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INTRODUCTION TO STOCK MARKETEvery individual tries to plan & 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
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.
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.
Capital Market is a market for long term funds.
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&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.
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,
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.
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
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