Introduction to Stock Markets

Primary Market

Primary market is the market where new securities are issued & secondary market provides liquidity to the securities issued in the primary market. These days business entities are moving towards primary markets to get better valuations & price discovery & to get easy access to funds. So, a well-developed & well functioning primary market is very essential for an economy so that the business entities can get an easy access to the funds, as & when required. The number of primary issues also reflects the level of economic activity in a country.

Regulation

The SEBI, Company Law Board & the respective stock exchanges regulate the primary market in India. SEBI lays down the norms for entering the primary market, allotment procedures, dividend, bonus issues & the things like that. The Company Law Board addresses the investor grievances & it can proceed against a company on its own motion. The Stock Exchanges list down the listing requirements, the code of conduct & the things like that.

Public Issues

Public issues are the issues of securities that are being issued to general public for cash. There are certain requirements that have to be fulfilled before a company can issue securities to the public. Any companies registered under the Indian Companies Act, 1956, can issue securities subject to these requirements. It is also called going public.

Rights Issues

Whenever a company, which had issued shares in the past, wants to issue additional shares, it has to offer a part of these shares to its existing shareholders. These are known as rights shares. A shareholder may choose to exercise his right & acquire additional shares or he may let his right expire or he may renounce it in favor of some other person. If the company doesn’t get full subscription on the rights shares, it can dispose these shares off in any manner it deems fit.

Bonus Issues

When a company has excess reserves & it wants to distribute these excess reserves among its shareholders, it can do so by issuing bonus shares. These are called bonus shares because the shareholders nee not pay for these shares. These are issued by capitalizing the reserves of the company.

These shares can be issued by capitalizing the genuine reserves of the company, viz., general reserve, any balance in the share premium account, any balance in the profit & loss account of the company & capital reserve only. These shares can’t be issued from any other source. If the company has any shares that are outstanding, as on the date of a bonus issue, it has to first make these shares fully paid up, only then it can issue bonus shares.

Private Placements

When a company wants to issue securities, but it is not mature enough to go to the capital markets, or it can’t bear the heavy expenses involved in a public issue, or the issue is not big enough, or it doesn’t have enough time to fulfill the formalities of a full fledged public issue, it can privately place these securities with certain selected investors. It is much easier to convince a handful of intelligent investors rather than convincing public at large. These investors off load their investments in the secondary market at a time, which they feel suitable for such an action.
Through this route, a company can save its time, effort, costs & energy that goes in to a public issue. For investors, they get securities at their terms & they can off load their investments at whatever time they want, generally at a profit.

Secondary Market

The secondary market is the market where buyers & sellers of securities meet & the already issued securities are traded. All the stock exchanges in India have secondary markets. A well-developed secondary market is very important for an economy because it provides liquidity to the securities that are being issued.

In India, following players are allowed to operate in the secondary markets, viz., stock exchange members (either on their own account or for clients), Institutional investors (both domestic as well as foreign) like mutual funds, pension funds, financial institutions etc. An individual investor can play in the secondary market, if he is the member of a stock exchange or he can play through a broker.

Recent Trends
In recent times, the turnover of the secondary market in India has increased. The average turnover on NSE is Rs. 6200 crores in 2005 – 06. Lots of changes have been made in the trading mechanism of the secondary markets like – demat trading, rolling settlement etc. SEBI is working hard to bring the trading procedure on Indian exchanges at par with global markets. The previously used public outcry system has been replaced with the new screen based system. With the concept of on – line trading being introduced, there has been a sharp increase in the number of people participating in equity trading.

Regulation
The SEBI, the Company Law Board & the respective stock exchanges are regulating the secondary market. SEBI formulates the rules & the regulations & the procedure to be followed for trading in the secondary markets.

OTCEI

OTCEI is an exchange wherein securities are traded securities are traded through a network of broker-dealers spread over different locations & linked to each other through telephones, telexes, faxes & computers etc. Companies listed on OTCEI are treated as companies in which the public is substantially interested & are subject to tax at a rate lower than what is applicable to other companies.

OTCEI was established to make stock market more investor friendly, to provide access without any geographical boundaries, to provide more liquidity to shares & to provide timely information to the investors. The players in OTCEI are Companies whose securities are listed on OTCEI, investors who deal through its counters & its members & dealers.

BSE

The Bombay stock exchange is the oldest stock exchange of Asia. The Stock Exchange, Mumbai which was established in 1875 as "The Native Share and Stockbrokers Association" (a voluntary non-profit making association), has evolved over the years into its present status as the premier Stock Exchange in the country.

The Stock Exchange, Mumbai (BSE) is generally referred to as the Gateway to the capital market in India. It is a lynchpin of the Indian Capital market. The BSE, along with the NSE, is the most important stock exchange because they reflect the general movement of the economy.
The BSE 30 – share index (Sensex) is the benchmark index of the country. It is calculated daily by multiplying the closing price of Sensex shares by the weight of their market to the total market cap of the Sensex. The Sensex reflects the market reaction to the major economic decisions, policies, events & results of the country. It also reflects general mood of the market on a particular day & the investor confidence.

FDI
Foreign direct investment is the investments made by foreign institutional investors directly in any business concern either through equity or preference equity or debentures or bonds etc. It is generally done in the primary market.

FII
Foreign Institutional investment is the made by the foreign institutional investors in any business concern (whether directly or indirectly). It is generally done in the secondary market. This FDI & FII reflects the confidence of these institutional investors in the economy. There are certain indices like Morgan Stanley Cumulative Index (MSCI) for the Asian region, which gives an indication as to which economies are performing better in the region & in that, which scrips are doing better than the rest.

Trading Procedure
The trading procedure on the BSE works like this – An investor enters into a trade through a broker, who buys or sells on his behalf for a commission. There are screens on BSE which display the going market price of a particular share. The investor can execute a trade at the going market price. The settlement is done on a weekly basis (apart from the shares that are being put in the rolling settlement list), i.e., one has the settle the trade on the last day of the settlement cycle, or it has to be carried forward by paying badla charges. For the shares that are being put on rolling settlement list, settlement is done on T + 5 days basis (5 trading days after the transaction date).

Most Traded Stocks
Most traded stocks are the shares, which have the highest volume on a particular day.

NSE
Established in 1994 by IDBI, ICICI, IFCI, LIC & some other financial institutions in Bombay, The National Stock Exchange is the second most important exchange in India in terms of securities traded & volumes. The NSE index is called S & P Nifty.

It is responsive to requirements of a well functioning stock market than the BSE. It is soon starting on – line trading. One can sit anywhere in the country & make trades on the NSE terminals, which it has provided across the country. The National Stock Exchange has set up facilities, which serve as a model for the securities industry in terms of trading systems, practices and procedures.

NSE is different from most Stock Exchanges in India where membership on an exchange also meant ownership of the exchange. At NSE, a Board of Directors manages the Exchange. Decisions relating to market operations are delegated to an Executive Committee, which includes representatives from the Trading Members, the public and the management. The day to day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.

Impact of Mutual Funds

Mutual funds & other institutional investors play a very important role in any economy. First of all, they collect small savings of people & invest in promising avenues. This increases capital formation in the economy. People get access to their expertise in research & investments as they are managed by experienced Fund Managers. The portfolio of a fund is diversified, so the risk of overall portfolio is reduced to a large extent. It is same like putting your eggs in different baskets. They help in providing the liquidity to the market & in increasing the confidence of the investors. Thus they play a very important role in any economy.