instrument types
- Debt securities include bonds, bills, notes CD,
Commercial paper and debentures.
Floating interest rate – some of debts instruments is paid on floating rate
of interest, which some time gain high returns and low returns as per the
interest changes.
Credit rating – Before issuing the bond the company must
undergo appraisal of credit rating process for evaluating if its eligible to
pay of its future debts or not.
Priority – debt holders are given 1st priority in the
company. They are paid with interest before tax evaluation.
Security – Most of debt security are secured debt which is backed by
some assets in cases the company becomes insolvent.
Features of debt
security
Coupon rate – interest paid on the bond / debt security.
Maturity – Tenure of the bond.
Principal – initial investment made by the investor when issuing the bond by
the borrower. On redemption the entire bond amount is refunded.
Redemption of bond – when bond matures the investor redeems the
investment amount on the bonds.
HPR (holding period returns) – Return earned during the period
of the bond invested.
Current yield - Measures the Expected annual return on bond.
Current yield = annual
coupon / current bond price or coupon rate/market price
Ex : The 8.24 GS 2018 is trading at Rs. 104, the current yield would be:
Current Yield = (8.24/104) = 0.07923 =
7.92%
YTM (yield to maturity) – more used measure to calculate the
return on debt investment. It considers all the future cashflows.
YTM
= Annual coupon + (FV- – PV) ÷ Number of Compounding Periods] ÷ [(FV
+ PV) ÷ 2].
FV – FACE VALUE
PV – PRESENT VALUE
C – COUPON
N – NUMBER OF
COMPOUNDING PERIODS
Duration – time duration effects the interest rate of the
bonds.
The longer the duration, the more sensitive the bond or portfolio is
likely to be to changes in interest rates.
The shorter a bond's duration, the less volatile it is likely to
be.
EX: bond with a 1-year duration would only lose 1% in value if rates
were to rise by 1%. In Contrast, a bond with a duration of 10 years would lose
10% if rates were to rise by that same 1%.
Discounted cashflows - Discount Factor = 1 /
(1 + Discount Rate) ^ Period Number
The discount factor is a value between zero and one that decreases over
time as the period number increases. This is because the discount factor
assumes that money today will be worth less in the future due to inflation .
The discount factor is used in financial modelling for a number of
purposes, including: Calculating net present value (NPV), Discounted cash
flow (DCF) analysis, Making the DCF model easier to audit, and Better illustrating
the effect of discounting.
Ex - Amit buys a 5-year bond issued at face value of Rs.100 and
redeemable at par. Coupon rate is 10 percent, payable annually. What is the
value of the bond if the market yield is 8 percent?
Face value – 100
Coupon rate – 10
discount rate – 8
Tenure – 5 , so end of the year the bond is paid with interest and
premium – 10+100 = 110
^ = no of times multiple the numbers
Discount Factor = 1
/ (1 + Discount Rate) ^ Period Number
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Discount Factor = 1
/ (1 + Discount Rate) ^ Period Number
|
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years
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cashflow
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1(1+discount rate)
^periods
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Discounted cashflow
|
|
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1
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10
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0.93
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9.26
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2
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10
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0.86
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8.57
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|
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3
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10
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0.79
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7.94
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|
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4
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10
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0.74
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7.35
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|
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5
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110
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0.68
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74.86
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|
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total
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|
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107.99
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Types of debentures
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Based on security
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Secured
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Unsecured
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- Company’s assets are pledged.
- Right to sell the assets in
cases company defaults to pay interest or principal.
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- Company’s assets are not pledged.
- No preferential rights
- During
wounding up of the company settles the unsecured debt also
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Based on TENURE
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Redeemable
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Irredeemable
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- Re-paid @ end of specified
period.
- Paid in once or instalments
basis.
- Premium or face value of the
debt taken is paid.
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- Paid @ the time of Wounding up of the company.
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Based on CONVERTABLITY
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Convertible
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Non –convertible
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- Convertible to Equity or any
other security over the lapse of time
- Fully convertible – bond is
fully converted into Equity.
- Partly convertible – Partly is
converted into Equity & rest is redeemed by company through BUY BACK
options.
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- Can’t be converted into equity and is redeemed over a time on a
specified date at the time of issuing the debentures.
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Based on COUPON RATE
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Specific coupon rate
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Zero coupon rate
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- Rate of interest are specified
in prior irrespective of either the company makes profit or loss.
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- No interest is paid, bond is
sold at discount to the buyers.
- Issue price – maturity value = interest gained.
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Based on Registration
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BEARER
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REGISTERED
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- Easy to transfer.
- No registration doc.
- negotiable
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- Non-transfer
- Registered in company records.
- non-negotiable
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3. money market securities - it includes
instruments for raising and investing funds for a certain period ranging from 1
day to 1 year.
It consists of below products
Repos– a transaction in which
one participant borrows money against the collateral of eligible security for
certain period.
Ex- loan against property – where money is loaned against property as collateral
which is equal to the loan taken.
Reverse repo – lending transaction,
a repo in the books of borrower and in the books of lender is a reverse repo.
Triparty repo – it takes place on
the electronic platform of the clearing corporation of India (CCIL) or the
exchanges.
Certificate of
deposits – CDs short term tradeable deposits issued by the banks to raise funds.
Treasury bills – short term debt securities
issued by government to meet its daily operations. It is also knowns as T-bills
with maturity period of 91 / 182 / 364 days.
Issued in AUCTION and managed by RBI, bidder of T-bills are Mutual fund
house, insurance companies, provident funds and other financial institutions.
4.
Which is right investment equity or debt?
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EQUITY
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DEBT
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Need
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Growth oriented
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Income oriented
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Time
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Long maturity
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Short maturity
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Risk
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High risk
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Less risk
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Returns
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Profit sharing
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Interest paid
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Voting
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Yes
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No
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5. Equity investing Process
6.
Factors underlying the investment process.
7. Equity Analysis and valuation
Technical analysis – is based on all the information that can affect the performance of
a share such as, company fundamentals, economic factors, and market sentiments
are reflected in the stock prices.
It converts the data into chart for better understanding of the movement
of stocks
Short term investor and traders will invest based on technical analysis.
Not suitable for long term investment
3 essential tools
Historical data
Trading volume with price movement
Time span inflicting the price change.
Equity is broadly valuated using below 2 models.
- Discounted
cashflow model (DCF)
- Relative
valuation models (RVM)
Fundamental Analysis – it involves both quantitative and qualitative studies. focus on long
term investment. The analysis is based on the Company returns on the share
capital as its main invest is on Equity share capital investment.
It involves comprehensive study of companies’
macro-economic trends.
Competitive factors
Company cost valuation
Companies financial position
Management strategies
7. Debt investing
8. Hybrid instrument
- Convertible debentures – converted into equity shares.
- Depository receipts – financial instruments that represents shares of the local company but
traded in stock exchange outside the country. DRs are issued in foreign
currency.
- FCCBs – foreign currency convertible bonds – raised by companies in
international markets, but which have the options of converting into equity
shares of the company before they mature. the payment of interest and repayment of principal is in foreign
currency.
- Warrants - Warrants are a derivative that give the right, but not the
obligation, to buy or sell a security—most commonly an equity—at a
certain price before expiration.
The price at which the underlying security can be bought or sold is
referred to as the exercise price or strike price.
An American warrant can be exercised at any time on or before the
expiration date.
- European warrants can only be exercised on the expiration date
- Warrants that give the right to buy a security are known as call
warrants.
- Warrants that give the right to sell a security are known as put warrants.
9. Derivatives - a financial contract those values are derived from the underlying assets
(value of the stock prices) such as equity, bonds, commodities, currencies and
debentures.
- 2 or more parties
involved.
- Trade only Exchanges
& OTC market.
- Leverage the
risk to gain more profit.
- Includes options,
futures, swaps and forward’s contract.
- Hedge the position
on holdings.
- Speculation of the
price movement of underlying assets to leverage the holdings.
- To use at it maximum
advantage
- Protecting the investment
from risk / avoiding.
Features of equity derivatives
They are traded in futures
& Options contract on stock indices or individual stocks.
Clearing corporation
act as intermediary in clearing, settlement and risk management of the stocks.
Index futures and
options are settled in CASH on EXPIRY
Individual stock
futures and options are settled in physical delivery pf the underlying stock.
Equity derivative
hedge the risk and speculate the price change.
Features of currency derivatives
- Currency futures &
options are available both in regional and international currency.
- All INR and cross currency contracts are cash settled in Indian INR
- Hedge the currency risk and speculating the exchange rates.
Features of currency derivatives
- Futures and options on
commodities are traded nationwide, contract varies as per the underlying assets,
such gold derivative the underlying asset will be gold etc.
- Commodity options are traded as options on futures contracts and not
options on the spot commodity
- Commodity futures is regulated by SEBI
- Commodity spot is regulated by state government
Chapter 3 – PRIMARY MARKET
1.
Primary market and its functions
Primary market refers
to market place where equity or debt capital is raised for the first time in
the form of NEW ISSUE or IPO.
Functions of primary market
- Capital formation
- Price discovery – it
determines the fair market value of the company it includes all the factors
such as financial health, industry trends and overall market conditions.
- Investor participation – its an great opportunity for the individual and institutional
investors to become a stakeholders in the company.
- Economic growth –
raising fund for company expansion is directly impacts the economic growth of
the nation.
2.
Intermediaries of primary market
a.
Merchant bankers
– they act as underwriters of the new issue
b.
Registrar–
registrars are entities that maintain a record of the applications, money
received and process the share allotment to the investor as per the investment
made.
c.
Transfer agents
– they maintain the records of security holdings and handle the transfer and redemption
of securities and also act as DPs.
d.
Bankers to the issue – there banks which specially appointed by the issuer
for managing the application of new issue or IPO.
e.
Brokers to the
issue – they act as intermediaries between investor and issuer, by managing the
new issue of the investor.
3.
Types of issues
IPO OR NEW ISSUE -
Companies which needs capital to increase its business growth intends to raise
the fund using IPO before entering the stock exchanges.
Issued
through investment banks hired.
IPO
issue the net worth of the company should be 1 RS crore.
IPO
issue size must not exceed 5 times the company’s net worth.
Steps to register the IPO.
- Provide
the 3 years financial report to NSE.
- "0"
in NCLAT & NCLT (national company law appellate tribunal / national company
law tribunal)
- No
constant losses
- Paid
of equity capital of RS 10 Crores
- "0"
disciplinary action against any of shareholders or BOD
Private Placement -
It refers to issuing large quantity of shares to a select
set of investors. According to Companies Act 2013, the number of investors
to whom shares are issued under private placement should not exceed fifty.
Private placements can be in the form of qualified institutional placements (QIP)
or preferential allotment.
Onshore and Offshore Offerings - While raising capital, issuers can
either issue the securities in the domestic market and
raise capital or approach investors outside the country. If
capital is raised from domestic market, it is called onshore offering and
if capital is raised from the investors outside the country, it is termed
as offshore offering.
Offer for Sale (OFS) –
is a form of share sale where existing shareholders to sell shares that have
already been allotted to them to another party.
Rights and bonus issues: Securities are issued to existing investors as on a
specific cut-off date, enabling them to buy more securities at a specific price
(rights) or get an allotment of additional shares without any consideration
(bonus).
4.
Types of issuers
|
Issuer
|
Type of Securities
|
Specific Needs and Structures
|
|
Central, State and Local Governments
|
Bonds (G-secs)
Treasury bills
Sovereign Gold Bonds (SGB)
|
Do not issue equity capital
Only Central Government issues T-bills
Instruments carry government guarantee
Issued only in domestic markets in India
|
|
Public Sector Units
|
Equity shares
Bonds
|
May offer equity held by the Government to the public as
disinvestment
Bonds may have special tax concessions
|
|
Private Sector Companies
|
Equity shares
Preference shares
Bonds
Convertible bonds
Commercial Paper
Securitized paper
|
High dependence on securities markets for raising capital
May issue equity and debt instruments in international markets
|
|
Banks, Non-banking Finance Companies, and Financial Institutions
|
Equity shares
Preference shares
Bonds
Convertible bonds
Securitized paper
Commercial paper
Certificates of deposit
|
Banks have low dependence on securities market due to access to
public deposits
May offer long-term bonds and preference shares as Tier-2
capital
Issues may have special tax concessions
May issue in international markets
|
|
Mutual Funds
|
Units
|
Capital is raised for specifically defined schemes
Schemes may be issued for a fixed tenor (closed-end) or as open
ended schemes
|
5.
Pricing a New issue
-
The pricing of the
new issue can either be Fixed by issuer or bidding process by the investors.
Fixed prices issue
– before going public or listing in the stock market. The company will reach
out to the merchant banker to decide the price at which new issue made. The information
is made available to the investor.
Book built issue
– book building is the process to identify the pries that the market is willing
to pay for the securities being issued in the market.
The company will
set the bid prices within which the investor can apply for the new issue.
·
Green shoe options
– GSO issued immediately on listing on the stock market to stabilize the price
of the share and it should not exceed 15% of issue made.
Chapter 3 – SECONDARY MARKET
1.
Secondary market: Role, functions
- Liquidity
- Transparency of price
- Information signaling – change or drop in the share price is the indication
showing the company is performing poor and financially instable.
- Economic activity
– market trend and index trend can determine the economic condition of the
country.
- Ease of investment
2. Secondary market types
OTC MARKET – “Decentralized market where
unlisted securities traded directly b/w 2 parties to buy/sell securities
through electronic mode.”
Ex – FOREX is an OTC market
Ex: there is small company looking to raise a capital which doesn’t meet
the requirement of listing or you’re an investor who wants to invest in some
exotic funds which is not listed in NYSE or NSADAQ. This people enter into OTC
market, where trading is done electronically.
OTC allows investor to trade stocks, bonds, derivatives and other
financial instruments directly b/w 2 parties without the supervision of a formal
exchanges.
EX: AAPL, MFST…etc are traded in OTC
market.
OTC markets do not have physical locations or market makers (a firm or
individual who actively quotes both B/S sides in market for particular
securities)
OTC shares are called penny stocks since they trade for > 5$ per
share.
Ex;- OTC is like pharmacy, where medication can be bought without
doctors prescriptions.
“FINRA (financial industry authority)
was est 1939 to regulate the OTC market, operated through network of market
makers who facilitate the trade b/w investors”
|
Feature
|
Exchange
|
OTC
|
|
Platform
|
Centralized
|
De-centralized
|
|
Pricing
|
Determined through auctions
|
Negotiated b/w buyers & sellers
|
|
Transparency
|
High
|
Low
|
|
Regulation
|
Govt agencies and exchanges life NASDAQ
|
Less regulated by agencies like FINRA & SEC
|
|
Products
|
Stocks, bonds, options and futures
|
Delisted securities, stocks, bonds, debentures.
|
How Can I Invest in OTC Securities?
Investing in OTC
securities is possible through many online discount brokers, which
typically provide access to OTC markets.
However, it's essential to note that not all brokers offer the same
level of access or support for OTC investments. Some brokers may limit trading
in certain OTC securities (such as "penny
stocks") or charge higher fees for these transactions.
OTC broker: - Interactive Brokers, trade station and zacks trade
How Are the OTC Markets Regulated?
1. OTC is regulated by
SEC & FINRA.
2. SEC - securities
exchange commission sets the regulatory framework for OTC.
3. FINRA – oversees the
day to day operations and compliance of broker- dealers participating in the
OTC Market.
STOCK EXCHANGES – Trade happens virtual b\w buyer &
seller of stock, Trades executed & settled by clearing agencies acts as
intermediaries b\w 2 Parties.”
A stock exchange is a centralized location where the shares of
publicly traded companies are bought and sold.
1. Fixed income
instruments - regular interest payment on the principal amount invested such as bonds,
debentures
2. Variable income
– the returns vary as per the market volatility such as equity,
derivatives
3. Hybrid instruments
– offers both fixed and variable returns on investments such as
convertible debenture bonds
List of stock exchanges
New York Stock Exchange: the New York Stock
Exchange (NYSE) requires a company to have issued at least 1.1 million
shares of stock worth $40 million and must have earned more than $10 million
over the last three years.
NASDAQ Stock Exchange: NASDAQ requires a company to have issued
at least 1.25 million shares of stock worth at least $70 million and must have
earned more than $11 million over the last three years.
London Stock Exchange: the main market of
the London Stock Exchange requires a minimum market capitalization
(£700,000), three years of audited financial statements, minimum public float
(25%) and sufficient working capital for at least 12 months from the
date of listing.
Bombay Stock Exchange: Bombay Stock Exchange (BSE)
requires a minimum market capitalization of ₹250
million (US$3.0 million) and minimum public float equivalent
to ₹100 million (US$1.2 million).
The Shanghai Stock Exchange (SSE): To be eligible for an initial
public offering (IPO) a company must meet certain criteria such as minimum
market capitalization, a minimum net profit, and a minimum number of
shareholders. Also, the company’s total share capital must not be less than RMB
30 million.
3.
Secondary market products
1. Equity (shares, scrip, and stocks) – an ownership of the company,
the number of shares you hold as much is the power you gain the company decision
making
2. Debentures – debt or bond issued by the company which is not backed
by any collateral, issued based on credit worthiness and in return debt holders
are paid interest until it matures.
3. Foreign currency Bonds – FCCB convertible bonds issued in a currency
that’s different to domestic currency.
4. Mutual
funds – pooling of different funds into one to form a portfolio to minimize the
risk and maximize the return
5. Derivatives
– whose value is determined by the underlying assets
6. CD's
– certificate of deposits, issued by the banks for a fixed period of time with
interest paid on the premium invested.
7. Government
securities – issued by central and state government to meets its financial obligation
by bidding or auction to the institutional investors or mutual fund house. Such
as T-bills , govt. bonds
8. Other
financial instruments which is tradeable in the markets or OTC.
4.
Participants of secondary market
- Stock exchanges
- Clearing corporations
- Investors
- Issuers
- Financial intermediaries
- Regulators
5.
Trade execution
Trade is executed in 2 modes
Open outcry trading – traders present
physically and shout out the bid and offers price.
Online trading - Executing the buy and sell order of
stocks using the broker owned electronic platform by themselves or on behalf of
them broker dealer will execute the trade.
6.
Type of orders
- Limit
order – Buyer and seller
specifies the prices of the trades being executed in exchange
- Market
order – Buyer and seller executes
the trade as per the prices available in the current market.
- Stop
loss order – price movement in the
opposite direction than the expected, the buyer or seller puts the stop loss
order to minimize the potential loss.
- Day
order or intraday – Valid for the day,
must close the buy or sell order placed on the same day before market closes.
- Circuit
breakers – Automatic halt of index
or stocks if there is rapid movement either upward or downward. Which does not
allow the buyer or seller stop trading on the particular stock or index.
7.
Type of confirmation note given by the broker when
trade executed
·
Contract note – confirmation
of trades being sent to the investor for trading on behalf of the investors.
·
Confirmation slip -
a document provided by your broker that verifies the details of a trade you
have executed.
·
Delivery note -
the documentation and process involved when shares are transferred to the
buyer’s account after a trade is settled.
·
Delivery instruction slip- a document used in the stock market to authorize the
transfer of securities from one demat account to another.
8.
Clearing & Settlement of trade life cycle
Delivery
– square off
Delivery means settling the trades as per
the standard T, intraday settled on that day only, T+1 day i.e. settled next
day is also know as rolling settlement day and T+2 settled after 2 days.
Squaring
off means closing an open position. If
you bought shares, squaring off involves selling them. If you sold shares
(short selling), squaring off means buying them back.
·
VAR margin – A
statistical technique called value at risk is used to measure the probability
of loss on value of stocks invested over a period of time based on historical
prices and volatility.
·
ELM – extreme
loss margin aims at covering the losses and it shall be 3.5% for any stock.
·
MTM – mark
to margin is computed at the end trading day by comparing the transaction pries
to closing price of the shares.
9.
Corporate actions – such
as bonus, rights, merger, dividends or warrants that impact the price movement
of equity share.
There are two types of corporate actions
Stock
benefits
Cash
benefits
Chapter 5 – MUTUAL FUNDS
1.
Meaning and terminology related to mutual funds
Mutual fund means
pooling of funds from various investor and investing in diversified portfolio
of funds i.e stocks, bonds and other securities.
2.
Mutual fund work
- Open ended funds –
mutual fund does not have a fixed maturity date. Investor can buy additional units
at any time at the current NAV.
- Closed end funds –
mutual funds is issued only the sachem is launched i.e. new fund offer. Investor
can’t buy additional fund and has fixed maturity date.
- Interval funds –
is has both open and closed ended fund.
3.
Types of Equity schemes
|
Equity Schemes
|
Debt schemes
|
|
Multi cap fund
|
Overnight fund
|
|
Large cap fund
|
Liquid fund
|
|
Large – mid cap fund
|
Ultra short duration fund
|
|
Mid cap fund
|
Money market fund
|
|
Small cap fund
|
Short duration
fund
|
|
Flexi cap fund
|
Long duration fund
|
|
Dividend yield fund
|
Corporate bond
|
|
Value fund
|
Credit risk fund
|
|
Focused fund
|
Gilt fund
|
4.
Concept of Systematic transaction in mutual funds
|
SIP
|
SWP
|
STP
|
|
Fixed sum of investment
is made periodically into mutual funds and can be matured anytime as per the
fund selected.
If its tax
fund there is a lock in period of 3 years and 5 years as per the scheme
|
Mutual funds
that allows investors to withdraw a fixed amount of money at regular intervals
from their investment.
|
Mutual funds
that allows investors to transfer a fixed amount of money from one mutual fund
scheme to another at regular intervals.
|
5.
Benefits and costs of investing mutual funds
- Diversification
- Professional management
- Liquidity
- Flexibility
- Tax efficiency
- Accessibility
- Cost and fees
Chapter – 6 Derivatives markets
1.
Definition -a financial contract those values are derived from the underlying assets
(value of the stock prices) such as equity, bonds, commodities, currencies and
debentures.
1. 2 or more parties involved.
2.
Trade only Exchanges & OTC market.
3.
Leverage the risk to gain more
profit.
4.
Includes options, futures, swaps and
forward’s contract.
5.
Hedge the position on holdings.
6.
Speculation of the price movement of underlying assets to leverage the
holdings.
7.
To use at it maximum advantage
8.
Protecting the investment from risk /
avoiding.
2.
Participants of Derivative markets
1. Hedgers -> Traders who wish to
protect themselves from price movements participate in the derivatives market.
For example, a farmer may use futures contracts to lock in a selling
price for his crops in advance of harvest.
2. Speculators – traders who are willing to take risk
by taking future position with the expectation of making profits. Higher the
risk higher the profit concept is applied.
3. Margin traders -> trader who take less
risk to gain the minimal return on investment
4. Arbitrageurs -> Arbitrageurs seek to
profit from price differences between different markets for the same asset.
For example, they may buy a currency at one exchange rate and then sell
it immediately at a higher rate in another market.
3.
Types of derivatives
- Forward
- Futures
- SWAP
- Options
1. Forward – contractual agreement b/w 2 parties to buy or sell the underlying assets
at certain date where the price is pre-determined or decided on the date of
contract forming and it’s not traded in the Exchanges& OTC market.
“The contract is
tailored suit as per the buyer & seller”.
Risk can’t be hedged since the contract
can become void since it’s not standardized.
Ex ;- Owner & tenant forms the contract to pay
a rent for house every month end. · Rent amount.
· Payment date
· Form of payment
· Risk – charges property destruction.
“All the above
factors will decide prior forming the contractual agreement between the tenant
and owner.”
2. Futures - standardized exchange traded contracts, where the 2 parties agree
to buy and sell shares at pre-determined date as they are traded in Lots
determined by the Exchanges. Clearing corporation plays the intermediaries
between the buyer and seller assuring the delivery of the contract.
Ex:- A buys the 3months currency contract for 92.00 Rs, which expires on
20-dec-2024. After a month the price goes up by 100 RS and in these cases, “A”
can sell the contract to hedge the high risk and earn profits with difference amount
into number of lots purchased or he can hold until the contract expires if the
value of the contract is going to increases.
3. SWAPS – Where 2 parties SWAP or exchanges their financial obligations and
liabilities to their rate of interest benefiting in the contract and traded
only on OTC Market.
“The some of cash flow swaps are based on notional principal amount such
as loan & bonds.”
Ex: If ABC has issued a 10,000 Rs Bond for 5 years with
Variable interest rate of 1.5% PA, and its speculated that the interest rate
may go up and its trying to Hege the risk of high interest payment on bond
debts. Hence the Management finds the company “JKL” who is looking to
Hedge its fixed interest rate of 2 % to Variable interest rate.
So, both the companies ABC & JKL
form a contract to Swap their interest rate to hedge the risk of paying high
interest rate. By ABC will paying to JKL the fixed interest rate to JKL and JKL
will pay their variable interest rate as defined in the contract.
If the interest rate increases ABC will
be benefited and Vice versa for JKL.
If the interest rate decreases JKL will be
benefited and Vice versa for ABC.
Different kinds of SWAP
Interest rate SWAP – Loan Principal amount is not exchanged, it’s just that the interest rate of
the loan is exchanged.
Commodity SWAP – Trade based on commodity products such oil and livestock.
Currency SWAPS – Trade based on the Swapping the different currency on the OTC market.
CDS – credit default swaps – Agreement signed by one party to pay the lost principal & interest
of loan taken if the borrower defaults or fails to pay back the loan.
Total return SWAPs – Fixed interest rate is paid, event thou the stock might have
outperformed, or capital is depreciated, the party should be paying the agreed
Fixed interest rate on the time on contract exposure.
4. OPTIONS -> Where it gives the Buyer the right and not the obligations to buy or
sell an underlying asset at an agreed price on or before the specific date.
holder of the option - The party taking
a long position i.e. buying the option
writer of the option - the party taking
a short position i.e. selling the option
types of options
1.
Call options -> which gives buyer a right to buy the underlying asset
2.
Put Options -> which gives buyer a right to sell the underlying asset
Options terminology
Arvind buys a call option on the Nifty index from Salim, to buy
the Nifty at a value of Rs. 10,000, three months from today. Arvind pays a
premium of Rs 100 to Salim. What does this mean?
Arvind is the buyer of the call option holding long position
Salim is the seller or writer of the call option holding short position
The contract is entered into today,
but will be completed three months later on the settlement date.
Rs.10,000
is the price
Arvind is willing to pay for Nifty, three months from today. This is called the
strike price or exercise price.
Arvind may or may not exercise the
option to buy Nifty at Rs.10,000 on the settlement date.
But if Arvind exercises the option,
Salim is under the obligation to sell Nifty at Rs.10,000 to Arvind.
Arvind pays Salim Rs.100 as the
upfront payment. This is called the option premium. This is also called as the
price of the option.
On the settlement date, Nifty is at
Rs. 10,200. This means Arvind’s option is “in-the-money.” He can buy the Nifty
at Rs.10,000, by exercising his option.
Salim earned Rs.100 as premium, but
lost as he has to sell Nifty at Rs.10,000 to meet his obligation, while the
market price was Rs. 10,200.
On the other hand, if on the
settlement date, the Nifty is at Rs. 9800, Arvind’s option will be
“out-of-the-money.”
There is no point paying Rs.10,000
to buy the Nifty, when the market price is Rs. 9800. Arvind will not exercise
the option. Salim will pocket the Rs.100 he collected as premium
3.
Trading and settlement of derivatives
- Futures
- Options
Future trading & settlement process
Expiry date
– The monthly contract expires on last Thursday of every month.
3
types of contracts available
- NEAR month – Expires this month last Thursday
- NEXT month – Expires next month last Thursday
- FAR month – Expires the 3rd
month of Thursday
Trading
process of FUTURES
Settlement
process of FUTURES
Trading process of OPTIONS
Settlement process of Options
|
American options
|
European options
|
|
Can be exercised
at any time on or before the expiry
|
Can be
exercised only on the expiry of the contract
|
|
ITM
|
OTM
|
|
IN-THE-MONEY –
if profit is made, if the market price is above the strike price.
|
OUT OF-THE-MONEY
– if its not profit, If the market price is below the strike price
|
Put
Call Ratio
The ratio of outstanding put
options to outstanding call options is called the put-call ratio (PCR).
PCR = Number of Put options
outstanding / Number of Call options outstanding
If the number of call options is higher than the
number of put options, the PCR is less than one.
If the number of puts is greater than the number of
calls, the PCR is greater than one.
Traders interpret these signals in
various ways, to interpret whether the signals are bullish or bearish.
