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Basics of capital market

 Investments
 Stock Exchanges
 Securities
 Primary Market
 Secondary Market
 Derivatives
 Depository
 Mutual Funds
 General
 Analysis
 Ratios
 Commonly using iterms

Investments
Needs to invest:

 Earn return on our idle funds

 Generate a specified sum of money
 Make a provision for an uncertain future

Three golden rules for investors:

1. Invest early
2. Invest regularly
3. Invest for long term and not short term

Twelve important steps to investing:

1. Obtain written documents explaining the investment
2. Read and understand such documents
3. Verify the legitimacy of the investment
4. Find out the cost and benefits
5. Assess the risk and return
6. Know the liquidity and safety
7. Ascertain if it is appropriate for your specific goals
8. Compare with other investment opportunities available
9. Examine if it fits in with other investments you are considering
10. Deal only through an authorized person or firm
11. Seek all clarifications about the intermediary and the investment
12. Explore the options available and make the investment

Factors which govern interest rates:

 Demand for money
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 Level of Government borrowings

 Supply of money
 Inflation rates
 The RBI and Government policies

Varies options for Investments:

Physical assets:-
Real estate, Gold/Jewelery, Commodities etc

Financial assets:-
Fixed assets, SB accounts, Post office Savings, Insurance, Provident
funds, Pension fund, Shares, Bonds, Debentures etc

Varies Short term financial options:

Savings Bank, Money Market, Fixed deposits with banks etc

Varies Long-term financial options:

 Post office Savings
 Public Provident Fund
 Company Fixed Deposit
 Bonds
 Mutual Funds

Stock Exchanges
Securities Contract (Regulation) Act, (SCRA) 1956 defines ‘Stock Exchange’ as
anybody of individuals, whether incorporated or not, constituted for Assisting, regulating
or controlling The business of Buying, selling or dealing in securities.
Regional / National

Equity Shares:
Equity share holders are the owners of the company and have voting rights

Debt Instrument
Through a contract one party lends money to another on pre- determined terms
Bond is a debt instrument issued by the central and state government and public
sector organizations. Debenture is the instrument issued by private corporate
sector.
Derivative:
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It is a product whose value is derived from the value of one or more basic
variables. These underling assets can be equity, index, foreign exchange (forex.),
commodity or any other asset.
Initially it was a hedging device against fluctuations in commodity prices
Financial derivatives came into spotlight in post 1970

Mutual Funds:
 A mutual fund is a body corporate registered with SEBI.
 MFs pools money from individual investors and invest the same in a variety
of financial instruments.
 MF collects funds from public and invests on behalf of the investors.
 MF issue units to the investors.
 Appreciation of the portfolio leads to an appreciation in the value of the
units held by the investors.
 The investment objectives specify the class of securities a MF can invest
in.
 The schemes offered by MFs vary from fund to fund

An Index
An index shows how specified portfolios of share prices are moving
in order to give an indication of market trends.
It is a basket of securities and the average price movement of the
basket of securities indicates the index movement, whether upwards
or downwards.
Depositories:
A depository is like a bank and depository account is like an SB account wherein
deposits are securities.

Dematerialization:
Dematerialization is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited to
the investor’s account with his DP.

Securities
SCRA 1956 defines securities are instruments such as shares, bonds, scrip,
stocks or other marketable securities of similar nature in or anybody corporate,
government securities, units of collective investment schemes, interest and
rights in securities etc.
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Securities Market
 It is a place where buyers and sellers of securities can enter into
transactions to purchase and sell securities.
 It performs an important role to raise funds through public issues.
 It enables transfer of resources from savers to investors (needs).
 It provides channels for reallocation of savings to investments and
entrepreneurship.

Common Securities are:-

 Shares
 Government Securities
 Derivative products
 Units of MFs

Regulators of Securities Market:

 Department of Economic Affairs (DEA)
 Department of Companyc Affairs (DCA)
 RBI
 SEBI

Role of SEBI
It is the regulatory authority in India.
Statutory powers of SEBI under sec.3 of SEBI Act: 1992-
a. Protecting the interests of investors in securities
b. Promoting the development of the securities market
c. Regulating the securities market.
Other powers of SEBI are:-

 Regulating the business in stock exchanges.

 Registering and regulating the working of stock brokers and sub-brokers.
 Promoting and regulating self-regulatory organizations
 Prohibiting fraudulent and unfair trade practices
 Calling for information from, undertaking inspection, conducting inquiries
and audits of the stock exchanges, intermediaries, self regulatory
organizations, mutual funds and other persons associated with the
securities market.

Participants in the securities market

 The issuers of securities
 Investors in securities
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 The intermediaries like Merchant Bankers, Brokers etc

The role of intermediaries:-

 Buying and sellinh of securities on stock exchange – need the service of a
trading member called share broker
 To maintain an account with a depository -Depository participant
for demat account.
 To subscribe for public issues and share trading -A bank account
 Always chose a SEBI registered intermediary because he accountable for
his activities.

The segments of security markets are;-

 The primary market- provides the channel for sale of new securities
 The secondary market- deals in securities previously issued.

Primary Market
Primary market provides opportunity to issuers of securities to raise resources to
meet their requirements of investment.

Face Value of A Share of the share.

It is the original cost of the stock shown on the certificate and it does not have
much bearing on the market price

Share premium

When a security is sold above its face value, it is said to be issued at a premium .

When a security is sold at less than its face value, it is said to be issued at a
discount.

Needs to issue shares

Usually the promoters capital and borrowings may not be sufficient for setting up
the business over a long term. So the companies invite the public to contribute
towards the equity and issue shares as per the rules and regulations laid down by
SEBI.

Different kinds of issues

Initial Public Offering (IPO)
When an unlisted company makes a fresh issue of securities to the public is
called IPO
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Follow on Public Offering (FPO)

When an already listed company makes a fresh issue of securities to the public is
called FPO.

Right Issue
When a listed company proposes to issue fresh securities to its existing
shareholders in a particular ratio to the number of securities held prior to the
issue.

Private placement
When a company directly approaches investors without public announcement is
called private placement. Issue is made to a select set of people. As per the
Companies Act ,1956, an issue becomes public if it results in allotment to 50
persons or more.

Preferential issue
An issue of shares or of convertible securities by listed companies to a selected
group of persons under sec.81 of the companies Act1956 is called preferential
issue..

Issue Price
The price at which a company’s shares are offered initially in the primary market
is called issue price

Market Capitalization
Market share price is multiplying by the number of shares in issue is called as
market capitalization

The price of an issue

SEBI does not play any role in price
The company and the Merchant bankers are fixing the parameters related with the
issue price.
Two types of pricing methods are following:
The company and the Lead Merchant Banker fix a price- is called fixed price
The company and the Lead Merchant Banker stipulates a floor price or a price
band and leave it to market forces to determine the the final price- Book building
process.

Book Building Process

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Bids are collected from investors at various prices, which are above or equal to
the floor price and the offer price is determined after the bid closing date. Floor
price is the minimum price at which bids can be made. The issue price is called
“Cut- Off Price”

Price Band
The spread between the floor and the cap of the price band shall not be more
than 20%. The price band can have revision and such a revision shall be
disseminated by informing the stock exchanges, by press release and also
indicating the change on the relevant website and the terminals of the trading
members participating in the book building process. In case the price band is
revised, the book building period shall be extended for a further period of three
days, subject to the total bidding period not exceeding ten years. The company is
deciding the price band , in consultation with Merchant Bankers.

Allotment and Refund

The basis of allotment should be completed with 15 days from the issue close
date. Within 2 working days the details of credit to de-mat account/ allotment
advice and dispatch of refund order needs to be completed.
It would take around 3 weeks to get the shares listed after issues.
Role of Registrar
The registrar finalize the list fo allot tees and ensures that the corporate action
has taken for crediting of shares to the de-mat accounts of the applicants is done
and the dispatch of refund orders to those applicable are sent. The lead
managers coordinate with the registrar.
Facilities providing by NSE for IPO
NSE is offering it’s electronic trading system for conducting online IPOs through
the Book building process.
Prospectus
SEBI insists the disclosure of information to the public. The information may be:-

 The reasons for raising money

 How the money is proposed to be spent
 What is the expected return
 The size of the issue
 The current status of the company
 The past and current performance
 The promoters
 project and cost of project
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 The product and capacity

 The means of financing

 The underwriting details
 The statutory compliances

Offer Document
Offer document means Prospects in case of Public issue
Offer document means Letter of offer in case of right issue
OD covers all the relevant information to an investor and is filled with ROC and
SEs.

Draft Offer Document

Draft offer document is the offer document in draft stage and are filled with SEBI,
at least 21 days prior to the filling of offer document. SEBI may specify changes
and will be available on the SEBI website for public comments for a period of 21
days from the filling of the draft offer document with SEBI.

Abridged prospectus
It is a shorter version of prospects with the application form of public
issue. Merchant Bankers are preparing prospects.
Lock-in period
Lock-in indicates a freeze on the sale of shares for a certain period of
time.
Listing of Securities
Listing means admission of securities to trading privileges on a stock
exchange through a formal agreement. The objective of admission to
dealing on the exchange is to provide liquidity and marketability to
securities.
The company is required to enter into a listing agreement with the
exchange and the listing agreement specifies the terms and
conditions of listing.
Delisting of Securities
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Delisting of securities means permanent removal of securities of a

listed company from a stock exchange.
SEBI’s Role in an Issue
Any company making a public issue or right issue of value of more
than Rs50 lakh is required to file a draft offer document with SEBI for
its observations The company can proceed further on the issue only
afer getting observations from SEBI. The validity period of SEBI’s
observation letter is three months only.
SEBI does not recommend any issue nor does take any responsibility
for the financial soundness of any scheme or the project.
SEBI does not guarantee for the funds that the investor proposes to
invest through the issue.
Foreign Capital Issuance
Indian companies are permitted to raise foreign currency resources
Issue of foreign currency convertible bonds through two sources:
a. Issue of foreign currency convertible bonds, which are known as
EURO issue.
b. Issue of ordinary shares through depository receipts.
i. Global Depository Receipts(GDR)
ii. American Depository Receipts(ADR)
Global Depository Receipts(GDR)
It is global finance vehicle that allows an issuer to raise capital
simultaneously in two or more markets through a global offering.
GDR may be used in public or private market inside or outside US.
GDR, a negotiable certificate usually represents company’s traded
equity/debt. The underlying shares correspond to the GDRs in a fixed
ratio say 1 GDR = 10 shares.
American Depository Receipts (ADR)
It is a physical certificate evidencing ownership of American
Depository Shares (ADSs). It is a US dollar denominated form of
equity ownership in a non- US company. It represents the foreign
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shares of the company held on deposit by a custodian bank in the

company’s home country and carries the corporate and economic
rights of the foreign shares, subject to the terms specified on the ADR
certificate.
One or several ADSs can be represented by a physical ADR
certificate. ADSs provide US investors with a convenient way to
invest in overseas securities and to trade non-US securities in the US.
ADSs are issued by a depository bank. They are traded in the same
manner as shares in US companies, on the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX) or quoted on
NASDAQ and OTC.
Secondary Market
Secondary market refers to a market where securities are traded after
being initially offered to the public in the primary market.
Secondary market provides an efficient platform for trading of his and
trading
Primary market - Securities are offered to public for subscription for
the purpose of raising funds or capital.
Secondary market – It is an equity trading place in which pre-issued
securities are traded among the investors.
Role of stock exchanges in buying and selling shares
SEBI provide a trading platform, where buyers and sellers can meet to
transact in securities. NSE and BSE are providing electronic trading
platform and the investors can trade through the computerized
trading screens. The internet based trading facility provided by the
trading members.
Demutualization of stock exchanges
It refers to the legal structure of an exchange whereby the ownership,
the management and the trading rights at the exchange are
segregated from one another. The ownership, management and
trading are in separate hands.
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But in a Mutual Exchange, the three functions of ownership,

management and trading are concentrated into a single group. Here,
the broker members are both the owners and the traders and they
further manage the exchange as well.
The NSE and Over the Counter Exchange of India (OTCEI) are the only
demutualised exchanges.

Stock Trading
Screen Based Trading
The traditional open cry was time consuming and inefficient. In order
to provide efficiency, liquidity and transparency, NSE introduced a
nationwide, on-line, fully automated Screen Based Trading System
(SBTS). A member can punch into the computer the quantities and the
price at which he would like to transact, and the transaction is
executed as soon as matching sale or buy order from a counter party
is found.
Neat
National Exchange for Automated Trading (NEAT), is a state of the art
client server based application. At the server end all trading
information is stored to achieve minimum response time and
maximum system availability for users. It has uptime record of 99.7%.
Place orders with broker
Every client/ Investor needs to enter an agreement with his broker
and may go to broker’s office or place an order on the phone/internet
for buying and selling shares.
Internet based trading enables an investor to buy/sell securities
through internet. Investor need to make agreement with an NSE
broker who provides this facility.
Contract Note
Contract note is a confirmation of trades done on a particular day on
behalf of the client by a trading member. A contract note should be in
the prescribed form, contain the details of trades, stamped with
requisite value and duly signed by the authorized signatory. Contract
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Notes are kept in duplicate.

Details on the contract note

 Name, address and SEBI registration number of the broker

 Name of the partner/ promoter/ authorized signatory
 Dealing office address and phone number, code number of the
member given by the exchange.
 Contract number, date of issue, settlement number etc
 Client name and code number
 Order number and order time
 Trade number and trade time
 Quantity and kind of security
 Brokerage and purchase /sale rate
 Service tax rate, securities transaction tax and any other
charges levied by the broker.
 Appropriate stamps have to be affixed on the contract note or it
is mentioned that the consolidated stamp duty is paid.
 Signature of the stock broker or the authorized signatory.
Maximum brokerage is 2.5 %
Protections from recognized stock exchanges

 The best prices prevailing at the time in the market

 Protection from counterparty risk through the clearing
corporation
 Access to investor grievance and redressal mechanism of stock
exchanges
 A broker’s registration number begins with the letters ‘INB’
 A sub-broker’s registration number begins with the letters ‘INS’
Precautions for safe investments in sock market

 Make sure the broker is registered with SEBI

 Ensure the contract notes for all the transactions
 All investments carry risks
 Do not be misled by market rumors and ‘hot tips’.
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 Take informed decisions by studying the fundamentals of the

company.
 Do not be attracted by announcements of fantastic results/news
reports.
 Do not be attracted to stocks based on what an internet website
promotes
 Investing in penny stocks does not guarantee high returns.
 Be cautious on a sudden spurt in price or trading activity.
 Advise or tips guarantees huge returns may be risky and may to
lead to lose money

Products in Secondary market

Shares are also known as equities have the potential to increase in
value over time. Since 1990, Indian stock market has returned 17% to
investors on an average in terms of increase in share prices or capital
appreciation. Besides that is paying dividend regularly. Dividend is a
percentage of the face value of a share.
Factors influencing the prices of a stock
1. Stock specific:
The sock specific factor is related to people’s expectations about the
company, its future earning capacity, financial health and
management, level of technology and marketing skills.
2. Market specific:
The market specific factor is influenced by the investor’s sentiment
towards the stock market as a whole. This depends on the
environment rather than the performance. Favorable economy,
political or regulatory environment, industry friendly budget, stable
government etc may result in a boom in the market.
Advice
The effect of market specific factor is generally short term. Ups and
downs, price of a stock in the long run gets stabilized based on the
stock specific factors. Therefore, all investors should analyze and
invest and not speculate in shares.
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Growth Stock
Companies, whose potential for growth in sales and earnings are
excellent, are growing faster than other companies in the market are
called Growth Stocks.
Value Stocks
Look for stocks which may have some hidden value is a real task. The
prices of some companies may have been beaten down because of
some bad event, or may be in an industry that’s not fancied by most
investors. Some of the company’s assets have value, but that value
may not be reflected in the stock’s prices. Value investors look to by
stocks that are undervalued, and then hold those socks until the rest
of the market realizes the real value of the company’s assets. Value
investors like P/E ration being below a certain absolute limit; dividend
yields above a certain absolute limit; total sales at a certain level
relative to the company’s market capitalization.
Methods to acquire equity shares
1. Primary market
2. Secondary Market
BID price
Bid is the price at which there is a ready buyer for the stck.
ASK or OFFER price
Ask is the price at which there is a seller ready to sell his stock.
Portfolio
A combination of different investment assets mixed and matched for
the purpose of achieving an investor’s goal.
Portfolio can include shares, debentures, bonds, mutual fundunits,
gold art and real estate etc but for most investors a portfolio has
come significantly to financial instruments.
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It is a risk management technique to minimize the risk that is

spreading the investments across various types of assets and
markets.

Debt Investment
Debt instrument represents a contract whereby one party lends
money to another on pre-determined temrs with regards to rate and
periodicity of interest, repayment.
Bond- debt instruments issued by the central Government and state
government and PSUs.
Debentures- for instruments issued by private corporate sector.
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a. Issue of foreign currency convertible bonds

b. Issue of foreign currency convertible bonds

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