Professional Documents
Culture Documents
CHAPTER 1:
INTRODUCTION TO CAPITAL MARKETS
Importantly, when you, as a shareholder, need your money back, you can sell these
shares to other or new investors. Such trades do not reduce or alter the companys capital.
Stock exchanges bring such sellers and buyers together and facilitate trading. Therefore,
companies raising money from public are required to list their shares on the stock exchange.
This mechanism of buying and selling shares through stock exchange is known as the
secondary markets.
As a shareholder, you are part owner of the company and entitled to all the benefits
of ownership, including dividend (companys profit distributed to owners). Over the years if
the company performs well, other investors would like to become owners of this performing
company by buying its shares. This increase in demand for shares leads to increase in its
price. You then have the option of selling your shares at a higher price than at which you
purchased it. You can thus increase your wealth, provided you make the right choice. The
reverse is also true!
Apart from shares, there are many other financial instruments (securities) used for
raising capital. Debentures or bonds are debt instruments that pay interest over their lifetime
and are used by corporates to raise medium or long-term debt capital. If you prefer fixed
income, you may invest in these instruments, which may give you higher rate of interest
than bank fixed deposit, because of the higher risk. Besides, equity and debt, a combination
of these instruments, like convertible debentures, preference shares are also issued to raise
capital.
If you have constraints like time, wherewithal, small amount etc. to invest in the
market directly, Mutual Funds (MFs), which are regulated entities, provide an alternative
avenue. They collect money from many investors and invest the aggregate amount in the
markets in a professional and transparent manner. The returns from these investments net of
management fees are available to you as a MF unit holder.
MFs offer various schemes, like those investing only in equity or debt, index funds,
gold funds, etc. to cater to risk appetite of various investors. Even with very small amounts,
you can invest in MF schemes through monthly systematic investment plans (SIP).
The institutions, players and mechanism that bring suppliers and users of capital
together, is known as capital market. It allows people to do more with their savings by
providing variety of assets thereby enhancing the wealth of investors who make the right
choice. Simultaneously, it enables entrepreneurs to do more with their ideas and talent,
facilitating capital formation.
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Thus capital market mobilizes savings and channelizes it, through securities, into
preferred entrepreneurs.
It is not that the providers of funds meet the user of and exchange funds for
securities. It is because the securities offered by the users may not match the preference of
the providers of funds. There are a large variety of intermediaries who bring the providers
and user of funds together to facilitate the transactions.
The market is supervised by SEBI. It ensures supply of quality securities and nonmanipulated demand for them. It develops best market practices and takes enforcement
actions against the miscreants. It essentially maintains discipline in the market so that the
participants can undertake transaction safely.
1.1 Definition of Capital Market
Capital markets are financial markets for the buying and selling of long-term debt or
equity-backed securities. These markets channel the wealth of savers to those who can put it
to long-term productive use, such as companies or governments making long-term
investments.
1.1.A. Major Objectives of Indian Capital Market
To mobilize resources for investments.
To facilitate buying and selling of securities.
To facilitate the process of efficient price discovery.
To facilitate settlement of transactions in accordance with the predetermined time
schedules.
1.1.B. Reforms in Capital Market of India
The major reform undertaken in capital market of India includes:
Establishment of SEBI:
The Securities and Exchange Board of India (SEBI) was established in 1988. It got a
legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant
banks, to control the operations of mutual funds, to work as a promoter of the stock
exchange activities and to act as a regulatory authority of new issue activities of companies.
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investors. It tries to protect the interest of the small investors from frauds and malpractices in
the capital market.
Growth of Derivative Transactions:
Since June 2000, the NSE has introduced the derivatives trading in the equities. In
November 2001 it also introduced the future and options transactions. These innovative
products have given variety for the investment leading to the expansion of the capital
market.
Commodity Trading:
Along with the trading of ordinary securities, the trading in commodities is also
recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such
transactions is growing at a splendid rate.
These reforms have resulted into the tremendous growth of Indian capital market.
1.1.C. Factors Affecting Capital Market in India
A range of factors affects the capital market. Some of the factors that influence capital
market are as follows: Performance of domestic Companies: The performance of the companies or rather corporate earnings is one of the factors
that have direct impact or effect on capital market in a country. Weak corporate earnings
indicate that the demand for goods and services in the economy is less due to slow growth in
per capita income of people. Because of slow growth in demand there is slow growth in
employment that means slow growth in demand in the near future. Thus weak corporate
earnings indicate average or not so good prospects for the economy as a whole in the near
term. In such a scenario the investors (both domestic as well as foreign) would be wary to
invest in the capital market and thus there is bear market like situation. The opposite case of
it would be robust corporate earnings and its positive impact on the capital market.
Environmental Factors: Environmental Factor in Indias context primarily means- Monsoon. In India around
60 % of agricultural production is dependent on monsoon. Thus there is heavy dependence
on monsoon. The major chunk of agricultural production comes from the states of Punjab,
Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country
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would directly affect the agricultural output in the country. Apart from monsoon other
natural calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the
capital market of a country.
Macro Economic Numbers: The macroeconomic numbers also influence the capital market. It includes Index of
Industrial Production (IIP) which is released every month, annual Inflation number indicated
by Wholesale Price Index (WPI) which is released every week, Export Import numbers
which are declared every month, Core Industries growth rate (It includes Six Core
infrastructure industries Coal, Crude oil, refining, power, cement and finished steel) which
comes out every month, etc. This macro economic indicators indicate the state of the
economy and the direction in which the economy is headed and therefore impacts the capital
market in India.
Global Cues: In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other parts of the world;
however the magnitude and intensity of impact would vary. Thus capital market in India is
also affected by developments in other parts of the world i.e. U.S., Europe, Japan, etc.
Global cues includes corporate earnings of MNCs, consumer confidence index in developed
countries, jobless claims in developed countries, global growth outlook given by various
agencies like IMF, economic growth of major economies, price of crude oil, credit rating of
various economies given by Moodys, S & P, etc.
Political stability and government policies: For any economy to achieve and sustain growth it has to have political stability and
pro- growth government policies. This is because when there is political stability there is
stability and consistency in governments attitude that is communicated through various
government policies. The vice- versa is the case when there is no political stability .So
capital market also reacts to the nature of government, attitude of government, and various
policies of the government.
Growth prospectus of an economy: When the national income of the country increases and per capita income of people
increases it is said that the economy is growing. Higher income also means higher
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expenditure and higher savings. This augurs well for the economy as higher expenditure
means higher demand and higher savings means higher investment. Thus when an economy
is growing at a good pace capital market of the country attracts more money from investors,
both from within and outside the country and vice -versa. So we can say that growth
prospects of an economy do have an impact on capital markets.
Investor Sentiment and risk appetite:Another factor, which influences capital market, is investor sentiment and their risk
appetite. Even if the investors have the money to invest but if they are not confident about
the returns from their investment, they may stay away from investment for some time. At the
same time if the investors have low risk appetite, which they were having in global and
Indian capital market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe, they may stay away from investment
and wait for the right time to come.
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CHAPTER 2:
CLASSIFICATION OF CAPITAL MARKET
2.1Primary Market
Companies issue securities from time to time to raise funds in order to meet their
financial requirements for modernization, expansions and diversification programs. These
securities are issued directly to the investors (both individuals as well as institutional)
through the mechanism called primary market or new issue market. The primary market
refers to the set-up, which helps the industry to raise the funds by issuing different types of
securities. This set-up consists of the type
of
securities
available,
institutions
and
framework.
The
the
primary
financial
regulatory
market
or
other
investors
with
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It is the segment of the capital market where capital formation occurs; and
In order to obtain required financing, new issues of shares, debentures securities
are sold in the primary market. Subsequent trading in these securities occurs in other
segment of the capital market, known as secondary market.
The securities that are often resorted for raising funds are equity shares, preference
shares, bonds, debentures, warrants, cumulative convertible preference shares, zero interest
convertible debentures, etc. Public issues of securities may be made through:
Prospectus,
Offer for sale,
Book building process and
Private placement
The investors directly subscribe the securities offered to public through a prospectus. The
company through different media generally makes wide publicity about the public offer.
2.1.A. Activities in the Primary Market
Appointment of merchant bankers
Collection of money
Pricing of securities being issued
Minimum subscription
Communication/ Marketing of the issue
Listing on the stock exchange(s)
Information on credit risk
Allotment of securities in demat/ physical mode
Making public issues
Record keeping
2.1.B. Function of Primary Market
Organization: Deals with the origin of the new issue. The proposal is analyzed in
terms of the nature of the security, the size of the issued timings of the issue and flotation
method of the issue.
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borrowers in new issue market raise capital for converting private capital into public
capital.
2.1.E. Types of issues
Primary market Issues can be classified into four types.
Initial Public Offer (IPO):
When an unlisted company makes either a fresh issue of securities or an offer for
sale of its existing securities or both, for the first time to the public, the issue is called as an
Initial Public Offer.
Follow On Public Offer (FPO):
When an already listed company makes either a fresh issue of securities to the public
or an offer for sale of existing shares to the public, through an offer document, it is referred
to as Follow on Offer (FPO).
Rights Issue:
When a listed company proposes to issue fresh securities to its existing shareholders,
as on a record date, it is called as a rights issue. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This route is best suited for
companies who would like to raise capital without diluting stake of its existing shareholders.
A Preferential issue:
A Preferential Issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act, 1956, that is
neither a rights issue nor a public issue. This is a faster way for a company to raise equity
capital. The issuer company has to comply with the Companies Act and the requirements
contained in the chapter, pertaining to preferential allotment in SEBI guidelines, which interalia include pricing, disclosures in notice etc.
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CHAPTER 3:
PARTICIPANTS OF INDIAN CAPITAL MARKET
There are several major players in the primary market. These include the merchant
bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and
individual investors. In the secondary market, there are the stock exchanges, stock brokers
(who are members of the stock exchanges), the mutual funds, financial institutions, foreign
institutional investors (FIIs), and individual investors. Registrars and Transfer Agents,
Custodians and Depositories are capital market intermediaries that provide important
infrastructure services for both primary and secondary markets.
I. Custodians
In the earliest phase of capital market reforms, to get over the problems associated
with paper-based securities, large holding by institutions and banks were sought to be
immobilized. Immobilization of securities is done by storing or lodging the physical security
certificates with an organization that acts as a custodian - a securities depository. All
subsequent transactions in such immobilized securities take place through book entries. The
actual owners have the right to withdraw the physical securities from the custodial agent
whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of
the beneficiary owners based on which the depository gives credit to the account of
beneficiary owners. The Stock Holding Corporation of India Limited was set up to act as a
custodian for securities of a large number of banks and institutions who were mainly in the
public sector. Some of the banks and financial institutions also started providing "Custodial"
services to smaller investors for a fee. With the introduction of dematerialisation of
securities there has been a shift in the role and business operations of Custodians. But they
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still remain an important intermediary providing services to the investors who still hold
securities in physical form.
II. Depositories
The depositories are important intermediaries in the securities market that is scripless or moving towards such a state. In India, the Depositories Act defines a depository to
mean "a company formed and registered under the Companies Act, 1956 and which has
been granted a certificate of registration under sub-section (IA) of section 12 of the
Securities and Exchange Board of India Act, 1992." The principal function of a depository is
to
dematerialise
securities
and
enable
their
transactions
in
book-entry
form.
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applicants who are stockbrokers or non-banking finance companies (NBFCs), for granting a
certificate of registration to act as a DP. For R & T Agents a minimum net worth of Rs. 10
crore is prescribed in addition to a grant of certificate of registration by SEBI. If a
stockbroker seeks to act as a DP in more than one depository, he should comply with the
specified net worth criterion separately for each such depository. If an NBFC seeks to act as
a DP on behalf of any other person, it needs to have a networth of Rs. 50 cr. in addition to
the networth specified by any other authority. No minimum net worth criterion has been
prescribed for other categories of DPs. However, depositories can fix a higher net worth
criterion for their DPs. NSDL stipulates a minimum net worth of Rs. 300 Lakh to be eligible
to become a DP as against Rs. 50 lakh prescribed by SEBI (D&P) Regulations, except for R
& T agents and NBFCs, as mentioned above.
IV. Merchant Bankers
Among the important financial intermediaries are the merchant bankers. The services
of merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though they
are distinct categories. The services provided by merchant banks depend on their inclination
and resources - technical and financial. Merchant bankers (Category I) are mandated by
SEBI to manage public issues (as lead managers) and open offers in take-overs. These two
activities have major implications for the integrity of the market. They affect investors'
interest and, therefore, transparency has to be ensured. These are also areas where
compliance can be monitored and enforced.
Merchant banks are rendering diverse services and functions. These include
organising and extending finance for investment in projects, assistance in financial
management, raising Eurodollar loans and issue of foreign currency bonds. Different
merchant bankers specialise in different services. However, since they are one of the major
intermediaries between the issuers and the investors, their activities are regulated by:
SEBI (Merchant Bankers) Regulations, 1992.
Guidelines of SEBI and Ministry of Finance.
Companies Act, 1956.
Securities Contracts (Regulation) Act, 1956.
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sent. The Lead manager coordinates with the Registrar to ensure follow up so that that the
flow of applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund orders
completed and securities listed.
VI. Bankers to the issue
Bankers to the issue, as the name suggests, carries out all the activities of ensuring
that the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection
centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the
issue to get quick estimates of collection and advising the issuer about closure of the issue,
based on the correct figures.
VII. Underwriters
Underwriting is an agreement, entered into by a company with a financial agency, in
order to ensure that the public will subscribe for the entire issue of shares or debentures
made by the company. The financial agency is known as the underwriter and it agrees to buy
that part of the company issues which are not subscribed to by the public in consideration of
a specified underwriting commission. The underwriting agreement, among others, must
provide for the period during which the agreement is in force, the amount of underwriting
obligations, the period within which the underwriter has to subscribe to the issue after being
intimated by the issuer, the amount of commission and details of arrangements, if any, made
by the underwriter for fulfilling the underwriting obligations. The underwriting commission
may not exceed 5 percent on shares and 2.5 percent in case of debentures. Underwriters get
their commission irrespective of whether they have to buy a single security or not.
Types of underwriting
Syndicate Underwriting: - is one in which, two or more agencies or underwriters
jointly underwrite an issue of securities. Such an arrangement is entered into when the total
issue is beyond the resources of one underwriter or when he does not want to block up large
amount of funds in one issue.
Sub-Underwriting:- is one in which an underwriter gets a part of the issue further
underwritten by another agency. This is done to diffuse the risk involved in underwriting.
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The name of every under-writer is mentioned in the prospectus along with the amount of
securities underwritten by him.
Firm Underwriting: - is one in which the underwriters apply for a block of
securities. Under it, the underwriters agree to take up and pay for this block of securities as
ordinary subscribers in addition to their commitment as underwriters. The underwriter need
not take up the whole of the securities underwritten by him. For example, if the underwriter
has underwritten the entire issue of 5 lakh shares offered by a company and has in addition
applied for 1 lakh shares for firm allotment. If the public subscribes to the entire issue, the
underwriter would be allotted 1 lakh shares even though he is not required to take up any of
the shares.
Types of underwriters
Underwriting of capital issues has become very popular due to the development of
the capital market and special financial institutions. The lead taken by public financial
institutions has encouraged banks, insurance companies and stock brokers to underwrite on a
regular basis. The various types of underwriters differ in their approach and attitude towards
underwriting: Development banks like IFCI, ICICI and IDBI: - they follow an entirely objective
approach. They stress upon the long-term viability of the enterprise rather than
immediate profitability of the capital issue. They attempt to encourage public
response to new issues of securities.
Institutional investors like LIC and AXIS: - their underwriting policy is governed by
their investment policy.
Financial and development corporations: - they also follow an objective policy while
underwriting capital issues.
Investment and insurance companies and stock-brokers: - they put primary emphasis
on the short term prospects of the issuing company as they cannot afford to block
large amount of money for long periods of time.
To act as an underwriter, a certificate of registration must be obtained from
Securities and Exchange Board of India (SEBI). The certificate is granted by SEBI under the
Securities and Exchanges Board of India (Underwriters) Regulations, 1993. These
regulations deal primarily with issues such as registration, capital adequacy, obligation and
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responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid
agreement with the issuer entity and the said agreement among other things should define
the allocation of duties and responsibilities between him and the issuer entity. These
regulations have been further amended by the Securities and Exchange Board of India
(Underwriters) (Amendment) Regulations, 2006.
VIII.Credit Rating Agencies
The 1990s saw the emergence of a number of rating agencies in the Indian market.
These agencies appraise the performance of issuers of debt instruments like bonds or fixed
deposits.
The rating of an instrument depends on parameters like business risk, market
position, operating efficiency, adequacy of cash flows, financial risk, financial flexibility,
and management and industry environment.
The objective and utility of this exercise is two-fold. From the point of view of the
issuer, by assigning a particular grade to an instrument, the rating agencies enable the issuer
to get the best price. Since all financial markets are based on the principle of risk/reward, the
less risky the profile of the issuer of a debt security, the lower the price at which it can be
issued. Thus, for the issuer, a favorable rating can reduce the cost of borrowed capital. From
the viewpoint of the investor, the grade assigned by the rating agencies depends on the
capacity of the issuer to service the debt. It is based on the past performance as well as an
analysis of the expected cash flows of a company, when viewed on the industry parameters
and performance of the company. Hence, the investor can judge for himself whether he
wants to place his savings in a "safe" instrument and get a lower return or he wants to take a
risk and get a higher return.
The 1990s saw an increase in activity in the primary debt market. Under the SEBI
guidelines all issuers of debt have to get the instruments rated. They also have to
prominently display the ratings in all that marketing literature and advertisements. The
rating agencies have thus become an important part of the institutional framework of the
Indian securities market.
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FIIs contribute to the foreign exchange inflow as the funds from multilateral finance
institutions and FDI are insufficient.
It lowers cost of capital, access to cheap global credit.
It supplements domestic savings and investments.
It leads to higher asset prices in the Indian market.
And has also led to considerable amount of reforms in capital market and financial
sector.
XVI. R&T Agents - Registrars to Issue
R&T Agents form an important link between the investors and issuers in the
securities market. A company, whose securities are issued and traded in the market, is
known as the Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service
the investors in respect of all corporate actions like sending out notices and other
communications to the investors as well as despatch of dividends and other non-cash
benefits. R&T Agents perform an equally important role in the depository system as well.
These are described in detail in the second section of this Workbook.
XVII. Stock Brokers
Stockbrokers are the intermediaries who are allowed to trade in securities on the
exchange of which they are members. They buy and sell on their own behalf as well as on
behalf of their clients. Traditionally in India, partnership firms with unlimited liabilities and
individually owned firms provided brokerage services. There were, therefore, restrictions on
the amount of funds they could raise by way of debt. With increasing volumes in trading as
well as in the number of small investors, lack of adequate capitalisation of these firms
exposed investors to the risks of these firms going bust and the investors would have no
recourse to recovering their dues. With the legal changes being effected in the membership
rules of stock exchanges as well as in the capital gains structure for stock-broking firms, a
number of brokerage firms have converted themselves into corporate entities. In fact, NSE
encouraged the setting up of corporate broking members and has today only 10% of its
members who are not corporate entities.
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SEBI and under its regulation. National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE) are the pre-dominant ones.
XX. Insurance Companies
Insurance companies receive premium in exchange for insurance policies and use
these funds to purchase a variety of securities. Thus, they invest the proceeds received from
insurance in stocks and bonds.
XXI. Pension funds
Many companies, corporations and government organizations and agencies offer
pension plans to their employers their employers or both periodically contribute funds to
such plans. The funds contributed are invested in securities until they are withdrawn by the
employees upon their retirement.
XXII. Commercial Banks
Commercial banks are those companies which are engage in accepting deposits from
savers and lending it back to deficit groups who are demanding loans and advances in order
to invest business. Commercial banks are a major source of deposits collectors among the all
other kinds of financial institutions. They mobilize their depository funds in many forms for
example, lending to individuals and corporations, invest in stock market and participate
other forms of investment.
XXIII. Saving Banks
Like commercial banks, savings banks also accumulate the scattered savings of the
country and then create investment friendly funds and lastly channelize these funds into
productive investments. Most savings banks are mutual in nature.
XXIV. Credit Unions
Credit union differs from commercial savings banks in that they are not profit
oriented company and restrict their business to the main members only. They use most of
their funds to provide loans to their internal members.
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CHAPTER 4:
INSTRUMENTS IN INDIAN CAPITAL MARKET
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issue
the
IDRs.
The
IDRs
would
have
following
features:
Overseas Custodian: It is a foreign bank having branches in India and requires approval
from Finance Ministry for acting as custodian and Indian depository has to be
registered
with
SEBI.
Approvals for issue of IDRs: IDR issue will require approval from SEBI and
application can be made for this purpose 90 days before the issue opening date.
Listing: These IDRs would be listed on stock exchanges in India and would be freely
transferable.
Eligibility
conditions
for
overseas
companies
to
issue
IDRs:
Capital: The overseas company intending to issue IDRs should have paid up capital and
free
reserve
of
at
least
$100
million.
Sales turnover: It should have an average turnover of $ 500 million during the last three
years.
Profits/dividend: Such company should also have earned profits in the last 5 years and
should have declared dividend of at least 10% each year during this period.
Debt equity ratio: The pre-issue debt equity ratio of such company should not be more
than
2:1.
Extent of issue: The issue during a particular year should not exceed 15% of the paid up
capital
plus
free
reserves.
Redemption: IDRs would not be redeemable into underlying equity shares before one
year
from
date
of
issue.
of
underlying
shares.
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CHAPTER 5:
TYPES OF CAPITAL MARKET
5. INTRODUCTION
Any government or corporation requires capital (funds) to finance its operations and
to engage in its own long-term investments. To do this, a company raises money through the
sale of securities - stocks and bonds in the company's name. These are bought and sold in
the capital markets.
Thus there are two types of capital market as follows:
Debt or Bond Market
Stock or Equity Market
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Because of the inverse relationship between bond valuation and interest rates, the bond
market is often used to indicate changes in interest rates or the shape of the yield curve.
Besides other causes, the decentralized market structure of the corporate and
municipal bond markets, as distinguished from the stock market structure, results in higher
transaction costs and less liquidity.
Bond markets in most countries remain decentralized and lack common exchanges
like stock, future and commodity markets. This has occurred, in part, because no two bond
issues are exactly alike, and the variety of bond securities outstanding greatly exceeds that of
stocks.
With a large section of population underprivileged, the welfare commitments of the
Indian state have to be supported by a large government borrowing program. The
outstanding marketable government debt has grown from 4.3 trillion in 200001 to 29.9
trillion in 201213. The size of the annual borrowing of the central government through
dated securities has grown from 1.0 trillion to 5.6 trillion during this period. It is no mean
achievement to manage such large issuances in a non-disruptive manner in the post Fiscal
Responsibility & Budget Management (FRBM) regime and declining SLR.
The liquidity in the secondary market has also increased significantly from a daily
average trading volume of 9 billion in February 2002 to 344 billion in March, 2013. The
development of the debt and the derivatives market in India needs to be seen from the
perspective of a central bank and a financial sector regulator which has a mandate to
facilitate development of debt markets of the country.
In many countries, debt market (both sovereign and corporate) is larger than equity
markets. In fact, in matured economies, the debt market is three times the size of the equity
market. However, in India like in emerging economies, the equity market has been more
active, developed and has been the centre of attention be it in media or otherwise.
Nevertheless, the Indian debt market has transformed itself into a much more vibrant trading
field for debt instruments from the elementary market about a decade ago. Further, the
corporate debt market in developed economies like US is almost 20% of their total debt
market. In contrast, the corporate bond market (i.e. private corporate sector raising debt
through public issuance in capital market), is only an insignificant part of the Indian debt
market. Amongst the most important reforms is the development and deepening of the nonpublic debt capital market (DCM), where growth has been lack lustre in contrast to a soaring
equity market.
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Corporate Bonds:
These bonds come from PSUs and private corporations and are offered for an
extensive range of tenures up to 15 years. Comparing to G-Secs, corporate bonds carry
higher risks, which depend upon the corporation, the industry where the corporation is
currently operating, the current market conditions, and the rating of the corporation.
However, these bonds also give higher returns than the G-Secs.
Certificate of Deposit:
These are negotiable money market instruments. Certificate of Deposits (CDs),
which usually offer higher returns than Bank term deposits, are issued in Demat form and
also as a Usance Promissory Notes. There are several institutions that can issue CDs. Banks
can offer CDs which have maturity between 7 days and 1 year. CDs from financial
institutions have maturity between 1 and 3 years. There are some agencies like ICRA,
FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are available in the
denominations of ` 1 Lac and in multiple of that.
Commercial Papers:
There are short term securities with maturity of 7 to 365 days. CPs is issued by
corporate entities at a discount to face value.
Zero Coupon bonds (ZCBs):
ZCBs are available at a discount to their face value. There is no interest paid on these
instruments but on maturity the face value is redeemed from the RBI. A bond of face value
100 will be available at a discount say at Rs 80 and the date of maturity is after two years.
This implies an interest rate on the instrument. When the bonds are redeemed Rs 100 will be
paid. The securities do not carry any coupon or interest rate i.e. unlike dated securities no
interest is paid out every year. When the bond matures the face value is returned. The
difference between the issue price (discounted price) and face value is the return on this
security.
5.1.D. Recent developments in the corporate debt market in India
In the recent past, the corporate debt market has seen a high growth of innovative
asset-backed securities. The servicing of debt and related obligations for such instruments is
backed by some sort of financial assets and/or credit support from a third party. Over the
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years greater innovation has been witnessed in the corporate bond issuances, like floating
rate instruments, zero coupon bonds, convertible bonds, callable (put-able) bonds and stepredemption bonds.
These innovative issues have provided a gamut of securities that caters to a wider
segment of investors in terms of maintaining a desirable risk-return balance. Over
the last five years, corporate issuers have shown a distinct preference for private
placements over public issues. This has further cramped the liquidity in the market. The
dominance of private placement in total issuances is attributable to a number of factors.
Lengthy issuance procedure for public issues, in particular, the information disclosure
requirements
Costs of a public issue are considerably higher than those for a private placement
The quantum of money raised through private placements is typically larger than
those that can be garnered through a public issue. Also, a corporate can expect to
raise debt from the market at finer rates than the prime-lending rate of banks and
financial institutions only with an AAA rated paper. This limits the number of
entities that would find it profitable to enter the market directly.
5.1.E. Advantages of debt market
The biggest advantage of investing in Indian debt market is its assured returns. The
returns that the market offer is almost risk-free (though there is always certain amount of
risks, however the trend says that return is almost assured). Safer are the government
securities. On the other hand, there are certain amounts of risks in the corporate, FI and PSU
debt instruments. However, investors can take help from the credit rating agencies which
rate those debt instruments.
Another advantage of investing in India debt market is its high liquidity. Banks offer
easy loans to the investors against government securities.
5.1.G. Disadvantages of debt market
As the returns here are risk free, those are not as high as the equities market at the same
time. So, at one hand we are getting assured returns, but on the other hand, we are getting
less return at the same time. Retail participation is also very less here, though increased
recently.
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39
Traders
Individuals
Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, the majority of outstanding bonds are held by institutions like pension funds,
banks and mutual funds. In the India, approximately 10% of the market is currently held by
private individuals. Mortgage-backed bonds accounted for around a quarter of outstanding
bonds in the US in 2009 or some $9.2 trillion. The sub-prime portion of this market is
variously estimated at between $500bn and $1.4 trillion. Treasury bonds and corporate
bonds each accounted for a fifth of US domestic bonds. The outstanding value of
international bonds increased by 13% in 2009 to $27 trillion.
5.1.I. Bond market size
Amounts outstanding on the global bond market increased 10% in 2009 to a record
$91 trillion. Domestic bonds accounted for 70% of the total and international bonds for the
remainder. The US was the largest market with 39% of the total followed by Japan (18%).
5.1.J. Bond market volatility
For market participants who own a bond, collect the coupon and hold it to maturity,
market volatility is irrelevant; principal and interest are received according to a predetermined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks,
most importantly changes in interest rates. When interest rates increase, the value of existing
bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the
value of existing bonds rise, since new issues pay a lower yield. This is the fundamental
concept of bond market volatility: changes in bond prices are inverse to changes in interest
rates. Fluctuating interest rates are part of a country's monetary policy and bond market
volatility is a response to expected monetary policy and economic changes.
5.1.K. Bond investments
Investment companies allow individual investors the ability to participate in the
bond markets through bond funds, closed-end funds and unit-investment trusts. Exchange traded funds (ETFs) are another alternative to trading or investing directly in a bond issue.
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These securities allow individual investors the ability to overcome large initial and
incremental trading sizes.
5.2.A. Equity or Stock Market
A stock market or equity market is a public market (a loose network of economic
transactions, not a physical facility or discrete entity) for the trading of company stock and
derivatives at an agreed price; these are securities listed on a stock exchange as well as
those only traded privately.
The size of the world stock market was estimated at about 36.6 trillion USD at the
beginning of October 2012. The total world derivatives market has been estimated at about
$791 trillion face or nominal value, 11 times the size of the entire world economy. The value
of the derivatives market, because it is stated in terms of notional values, cannot be directly
compared to a stock or a fixed income security, which traditionally refers to an actual value.
Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on
an event occurring is offset by a comparable derivative 'bet' on the event not occurring).
Many such relatively illiquid securities are valued as marked to model, rather than an actual
market price.
The stocks are listed and traded on stock exchanges which are entities of a
corporation or mutual organization specialized in the business of bringing buyers and sellers
of the organizations to a listing of stocks and securities together. The largest stock market in
the United States, by market cap is the New York Stock Exchange, NYSE, while in Canada,
it is the Toronto Stock Exchange. Major European examples of stock exchanges include the
London Stock Exchange, Paris Bourse, and the Deutsche Brse. Asian examples include the
Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange,
and the Bombay Stock Exchange. In Latin America, there are such exchanges as the
BM&F Bovespa.
5.2.B. Trading
Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.
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Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This type of auction is used in stock
exchanges and commodity exchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind, composed of a network
of computers where trades are made electronically via traders.
Actual trades are based on an auction market model 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 ask price or bid price for the stock,
respectively.) When the bid and ask prices match, a sale takes place, on a first-come-firstserved 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.
5.2.C. Market participants
A few decades ago, worldwide, buyers and sellers were individual investors, such as
wealthy businessmen, with long family histories (and emotional ties) to particular
corporations. Over time, markets have become more "institutionalized"; buyers and sellers
are largely institutions (e.g., pension funds, insurance companies, mutual funds, index
funds, exchange-traded funds, hedge funds, investor groups, banks and various other
financial institutions). The rise of the
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 went to
'negotiated' fees, but only for large institutions.
However, corporate governance (at least in the West) has been very much adversely
affected by the rise of (largely 'absentee') institutional 'owners'.
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43
Adjustment of equilibrium
The investors in the stock exchange promote the adjustment of equilibrium of
demand and supply of a particular stock and thus prevent the tendency of fluctuation in the
prices of shares.
Maintenance of liquidity
The bank and insurance companies purchase large number of securities from the
stock exchange. These securities are marketable and can be turned into cash at any time.
Therefore banks prefer to keep securities instead of cash in their reserve .This it facilities the
banking system to maintain liquidity by procuring the marketable securities.
Promotion of the habit of saving
Stock exchange provide a place for saving to general public. Thus it creates the habit
of thrift and investment among the public. This habit leads to investment of funds
incorporate or government securities. The funds placed at the disposal of companies are used
by them for productive purposes.
Refining and advancing the industry
Stock exchange advances the trade , commerce and industry in the country. It
provides opportunity to capital to flow into the most productive channels. Thus the flow of
capital from unproductive field to productive field helps to refine the large scale enterprises.
Promotion of capital formation
It plays an important part in capital formation in the country. Its publicity regarding
various industrial securities makes even disinterested people feel interested in investment.
Increasing Govt. Funds
The govt. can undertake projects of national importance and social value by raising
funds through sale of its securities on stock exchange.
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CHAPTER 6:
EQUITY MARKET IN INDIA
The Indian Equity Market is more popularly known as the Indian Stock Market. The
Indian equity market has become the third biggest after China and Hong Kong in the Asian
region. The Indian financial markets have also grown considerably. The market
capitalization of the equity market (National Stock Exchange) has grown from
approximately 6.5 trillion in200001 to approximately 60 trillion in 200910 and further to
approximately 61 trillion in 201112.The market was slow since early 2007 and continued
till the first quarter of 2009.
6.1.A. Importance of Equity Market in India
Raising Capital For Businesses:
The Stock Exchange provide companies with the facility to raise capital for
expansion through selling shares to the investing public.
Facilitating Company Growth:
A takeover bid or a merger agreement through the stock market is one of the
simplest and most common ways for a company to grow by acquisition or fusion.
Creating Investment Opportunities For Small Investors:
As opposed to other businesses that require huge capital outlay, investing in shares is
open to 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
to own shares of the same companies as large investors.
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
general show signs of stability and growth. An economic recession, depression, or financial
crisis could 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.
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Speculation:
The stock exchanges are also fashionable places for speculation. In a financial
context, the terms "speculation" and "investment" are actually quite specific. For instance,
although the word "investment" is typically used, in a general sense, to mean any act of
placing money in a financial vehicle with the intent of producing returns over a period of
time, most ventured moneyincluding funds placed in the world's stock marketsis
actually not investment but speculation.
6.2. Major Stock Exhanges of India
6.2.A. Bombay Stock Exchange (BSE) :
BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity
broking industry in India led to
the formation of the Native
Share Brokers Association in
1875,
which
Bombay
later
Stock
became
Exchange
Limited (BSE).
BSE is widely recognized
due to its pivotal and preeminent role in the development
of the Indian capital market.
In
1995,
the
trading
system transformed from open outcry system to an online screen-based order-driven trading
system.
The exchange opened up for foreign ownership (foreign institutional investment).
Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
Expanded the product range (equities/derivatives/debt).
Introduced the book building process and brought in transparency in IPO issuance.
Depositories for share custody (dematerialization of shares).
Internet trading (e-broking).
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BSE has a nation-wide reach with a presence in more than 450 cities and towns of
India. BSE has always been at par with the international standards. It is the first exchange in
India and the second in the world to obtain an ISO 9001:2000 certifications.
The equity market capitalization of the companies listed on the BSE was US$1.63
trillion as of December 2011, making it the 4th largest stock exchange in Asia and the 8th
largest in the world. The BSE has the largest number of listed companies in the world.
As of December 2011, there are over 5,085 listed Indian companies and over 8,196
scrips on the stock exchange, the Bombay Stock Exchange has a significant trading volume.
Though many other exchanges exist, BSE and the National Stock Exchange of India account
for the majority of the equity trading in India.
6.2.B. National Stock Exchange (NSE) :
With the liberalization
of the Indian economy, it was
found inevitable to lift the
Indian stock market trading
system
on
par
with
the
poweredPherwani
47
traditional
trading
inefficiencies,
of
liquidity,
such
as,
lack
of
and
benami
transactions,
48
CHAPTER 7:
DERIVATIVE MARKETS IN INDIA
The emergence of the market for derivative products such as futures and forwards
can be traced back to the willingness of risk-averse economic agents to guard themselves
against uncertainties arising out of price fluctuations in various asset classes. This
instrument is used by all sections of businesses, such as corporate, SMEs, banks, financial
institutions, retail investors, etc.
7.1.A. Participants Of Derivative Markets
Hedgers face risk associated with the price of an asset. They belong to the business
community dealing with the underlying asset to a future instrument on a regular
basis. They use futures or options markets to reduce or eliminate this risk.
Speculators have a particular mindset with regard to an asset and bet on future
movements in the assets price. Futures and options contracts can give them an extra
leverage due to margining system.
Arbitragers are in business to take advantage of a discrepancy between prices in two
different markets. For example, when they see the futures price of an asset getting
out of line with the cash price, they will take offsetting positions in the two markets
to lock in a profit.
7.1.B. Major types of derivatives:
I. Forwards:
A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price. One of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price.
The other party assumes a short position and agrees to sell the asset on the same date
forthe same price, other contract details like delivery date, price and quantity are
negotiatedbilaterally by the parties to the contract. The forward contracts are normally
traded outside the exchange.
The salient features of forward contracts are:
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50
Futures Price:
The price at which the futures contract trades in the futures market.
Contract Cycle:
The period over which a contract trades. The index futures contracts on the NSE
have one month, two months and three months expiry cycles that expires on the last
Thursday of the month. Thus a contract which is to expire in January will expire on the last
Thursday of January.
Expiry Date:
It is the date specified in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist.
Contract Size:
It is the quantity of asset that has to be delivered under one contract. For instance, the
contract size on NSEs futures market is 200 Nifties.
Basis:
In the context of financial futures, basis can be defined as the futures price minus the
spot price. There will be different basis for each delivery month, for each contract. In a
normal market, basis will be positive; this reflects that the futures price exceeds the spot
prices.
Cost Of Carry:
The relationship between futures price and spot price can be summarized in terms of
what is known as the cost of carry. This measures the storage cost plus the interest paid to
finance the asset less the income earned on the asset.
Initial Margin:
The amount that must be deposited in the margin account at the time when a futures
contract is first entered into is known as initial margin.
Mark To Market:
In the futures market, at the end of each trading day, the margin account is adjusted
to reflect the investors gain or loss depending upon the futures closing price. This is called
Marking-to-market.
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Maintenance Margin:
This is somewhat lower than the initial margin.
This is set to ensure that the balance in the margin account never becomes negative.
If the balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial margin
level before trading commences on the next day.
Advantages Of Stock Futures Trading:
Investing in futures is less costly as there is only initial margin money to be
deposited.
A large array of strategies can be used to hedge and speculate; with smaller cash
outlay there is greater liquidity.
III. Options:
An option is a contract, or a provision of a contract, that gives one party (the option
holder) the right, but not the obligation, to perform a specified transaction with another party
(the option issuer or option writer) according to the specified terms. The owner of a property
might sell another party an option to purchase the property any time during the next three
months at a specified price. For every buyer of an option there must be a seller. The seller is
often referred to as the writer. As with futures, options are brought into existence by being
traded, if none is traded, none exists; conversely, there is no limit to the number of option
contracts that can be in existence at any time. As with futures, the process of closing out
options positions will cause contracts to cease to exist, diminishing the total number.
Thus an option is the right to buy or sell a specified amount of a financial instrument
at a pre-arranged price on or before a particular date.
There are two options which can be exercised:
Call option, the right to buy is referred to as a call option.
Put option, the right to sell is referred as a put option.
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CHAPTER 8:
COMMODITY DERIVATIVES IN INDIA
Commodity derivatives in India were established by the Cotton Trade Association in
1875, since then the market has suffered from liquidity problems and several regulatory
dogmas. However in the recent times the commodity trade has grown significantly and today
there are 25 derivatives exchanges in India which include four national commodity
exchanges; National Commodity and Derivatives Exchange (NCDEX), National MultiCommodity Exchange of India (NCME), National Board of Trade (NBOT) and Multi
Commodity Exchange (MCX)
8.1. Major Commodity Derivative exchanges in India
8.1.A. NCDEX
It is the largest commodity derivatives exchange in India and is the only commodity
exchange promoted by national level institutions. NCDEX was incorporated in 2003
Under the Companies Act, 1956 and is regulated by the Forward Market Commission in
respect of the futures trading in commodities. NCDEX is located in Mumbai. NCDEX is a
closely held private company which is promoted by national level institutions and has an
independent Board of Directors and professionals not having vested interest in commodity
markets.
8.1.B. MCX
MCX is recognised by the government of India and is amongst the worlds top three
bullion exchanges and top four energy exchanges. MCXs headquarter is in Mumbai and
facilitates online trading, clearing and settlement operations for the commodities futures
market in the country.
MCX is India's No. 1 commodity exchange with 83% market share in 2009
The exchange's main competitor is National Commodity & Derivatives Exchange
Ltd.
The highest traded item is gold.
As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion.
MCX now reaches out to about 800 cities and towns in India with the help of about
126,000 trading terminals.
MCX COMDEX is India's first and only composite commodity futures price index.
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CHAPTER 9:
SECURITIES EXCHANGE BOARD OF INDIA
9.1.A. History
Initially SEBI was a non statutory body without any statutory power. However in
1995, the SEBI was given additional statutory power by the Government of India through an
amendment to the securities and Exchange Board of India Act 1992. In April, 1998 the SEBI
was constituted as the regulator of capital market in India under a resolution of the
Government of India.
9.1.B. Introduction
Securities and Exchange Board of India (SEBI) has been established with the prime
mandate to protect the interest of investors in securities. The Securities and Exchange Board
of India (SEBI) is the regulatory authority established under the SEBI Act 1992, in order to
protect the interests of the investors in securities as well as promote the development of the
capital market. It involves regulating the business in stock exchanges; supervising the
working of stock brokers, share transfer agents, merchant bankers, underwriters, etc; as well
as prohibiting unfair trade practices in the securities market. An investor enjoys investing, if
He knows how to invest;
He has full knowledge of the market;
The market is safe and there are no miscreants; and
There are arrangements for redressal in case of grievances.
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CHAPTER 10:
RESEARCH METHODLOGY
To be able to estimate the reliability of a report, the methods which it is based upon have
to be considered. Hence, this chapter, methodology, will give the reader an insight into my research
process, selection and data collection.
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Books
Internet sources
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CHAPTER 11:
ANALYSIS OF PRIMARY DATA
QUESTIONNAIRE
Name
Occupation
Mutual Fund
Yes
No
Bonds
Yes
No
Insurance
Yes
No
Equity Shares
Yes
No
Fixed Deposits
Yes
No
Commodity markets
Yes
No
Yes
No
Real Estate
Yes
No
Private equity
Yes
No
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5. What are the factors which you consider while investing in capital markets?
Return
(capital
appreciation)
Liquidity
Convenience Risk
Tax Saving
6. You like investing in financial products through?
Primary market
Secondary market
7. How will you invest your money in any secondary market?
Through any stock broking company.
Through Banks
8. What is your annual income?
1lac to 3 lacs
3lacs to 5lacs
5 lacs to 10lacs
more than 10 lacs
9. How long you prefer to keep your money when invested through secondary
market?
Less than 6 months
6 months to 1 year
1 year to 3 years
More than 3 years
10. How much return you expect from secondary market investment?
10% to 20%
20% to 30%
30% to 50%
More than 50%
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41-50
21-40
Above 50
AGE GROUP
12
10
8
6
AGE GROUP
4
2
0
BELOW 20
21-40
41-50
ABOVE 50
Mutual Fund
Yes
No
Bonds
Yes
No
Insurance
Yes
No
Equity Shares
Yes
No
Fixed Deposits
Yes
No
Commodity markets
Yes
No
Yes
No
Real Estate
Yes
No
Private equity
Yes
No
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30
25
20
15
10
Yes
No
Friends / Relatives
Magazines /Newspaper
Information
9
8
7
6
5
4
3
2
1
0
Information
62
Controller
25
20
15
Controller
10
5
0
SEBI
IRDA
AMFI
RBI
5. What are the factors which you consider while investing in capital markets?
Return
Liquidity
(capital
Convenience Risk
appreciation)
Tax Saving
20
18
16
14
12
10
8
6
4
2
0
Returns
Tax Saving
Liquidity
Convinience
Risk
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63
Prefrence
20
18
16
14
12
10
8
6
4
2
0
Prefrence
Primary Market
Secondary Market
10
5
0
Stock Broking Company
Through Banks
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Series 1
14
12
10
8
6
Series 1
4
2
0
1lac to 3 lacs
3lacs to 5 lacs
5lacs to 10 lacs
more than 10
lacs
9. How long you prefer to keep your money when invested through secondary
market?
Less than 6 months
1 year to 3 years
6 months to 1 year
Investment Horizon
12
10
8
6
Investment Horizon
4
2
0
Less than 6 6 months to 1 year to 3 more than 3
months
1 year
years
years
10. How much return you expect from secondary market investment?
10% to 20%
20% to 30%
30% to 50%
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65
Returns
12
10
8
6
Returns
4
2
0
10%to 20%
20% to 30%
From the above questionnaire and survey, we can conclude by saying that
each age category has their own investment, risk, time horizon and liquidity perspectives.
When considered about the products offered through different markets majority of
the sample population is aware of general instruments like mutual funds ,bonds , insurance
, equity shares and fixed deposits. A general awareness about other products like
commodity markets, forex investment should be encouraged.
People gathering information through advertisements, company sales force ,
Friends and relatives, magazines and others include brokers and most of the people like
investing via registered brokers established in the market.
The general consensus of people covered in the survey likes to invest via secondary
market.
The returns expected from the market varies according to the time horizon and risk
preference of individuals. People expecting 10 -20% and 20-30% of returns forms the
major part of people participating in the market .
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67
www.sbimf.com
www.moneycontrol.com
www.amfiindia.com
www.onlineresearchonline.com
www.mutualfundsindia.com
www.sebi.gov.in
www.rbi.gov.in
Beginners guide to capital Markets
Capital market and securities laws (module ii paper 6)
www.investopedia.com
Capital Markets and NSDL-Overview National - Handbook for NSDL Depository
Operations Module
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