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Equity

Capital Markets
Equity shares of companies are traded in equity markets, which are further classified as primary and secondary market.
New issues market or Primary Market:
(Please refer to ‘Investments’ section for details)
This market deals with the new securities, which were not previously available to the investing public. Primary markets are used to raise fresh capital by companies for cash or for consideration other than the cash.

Stock exchange or Secondary Market:

Stock exchanges are organized markets, which are used to facilitate trading in securities. Securities that have been issued by the companies and are listed on the stock exchange are traded. MORE>>

This is divided into two segments:

Cash Markets: The segment of the market in which securities are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.

Derivatives: Futures contracts, forward contracts, options and swaps are the most common types of derivatives. A transaction for which securities can be reasonably expected to be delivered in one month or less. Though these securities may be bought and sold at spot prices, the securities in question are traded on a forward physical market. Derivatives are generally used to hedge risk, but can also be used for speculative purposes.

Securities & Exchange Board of India (SEBI): The regulatory body of the Stock markets in India.

STOCK MARKETS

1)   What is equity?

2)   What is a Stock Exchange?

3)   What are the functions of the stock exchanges?

   a) Liquidity and Marketability of securities

   b) Fair price determination

   c) Source for long term funds

   d) Helps in capital formation

   e) Reflects the general state of economy

4)   What is a Stock Market Index?

5)   What do the fluctuations of Index say?

6)   What’s the concept behind the Index?

1.What is equity?

Equity is an ordinary share issued by a company. The first public offer of securities by a company after its inception is known as an Initial Public Offering (IPO).

A share is one unit of ownership. For example if a company has issued 10,00,000 shares and a person owns 1000 of them, that means he owns 0.1% of the company.

Reasons for Going Public
To raise funds for financing capital expenditure needs like expansion, diversification etc.
To finance increased working capital requirement
As an exit route for existing investors
For debt financing
Rights of equity shareholder:
  • Right to share the profits of the company
  • Right to control
  • Right in liquidation

2. What is a Stock Exchange?

Secondary markets are also referred to as Stock Exchange. They are a part of capital markets. To state simply it is a place where the securities issued by the Government, public bodies and Joint Stock Companies are traded. In the case of India, the stock markets are regulated by the Securities & Exchange Board of India (SEBI).

3. What are the functions of the stock exchanges?

Functions of the stock exchanges can be summarised as follows:

a) Liquidity and Marketability of securities:

The basic function of the stock market is the creation of a continuous market for securities, enabling them to be liquidated, where investors can convert their securities into cash at any time at the prevailing market price.

b) Fair price determination:

This market is a nearly perfect competitive market as there are large number of buyers and sellers. Due to nearly perfect information, active bidding take place from both the sides. This ensures the fair price to be determined by demand and supply forces.

c)Source for long term funds:

Corporates, Government and public bodies raise funds from the equity market. These securities are negotiable and transferable. They are traded and change hands from one investor to the other without affecting the long-term availability of funds to the issuing companies.

d) Helps in capital formation:

It helps in mobilising the surplus funds from individuals and institutions and channelises them to Corporates and Government bodies for more profitable ventures.

e) Reflects the general state of economy:

The performance of the stock markets reflects the boom and depression in the economy. It indicates the general state of the economy to all those concerned, who can take suitable steps in time. The Government takes suitable monetary and fiscal steps depending upon the state of the economy.

4. What is a Stock Market Index?

It is an answer to the question “how is the market doing?” It is representative of the entire stock market. Movements of the index represent the average returns obtained by investors in the stock market.

5. What do the fluctuations of Index say?

Stock indices reflect expectation about future performance of the companies listed in the stock market or performance of the industrial sector. They reflect the publicly available information on the economy, industrial sectors and companies as a whole. This is available as Fundamental and technical data. Investor sentiment also plays an important role in the stock market movement. When the index goes up, the market thinks that the future returns will be higher than they are at present and vice versa.

6. What’s the concept behind the Index?
Stock prices are sensitive to the following news:
i) Company specific news
ii) Country specific news (which includes budget, elections, government policies, wars and so on)

The four main legislation governing the securities market are:
1. The SEBI Act, 1992, which establishes SEBI to protect investors and develop and regulate securities market.
2. The companies Act, 1956, which sets out code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues.
3. The securities contracts (regulation) Act, 1956, which provides for regulation of transaction in securities through control over stock exchanges.
4. The depositories Act, 1996 which provides for electronic maintenance
And transfer of ownership of demat securities.

Cash Markets
Segment of the exchange dealing in buying and selling of shares. Prices are settled in cash on the spot at current market prices.

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