8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 1/50

The Definition

The term 'the stock market' is a concept for the mechanism that enables the trading of 

company stocks (collective shares), other securities, and derivatives. Bonds are stilltraditionally traded in an informal, over-the-counter market known as the bond market.Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter').

The size of the worldwide 'bond market' is estimated at $45 trillion.

The size of the 'stock market' is estimated at about $51 trillion.The world derivatives market has been estimated at about $480 trillion 'face' or nominalvalue, 30 times the size of the U.S. economy…and 12 times the size of the entire worldeconomy.[1] The major U.S. Banks alone are said to account for well over $200 trillion. Itmust be noted though that the value of the derivatives market, because it is stated in termsof notional values, cannot be directly compared to a stock or a fixed income security, whichtraditionally refers to an actual value. (Many such relatively illiquid securities are valued asmarked to model, rather than an actual market price.)

The stocks are listed and traded on stock exchanges which are entities (a corporation or 

mutual organization) specialized in the business of bringing buyers and sellers of stocksand securities together. The stock market in the United States includes the trading of allsecurities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regionalexchanges, the OTCBB, and Pink Sheets. European examples of stock exchanges includethe Paris Bourse (now part of Euronext), the London Stock Exchange and the DeutscheBörse.

Trading 

Participants in the stock market range from small individual stock investors to large hedgefund traders, who can be based anywhere. Their orders usually end up with a professionalat a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a tradingfloor, by a method known as open outcry. This type of auction is used in stock exchangesand commodity exchanges where traders may enter "verbal" bids and offerssimultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders at computer terminals.

Actual trades are based on an auction market paradigm where a potential buyer

bids a specific price for a stock and a potential seller asks a specific price for the

stock. (Buying or selling at market means you will accept any bid price or ask price

for the stock.) When the bid and ask prices match, a sale takes place on a first comefirst served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between

buyers and sellers, thus providing a marketplace (virtual or real). The exchanges

provide real-time trading information on the listed securities, facilitating price

discovery.

The New York Stock Exchange is a physical exchange. This is also referred to as a "listed"exchange (because only stocks listed with the exchange may be traded). Orders enter by

way of brokerage firms that are members of the exchange and flow down to floor brokers

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 2/50

who go to a specific spot on the floor where the stock trades. At this location, known as thetrading post, there is a specific person known as the specialist whose job is to match buyorders and sell orders. Prices are determined using an auction method known as "openoutcry": the current bid price is the highest amount any buyer is willing to pay and thecurrent ask price is the lowest price at which someone is willing to sell; if there is a spread,no trade takes place. For a trade to take place, there must be a matching bid and ask price.(If a spread exists, the specialist is supposed to use his own resources of money or stock toclose the difference, after some time.) Once a trade has been made, the details are reportedon the "tape" and sent back to the brokerage firm, who then notifies the investor who

 placed the order. Although there is a significant amount of direct human contact in this process, computers do play a huge role in the process, especially for so-called "programtrading".

The Nasdaq is a virtual (listed) exchange, where all of the trading is done over a

computer network. The process is similar to the above, in that the seller provides an

asking price and the buyer provides a bidding price. However, buyers and sellers

are electronically matched. One or more Nasdaq market makers will always provide

a bid and ask price at which they will always purchase or sell 'their' stock.[2].

The Paris Bourse, now part of Euronext is an order-driven, electronic stock exchange. Itwas automated in the late 1980s. Before, it consisted of an open outcry exchange.Stockbrokers met in the trading floor or the Palais Brongniart. In 1986, the CATS tradingsystem was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have movedaway from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs GroupInc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away fromthe exchanges to their internal systems. That share probably will increase to 18 percent by2010 as more investment banks bypass the NYSE and Nasdaq and pair buyers and sellersof securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.

 Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, whereclients can move big blocks of stock anonymously, brokers pay the exchanges less in feesand capture a bigger share of the $11 billion a year that institutional investors pay intrading commissions.

Market participants

Many years ago, worldwide, buyers and sellers were individual investors, such aswealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers andsellers are largely institutions (e.g., pension funds, insurance companies, mutual funds,hedge funds, investor groups, and banks). The rise of the institutional investor has broughtwith it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then wentto 'negotiated' fees, but only for large institutions).

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 3/50

However, corporate governance (at least in the West) has been very much adverselyaffected by the rise of (largely 'absentee') institutional 'owners.'

History

Historian Fernand Braudel suggests that in Cairo in the 11th century Muslim and Jewishmerchants had already set up every form of trade association and had knowledge of everymethod of credit and payment, disproving the belief that these were invented later byItalians. In 12th century France the courratiers de change were concerned with managingand regulating the debts of agricultural communities on behalf of the banks. Because these

men also traded with debts, they could be called the first brokers. In late 13th centuryBruges commodity traders gathered inside the house of a man called Van der Beurse, andin 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, aninformal meeting. The idea quickly spread around Flanders and neighboring counties and"Beurzen" soon opened in Ghent and Amsterdam.

In the middle of the 13th century Venetian bankers began to trade in government securities.In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading ingovernment securities during the 14th century. This was only possible because these were

independent city states not ruled by a duke but a council of influential citizens. The Dutchlater started joint stock companies, which let shareholders invest in business ventures andget a share of their profits - or losses. In 1602, the Dutch East India Company issued thefirst shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the firststock exchange to introduce continuous trade in the early 17th century. The Dutch"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trustsand other speculative instruments, much as we know them" (Murray Sayle, "Japan GoesDutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets invirtually every developed and most developing economies, with the world's biggestmarkets being in the United States, Canada, China (Hongkong), India, UK, Germany,France and Japan.The Bombay Stock Exchange in India.The Bombay Stock Exchange in India.

Importance of stock market

Function and purpose

The stock market is one of the most important sources for companies to raise money. Thisallows businesses to go public, or raise additional capital for expansion. The liquidity that

an exchange provides affords investors the ability to quickly and easily sell securities. Thisis an attractive feature of investing in stocks, compared to other less liquid investmentssuch as real estate.

History has shown that the price of shares and other assets is an important part of thedynamics of economic activity, and can influence or be an indicator of social mood. Risingshare prices, for instance, tend to be associated with increased business investment and viceversa. Share prices also affect the wealth of households and their consumption. Therefore,central banks tend to keep an eye on the control and behavior of the stock market and, ingeneral, on the smooth operation of financial system functions. Financial stability is the

raison d'être of central banks.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 4/50

Exchanges also act as the clearinghouse for each transaction, meaning that they collect anddeliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well asemployment. In this way the financial system contributes to increased prosperity.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable transformation.One feature of this development is disintermediation. A portion of the funds involved insaving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interestin investing in the stock market, either directly or through mutual funds, has been animportant component of this process. Statistics show that in recent decades shares havemade up an increasingly large proportion of households' financial assets in many countries.In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made

up almost 60 per cent of households' financial wealth, compared to less than 20 per cent inthe 2000s. The major part of this adjustment in financial portfolios has gone directly toshares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investmentof premiums, etc. The trend towards forms of saving with a higher risk has beenaccentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In alldeveloped economic systems, such as the European Union, the United States, Japan andother developed nations, the trend has been the same: saving has moved away fromtraditional (government insured) bank deposits to more risky securities of one sort or another.

The stock market, individual investors, and financial risk 

Riskier long-term saving requires that an individual possess the ability to manage theassociated increased risks. Stock prices fluctuate widely, in marked contrast to the stabilityof (government insured) bank deposits or bonds. This is something that could affect notonly the individual investor or household, but also the economy on a large scale. Thefollowing deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers haveentered the stock market, or have acquired other 'risky' investments (such as 'investment'

 property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Televisioncommentators, financial writers, analysts, and market strategists are all overtalking eachother to get investors' attention. At the same time, individual investors, immersed in chatrooms and message boards, are exchanging questionable and often misleading tips. Yet,despite all this available information, investors find it increasingly difficult to profit. Stock  prices skyrocket with little reason, then plummet just as quickly, and people who haveturned to investing for their children's education and their own retirement becomefrightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 5/50

This is a quote from the preface to a published biography about the well-known and longterm value oriented stock investor Warren Buffett.[1] Buffett began his career with only100 U.S. dollars and has over the years built himself a multibillion-dollar fortune. Thequote illustrates some of what has been happening in the stock market during the end of the20th century and the beginning of the 21st.

The behavior of the stock market NASDAQ in Times Square, New York City. NASDAQ in Times Square, New York City.

From experience we know that investors may temporarily pull financial prices away fromtheir long term trend level. Over-reactions may occur— so that excessive optimism(euphoria) may drive prices unduly high or excessive pessimism may drive prices undulylow. New theoretical and empirical arguments have been put forward against the notionthat financial markets are efficient.

According to the efficient market hypothesis (EMH), only changes in fundamentalfactors, such as profits or dividends, ought to affect share prices. (But this largely theoreticacademic viewpoint also predicts that little or no trading should take place— contrary to

fact— since prices are already at or near equilibrium, having priced in all publicknowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent — the largest-ever one-day fall in the United States. This event demonstrated that share prices can falldramatically even though, to this day, it is impossible to fix a definite cause: a thoroughsearch failed to detect any specific or unexpected development that might account for thecrash. It also seems to be the case more generally that many price movements are notoccasioned by new information; a study of the fifty largest one-day share price movementsin the United States in the post-war period confirms this.[2] Moreover, while the EMH predicts that all price movement (in the absence of change in fundamental information) israndom (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer.

Various explanations for large price movements have been promulgated. For instance,some research has shown that changes in estimated risk, and the use of certain strategies,such as stop-loss limits and Value at Risk limits, theoretically could cause financialmarkets to overreact.

Other research has shown that psychological factors may result in exaggerated stock pricemovements. Psychological research has demonstrated that people are predisposed to'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something

like seeing familiar shapes in clouds or ink blots.) In the present context this means that asuccession of good news items about a company may lead investors to overreact positively(unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.[3]

Another phenomenon— also from psychology— that works against an objectiveassessment is group thinking. As social animals, it is not easy to stick to an opinion thatdiffers markedly from that of a majority of the group. An example with which one may befamiliar is the reluctance to enter a restaurant that is empty; people generally prefer to havetheir opinion validated by those of others in the group.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 6/50

In one paper the authors draw an analogy with gambling.[4] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of theinvestment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavyweight to the psychology of other investors and how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs. Inexperiencedinvestors rarely get the assistance and support they need. In the period running up to the

recent Nasdaq crash, less than 1 per cent of the analyst's recommendations had been to sell(and even during the 2000 - 2002 crash, the average did not rise above 5%). The mediaamplified the general euphoria, with reports of rapidly rising share prices and the notionthat large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash, sothat by summer of 2002, predictions of a DOW average below 5000 were quite common.)

Irrational behavior

Sometimes the market tends to react irrationally to economic news, even if that news hasno real effect on the technical value of securities itself. Therefore, the stock market can be

swayed tremendously in either direction by press releases, rumors and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict.

Stock market index

Main article: Stock market index

The movements of the prices in a market or section of a market are captured in priceindices called stock market indices, of which there are many, e.g., the S&P, the FTSE andthe Euronext indices. Such indices are usually market capitalization (the total market valueof floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently toinclude/exclude stocks in order to reflect the changing business environment.

Derivative instruments

Main article: Derivative (finance)

Financial innovation has brought many new financial instruments whose pay-offs or values

depend on the prices of stocks. Some examples are exchange traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. Theselast two may be traded on futures exchanges (which are distinct from stock exchanges— their history traces back to commodities futures exchanges), or traded over-the-counter. Asall of these products are only derived from stocks, they are sometimes considered to betraded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.

Leveraged Strategies

Stock that a trader does not actually own may be traded using short selling; margin buying

may be used to purchase stock with borrowed funds; or, derivatives may be used to control

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 7/50

large blocks of stocks for a much smaller amount of money than would be required byoutright purchase or sale.

Short selling

Main article: Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds itsclients' shares or its own shares on account to lend to short sellers) then sells it on the

market, hoping for the price to fall. The trader eventually buys back the stock, makingmoney if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also beused by unscrupulous traders to artificially lower the price of a stock. Hence most marketseither prevent short selling or place restrictions on when and how a short sale can occur.The practice of naked shorting is illegal in most (but not all) stock markets.

Margin buying

Main article: margin buying

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it torise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of acertain percentage of those other stocks' value. In the United States, the marginrequirements have been 50% for many years (that is, if you want to make a $1000investment, you need to put up $500, and there is often a maintenance margin below the$500). A margin call is made if the total value of the investor's account cannot support theloss of the trade. (Upon a decline in the value of the margined securities additional fundsmay be required to maintain the account's equity, and with or without notice the marginedsecurity or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.)Regulation of margin requirements (by the Federal Reserve) was implemented after theCrash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), butthen selling them (before the three-days are up) and using part of the proceeds to make theoriginal payment (assuming that the value of the stocks has not declined in the interim).

New issuance

Main article: Thomson Financial league tables

Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by USissuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe,Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.

Investment strategies

Main article: Stock valuation

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 8/50

Additionally, many choose to invest via the index method. In this method, one holds aweighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategyis to maximize diversification, minimize taxes from too frequent trading, and ride thegeneral trend of the stock market (which, in the U.S., has averaged nearly 10%/year,compounded annually, since World War II).

Finally, one may trade based on inside information, which is known as insider trading.One of the many things people always want to know about the stock market is, "How do I

make money investing?" There are many different approaches; two basic methods areclassified as either fundamental analysis or technical analysis. Fundamental analysis refersto analyzing companies by their financial statements found in SEC Filings, business trends,general economic conditions, etc. Technical analysis studies price actions in marketsthrough the use of charts and quantitative techniques to attempt to forecast price trendsregardless of the company's financial prospects. One example of a technical strategy is theTrend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control anddiversification.

History of stock exchangesIn 11th century France the courratiers de change were concerned with managing andregulating the debts of agricultural communities on behalf of the banks. As these men alsotraded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursameaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in Brugesgathered inside the house of a man called Van der Burse, and in 1309 they institutionalizedthis until now informal meeting and became the "Bruges Bourse". The idea spread quicklyaround Flanders and neighbouring counties and "Bourses" soon opened in Ghent andAmsterdam.

In the middle of the 13th century, Venetian bankers began to trade in governmentsecurities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florencewho also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influentialcitizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in businessventures and get a share of their profits - or losses. In 1602, the Dutch East India Companyissued the first shares on the Amsterdam Stock Exchange. It was the first company to issuestocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.

The role of stock exchangesBombay Stock ExchangeBombay Stock ExchangeFrankfurt Stock Exchange

Frankfurt Stock Exchange

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 9/50

Hong Kong Stock ExchangeHong Kong Stock ExchangeLondon Stock ExchangeLondon Stock ExchangeMadrid Stock ExchangeMadrid Stock ExchangeMontreal Stock ExchangeMontreal Stock Exchange New York Stock Exchange

 New York Stock ExchangeOsaka Securities ExchangeOsaka Securities ExchangePhilippine Stock Exchange, in Makati CityPhilippine Stock Exchange, in Makati CitySão Paulo Stock ExchangeSão Paulo Stock ExchangeShanghai Stock ExchangeShanghai Stock ExchangeTaiwan Stock Exchange

Taiwan Stock ExchangeTokyo Stock ExchangeTokyo Stock ExchangeToronto Stock ExchangeToronto Stock ExchangeSWX Swiss ExchangeSWX Swiss ExchangeStock exchanges have multiple roles in the economy, this may include the following:[1][2]

Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansionthrough selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocationof resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for severaleconomic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increasedistribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock marketis one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth

Stocks exchanges do not exist to redistribute wealth although casual and professional stock investors through stock price increases (that may result in capital gains for the investor) anddividends get a chance to share in the wealth of profitable businesses.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 10/50

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve ontheir management standards and efficiency in order to satisfy the demands of theseshareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies(companies that are owned by shareholders who are members of the general public andtrade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by thecompany founders and/or their families and heirs, or otherwise by a small group of 

investors). However, some well-documented cases are known where it is alleged that therehas been considerable slippage in corporate governance on the part of some publiccompanies (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001),Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are amongthe most widely scrutinized by the media).

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is opento both the large and small stock investors because a person buys the number of shares they

can afford. Therefore the Stock Exchange provides the opportunity for small investors toown shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to financeinfrastructure projects such as sewage and water treatment works or housing estates byselling another category of securities known as bonds. These bonds can be raised throughthe Stock Exchange whereby members of the public buy them, thus loaning money to thegovernment. The issuance of such municipal bonds can obviate the need to directly tax thecitizens in order to finance development, although by securing such bonds with the fullfaith and credit of the government instead of with collateral, the result is that thegovernment must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces.Share prices tend to rise or remain stable when companies and the economy in generalshow signs of stability and growth. An economic recession, depression, or financial crisiscould eventually lead to a stock market crash. Therefore the movement of share prices and

in general of the stock indexes can be an indicator of the general trend in the economy.

Stock Exchange

Major stock exchanges

Twenty Major Stock Exchanges In The World & Their Market Capitalization as of August

2007

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 11/50

Region ↓ stock exchane value trllions of US dollars) ↓ North America-Europe NYSE Euronext $19.6Asia Pacific Tokyo Stock Exchange $4.52 North America NASDAQ $4.05 (July 2007)Europe London Stock Exchange $3.85Asia Pacific Shanghai Stock Exchange $2.38Asia Pacific Hong Kong Stock Exchange $2.28 North America Toronto Stock Exchange $1.90Europe Frankfurt Stock Exchange (Deutsche Börse) $1.89

Europe Madrid Stock Exchange (BME Spanish Exchanges) $1.50Asia Pacific Australian Securities Exchange $1.28Europe Nordic Stock Exchange Group OMX1 $1.27Europe Swiss Exchange $1.25Asia Pacific Bombay Stock Exchange $1.11Asia Pacific Korea Exchange $1.10South America São Paulo Stock Exchange $1.09Europe Milan Stock Exchange (Borsa Italiana) $1.06Asia Pacific National Stock Exchange of India $1.05Europe Moscow Interbank Currency Exchange $0.860

(January 2007)Africa Johannesburg Securities Exchange $0.777Asia Pacific Taiwan Stock Exchange $0.678

 Note 1: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and VilniusStock Exchanges

* Remarks: There are 2 pending major mergers: NASDAQ with OMX; and LondonStock Exchange with Milan Stock Exchange

The main stock exchanges in the world include:

* American Stock Exchange* Australian Stock Exchange* Bolsa Mexicana de Valores* Bombay Stock Exchange* Euronext Amsterdam* Euronext Brussels* Euronext Lisbon* Euronext Paris* Frankfurt Stock Exchange* Helsinki Stock Exchange* Hong Kong Stock Exchange* Istanbul Stock Exchange* JASDAQ* Johannesburg Securities Exchange* Karachi Stock Exchange* Korea Stock Exchange* Kuwait Stock Exchange* London Stock Exchange* Madrid Stock Exchange

* Milan Stock Exchange

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 12/50

* Nagoya Stock Exchange* National Stock Exchange of India* NASDAQ* New York Stock Exchange* Osaka Securities Exchange* São Paulo Stock Exchange* Shanghai Stock Exchange* Singapore Exchange* Stockholm Stock Exchange

* Taiwan Stock Exchange* Tokyo Stock Exchange* Toronto Stock Exchange* Zurich Stock Exchange

Listing requirements

Listing requirements are the set of conditions imposed by a given stock exchange uponcompanies that want to be listed on that exchange. Such conditions sometimes includeminimum number of shares outstanding, minimum market capitalization, and minimum

annual income.

Requirements by stock exchange

Companies have to meet the requirements of the exchange in order to have their stocks andshares listed and traded there, but requirements vary by stock exchange:

* London Stock Exchange: The main market of the London Stock Exchange hasrequirements for a minimum market capitalization (£700,000), three years of auditedfinancial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing.

  * NASDAQ Stock Exchange: To be listed on the NASDAQ a company must haveissued at least 1.25 million shares of stock worth at least $70 million and must have earnedmore than $11 million over the last three years ([1]).

* New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE),for example, a company must have issued at least a million shares of stock worth $100million and must have earned more than $10 million over the last three years ([2]).

  * Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for aminimum market capitalization of Rs.250 Million and minimum public float equivalent to

Rs.100 Million([3]).

Ownership

Stock exchanges originated as mutual organizations, owned by its member stock brokers.There has been a recent trend for stock exchanges to demutualize, where the members selltheir shares in an initial public offering. In this way the mutual organization becomes acorporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002)and the New York Stock Exchange (2005).

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 13/50

Other types of exchanges

In the 19th century, exchanges were opened to trade forward contracts on commodities.Exchange traded forward contracts are called futures contracts. These commodityexchanges later started offering future contracts on other products, such as interest ratesand shares, as well as options contracts. They are now generally known as futuresexchanges.

The future of stock exchanges in the United States

The future of stock trading appears to be electronic, as competition is continually growing

 between the remaining traditional New York Stock Exchange specialist system against therelatively new, all Electronic Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.

The ECNs contend that an array of special interests profit at the expense of investors ineven the most mundane exchange-directed trades. Machine-based systems, they argue, aremuch more efficient, because they speed up the execution mechanism and eliminate theneed to deal with an intermediary.

Historically, the 'market' (which, as noted, encompasses the totality of stock trading on allexchanges) has been slow to respond to technological innovation. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders."

William Lupien, founder of the Instinet trading system and the OptiMark system, has beenquoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fastonce you reach the tipping point. We're now at the tipping point."

Congress mandated the establishment of a national market system of multiple exchanges in1975. Since then, ECNs have been developing rapidly.[citation needed]

One example of improved efficiency of ECNs is the prevention of front running, by whichmanual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that theintroduction of a large order will cause. By executing large trades at lightning speedwithout manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years.[citation needed]Under the specialist system, when the market sees a large trade in a name, other buyers areimmediately able to look to see how big the trader is in the name, and make inferences

about why s/he is selling or buying. All traders who are quick enough are able to use thatinformation to anticipate price movements.

ECNs have changed ordinary stock transaction processing (like brokerage services beforethem) into a commodity-type business. ECNs could regulate the fairness of initial publicofferings (IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap researchefforts.

Some[attribution needed], however, believe the answer will be some combination of the

 best of technology and "upstairs trading" — in other words, a hybrid model.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 14/50

Trading 25,000 shares of Lucent stock (recent[when? — see talk page] quote: $2.80;recent[when? — see talk page] volume: 49,069,700) would be a relatively simple e-commerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recentquote: $88,710.00; recent volume: 450) may never be. The choice of system should beclear (but always that of the trader), based on the characteristics of the security to be traded.

Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is

especially true for investment managers that direct huge trading volume, and own a stake inan ECN or specialist firm. For example, in its individual stock-brokerage accounts,"Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37%of its undesignated market orders through the Boston Stock Exchange, where an affiliatecontrols a specialist post."

Fidelity says these arrangements are governed by a separate brokerage "order-flowmanagement" team, which seeks to obtain the best possible execution for customers, andthat its execution is highly rated.[citation needed]

The "upstairs market" NASDAQ in Times Square, New York City.

Recent research by Kumar Venkataraman, finance professor at SMU's Cox School of Business, and Hendrik Bessembinder offers insight and evidence into new possibilities anddifficult issues facing stock exchanges. In “Does an electronic stock exchange need anupstairs market?” from the July, 2003 issue of Journal of Financial Economics, the authorsfind that a large portion of institutional trading in electronic exchanges is executed awayfrom the centralized book in the informal 'upstairs market', thus presenting new challenges.

Despite the efficiencies of computerized markets, virtually every stock market isaccompanied by a parallel "upstairs" market, where larger traders employ the services of  brokerage firms to locate counterparties and negotiate trade terms. Upstairs markets are based on relationships. Rather than submitting an electronic order to effortlessly attractcounterparties, the upstairs brokers seek out counterparties (from traders known to themwho might be interested). They then negotiate transactions that might otherwise beexecuted at an inordinate cost or delay. An electronic trading system lowers the fixed costsof trading for relatively liquid stocks in block sizes not likely to overwhelm the currentmarket. However, it does not allow for the informal exchange of information (?) that isimportant for certain types of large trades and for illiquid stocks.

In electronic markets, traders don’t get a sense of who they’re trading with, how muchmore the other party is trading, etc., and that information can be very important to sometraders. Large (institutional) traders therefore seek other trading venues such as the 'upstairsmarket' to lower the risk of exposing their order positions, to ensure symmetric transfer of information, and to retain some of the give and take of the old open outcry market.Approximately 70% of block-size trade transactions are executed in the upstairs market inParis.

The Paris Bourse provides an excellent illustration of the use of upstairs intermediationmarkets, because its electronic limit order market closely resembles the downstairs

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 15/50

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 16/50

The future role of the specialist

The specialist trades in circumstances when others do not or will not, and therefore takeson a risk which warrants compensation. The current debate centers on the model of compensation. The specialist at the Paris Bourse is compensated in cash and withinvestment banking business. In contrast, the NYSE specialist is compensated in the formof privileged information on order flow. In recent months, several U.S. institutions havealleged that the NYSE trading abuses is an outcome of this compensation structure. TheParis model overcomes this criticism and presents an alternative for the NYSE to consider.Results show, however, that there continues to be a role for the specialist (or, at least, an

'upstairs trader') in electronic markets. Investors value the presence of a specialist becausethey can get in and out of a stock with greater ease.

 Stock market index 

A comparison of three major stock indices: the NASDAQ Composite, Dow Jones IndustrialAverage, and S&P 500. All three have the same height at March 2007. Notice the large dot-com spike on the NASDAQ, a result of the large number of tech companies on that index.A comparison of three major stock indices: the NASDAQ Composite, Dow Jones IndustrialAverage, and S&P 500. All three have the same height at March 2007. Notice the large dot-com spike on the NASDAQ, a result of the large number of tech companies on that index.

A stock market index is a listing of stock and a statistic reflecting the composite value of itscomponents. It is used as a tool to represent the characteristics of its component stocks, allof which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations. Many indicescompiled by news or financial services firms are used to benchmark the performance of  portfolios such as mutual funds.  Contents

* 1 Types of indices* 2 Weighting* 3 Critique of Capitalisation-Weighting* 4 Indices and passive investment management* 5 Ethical stock market indices* 6 Environmental stock market indices* 7 Innovations Awards to Stock Indexes* 8 See also* 9 References* 10 External links

1. Types of indices

Stock market indices may be classed in many ways. A broad-base index represents the

 performance of a whole stock market — and by proxy, reflects investor sentiment on thestate of the economy. The most regularly quoted market indices are broad-base indicescomprised of the stocks of large companies listed on a nation's largest stock exchanges,such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE100, the French CAC 40, the German DAX, the Japanese Nikkei 225 and the Hong KongHang Seng Index.

The concept may be extended well beyond an exchange. The Dow Jones Wilshire 5000Total Stock Market Index, as its name implies, represents the stocks of nearly every publicly traded company in the United States, including all U.S. stocks traded on the New

York Stock Exchange (but not ADRs) and most traded on the NASDAQ and American

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 17/50

Stock Exchange. The Europe, Australia, and Far East Index (EAFE), published by MorganStanley Capital International, is a listing of large companies in developed economies in theEastern Hemisphere. Russell Investment Group added to the family of indexes bylaunching the Russell Global 10000 which covers 80 countries and all stocks with a marketcapitalization greater than $200 million USD.

More specialised indices exist tracking the performance of specific sectors of the market.The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type

of management, or even more specialized criteria — one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linuxoperating environment.

2. Weighting

An index may also be classified according to the method used to determine its price. In aPrice-weighted index such as the Dow Jones Industrial Average and the NYSE ARCATech 100 Index, the price of each component stock is the only consideration whendetermining the value of the index. Thus, price movement of even a single security willheavily influence the value of the index even though the dollar shift is less significant in a

relatively highly valued issue, and moreover ignoring the relative size of the company as awhole. In contrast, a market-value weighted or capitalization-weighted index such as theHang Seng Index factors in the size of the company. Thus, a relatively small shift in the price of a large company will heavily influence the value of the index. In a market-shareweighted index, price is weighted relative to the number of shares, rather than their totalvalue.

Traditionally, capitalization- or share-weighted indices all had a full weightingi.e. all outstanding shares were included. Recently, many of them have changed to a float-adjusted weighting which helps indexing.

3. Critique of Capitalisation-Weighting

The use of capitalisation-weighted indices is often justified by the central conclusion of modern portfolio theory that the optimal investment strategy for any investor is to hold themarket portfolio, the capitalisation-weighted portfolio of all assets. However, empiricaltests conclude that market indices are not efficient.[citation needed] This can be explained by the fact that these indices do not include all assets or by the fact that the theory does nothold. The practical conclusion is that using capitalisation-weighted portfolios is notnecessarily the optimal method.

As a consequence, capitalisation weighting has been subject to severe criticism (see e.g.Haugen and Baker 1991, Amenc, Goltz, and Le Sourd 2006, or Hsu 2006), pointing out

that the mechanics of capitalisation weighting lead to trend-following strategies that provide an inefficient risk-return trade-off.

Also, while capitalisation weighting is the standard in equity indexconstruction, different weighting schemes exist. First, while most indices use capitalisationweighting, additional criteria are often taken into account, such as sales/revenue and netincome (see the “Guide to the Dow Jones Global Titan 50 Index”, January 2006). Second,as an answer to the critiques of capitalisation-weighting, equity indices with differentweighting schemes have emerged, such as "wealth"-weighted (Morris, 1996),“fundamental”-weighted (Arnott, Hsu and Moore 2005), “diversity”-weighted (Fernholz,Garvy, and Hannon 1998) or equal-weighted indices.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 18/50

4. Indices and passive investment management

There has been an accelerating trend in recent decades to create passively managed mutualfunds that are based on market indices, known as index funds. Advocates claim that indexfunds routinely beat a large majority of actively managed mutual funds; one study claimedthat over time, the average actively managed fund has returned 1.8% less than the S&P 500index - a result nearly equal to the average expense ratio of mutual funds (fund expensesare a drag on the funds' return by exactly that ratio). Since index funds attempt to replicatethe holdings of an index, they obviate the need for — and thus many costs of — theresearch entailed in active management, and have a lower "churn" rate (the turnover of 

securities which lose fund managers' favor and are sold, with the attendant cost of commissions and capital gains taxes).

Indices are also a common basis for a related type of investment, the exchange-traded fundor ETF. Unlike an index fund, which is priced daily, an ETF is priced continuously, isoptionable, and can be sold short.5. Ethical stock market indices

A notable specialised index type is those for ethical investing indices that include onlythose companies satisfying ecological or social criteria, e.g. those of The Calvert Group,KLD, Dow Jones Sustainability Index and Wilderhill Clean Energy Index.

Another important trend is strict mechanical criteria for inclusion and exclusion to preventmarket manipulation, e.g. in Canada when Nortel was permitted to rise to over 50% of theTSE 300 index value. Ethical indices have a particular interest in mechanical criteria,seeking to avoid accusations of ideological bias in selection, and have pioneered techniquesfor inclusion and exclusion of stocks based on complex criteria. Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multipleanalysts weighted according to probability, to determine which stocks have become toorisky to hold in the index of concern.

Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria", e.g.regarding board composition or hiring practices, but fail to perform ethically with respectto shareholders, e.g. Enron. Indeed, the seeming "seal of approval" of an ethical index may put investors more at ease, enabling scams. One response to these criticisms is that trust inthe corporate management, index criteria, fund or index manager, and securities regulator,can never be replaced by mechanical means, so "market transparency" and "disclosure" arethe only long-term-effective paths to fair markets.

6. Environmental stock market indices

An environmental stock market index aims to provide a quantitative measure of theenvironmental damage caused by the companies in an index. Indices of this nature face

much the same criticism as Ethical indices do — that the 'score' given is partiallysubjective.

However, whereas 'ethical' issues (for example, does a company use a sweatshop) arelargely subjective and difficult to score, an environmental impact is often quantifiablethrough scientific methods. So it is broadly possible to assign a 'score' to (say) the damagecaused by a tonne of mercury dumped into a local river. It is harder to develop a scoringmethod that can compare different types of pollutant — for example does one hundredtonnes of carbon dioxide emitted to the air cause more or less damage (via climate change)than one tonne of mercury dumped in a river (and poisoning all the fish).

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 19/50

Generally, most environmental economists attempting to create an environmental indexwould attempt to quantify damage in monetary terms. So one tonne of carbon dioxidemight cause $100 worth of damage, whereas one tonne of mercury might cause $50,000 (asit is highly toxic). Companies can therefore be given an 'environmental impact' score, basedon the cost they impose on the environment. Quantification of damage in this nature isextremely difficult, as pollutants tend to be market externalities and so have no easilymeasurable cost by definition.

7. Innovations Awards to Stock Indexes

* Most Innovative Benchmark Indexo 2004 — CBOE S&P 500 BuyWrite Index (BXM)o 2005 — FTSE/RAFI Fundamental Index Serieso 2006 — Standard and Poor’s Case-Shiller House Prices Indices

* Most Innovative ETFo 2004 — iShares MSCI EAFE (EFA) and Emerging Marketso 2005 — EasyETF GSCI Commodities ETFo 2006 — PowerShares DB Commodity Index Tracking Fund (DBC) and

PowerShares G10 Currency Harvest Fund (DBV)* Most Innovative Index Derivative

o 2004 — CBOE Volatility Index (VIX) Futureso 2005 — Options on Vanguard VIPERS at the CBOEo 2006 — Chicago Board Options Exchange Options on the CBOE Volatility Index

(VIX)* Best Index-related Research Paper 

o 2004 — Steven Schoenfeldo 2005 — Rob Arnotto 2006 — Eugene F. Fama and Kenneth R. French

* Lifetime Achievement Awardo 2004 — Tim Harberto 2005 — William Sharpe and Nathan Mosto 2006 — Burton G. Malkiel and Ronald J. Ryan

Stock trader

A stock trader or a stock investor is an individual or firm who buys and sells stocks or  bonds (and possibly other financial assets) in the financial markets.

Contents* 1 Stock trader versus stock investor 

* 2 Methodologyo 2.1 Information Resources

* 3 Expenses, costs and risk * 4 Stock Picking

o 4.1 Dart Board Method* 5 Famous stock traders or stock investors* 6 References* 7 See also

1. Stock trader versus stock investor

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 20/50

Charting is the use of graphical and analytical patterns and data to attempt to predict future prices.Charting is the use of graphical and analytical patterns and data to attempt to predict future prices.

Individuals or firms trading equity (stock) markets as their principal capacity are calledstock traders. Stock traders usually try to profit from short-term price volatility with tradeslasting anywhere from several seconds to several weeks. The stock trader is usually a professional. A person can call herself a full or part-time stock trader/investor while

maintaining other professions. When a stock trader/investor has clients, and acts as amoney manager or adviser with the intention of adding value to his clients finances, he isalso called a financial adviser or manager. In this case, the financial manager could be anindependent professional or a large bank corporation employee. This may includemanagers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment, fund management, and wealth management.Several different types of stock trading exist including day trading, swing trading, marketmaking, scalping (trading), momentum trading, trading the news, and arbitrage.Stock traders in the trading floor of the New York Stock Exchange.Stock traders in the trading floor of the New York Stock Exchange.

On the other hand, stock investors purchase stocks with the intention of holding for anextended period of time, usually several months to years. They rely primarily onfundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, whichas the name suggests, implies that investors will hold stocks for the very long term,generally measured in years. This strategy was made popular in the equity bull market of the 1980s and 90s where buy-and-hold investors rode out short-term market declines andcontinued to hold as the market returned to its previous highs and beyond. However, duringthe 2001-2003 equity bear market, the buy-and-hold strategy lost some followers as broader market indexes like the NASDAQ saw their values decline by over 60%.

2. Methodology

Stock traders/investors usually need a stock broker such as a bank or a brokerage firm toaccess the stock market. Since the advent of Internet banking, an Internet connection iscommonly used to manage positions. Using the Internet, specialized software, and a personal computer, stock traders/investors make use of technical analysis and fundamentalanalysis to help them in the decision-making process. They may use several informationresources.

financial market

In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds),commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect theefficient market hypothesis.

Financial markets have evolved significantly over several hundred years andare undergoing constant innovation to improve liquidity.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 21/50

Both general markets, where many commodities are traded and specialisedmarkets (where only one commodity is traded) exist. Markets work by

 placing many interested sellers in one "place", thus making them easier tofind for prospective buyers. An economy which relies primarily oninteractions between buyers and sellers to allocate resources is known as amarket economy in contrast either to a command economy or to a non-market economy that is based, such as a gift economy.

In Finance, Financial markets facilitate:-The raising of capital (in the capital markets);

-The transfer of risk (in the derivatives markets); and

-International trade (in the currency markets).

They are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the

capital. These receipts are  securities which may be freely bought or sold. Inreturn for lending money to the borrower, the lender will expect somecompensation in the form of interest or dividends.

Contents

• 1 Definition

•

2 Types of financial markets• 3 Raising capital

o 3.1 Lenders

o 3.2 Borrowers

• 4 Derivative products

• 5 Currency markets

• 6 Analysis of financial markets

• 7 Financial markets in popular culture

o 7.1 Financial markets slang

• 8 See also

• 9 Notes

• 10 References

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 22/50

Definition

The term Financial markets can be a cause of much confusion.

Financial markets could mean:

1. organisations that facilitate the trade in financial products. i.e. Stock 

exchanges facilitate the trade in stocks, bonds and warrants.

2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways

including: the use of stock exchanges; directly between buyers and sellers etc.

In academia, students of finance will use both meanings but students of economics will only use the second meaning.Financial markets can bedomestic or they can be international.

Types of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of:

-Stock markets, which provide financing through the issuance of shares or 

-Common stock , and enable the subsequent trading thereof.

-Bond markets, which provide financing through the issuance of Bonds, andenable the subsequent trading thereof.

-Commodity markets, which facilitate the trading of commodities.

-Money markets, which provide short term debt financing and investment.

-Derivatives markets, which provide instruments for the management of 

financial risk.

-Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.

-Insurance markets, which facilitate the redistribution of various risks.

-Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of  primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets.Secondary markets allow investors to sell securities that they hold or buyexisting securities.

Raising capital

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 23/50

To understand financial markets, let us look at what they are used for, i.e. what is their

purpose?

Without financial markets, borrowers would have difficulty finding lendersthemselves. Intermediaries such as  banks help in this process. Banks takedeposits from those who have money to save. They can then lend moneyfrom this pool of deposited money to those who seek to borrow. Banks

 popularly lend money in the form of loans and mortgages.

More complex transactions than a simple bank deposit require markets wherelenders and their agents can meet borrowers and their agents, and whereexisting borrowing or lending commitments can be sold on to other parties. Agood example of a financial market is a stock exchange. A company can raisemoney by selling shares to investors and its existing shares can be bought or sold.

The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Relationship between lenders and borrowers

LendersFinancial

Intermediaries

Financial

MarketsBorrowers

IndividualsCompanies

BanksInsurance Companies

Pension Funds

Mutual Funds

Interbank Stock ExchangeMoney MarketBond Market

Foreign Exchange

IndividualsCompanies

Central GovernmentMunicipalities

Public Corporations

Lenders

Many individuals are not aware that they are lenders, but almost everybodydoes lend money in many ways. A person lends money when he or she:

-puts money in a savings account at a bank;-contributes to a pension plan;

-pays premiums to an insurance company;

-invests in government bonds; or 

-invests in company shares.

Companies tend to be borrowers of capital. When companies have surplus

cash that is not needed for a short period of time, they may seek to make

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 24/50

money from their cash surplus by lending it via short term markets calledmoney markets.

There are a few companies that have very strong cash flows. Thesecompanies tend to be lenders rather than borrowers. Such companies maydecide to return cash to lenders (e.g. via a share buyback .) Alternatively, theymay seek to make more money on their cash by lending it (e.g. investing in

 bonds and stocks.)

Borrowers

 Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase.

Companies borrow money to aid short term or long term cash flows. Theyalso borrow to fund modernisation or future business expansion.

Governments often find their spending requirements exceed their  tax revenues. To make up this difference, they need to borrow. Governments also

 borrow on behalf of nationalised industries, municipalities, local authoritiesand other public sector bodies. In the UK, the total borrowing requirement isoften referred to as the public sector borrowing requirement (PSBR).

Governments borrow by issuing  bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds.Government debt seems to be permanent. Indeed the debt seemingly expandsrather than being paid off. One strategy used by governments to reduce thevalue of the debt is to influence inflation.

 Municipalities and local authorities may borrow in their own name as well asreceiving funding from national governments. In the UK, this would cover anauthority like Hampshire County Council.

 Public Corporations typically include nationalised industries. These mayinclude the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrowinternationally with the aid of Foreign exchange markets.

Derivative products

During the 1980s and 1990s, a major growth sector in financial markets is thetrade in so called derivative products, or derivatives for short.

In the financial markets, stock prices, bond prices, currency rates, interestrates and dividends go up and down, creating risk . Derivative products arefinancial products which are used to control risk or paradoxically exploit risk.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 25/50

Currency markets

 Main article: Foreign exchange market 

Seemingly, the most obvious buyers and sellers of  foreign exchange areimporters/exporters. While this may have been true in the distant past,whereby importers/exporters created the initial demand for currency markets,importers and exporters now represent only 1/32 of foreign exchange dealing,

according to BIS.[1]

The picture of foreign currency transactions today shows:

-Banks and Institutions

-Speculators

-Government spending (for example, military bases abroad)

-Importers/Exporters

-Tourists

Analysis of financial markets

Much effort has gone into the study of financial markets and how prices varywith time. Charles Dow, one of the founders of Dow Jones & Company andThe Wall Street Journal, enunciated a set of ideas on the subject which arenow called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, atleast in the short term. The claims of the technical analysts are disputed bymany academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the lastchange.

The scale of changes in price over some unit of time is called the volatility. Itwas discovered by Benoît Mandelbrot that changes in prices do not follow aGaussian distribution, but are rather modeled better by Lévy stable 

distributions. The scale of change, or volatiliy, depends on the length of thetime unit to a power a bit more than 1/2. Large changes up or down are morelikely that what one would calculate using a Gaussian distribution with anestimated standard deviation.

Financial markets in popular culture

  Gordon Gekko is a famous caricature of a rogue financial markets operator,

 famous for saying "greed ... is good". 

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 26/50

Only negative stories about financial markets tend to make the news. Thegeneral perception, for those not involved in the world of financial markets isof a place full of  crooks and con artists. Big stories like the Enron scandalserve to enhance this view.

Stories that make the headlines involve the incompetent, the lucky and thedownright skillful. The Barings scandal is a classic story of incompetencemixed with greed leading to dire consequences. Another story of note is thatof  Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had aserious impact on its course in Europe. A commonly recurring event is thestock market bubble, whereby market prices rise to dizzying heights in a socalled exaggerated  bull market. This is not a new phenomenon; indeed thestory of Tulip mania in the Netherlands in the 17th century illustrates an earlyrecorded example.

Financial markets are merely tools. Like all tools they have both beneficial 

and harmful  uses. Overall, financial markets are used by honest people.

Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.

Financial markets slang

-Big swinging dick , a highly successful financial markets trader. The termwas made popular in the book  Liar's Poker , by Michael Lewis 

-Geek , a Quant 

-Grim, an ageless man known for his whistle and tendency to relate currentevents to financial market[citation needed ] 

-Nerd, a Quant 

-Quant, a quantitative analyst skilled in the black arts of PhD level (andabove) mathematics and statistical methods

-Rocket scientist, a financial consultant at the zenith of mathematical andcomputer programming skill. They are able to invent derivatives of 

frightening complexity and construct sophisticated pricing models. Theygenerally handle the most advanced computing techniques adopted by thefinancial markets since the early 1980s. Typically, they are physicists andengineers by training; rocket scientists do not necessarily build rockets for aliving.

-White Knight, a friendly party in a takeover  bid. Used to describe a partythat buys the shares of an organisation to help prevent the takeover of thatorganisation by another party

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 27/50

Option (finance) For other uses, see Option (disambiguation).

Options are financial instruments that convey the right, but not theobligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified amount of a security at a set strike price at some time on or before expiration, while

 buying a put option provides the right to sell. Upon the option holder's choiceto exercise the option, the party who sold, or wrote, the option must fulfill theterms of the contract.[1]

The theoretical value of an option can be determined by a variety of techniques, including the use of sophisticated option valuation models. Thesemodels can also predict how the value of the option will change in the face of changing conditions. Hence, the risks associated with trading and owningoptions can be understood and managed with some degree of precision.

Exchange-traded options form an important class of options which havestandardized contract features and trade on public exchanges, facilitatingtrading among independent parties. Over-the-counter  options are traded

 between private parties, often well-capitalized institutions, that havenegotiated separate trading and clearing arrangements with each other.Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a formof incentive compensation.

Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, manyof the valuation and risk management principles apply across all financialoptions.

Contents

• 1 Contract specifications

• 2 Types of options

o 2.1 Option styles

• 3 Valuation models

o 3.1 Black Scholes

o 3.2 Binomial option pricing model

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 28/50

o 3.3 Heston model

o 3.4 Monte Carlo model

• 4 Risks

o 4.1 Example

o 4.2 Pin risk 

• 5 Trading

• 6 The basic trades of traded stock options

o 6.1 Long Call

o 6.2 Short Call

o 6.3 Long Put

o 6.4 Short Put

• 7 Option strategies

• 8 Historical uses of options

• 9 See also

• 10 References

• 11 Further reading

o 11.1 Business press and web siteso 11.2 Academic literature

• 12 External links

Contract specifications

Every financial option is a contract between the two counterparties. Option

contracts may be quite complicated; however, at minimum, they usuallycontain the following specifications:[2]

-whether the option holder has the right to buy (a call option) or the right tosell (a put option)

-the amount and class of the underlying asset(s) (e.g. 100 shares of XYZ Co.B stock)

-the strike price, also known as the exercise price, which is the price at which

the underlying transaction will occur upon exercise 

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 29/50

-the expiration date, or expiry, which is the last date the option can beexercised

-the settlement terms, for instance whether the writer must deliver the actualasset on exercise, or may simply tender the equivalent cash amount

-the terms by which the option is quoted in the market, usually a multiplier such as 100, to convert the quoted price into actual premium amount

Types of options

The primary types of financial options are:

-Exchange traded options (also called "listed options") is a class of exchange traded derivatives. Exchange traded options have standardizedcontracts, and are settled through a clearing house with fulfillment guaranteed

 by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:[3][4] 

1.stock options,

2.commodity options,

3. bond options and other interest rate options 

4.index (equity) options, and

5.options on futures contracts

Over-the-counter, or  OTC options are traded between two private parties,

and are not listed on an exchange. The terms of an OTC option areunrestricted and may be individually tailored to meet any business need. Ingeneral, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:

1.interest rate options

2.currency cross rate options, and

3.options on swaps or swaptions.

Employee stock options are issued by a company to its employees ascompensation.

Option styles

 Naming conventions are used to help identify properties common to many

different types of options. These include:

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 30/50

-European option - an option that may only be exercised on expiration.

-American option - an option that may be exercised on any trading day on or  before expiration.

-Bermudan option - an option that may be exercised only on specified dateson or before expiration.

-Barrier option - any option with the general characteristic that the

underlying security's price must reach some trigger level before the exercisecan occur.

Valuation models

The value of an option can be estimated using a variety of quantitativetechniques, although most commonly through the use of option pricingmodels such as Black-Scholes and the  binomial options pricing model.[5] Ingeneral, standard option valuation models depend on the following factors:

-The current market price of the underlying security,

-the strike price of the option, particularly in relation to the current market price of the underlier,

-the cost of holding a position in the underlying security, including interestand dividends,

-the time to expiration together with any restrictions on when exercise mayoccur, and

-an estimate of the future volatility of the underlying security's price over thelife of the option.

More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates.

The following are some of the principal valuation techniques used in practiceto evaluate option contracts.

Black Scholes

The Black-Scholes model was the first quantitative technique tocomprehensively and accurately estimate the price for a variety of simpleoption contracts. By employing the technique of constructing a risk neutral

 portfolio that replicates the returns of holding an option, Fischer Black andMyron Scholes produced a closed-form solution for a European option'stheoretical price.[6] At the same time, the model generates hedge parameters necessary for effective risk management of option holdings. While the ideas

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 31/50

 behind Black-Scholes were ground-breaking and eventually led to a  Nobel Prize in Economics for Myron Scholes and Robert Merton, application of themodel in actual options trading is clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constantinterest rate. Nevertheless, the Black-Scholes model is still widely used inacademic work, and for many financial applications where the model's error is within margin of tolerance.[7]

Binomial option pricing model

Closely following the derivation of Black and Scholes, John Cox, Stephen Ross and Mark Rubinstein developed the original version of the  binomial options pricing model.[8] [9] It models the dynamics of the option's theoreticalvalue for discrete time intervals over the option's duration. The model startswith a binomial tree of discrete future possible underlying stock prices. Byconstructing a riskless portfolio of an option and stock (as in the Black-Scholes model) a simple formula can be used to find the option price at each

node in the tree. This value can approximate the theoretical value produced by Black Scholes, to the desired degree of precision. However, the binomialmodel is considered more accurate than Black-Scholes because it is moreflexible, e.g. discrete future dividend payments can be modeled correctly atthe proper forward time steps, and American options can be modeled as wellas European ones. Binomial models are widely used by professional optiontraders.

Heston model

Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, suggesting that volatility is stochastic, varying both for time andfor the price level of the underlying security. Stochastic volatility modelshave been developed including one developed by SL Heston.[10] One principaladvantage of the Heston model is that it can be solved in closed-form, whileother stochastic volatility models require complex numerical models.[10]

Monte Carlo model

For many classes of options, traditional valuation techniques are intractabledue to the complexity of the instrument. In these cases, a Monte Carloapproach may often be useful. Rather than attempt to solve the differentialequations of motion that describe the option's value in relation to theunderlying security's price, a Monte Carlo model determines the value of theoption for a set of randomly generated economic scenarios. The resultingsample set yields an expectation value for the option.

Risks

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 32/50

As with all securities, trading options entails the risk of the option's valuechanging over time. However, unlike traditional securities, the return fromholding an option varies non-linearly with the value of the underlier and other factors. Therefore, the risks associated with holding options are morecomplicated to understand and predict.

In general, the change in the value of an option can be derived from Ito's lemma as:

where the greeks Δ, Γ, κ and θ are the standard hedge parameters calculatedfrom an option valuation model, such as Black-Scholes, and dS , d σ and dt areunit changes in the underlier price, the underlier volatility and time,respectively.

Thus, at any point in time, one can estimate the risk inherent in holding anoption by calculating its hedge parameters and then estimating the expectedchange in the model inputs, dS , d σ and dt , provided the changes in thesevalues are small. This technique can be used effectively to understand and

manage the risks associated with standard options. For instance, by offsettinga holding in an option with the amount − Δ of shares in the underlier, a trader can form a delta neutral portfolio that is hedged from loss for small changesin the underlier price. The corresponding price sensitivity formula for this

 portfolio is:

Example

A call option expiring in 99 days on 100 shares of XYZ stock is struck at$50, with XYZ currently trading at $48. With future realized volatility over the life of the option estimated at 25%, the theoretical value of the option is$1.89. The hedge parameters Δ, Γ, κ, θ are (0.439, 0.0631, 9.6, and -0.022),respectively. Assume that on the following day, XYZ stock rises to $48.5 andvolatility falls to 23.5%. We can calculate the estimated value of the calloption by applying the hedge parmeters to the new model inputs as:

Under this scenario, the value of the option increases by $0.132 to $2.022,realizing a profit of $13.20. Note that for a delta neutral portfolio, where bythe trader had also sold 44 shares of XYZ stock as a hedge, the net loss under 

the same scenario would be ($8.75).

Pin risk 

A special situation called  pin risk can arise when the underlier closes at or very close to the option's strike value on the last day the option is traded prior to expiration. The option writer (seller) may not know with certainty whether or not the option will actually be exercised or be allowed to expire worthless.Therefore, the option writer may end up with a large, unwanted residual

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 33/50

 position in the underlier when the markets open on the next trading day after expiration, regardless of their best efforts to avoid such a residual.

Trading

The most common way to trade options is via standardized options contractsthat are listed by various futures and options exchanges. [11] By publishingcontinuous, live markets for option prices, an exchange enables independent

 parties to engage in price discovery and execute transactions. As anintermediary to both sides of the transaction, the benefits the exchange

 provides to the transaction include:

-fulfillment of the contract is backed by the credit of the exchange, whichtypically has the highest rating (AAA),

-counterparties remain anonymous,

-enforcement of market regulation to ensure fairness and transparency, and

-maintenance of orderly markets, especially during fast trading conditions.

Over-the-counter options contracts are not traded on exchanges, but instead between two independent parties. Ordinarily, at least one of thecounterparties is a well-capitalized institution. By avoiding an exchange,users of OTC options can narrowly tailor the terms of the option contract tosuit individual business requirements. In addition, OTC option transactionsgenerally do not need to be advertised to the market and face little or noregulatory requirements. However, OTC counterparties must establish credit

lines with each other, and conform to each others clearing and settlement procedures.

With few exceptions,[12] there are no secondary markets for employee stock  options. These must either be exercised by the original grantee or allowed toexpire worthless.

The basic trades of traded stock options

These trades are described from the point of view of a speculator. If they are

combined with other positions, they can also be used in hedging.

Long Call

Payoffs and profits from a long call.

A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He wouldhave no obligation to buy the stock, only the right to do so until theexpiration date. If the stock price increases over the exercise price by more

than the premium paid, he will profit. If the stock price decreases, he will let

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 34/50

the call contract expire worthless, and only lose the amount of the premium.A trader might buy the option instead of shares, because for the same amountof money, he can obtain a larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares.

Short Call

Payoffs and profits from a naked short call.

A trader who believes that a stock price will decrease can short sell the stock or instead sell a call. Both tactics are generally considered inappropriate for small investors. The trader selling a call has an obligation to sell the stock tothe call buyer at the buyer's option. If the stock price decreases, the short call

 position will make a profit in the amount of the premium. If the stock priceincreases over the exercise price by more than the amount of the premium,the short will lose money, with the potential loss unlimited.

Long Put

Payoffs and profits from a long put.A trader who believes that a stock's price will decrease can buy the right tosell the stock at a fixed price. He will be under no obligation to sell the stock,

 but has the right to do so until the expiration date. If the stock price decreases below the exercise price by more than the premium paid, he will profit. If thestock price increases, he will just let the put contract expire worthless andonly lose his premium paid.

short Put

Payoffs and profits from a naked short put.A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price increases, theshort put position will make a profit in the amount of the premium. If thestock price decreases below the exercise price by more than the amount of the

 premium, the short will lose money, with the potential loss being up to thefull value of the stock.

Option strategies

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 35/50

Payoffs from buying a butterfly spread.

Payoffs from selling a straddle.

Combining any of the four basic kinds of option trades (possibly withdifferent exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simplestrategies usually combine only a few trades, while more complicatedstrategies can combine several.

Strategies are often used to engineer a particular risk profile to movements inthe underlying security. For example, buying a butterfly spread (long one X1call, short two X2 calls, and long one X3 call) allows a trader to profit if thestock price on the expiration date is near the middle exercise price, X2, anddoes not expose the trader to a large loss.

Selling a straddle (selling both a put and a call at the same exercise price)would give a trader a greater profit than a butterfly if the final stock price isnear the exercise price, but might result in a large loss.

Historical uses of options

Contracts similar to options are believed to have been used since ancienttimes. In the real estate market, call options have long been used to assemblelarge parcels of land from separate owners, e.g. a developer pays for the right

to buy several adjacent plots, but is not obligated to buy these plots and mightnot unless he can buy all the plots in the entire parcel. Film or theatrical

 producers often buy the right — but not the obligation — to dramatize aspecific book or script. Lines of credit give the potential borrower the right

 — but not the obligation — to borrow within a specified time period.

Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the

 buyer's option, or may be called (bought back) at specified prices at the

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 36/50

issuer's option. Mortgage borrowers have long had the option to repay theloan early.

 Privileges were options sold over the counter in nineteenth century America,with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three monthsafter purchase. They were not traded in secondary markets.

Bank A bank is a commercial or state institution that provides financial services,including issuing money in various forms, receiving deposits of money,lending money and processing transactions and the creating of credit. Acommercial bank accepts deposits from customers and in turn makes loans,even in excess of the deposits; a process known as fractional-reserve banking.Some banks (called Banks of issue) issue  banknotes as legal tender. Many

 banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches.

Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is granted by bank regulatoryauthorities which provides rights to conduct the most fundamental bankingservices such as accepting deposits and making loans. A commercial bank isusually defined as an institution that both accepts deposits and makes loans;

there are also financial institutions that provide selected banking serviceswithout meeting the legal definition of a bank.

Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected thosefunds back with interest when the goods were sold. For centuries, the bankingindustry only dealt with businesses, not consumers. Commercial lendingtoday is a very intense activity, with banks carefully analysing the financial

condition of their business clients to determine the level of risk in each loantransaction. Banking services have expanded to include services directed atindividuals, and risk in these much smaller transactions are pooled.

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest itcharges in its lending activities. This difference is referred to as the  spread 

 between the cost of funds and the loan interest rate. Historically, profitabilityfrom lending activities has been cyclic and dependent on the needs and

strengths of loan customers. In recent history, investors have demanded a

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 37/50

more stable revenue stream and banks have therefore placed more emphasison transaction fees, primarily loan fees but also including service charges onarray of deposit activities and ancillary services (international banking,foreign exchange, insurance, investments, wire transfers, etc.). However,lending activities still provide the bulk of a commercial bank's income.

The name bank derives from the Italian word banco "desk", used during theRenaissance by Florentines bankers, who used to make their transactions

above a desk covered by a green tablecloth.[citation needed ]

Contents

• 1 Services typically offered by banks

• 2 Types of banks

o 2.1 Types of retail banks

o 2.2 Types of investment banks

o 2.3 Both combined

o 2.4 Other types of banks

2.4.1 Islamic banking

• 3 Banks in the economy

o 3.1 Role in the money supply

o 3.2 Size of global banking industry

o 3.3 Bank crisis

• 4 Challenges within the banking industry

• 5 Regulation

• 6 Public perceptions of banks

• 7 Profitability

• 8 Bank size information

o 8.1 Top ten banking groups in the world ranked by Shareholder equity ($m) 

o 8.2 Top ten banking groups in the world ranked by assets

o 8.3 Top ten banks in the world ranked by market capitalisation

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 38/50

o 8.4 Top ten bank holding companies in the world ranked by profit

o 8.5 Top ten banking groups in the world ranked by Tier 1 capital

• 9 History of banking

• 10 See also

o 10.1 Country specific information

o 10.2 Types of institution

o 10.3 Terms and concepts

o 10.4 Related lists

• 11 Further reading

• 12 Notes

Services typically offered by banks

Although the basic type of services offered by a bank depends upon the typeof bank and the country, services provided usually include:

-Taking deposits from their customers and issuing current (UK) or checking (US) accountsand savings accounts to individuals and businesses

-Extending loans to individuals and businesses

-Cashing cheques 

-Facilitating money transactions such as wire transfers and cashier's checks 

-Issuing credit cards, ATM cards, and debit cards 

-Storing valuables, particularly in a safe deposit box 

-Cashing and distributing bank rolls 

-Consumer & commercial financial advisory services

-Pension & retirement planning

Financial transactions can be performed through many different channels:

-A branch, banking centre or financial centre is a retail location where a bank or financialinstitution offers a wide array of face to face service to its customers

-ATM is a computerised telecommunications device that provides a financial institution'scustomers a method of financial transactions in a public space without the need for a

human clerk or bank teller 

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 39/50

-Mail is part of the postal system which itself is a system wherein written documentstypically enclosed in envelopes, and also small packages containing other matter, aredelivered to destinations around the world

-Telephone banking is a service provided by a financial institution which allows itscustomers to perform transactions over the telephone

-Online banking is a term used for performing transactions, payments etc. over the Internetthrough a bank, credit union or building society's secure website

Types of banks

Banks' activities can be divided into retail banking, dealing directly withindividuals and small businesses; business banking, providing services tomid-market business; corporate banking, directed at large business entities;and investment banking, relating to activities on the financial markets. Most

 banks are profit-making, private enterprises. However, some are owned bygovernment, or are non-profits.

Central banks are non-commercial bodies or government agencies oftencharged with controlling interest rates and money supply across the wholeeconomy. They generally provide liquidity to the banking system and act asLender of last resort in event of a crisis.

Types of retail

Commercial bank : the term used for a normal bank to distinguish it from aninvestment bank. After the Great Depression, the U.S. Congress required that

 banks only engage in banking activities, whereas investment banks were limited to

capital market activities. Since the two no longer have to be under separateownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large

 businesses.

Community Banks: locally operated financial institutions that empower employees to makelocal decisions to serve their customers and the partners

Community development banks: regulated banks that provide financial services and creditto underserved markets or populations.

Postal savings banks: savings banks associated with national postal systems.

Private banks: manage the assets of high net worth individuals.

Offshore banks: banks located in jurisdictions with low taxation and regulation. Manyoffshore banks are essentially private banks.

Savings bank : in Europe, savings banks take their roots in the 19th or sometimes even 18thcentury. Their original objective was to provide easily accessible savings products to allstrata of the population. In some countries, savings banks were created on public initiative,while in others socially committed individuals created foundations to put in place the

necessary infrastructure. Nowadays, European savings banks have kept their focus on retail

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 40/50

 banking: payments, savings products, credits and insurances for individuals or small andmedium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regionaloutreach and by their socially responsible approach to business and society.

Building societies and Landesbanks: conduct retail banking.

Ethical banks: banks that prioritize the transparency of all operations and make only whatthey consider to be socially-responsible investments.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such asmergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade financing. The moderndefinition, however, refers to banks which provide capital to firms in the form of sharesrather than loans. Unlike Venture capital firms, they tend not to invest in newcompanies.

Both combined

Universal banks, more commonly known as a financial services company, engage inseveral of these activities. For example, First Bank   (a very large bank) is involved incommercial and retail lending, and its subsidiaries in tax-havens offer offshore bankingservices to customers in other countries. Other large financial institutions are similarlydiversified and engage in multiple activities. In Europe and Asia, big banks are verydiversified groups that, among other services, also distribute insurance, hence the term bancassurance is the term used to describe the sale of insurance products in a bank. Theword is a combination of "banque or bank" and "assurance" signifying that both banking

and insurance are provided by the same corporate entity.

Other types of banks

- Islamic banking

Islamic banks adhere to the concepts of  Islamic law. Islamic banking revolves aroundseveral well established concepts which are based on Islamic canons. Since the concept of interest is forbidden in Islam, all banking activities must avoid interest. Instead of interest,

the bank earns profit (mark-up) and fees on financing facilities that it extends to thecustomers. Also, deposit makers earn a share of the bank’s profit as opposed to a predetermined interest.[citation needed ] 

Banks in the economy

Role in the money supply

A bank raises funds by attracting deposits, borrowing money in the inter- bank market, or issuing financial instruments in the money market or a

capital market. The bank then lends out most of these funds to borrowers.

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 41/50

However, it would not be prudent for a bank to lend out all of its balancesheet. It must keep a certain proportion of its funds in reserve so that it canrepay depositors who withdraw their deposits. Bank reserves are typicallykept in the form of a deposit with a central bank . This behaviour is calledfractional-reserve banking and it is a central issue of monetary policy. Notethat under  Basel I (and the new round of  Basel II), banks no longer keepdeposits with central banks, but must maintain defined capital ratios. [citation  

needed ]

Size of global banking industry

Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach arecord $60.5 trillion. This follows a 19.3% increase in the previous year. EU

 banks held the largest share, 50% at the end of 2005, up from 38% a decadeearlier. The growth in Europe’s share was mostly at the expense of Japanese

 banks whose share more than halved during this period from 33% to 13%.The share of US banks also rose, from 10% to 14%. Most of the remainder 

was from other Asian and European countries.

[citation needed ]

The US had by far the most banks (7,540 at end-2005) and branches (75,000)in the world. The large number of banks in the US is an indicator of itsgeography and regulatory structure, resulting in a large number of small tomedium sized institutions in its banking system. Japan had 129 banks and12,000 branches. In 2004, Germany, France, and Italy had more than 30,000

 branches each—more than double the 15,000 branches in the UK.[1]

Bank crisis

Banks are susceptible to many forms of risk which have triggered occasionalsystemic crises. Risks include liquidity risk (the risk that many depositorswill request withdrawals beyond available funds), credit risk (the risk thatthose who owe money to the bank will not repay), and interest rate risk (therisk that the bank will become unprofitable if rising interest rates force it to

 pay relatively more on its deposits than it receives on its loans), amongothers.

Banking crises have developed many times throughout history when one or 

more risks materialize for a banking sector as a whole. Prominent examplesinclude the U.S. Savings and Loan crisis in 1980s and early 1990s, theJapanese banking crisis during the 1990s, the  bank run that occurred duringthe Great Depression, and the recent liquidation by the central Bank of 

 Nigeria, where about 25 banks were liquidated.[citation needed ]

Challenges within the banking industry

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 42/50

The banking industry is a highly regulated industry with detailed and focusedregulators. All banks with FDIC-insured deposits have the FDIC as aregulator; however, for examinations, the Federal Reserve is the primaryfederal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (“OCC”) is the primary federal regulator for national banks;and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State non-member banks are examined by the state agencies aswell as the FDIC. National banks have one primary regulator—the OCC.

Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.

The Federal Financial Institutions Examination Council (FFIEC) wasestablished in 1979 as a formal interagency body empowered to prescribeuniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations areconstantly changing.

In addition to changing regulations, changes in the industry have led toconsolidations within the Federal Reserve, FDIC, OTS and OCC. Officeshave been closed, supervisory regions have been merged, staff levels have

 been reduced and budgets have been cut. The remaining regulators face anincreased burden with increased workload and more banks per regulator.While banks struggle to keep up with the changes in the regulatoryenvironment, regulators struggle to manage their workload and effectivelyregulate their banks. The impact of these changes is that banks are receiving

less hands-on assessment by the regulators, less time spent with eachinstitution, and the potential for more problems slipping through the cracks,

 potentially resulting in an overall increase in bank failures across the UnitedStates.

The changing economic environment has a significant impact on banks andthrifts as they struggle to effectively manage their interest rate spread in theface of low rates on loans, rate competition for deposits and the generalmarket changes, industry trends and economic fluctuations. It has been a

challenge for banks to effectively set their growth strategies with the recenteconomic market. A rising interest rate environment may seem to helpfinancial institutions, but the effect of the changes on consumers and

 businesses is not predictable and the challenge remains for banks to grow andeffectively manage the spread to generate a return to their shareholders.

The management of the banks’ asset portfolios also remains a challenge intoday’s economic environment. Loans are a bank’s primary asset categoryand when loan quality becomes suspect, the foundation of a bank is shaken to

the core. While always an issue for banks, declining asset quality has become

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 43/50

a big problem for financial institutions. There are several reasons for this, oneof which is the lax attitude some banks have adopted because of the years of “good times.” The potential for this is exacerbated by the reduction in theregulatory oversight of banks and in some cases depth of management.Problems are more likely to go undetected, resulting in a significant impacton the bank when they are recognized. In addition, banks, like any business,struggle to cut costs and have consequently eliminated certain expenses, suchas adequate employee training programs.

Banks also face a host of other challenges such as aging ownership groups.Across the country, many banks’ management teams and board of directorsare aging. Banks also face ongoing pressure by shareholders, both public and

 private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is alsoan extremely competitive industry. Competing in the financial servicesindustry has become tougher with the entrance of such players as insuranceagencies, credit unions, check cashing services, credit card companies, etc.

Bank Regulation

Bank regulations are a form of government regulation which subject banks tocertain requirements, restrictions and guidelines, aiming to uphold thesoundness and integrity of the financial system. The combination of theinstability of banks as well as their important facilitating role in the economyled to banking being thoroughly regulated. The amount of capital a bank isrequired to hold is a function of the amount and quality of its assets. Major 

 banks are subject to the Basel Capital Accord promulgated by the Bank for  International Settlements. In addition, banks are usually required to purchasedeposit insurance to make sure smaller investors are not wiped out in theevent of a bank failure.

Another reason banks are thoroughly regulated is that ultimately, nogovernment can allow the banking system to fail. There is almost always alender of last resort—in the event of a liquidity crisis (where short termobligations exceed short term assets) some element of government will step

in to lend banks enough money to avoid bankruptcy.

Public perceptions of banks

In United States history, the National Bank was a major political issue duringthe presidency of  Andrew Jackson. Jackson fought against the bank as asymbol of greed and profit-mongering, antithetical to the democratic ideals of 

the United States.[citation needed ]

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 44/50

Currently, many people consider that various banking policies take advantageof customers. In Canada, for example, the  New Democratic Party has calledfor the abolition of user fees for automated teller transactions.[2] Other specific concerns are policies that permit banks to hold deposited funds for several days, to apply withdrawals before deposits or from greatest to least,which is most likely to cause the greatest overdraft, that allow backdatingfunds transfers and fee assessments, and that authorize electronic fundstransfers despite an overdraft.[citation needed ] Some have expressed concern about

a systemic lack of bank accountability to the public in Canada. [1]

In response to the perceived greed and socially-irresponsible all-for-the-profitattitude of banks, in the last few decades a new type of bank called ethical 

 banks have emerged, which only make socially-responsible investments (for instance, no investment in the arms industry) and are transparent in all itsoperations.

In the US, credit unions have also gained popularity as an alternativefinancial resource for many consumers. Also, in various European countries,cooperative banks are regularly gaining market share in retail banking.[citation  

needed ]

Profitability

Large banks in the United States are some of the most profitablecorporations, especially relative to the small market shares they have. Thisamount is even higher if one counts the credit divisions of companies likeFord, which are responsible for a large proportion of those companies'

 profits. [citation needed ]

In the past 10 years in the United States, banks have taken many measures toensure that they remain profitable while responding to ever-changing marketconditions. First, this includes the Gramm-Leach-Bliley Act, which allows

 banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks torespond to increasing consumer demands for "one-stop shopping" byenabling cross-selling of products (which, the banks hope, will also increase

 profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interestrates to those customers that are considered to be a higher credit risk and thusincreased chance of default on loans. This helps to offset the losses from badloans, lowers the price of loans to those who have better credit histories, andoffers credit products to high risk customers who would otherwise beendenied credit. Third, they have sought to increase the methods of payment

 processing available to the general public and business clients. These products include debit cards, pre-paid cards, smart-cards, and credit cards.

These products make it easier for consumers to conveniently make

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 45/50

transactions and smooth their consumption over time (in some countries withunder-developed financial systems, it is still common to deal strictly in cash,including carrying suitcases filled with cash to purchase a home). However,with convenience there is also increased risk that consumers will mis-managetheir financial resources and accumulate excessive debt. Banks make moneyfrom card products through interest payments and fees charged to consumersand transaction fees to companies that accept the cards.

The banking industry's main obstacles to increasing profits are existingregulatory burdens, new government regulation, and increasing competitionfrom non-traditional financial institutions.

Bank size information

Top ten banking groups in the world ranked by Shareholder

equity ($m)

The 2006 bank atlas was compiled from commercial banks’ annual reports

and financial statements for 2006 and 2005.[3] Figures in U.S. dollars

Rank Country Company Shareholder equity ($m)

1 United States Citigroup 112537 $mln

2 United States JPMorgan Chase 107211 $mln

3 United States Bank of America 101224 $mln

4 United Kingdom HSBC 98226 $mln

5 Japan Mitsubishi UFJ Financial Group 83281 $mln

6 France Credit Agricole Group 65137 $mln

7 United Kingdom Royal Bank of Scotland Group 64453 $mln

8 France BNP Paribas 56610 $min

9 Spain Santander Central Hispano 53640 $min

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 46/50

10 Japan Mizuho Financial Group 52243 $min

Top ten banking groups in the world ranked by assets

Figures in U.S. dollars, and as at end-2004[4]

Rank Country Company Assets (US $)

1 Switzerland UBS 1,533 billion

2 United States Citigroup 1,484 billion

3 Japan Mizuho Financial Group 1,296 billion

4 United Kingdom HSBC Holdings 1,277 billion

5 France Credit Agricole Group 1,243 billion

6 France BNP Paribas 1,234 billion

7 United States JPMorgan Chase & Co. 1,157 billion

8 Germany Deutsche Bank  1,144 billion

9 United Kingdom Royal Bank of Scotland 1,119 billion

10 United States Bank of America 1,110 billion

Top ten banks in the world ranked by market capitalisation

Figures in U.S. dollars, and as at 26 July 2006[5] 

Rank Country Company Market Capitalisation (US $)

1 United States Citigroup 275 billion

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 47/50

2 China ICBC 250 billion

3 United States Bank of America 230 billion

4 United Kingdom HSBC 200 billion

5 United States JPMorgan Chase 165 billion

6 Japan Mitsubishi UFJ 145 billion

7 Italy Unicredit 130 billion (2007)

8 United States Wells Fargo 120 billion

9 Switzerland UBS 110 billion

10 United Kingdom Royal Bank of Scotland 100 billion

As at 16 May 2007, following the January 2007 merger between Banca Intesaand Sanpaolo SPA, Italy's newly formed Intesa Sanpaolo has a market cap of 

$104.7 billion.

Top ten bank holding companies in the world ranked by profit

Figures in U.S. dollars, and as 2006

Rank Country Company Profit (US $)

1 United States Citigroup 22.13 billion

2 United States Bank of America 21.13 billion

3 United Kingdom HSBC 14.55 billion

4 United States JP Morgan Chase 14.44 billion

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 48/50

5 United Kingdom Royal Bank of Scotland Group 12.1 billion

6 Switzerland UBS 9.79 billion

7 United States Goldman Sachs 9.34 billion

8 United States Wells Fargo 8.48 billion

9 United States Wachovia 7.79 billion

10 United States Morgan Stanley 7.45 billion

Top ten banking groups in the world ranked by Tier 1 capital

Figures in U.S. dollars, and as at end-2005[6]

Rank Country Company Tier 1 Capital (US $)

1 United Kingdom HSBC 79 billion

2 United States Citigroup 75 billion

3 United States Bank of America 73 billion

4 United States JP Morgan Chase 72 billion

5 Japan Mitsubishi UFJ Financial Group 64 billion

6 France Credit Agricole Group 60 billion

7 United Kingdom Royal Bank of Scotland 48 billion

8 Japan Sumitomo Mitsui Financial Group 40 billion

9 Japan Mizuho Financial Group 39 billion

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 49/50

10 Spain Santander Central Hispano 38 billion

History of banking

 Main article: History of bankingFlorentine banking — The Medicis and Pittis among others

Banknotes — Introduction of paper money

Bank of Amsterdam 

Bank of Sweden  — The rise of the national banks 

Bank of England — The evolution of modern central banking policies

Bank of America — The invention of centralized check and payment processingtechnology

Swiss bank  

United States Banking 

Financial markets

Finance seriesFinancial market

Financial market participants

Corporate financePersonal financePublic finance

Banks and BankingFinancial regulation

Bond market

Fixed incomeCorporate bond

Government bondMunicipal bondBond valuationHigh-yield debt

v d e

8/2/2019 Anil Stock Markets Data-27!09!07

http://slidepdf.com/reader/full/anil-stock-markets-data-270907 50/50

Stock market

Stock Preferred stock Common stock Stock exchange

Foreign exchange market

Retail forex

Derivative market

Credit derivativeHybrid security

OptionsFutures

ForwardsSwaps

Other Markets

Commodity marketOTC market

Real estate marketSpot market