Overview of the Indian Securities Market/Capital Market:
Before learning how to trade in different in financial securities or commodities, we will just give you an overview/basics about Indian stock/commodity/currency exchanges, regulators, and different participants in securities market. This will guide you to trade in Indian Financials Market.
- What is SECURITIES MARKET? Securities Market is a place where:
- Companies raise resources through public issues.
- Buyer and sellers enter into transactions and make profit or loss.
- EXAMPLES OF SECURITIES: Bonds, Stocks (also known as share, equity share), Mutual Funds, Derivatives of Securities etc.
- DERIVATIVES OF SECURITIES: Futures, Options (Call, Puts)
- What are the two types of derivative markets in India?
- Financial Derivatives and Commodity Derivatives
- Who regulates the Indian securities markets (capital markets)?
- SEBI (Securities and Exchange Board of India)
- RBI (Reserve Bank of India)
- DEA (Department of Economic Affairs)
- DCA (Department of Company Affairs)
- What are the two types within Security Markets?
- Primary Market and Secondary Markets are types of markets which are inter-dependable.
- Give examples of stock exchanges?
- NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are examples of stock exchanges. They provide a trading platform to buy and sell securities. Through NSE or BSE TRADING MEMBERS, investors can buy and sell securities.
- What is an IPO?
- IPO means Initial Public Offering. A new company xyz (which is not trading in Securities Market) may need more funds.
So it issues an IPO to PUBLIC.
- Can you name the instruments that come under IPO?
- Equity shares, bonds and non-convertible debentures.
- What is primary market?
- Companies raise resources through public issues of securities.
- Example: A new company xyz (which is not trading in Securities Market) may need more funds. So it issues an IPO EQUITY SHARE to the public. Public analyzes that company, and if they are interested, they buy that IPO. IPO shares are allotted by book building process and there are several restrictions to buy that IPO and everyone will not get shares as they like. Example: I may be interested to buy 100 IPO shares and would have paid the money to company XYZ. In this book building process, a price band is fixed and XYZ would have allocated 20 shares to me and the additional money that I paid for those 80 equity shares will be credited to me later. The reason behind this they will try to allocate shares to all who have applied. If the participants are less, then you will get those 100 IPO equity shares. Even though I was not allocated 80 shares, I will be buying those 80 shares in the secondary market.
- What is a Secondary Market?
- Secondary Market deals with securities already issued.
- Example: company XYZ'S IPO shares which are previously issued, are listed on the secondary markets and buyers and sellers do transactions here. The price band may not be same as it was in the primary market since price depends on demand. If demand is more on the listed day, you have to buy those shares with higher price and if demand is less, then price will be less.
- Give example of stock exchanges where primary market and secondary market activities happen?
- NSE (National Stock Exchange) and BSE (Bombay Stock Exchange)
- Who regulates commodities market?
- Forward Markets Commission under the guidance from Government of India.
- Are options allowed in Commodity?
- No. As of 14th March 2013, It is not allowed in commodity market. Options are allowed in stock, stock indexes, and currency.
- What are the popular commodity exchanges?
- MCX, NCDEX and NSEL. In MCX and NCDEX futures are traded. In NSEL, you can do trading on eseries products, which is similar like trading in cash segment in equities in NSE and BSE.
- What is an Index?
- Bunch of stocks grouped together and each stock has a value. If one or more of stocks value increases, then index value will increase. If one or more stocks value decreases, then index value will decrease. Example: it's like cricket score. If all players play well, then score increases; otherwise score decreases. Sometimes few players score double hundreds and centuries and most of the other players may not play well. In that situation also, score increases. Same is with Index also. Index acts as a bench mark.
- What is NIFTY?
- NIFTY contains 50 stocks. It's scientifically developed based on 50 stocks and indicates the market movement.
- What is Sensex?
- SENSEX contains 30 stocks. It's scientifically developed based on 30 stock sand indicates the market movement.
- Who are the participants in Securities Market?
- One who issues securities (Government, Private), Depositories, DP (Depository Participants), Intermediaries , (Brokers, Banks, Clearing Corporations).
- What is the role of a Depository?
- It holds the securities in an account. It transfers securities between accounts on the instruction of account holder. The Depository provides its services through its agents called DEPOSITORY PARTICIPANTS.
- Name the Depositories in stock and future market?
- NSDL - National Securities Depository Limited
- CSDL - Central Securities Depository Limited
- What is the role of a clearing corporation?
- It provides funds to those who have sold their shares.
- It receives the shares from the sellers and delivers it to the buyers.
- It provides financial guarantee for all transactions.
- Give an example of a clearing corporation:
- NSCCL: National Securities Clearing Corporation, which is a subsidy of NSE.
- What is a Demat account?
- Securities are held electronically and transfer of securities happens electronically. There are no physical certificates, when you buy the shares. Everything is stored electronically.
- What is an ISIN?
- International Securities identification Number is a unique identification number for a security.
- What is the role of a broker?
- Mediator between you and exchanges, depositories, Clearance Corporation, banks etc.
- Provides a trading platform for trading.
- Collects AMOUNT from you for trading.
- Charges service fee for their services, collects appropriate fee and remits to stock exchanges, regulators and Government of India etc for the transactions that you do.
- Researches the financial securities and advices you on trading.
- Sends contract note to you for your transactions.
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