Securities Market – A Broad Overview:
Securities markets provide a channel for allocation of savings to those who
have a productive need for them. As a result, the savers and investors are not
constrained by their individual abilities, but by the economy’s abilities to
invest and save respectively, which enhances savings and investment in the economy.
Types of Securities:
There are different types of securities in which investors can opt to invest. Broadly those securities include : Debt securities like bonds, debentures, government securities etc. and Equities like shares, ADRs and GDRs.
Bond:
It is an instrument for long term debt. It’s a security that obligates the issuer to make specified payments to the bondholder.
Equity:
Equity, refers to the residual claim or interest of the mass number of investors (share holders) in an asset, after all liabilities are paid.
Debentures:
The term is used in corporate finance for a medium to long-term debt instrument used by large companies to borrow money.
Government Securities:
Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities. Mostly Government Securities are interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments.
ADR:
An American Depositary Receipt (or ADR) is a negotiable certificate representing ownership of shares in a non-U.S corporation. ADRs are quoted
and traded in U.S. dollars in the U.S. securities market. Also, the dividends
are paid to investor in U.S. dollars. ADRs were specifically designed to
facilitate the purchase, holding and sale of non-U.S. securities by U.S.
investor, and to provide a corporate finance vehicle for non-U.S. companies.
GDR:
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering. GDRs may be used in either the public or private markets inside or outside the US. GDR, a negotiable certificate usually represents a company’s publicly traded equity or debt.
Other than securities, people can invest in funds - Index Fund, Mutual Fund, Exchange Traded Fund
Index Fund: Index funds are those funds which track the performance of an index. in Indian context, the index funds attempt to copy the performance of the two main indicies in the market =>S&P CNX Nifty or Sensex. This is done by investing in all the stocks that comprise the index in proportions equal to the weightage given to those stocks in the index. Index funds do not trade stocks throughout the year. They at times hold the stocks for the full year even if there are changes in the composition of index, this reduces transaction costs. Index funds are appropriate for conservative long term investors looking at moderate risk, moderate return arising out of s well diversified portfolio.
Mutual Funds: A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc.
Mutual funds can be of two types : Close ended and Open ended
Close ended mutual funds have a limited life defined at the time of issue; while open ended mutual funds can have unlimited life period.
Exchange Traded Fund: An exchange traded fund (ETFs) is a type of Investment Company whose investment objective is to achieve similar returns as in case of a particular market index. ETFs can either invest in either all of the securities or a representative sample of securities included in the index. The ETFs offer a one stop exposure to a diversified basket of securities that can be traded in real time like an individual stock. The first ETFs in India, based on S&P CNX Nifty, was the Nifty Benchmark Exchange Traded Scheme (Nifty BeES).
Procedure for Trading:
There are 23 stock exchanges in India. They follow a trading system with systematic and similar settlement procedure.
Screen Based Trading System:
Online screen based trading system is a system, where a broker (member of a stock exchange) can punch into the trading computer-the quantity, the price and the specification of a security in which he would like to transact and the transaction is executed as soon as a matching sell/buy order is found from a counter party broker.
Active Order:
When an order is placed, the system will try and find the match from the orders that already exists. The incoming orders are called active order.
Passive Order:
When an order is placed, the system will try and find the match from the orders that already exists. Those orders which already exist on the system, are called passive order.
Order Price: An order can be placed either in market rate (market order) or specified rate (limit order).
Market Order:
Market orders are orders for which price is specified as 'MKT' at the time the order is entered. For such orders, the system determines the price.
Market order to buy is market buy order.
Market order to sale is market sale order.
Limit Order:
It’s an order, in which the investor specifies the limit price in addition to the quantity that he wishes to offer. In the case of a buying order limit price is the highest price that the investor is willing to pay where as in case of sale order it’s the lowest price that he is willing to accept.
Dematerialised Trading:
SEBI has made it compulsory that trading in securities should be only in dematerialised form. A depository holds securities in dematerialised form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry.
Institutional Trades:
Trades by mutual funds and foreign institutional investors are termed as institutional trades. Transactions by mutual funds in the secondary market are governed by SEBI regulations, 1996.
Contract Note:
Contract note (form A) is a legal contractual document between the broker and the client, as per the Securities Contract Regulation Act, 1956 and SEBI Act, 1992.
A contract note contains the date and time of transaction, order number, trade number, security name, quantity traded, market rate, brokerage, service tax and securities transaction tax applicable.
At present a client can opt to receive physical or electronic contract notes.
Brokerage:
Brokerage is the amount payable by a client to his broker for the transactions executed. Brokerage can be maximum 2.5% of the total trade value of trade as specified by the law. However, there is no lower limit specified for brokerage charged.
Securities Transaction Tax (STT):
In the union budget 2004-05, government proposed the Securities Transaction Tax relating to securities transactions. It is collected by the stock exchange from the broker on behalf of the government. In turn the broker collects the STT from the client for each trade.
Procedure for Clearing and Settlement:
The transactions in secondary market pass through three distinct phases=>trading, clearing and settlement. While the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities obligations for trading members for settlement of funds and securities obligations of trading members. The clearing process involves determination of what counter parties owe and which counter parties are due to receive on the settlement date, thereafter the obligations are discharged by settlement.
| :: Settlement Procedure :: |
The clearing corporation is responsible for post trade activities such as the risk management and the clearing and settlement of trades executed on a stock exchanges.
Clearing Bank:
Clearing banks are a key link between the clearing members and Clearing Coproration to effect settlement of funds. Every clearing member is required to open a dedicated clearing account with one of the designated clearing bank.
Depository:
A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, government securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides service related to transactions in securities.
Clearing Member:
Clearing members are responsible for settling their obligations. They do so by making available funds and /or securities in the designated accounts with clearing bank / depositories on the date of settlement.
Types of Settlement:
On every stock exchange, various settlements are effected every day such as daily settlement, auction settlement etc. Each of these settlements is identified by combination of a market type and a settlement number. Hence investors are required to mention the appropriate settlement details on the delivery instruction slip while transferring the shares to their broker’s account. These settlement details are available on the contract note issued by the broker.
Trading Procedure:
Procedure for Sale:
The procedure for selling dematerialised securities is very simple.
:: A person sells securities in any of the stock exchanges linked to NSDL through a broker;
:: Then he gives instruction to his Depository Participant (DP) to debit his account and credit the broker’s account before the deadline time specified by his DP.
:: Before the pay-in day, his broker gives instruction to its DP for delivery to clearing corporation;
:: His broker receives payment from the stock exchange (clearing corporation).
:: Finally he receives payment from the broker for the sale of securities.
Procedure for Purchase:
:: A person purchases securities through a broker;
:: He makes payment to his broker who arranges payment to clearing corporation on the pay-in day.
:: His broker receives credit of securities in its clearing account (clearing member account) on the pay-out day.
:: Then his broker gives instructions to its DP to debit its clearing member account and credit his account.
:: Finally the person receives shares into his account. However, if standing instructions are not given at the time of opening the account, he will have to give ‘Receipt Instructions’ to his DP for receiving credit.
Important facts for an investor:
Margin:
Margins form a key part of the risk management system. In the stock a market there is always an uncertainty in the movement of share prices. This
uncertainty leads to risk which is addressed by margining system of stock markets.
Types of margin:
:: Value at Risk (VaR) margin
:: Extreme Loss Margin
:: Mark to Market Margin
Circuit Breakers:
Volatility in stock prices is a cause of concern for both the policy makers and the investors. To curb excessive volatility, SEBI has prescribed a system of circuit breakers. The circuit breaker brings about a nation wide coordinated halt in trading on all the equity and equity derivatives markets.
Book building through online IPO system:
Book building is basically a process used in IPO for efficient price discovery, wherein during the period when the offer is open, bids are collected from investors at various prices, which are above or equal to the floor price. An infrastructure for conducting online IPOs through book building has been offered. It helps to discover price as well as demand for the security to be issued through a process of bidding.
Disinvestment in PSUs in India:
Disinvestment represents sale of government share holding in public sector undertakings (PSUs).the disinvestment commission was set up in 1996 and it recommended mainly a shift from public offerings to a strategic/trade sales with transfer of management in respect of a number of PSUs.The main objective of disinvestment has been to reduce the fiscal deficit, and distribute the shares to a wider investor base. Disinvestment through the capital market route is most preferred route these days as it has certain advantages over the strategic sale route such as: a) increases public ownership, b) helps in better price recovery.
Market Capitalization:
Market capitalization represents the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share. For example, if XYZ company has 15,000,000 shares outstanding and a share price of $20 per share then the market capitalization is 15,000,000 x $20 = $300,000,000.
KYC norm:
Know your customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Know your customer policies have becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing.KYC should not be thought of as a form to be filled - it is a process to be undergone from the start of a customer relationship to the end.
Insider Trading:
Insider trading is considered an offence and is hence prohibited. As per SEBI regulation, 1992 insiders are prohibited from dealing in listed securities on the basis of ‘unpublished price sensitive information’, communicating, counseling or procuring such information from any other person to deal in securities of any company on the basis of such information.
Legal Framework:
SEBI Act, 1992:
The SEBI act, 1992 was enacted to empower SEBI with statutory powers for:
:: Protecting the interests of investors in securities,
:: Promoting the development of securities market and
:: Regulating the securities market.
Securities contract Act, 1956:
It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives Central Government regulatory jurisdiction over:
:: Stock exchanges through a process of recognition and continued supervision,
:: Contracts in securities, and
:: Listing of securities on stock exchanges.
Depositories Act, 1996:
The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by:
:: Making securities of public limited companies freely transferable subject to certain exceptions;
:: Dematerialising the securities in the depository mode; and
:: Providing for maintenance of ownership records in a book entry form.
Solution of Dispute:
Investor Service Cell (ISC):
Investor complaints received against the trading members / companies in respect of claims/disputes for transactions executed on the Exchange are handled by the Investor Service Cell (ISC). The complaints are forwarded to the trading members for resolution and seeking clarifications.
Arbitration:
Arbitration, which is a quasi judicial process, is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996. The Exchange Bye Laws prescribe the provisions in respect of Arbitration and the procedure therein has been prescribed in the Regulations.
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