Portfolio Investment

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<p>INTRODUCTION TO STOCK MARKETEvery individual tries to plan &amp; secure his/her future using various avenues of investment. An individual invests money because of multiple reasons. A few of these can be listed as :More and more returns on money invested, thus a new source of income. Planning/ securing ones future Tax benefits Saving for childrens education/ social obligation Safety Hedging against devaluation Possessing liquidity</p> <p>The growth of an economy and hence development of a nation depends on the amount of resources that are readily available to various factors of production in the economy. Implicit in this statement is the fact that savings/investment of the inhabitants and other like Non- residents, foreigners, both individual and institutions play a key role. It is financial markets which help in channelising the savings/ investments into the economy and makes it available to factor of production. A Stock Market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. All the participants in the stock market range from small individual to large hedge fund traders, who can be based anywhere. The purpose of a stock exchange is to facilitate the exchange of securities between the buyers and sellers and thus providing a marketplace (virtual or real). Years ago, buyers and sellers were the individual investors, such as wealthy businessmen, with long family histories to particular corporations. Over the time, markets have become more 'institutionalized', buyers and sellers are largely institutions such as pension funds, insurance companies, mutual funds, index funds, banks and various other financial institutions.</p> <p>The stock market is one of the most important sources for the companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. Last but not the least, Riskier long term savings requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in a marked contrast to the stability of bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. Financial Markets consist of Money Market and Capital Market. Money Market provides short-term capital to borrowers for meeting their short term working requirement.</p> <p>Capital Market is a market for long term funds.</p> <p>ABOUT CAPITAL MARKETThe market where investment funds like bonds, equities and mortgages are traded is known as the capital market. The primal role of the capital market is to channelize investments from investors who have surplus funds to the ones who are running a deficit. The capital market offers both long term and overnight funds. The financial instruments that have short or medium term maturity periods are dealt in the money market whereas the financial instruments that have long maturity periods are dealt in the capital market. The different types of financial instruments that are traded in the capital markets are equity instruments, credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments and derivative instruments. The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. Thus bond markets and stock markets are considered capital markets. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded. The Indian Equity Markets and the Indian Debt markets together form the Indian Capital markets The Indian Equity Market depends mainly on monsoons, global funds flowing into equities and the performance of various companies. The Indian Equity Market is almost wholly dominated by two major stock exchanges -National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). The benchmark indices of the two exchanges - Nifty of NSE and Sensex of BSE are closely followed. The two exchanges also have an F&amp;O (Futures and options) segment for trading in equity derivatives including the indices. The major players in the Indian Equity Market are Mutual Funds, Financial Institutions and FIIs representing mainly Venture Capital Funds and Private Equity Funds. Indian Equity Market at present is a lucrative field for investors. Indian Stocks are profitable not only for long and medium-term investors but also the position traders, short-term swing traders and also very short term intra-day traders. In India as on December 30 2007, market capitalization (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with other emerging economies and selected matured markets.</p> <p>For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. Capital market is further sub divided in to: PRIMARY MARKET (New issues market) Primary market denotes the market for new issues. It has no physical existence. It is concerned with the floatation and issue of new shares and debentures by new or existing companies. The shares are offered to the public. The primary market establishes a linkage between the companies raising finance and the investing public. To make new issues, companies are assisted by brokers, underwriters or commercial banks, in general. The public, who are interested in subscribing for the shares of the company, must submit an application form. The forms will be available with the brokers, underwriters, etc. The investing public invests their saving in securities for varied reasons. They should be able to dispose the securities, in case of need. Sale of securities is a specialized activity. Hence, the companies issuing the securities should make use of the services of agencies/ institutions who are specialists in issue of securities. Methods of new issues The company, which raises finance through new issues, may Follow any of the following methods: a) Public issue b) Offer for sale c) Through intermediaries (i) Private placement (ii) Sundry intermediaries (iii) Managing brokers d) Underwriting e) Rights issue Secondary market A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the New York Stock Exchange and the NASDAQ are secondary markets. Secondary markets exist for other securities as well, such as when funds,</p> <p>investment banks, or entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly. In the case of assets like mortgages, several secondary markets may exist, as bundles of mortgages are often re-packaged into securities like GNMA Pools and re-sold to investors. Definition A market in which an investor purchases a security from another investor rather than the issuer, subsequent to the original issuance in the primary market. also called aftermarket. STOCK EXCHANGE The word Stock means a fraction of the capital of a company and the word Exchange means a place for purchasing and selling something. Stock exchanges deal in securities like shares, debentures or bonds issued by the companies or corporations in the private as well as public sector and bonds issued by the central and state governments. The Securities Contracts (Regulations) Act, 1956 defines stock exchange as an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities. According to Hastings stock exchange or securities market comprises all the places where buyers and sellers of stock and bonds or their representatives, undertake transactions involving the sales of securities.</p> <p>FUNCTIONS OF STOCK EXCHANGEThe functions performed by a stock exchange are as follows: 1. Ready Market: Stock exchange ensures increased liquidity and ready market for the securities. This enables it to attract people Who have surplus money even for a short period of time. 2. Mobilization of Savings: Stock exchange helps in mobilization of surplus funds of individuals, business firms and cooperatives for investment in popular securities. 3. Evaluation of Securities: Stock exchange helps in determining the price of various securities. The prices at which transactions</p> <p>take place are recorded and they are made public in the form of market quotations which help the investors to know current market prices of various securities. 4. Capital Formation: Stock exchange not only mobilizes the existing savings but also induces the public to save money. This facilitates capital formation in the country. 5. Proper Canalization of Capital: Stock exchange directs the flow of savings into the most productive channels. When an existing Company issues securities to raise more capital, it will be successful only if it is earning sufficient profits. Public response to such issues by weaker companies will be discouraging. 6. Fair Dealings: Stock exchanges ensure fair dealings and safety of funds because of strict regulations on the working of stock Exchange. The members of the stock exchange have to operate under certain rules which checks over trading, illegitimate speculation and manipulation. Thus, stock exchange safeguards the interest of the investors. 7. Control of Corporate Sector: Every company has to conform to the rules framed by the stock exchange. Through these rules, stock exchange exercises influence on the management and working of companies in public interest 8. Barometer of Business Progress: Stock exchange acts as a Barometer of the business conditions in the country. Booms and Depressions are reflected by the index of prices of various securities maintained by the stock exchange. Optional. Listing is now made compulsory for all public companies, However, subject to certain exemptions.</p> <p>STOCK MARKET IN INDIAStock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. HISTORY OF THE INDIAN STOCK MARKET THE ORIGIN One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history. 18th Century 1830's 1840's 1850's 1860's 1860-61 1862-63 1865 East India Company was the dominant institution and by end of the century, busuness in its loan securities gained full momentum Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader Recognition from banks and merchants to about half a dozen brokers Rapid development of commercial enterprise saw brokerage business attracting more people into the business The number of brokers increased to 60 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India The number of brokers increased to about 200 to 250 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)</p> <p>PRE- INDEPENDENCE SCENARIO ESTABLISHMENT OF DIFFERENT STOCK EXCHANGE.</p> <p>With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business. 1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay 1880's Development of cotton mills industry and set up of many others 1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association" 1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal 1908 "The Calcutta Stock Exchange Association" was formed 1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. 1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down 1934 Establishment of the Lahore Stock Exchange 1936 Merger of the Lahore Stock Exchange with the Punjab Stock Exchange 1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies 1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established 1944 Establishment of "The Hyderabad Stock Exchange Limited" 1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited" 1874 Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table:</p> <p>S.</p> <p>As on 31st December</p> <p>194 196 197 197 198 1985 1991</p> <p>1995</p> <p>No. 1 No. of Stock Exchanges 2 No. of Listed Cos. 3 4 5 6 7 8 No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lak Rs.)</p> <p>6</p> <p>1</p> <p>1</p> <p>5 8 155 2 323 0 261 4 327 3</p> <p>0 9 226 5 369 7 397 3 675 0 14 4344 6174 20 6229 22 8593</p> <p>7 7 8 112 120 159 5 3 9 150 211 283 6 1 8 181 270 753 2 129 267 971 2 5 24</p> <p>8967 11784</p> <p>9723 32041 59583 2530 11027 478121 2 9 224 582 260 514 1770 344 693 5564 803</p> <p>63 113 168 175</p> <p>86 107 167 211 298 358 170 148 126 170</p> <p>Trading Pattern of the Indian Stock Market Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange. They are divided into two categories:</p> <p>Types of Transactions The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:</p> <p>Indian stock exchange allows...</p>