2.13. Study Study of Inof Investment vestment and Stoand Stock Marck Marketket
2.13.1.
2.13.1.
Securities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSEBI is the Regulator for the Securities Market in India. Originally set up by SEBI is the Regulator for the Securities Market in India. Originally set up by the
the Government of IndiaGovernment of India in 1988, it acquired statutory form in 1992 within 1988, it acquired statutory form in 1992 with SEBI ActSEBI Act 1992
1992 being passed by the Indian Parliament. Chaired bybeing passed by the Indian Parliament. Chaired by C B Bhave,C B Bhave, SEBI isSEBI is headquartered in the popular business district of
headquartered in the popular business district of Bandra-Kurla complexBandra-Kurla complex inin Mumbai,Mumbai, and has Northern, Eastern, Southern and Western regional offices in
and has Northern, Eastern, Southern and Western regional offices in New Delhi,New Delhi, Kolkata,
Kolkata, ChennaiChennai andand AhmedabadAhmedabad
SEBI has to be responsive to the needs of three groups, which constitute the SEBI has to be responsive to the needs of three groups, which constitute the market:
market:
the issuers of securitiesthe issuers of securities
the investorsthe investors
The market intermediaries.The market intermediaries.
SEBI has three functions rolled into one body quasi-legislative, quasi-judicial SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal appeals process to create accountability. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former Chief Justice which is a three member tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the
of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the SupremeSupreme Court.
Court.
SEBI has enjoyed success as a regulator by pushing systemic reforms SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as
active in setting up the regulations as required under law.required under law.
With the objective of improving market efficiency, enhancing transparency, With the objective of improving market efficiency, enhancing transparency, checking unfair trade practices and bringing the Indian market up to international checking unfair trade practices and bringing the Indian market up to international standards, a package of reforms consisting of measures to liberalize, regulate and standards, a package of reforms consisting of measures to liberalize, regulate and
2.13.2.
2.13.2.
National Stock ExchangeNational Stock ExchangeThe National Stock Exchange commenced its operations in 1947 as a first The National Stock Exchange commenced its operations in 1947 as a first step in reforming the securities market the
step in reforming the securities market the exchange.exchange.
Before the NSE was set up trading on the stock exchange in India used to Before the NSE was set up trading on the stock exchange in India used to take place through open outcry without use of information technology for immediate take place through open outcry without use of information technology for immediate matching or recording of trades. This was
matching or recording of trades. This was time consuming and inefficient.time consuming and inefficient.
The practice of physical trading imposed limits on trading volumes as well as, The practice of physical trading imposed limits on trading volumes as well as, the speed with which new information was incorporated in to prices. To obviate this, the speed with which new information was incorporated in to prices. To obviate this, the NSE introduced screen-based trading system where a member can punch into the NSE introduced screen-based trading system where a member can punch into the computer the quantities of shares and the prices at which he wants to transact. the computer the quantities of shares and the prices at which he wants to transact. The transaction is executed as soon as the quote punched by a trading member The transaction is executed as soon as the quote punched by a trading member finds a matching sale or buys quote f
finds a matching sale or buys quote from counterparty.rom counterparty.
2.13.3.
2.13.3.
Bombay Stock Exchange:Bombay Stock Exchange:BSC Sensex or Bombay Stock Exchange Sensitive index is a value-weighted BSC Sensex or Bombay Stock Exchange Sensitive index is a value-weighted index composed of 30 stocks started in 01 of Jan, 1986. it consist of the 30 largest index composed of 30 stocks started in 01 of Jan, 1986. it consist of the 30 largest and most actively traded stock , representative of various sectors, on the Bombay and most actively traded stock , representative of various sectors, on the Bombay stock exchange .these companies account for around one-fifth of market stock exchange .these companies account for around one-fifth of market capitalization of the BSE. The base value of the sensex is 100 on April 1, 1979, and capitalization of the BSE. The base value of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.
the base year of BSE-SENSEX is 1978-79.
At irregular intervals, the Bombay stock exchange (BSE) authorities review At irregular intervals, the Bombay stock exchange (BSE) authorities review and modify its compo
and modify its composition to make sure sition to make sure it reflect it reflect current market conditions. Tcurrent market conditions. Thehe index is calculated based on free float capitalization method; a variation of the index is calculated based on free float capitalization method; a variation of the
market cap method. Instead of using a company‟s outstanding share it uses its float, market cap method. Instead of using a company‟s outstanding share it uses its float,
or share that are readily available for trading. The free float method, therefore, dose or share that are readily available for trading. The free float method, therefore, dose not includes restricted stocks, such as those held by company insiders.
not includes restricted stocks, such as those held by company insiders.
2.13.4.
What does investing in equity mean: -
What does investing in equity mean: - When you buy a company‟s equity, you areWhen you buy a company‟s equity, you are
in effect financing it, and being compensated with a stake in the business. You in effect financing it, and being compensated with a stake in the business. You become part-owner of the company, entitled to dividends and other benefits that the become part-owner of the company, entitled to dividends and other benefits that the company may announce, but without any guarantee of a return on your investments. company may announce, but without any guarantee of a return on your investments.
Fundamental analysis: -
Fundamental analysis: - The analysis of factual information like financial figures,The analysis of factual information like financial figures, balance sheet, and other information publicly available is known as fundamental balance sheet, and other information publicly available is known as fundamental analysis. This information is used to derive a fair price of the share of the share of analysis. This information is used to derive a fair price of the share of the share of the company. The faithful fundamentalists believe that the market incorporates all the company. The faithful fundamentalists believe that the market incorporates all facts relating to the financial performance of the company.
facts relating to the financial performance of the company.
Technical Analysis: -
Technical Analysis: - Technical analysis is the study of historic price movements ofTechnical analysis is the study of historic price movements of securities and trading volumes.
securities and trading volumes.
Technical analysis believes that prices of the securities are determined largely Technical analysis believes that prices of the securities are determined largely by forces of demand and supply. Share prices move in patterns which are easily by forces of demand and supply. Share prices move in patterns which are easily identifiable. Crucial insights in to these patterns can be obtained by keeping track of identifiable. Crucial insights in to these patterns can be obtained by keeping track of price charts, leading to predictions that a stock price may move up to down. The price charts, leading to predictions that a stock price may move up to down. The belief is that by knowing the past, future prices can predict.
belief is that by knowing the past, future prices can predict.
Settlement cycle: -
Settlement cycle: - The accounting period for the securities traded on theThe accounting period for the securities traded on the Exchange. On the NSE, the cycle beings on Wednesday and ends on the following Exchange. On the NSE, the cycle beings on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday. Tuesday, and on the BSE the cycle commences on Monday and ends on Friday.
At the end of this period, the obligations of each broker are calculated and the At the end of this period, the obligations of each broker are calculated and the brokers settle their respective obligations of each broker are calculated and the brokers settle their respective obligations of each broker are calculated and the brokers settle their respective obligations as per the rules, bye-laws and regulations brokers settle their respective obligations as per the rules, bye-laws and regulations of the clearing corporation.
of the clearing corporation.
If a transaction is entered on the first day of the settlement, the same will be If a transaction is entered on the first day of the settlement, the same will be settled in the eighth working day excluding the day of transaction. However, if the settled in the eighth working day excluding the day of transaction. However, if the same is done on the last day of the settlement, it will be settled on the fourth working same is done on the last day of the settlement, it will be settled on the fourth working day excluding the day of transaction.
Rolling settlement: -
Rolling settlement: - The rolling settlement ensures that each day‟s trade is settledThe rolling settlement ensures that each day‟s trade is settled
by keeping a fixed gap of a specified number of working days between a trade and by keeping a fixed gap of a specified number of working days between a trade and its settlement, at present, this gap is five working days after the trading day. The its settlement, at present, this gap is five working days after the trading day. The waiting period is uniform for all trades.
waiting period is uniform for all trades.
Deliver the shares and pay the money to broker: -
Deliver the shares and pay the money to broker: - As a seller, in order to ensuresAs a seller, in order to ensures smooth settlement you should deliver the shares to your broker immediately after smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. Similarly, as getting the contract note for sale but in any case before the pay-in day. Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase a buyer, one should pay immediately on the receipt of the contract note for purchase but in any case before the pay-in
but in any case before the pay-in day.day.
Short selling: -
Short selling: - short selling is a legitimate trading strategy, it is a sale of a securityshort selling is a legitimate trading strategy, it is a sale of a security that the seller does not own, or any sale that is completed by the delivery of a that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller take the risk that they will be able to buy the stock at security borrowed by the seller take the risk that they will be able to buy the stock at
a more favourable price than the price at which they “sold short” a more favourable price than the price at which they “sold short” Auction: -
Auction: - An auction is conducted for those securities that members fail toAn auction is conducted for those securities that members fail to deliver/short deliver during pay-in. three factors primarily give rise to an auction, deliver/short deliver during pay-in. three factors primarily give rise to an auction, short deliveries, un-rectified bad delivering up-rectified company objection. The short deliveries, un-rectified bad delivering up-rectified company objection. The buy/sell auction for a capital market security is managed through the auction market. buy/sell auction for a capital market security is managed through the auction market. As opposed to the normal market where trade matching is an on-going process, the As opposed to the normal market where trade matching is an on-going process, the trade matching process for auction starts aft
trade matching process for auction starts after the auction period is over.er the auction period is over.
If the shares are not bought at the auction, if the shares are not offered for If the shares are not bought at the auction, if the shares are not offered for sale, the exchange squares up the transaction as per SEBI guidelines, the sale, the exchange squares up the transaction as per SEBI guidelines, the transaction is squared up at the highest price from the relevant trading period till the transaction is squared up at the highest price from the relevant trading period till the auction day or at 20 percent above the last available closing price whichever is auction day or at 20 percent above the last available closing price whichever is higher. The pay in and pay out of funds for auction square up is held along with the higher. The pay in and pay out of funds for auction square up is held along with the pay-out for the relevant auction.
pay-out for the relevant auction.
Hawala Rate: -
Hawala Rate: - Hawala rate is a making-up price at which buyers and sellers settleHawala rate is a making-up price at which buyers and sellers settle their speculative transaction at the end of the settlement. It is the basis for buy and their speculative transaction at the end of the settlement. It is the basis for buy and sells for the investor opting for carry forward during the next settlement. This price is sells for the investor opting for carry forward during the next settlement. This price is
This price is significant because for a speculative buyer or a seller, the This price is significant because for a speculative buyer or a seller, the Hawala rate is the standard rate for settling his trade and for carrying forward Hawala rate is the standard rate for settling his trade and for carrying forward business to the next settlement. For example, an investor buys the stock of x business to the next settlement. For example, an investor buys the stock of x company at Rs.100 on Monday. By Friday (BSE settlement day), if Rs. 90 is the company at Rs.100 on Monday. By Friday (BSE settlement day), if Rs. 90 is the weighted average price in the last half-an-hour, the buyer would have to carry weighted average price in the last half-an-hour, the buyer would have to carry forward his trade at this price of Rs. 90. He then settles at Rs. 90 and enters in to a forward his trade at this price of Rs. 90. He then settles at Rs. 90 and enters in to a contract at Rs. 90 plus BLESS charges for
contract at Rs. 90 plus BLESS charges for the next settlement.the next settlement.
Normally, Stock Exchange does not interfere with the Hawala rates. However, Normally, Stock Exchange does not interfere with the Hawala rates. However, there are instances, when rates have been changed to ensure safety of the markets. there are instances, when rates have been changed to ensure safety of the markets. This is so because in case the market witnesses a sharp fall during a settlement, the This is so because in case the market witnesses a sharp fall during a settlement, the chances of a broker default are extremely high. This is when the exchange chances of a broker default are extremely high. This is when the exchange administration steps in and raises the Hawala rate to avert
administration steps in and raises the Hawala rate to avert any possible default.any possible default.
Book-closure and record date: -
Book-closure and record date: - When shares of a joint stock companyWhen shares of a joint stock company invariablyinvariably change hands during
change hands during marketmarket trades, identifying the owner of some shares becomestrades, identifying the owner of some shares becomes difficult. So it is difficult to pass on certain benefits (like share
difficult. So it is difficult to pass on certain benefits (like share bonus issue,bonus issue, splitssplits andand dividend
dividend payments) topayments) to shareholders.shareholders.
So, when a joint stock company declares dividends or bonus issues, there So, when a joint stock company declares dividends or bonus issues, there has to be a cut-off date for such benefits to be transferred to the shareholders. This has to be a cut-off date for such benefits to be transferred to the shareholders. This date is termed as "Book Closure" date or "Record Date". It is the date after which the date is termed as "Book Closure" date or "Record Date". It is the date after which the company will not handle any transfer of shares requests until the benefits are company will not handle any transfer of shares requests until the benefits are transferred. Only shareholders marked in the company's register at the Book Closure