CHAPTER – I
1.1 INTRODUCTION
Indian stock market marks to be one of the oldest stock market in Asia. It dates
back to the close of 18th century when the East India Company used to
transact loan securities. In the 1830s, trading on corporate stocks and shares in
Bank and Cotton presses took place in Bombay. Though the trading was broad
but the brokers were hardly half dozen during 1840 and 1850.
An informal group of 22 stockbrokers began trading under a banyan tree
opposite the Town Hall of Bombay from the mid-1850s, each investing a (then)
princely amount of Rupee 1. This informal group of stockbrokers organized
themselves as the Native Share and Stockbrokers Association which, in 1875,
was formally organized as the Bombay Stock Exchange (BSE).
In 1956, the Government of India recognized the Bombay Stock Exchange as
the first stock exchange in the country under the Securities Contracts
(Regulation) Act. The most decisive period in the history of the BSE took place
after 1992. In the aftermath of a major scandal with market manipulation
involving a BSE member named Harshad Mehta, BSE responded to calls for
reform with intransigence. The foot-dragging by the BSE helped radicalize the
position of the government, which encouraged the creation of the National
Stock Exchange (NSE), which created an electronic marketplace.
National Stock Exchange started trading on 4th November, 1994. Within less
than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it
never caught up with NSE spot market turnover. The second strategic failure at
BSE came in the following two years. NSE embarked on the launch of equity
derivatives trading. BSE responded by political effort, with a friendly SEBI
chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE
and D. R. Mehta succeeded in delaying the onset of equity derivatives trading
by roughly five years. But this trading, and the accompanying shift of the spot
market to rolling settlement, did come along in 2000 and 2001 - helped by
another major scandal at BSE involving the then President Mr. Anand Rathi.
NSE scored nearly 100% market share in the runaway success of equity
derivatives trading, thus consigning BSE into clearly second place. Today, NSE
has roughly 66% of equity spot turnover and roughly 100% of equity
derivatives turnover.
1.1.1 An overview of the Indian securities market
Securities markets provides a channel for allocation of savings to those
who have a productive need for them. The Indian securities market has
two interdependent and inseparable segments:
1. Primary market
2. Secondary market
1. Primary Market: Primary market provides an opportunity to the
issuers of securities, both Government and corporations, to raise resources to
meet their requirements of investment. Securities, in the form of equity or
debt, can be issued in domestic/international markets at face value, discount
or premium. The primary market issuance is done either through public issues
or private placement. Under Companies Act, 1956, an issue is referred as
public if it results in allotment of securities to 50 investors or more. However,
when the issuer makes an issue of securities to a select group of persons not
exceeding 49 and which is neither a rights issue nor a public issue it is called a
private placement.
2. Secondary Market: Secondary market refers to a market where
securities are traded after being offered to the public in the primary
market or listed on the Stock Exchange. Secondary market comprises of
equity, derivatives and the debt markets. The secondary market is
operated through two mediums, namely, the Over-the-Counter (OTC)
market and the Exchange-Traded market. OTC markets are informal
markets where trades are negotiated.
[Link] Indicators of Securities Market
1. Index:
An Index is used to give information about the price movements of
products in the financial, commodities or any other markets. Stock market
indices are meant to capture the overall behavior of the equity markets. The
stock market index is created by selecting a group of stocks that are
representative of the whole market or a specified sector or segment of the
market. The bluechip index of NSE is S&P CNX Nifty and for BSE is Sensex.
2. Market Capitalization:
Market capitalization is defined as value of all listed shares on the
country’s exchanges. It is computed on a daily basis. Market capitalization of a
particular company on a particular day can be computed as product of the
number of shares outstanding and the closing price of the share. Here the
number of outstanding shares refers to the issue size of the stock.
3. Market Capitalization Ratio:
The market capitalization ratio is defined as market capitalization of
stocks divided by GDP. It is used as a measure of stock market size.
4. Turnover:
Turnover for a share is computed by multiplying the traded quantity
with the price at which the trade takes place. Similarly, to compute the
turnover of the companies listed at the Exchange we aggregate the traded
value of all the companies traded on the Exchange.
5. Turnover Ratio:
The turnover ratio is defined as the total value of shares traded on a
country’s stock Exchange for a particular period divided by market
capitalization at the end of the period. It is used as a measure of trading
activity or liquidity in the stock markets.
[Link] and Participants
1. Products:
Financial markets facilitate reallocation of savings from savers to
entrepreneurs. Savings are linked to investments by a variety of
intermediaries through a range of complex financial products called
“Securities”.
Under the Securities Contracts (Regulation) Act [SC(R)A], 1956,
“Securities” include
A. Shares, bonds, scrips, stocks or other marketable securities of
like nature in or of any incorporate company or body
corporate
B. Government securities
C. Derivatives of securities
D. Units of collective investment scheme
E. Interest and rights in securities, and security receipt or any
other instruments so declared by the central government.
Broadly, securities can be of three types
1. Equities
2. Debt securities
3. Derivatives.
2. Participants:
The securities market has essentially three categories of participants
1. The investors
2. The issuers
3. The intermediaries
These participants are regulated by the Securities and Exchange Board of
India (SEBI), Reserve Bank of India (RBI), Ministry of Corporate Affairs
(MCA) and the Department of Economic Affairs (DEA) of the Ministry of
Finance.
1.1.3. Market Segments and their Products
The Exchange provides trading in four different segments as shown in the
figure below
Market
Segments
Whole sale Capital Futures & Currency
Market
Debt market Options Derivatives
Figure 1: Market Segments in India Source: NSE, NCFM Module
1. Wholesale Debt Market (WDM) Segment:
This segment at NSE commenced its operations in June 1994. It
provides the trading platform for wide range of debt securities which
includes State and Central Government securities, T-Bills, PSU Bonds,
Corporate debentures, Commercial Papers, Certificate of Deposits etc.
2. Capital Market (CM) Segment:
This segment at NSE commenced its operations in November 1994. It
offers a fully automated screen based trading system, known as the
National Exchange for Automated Trading (NEAT) system. Various
types of securities e.g. equity shares, warrants, debentures etc. are
traded on this system.
3. Futures & Options (F&O) Segment:
This segment provides trading in derivatives instruments like index
futures, index options, stock options, and stock futures, and
commenced its operations at NSE in June 2000.
4. Currency Derivatives Segment (CDS) Segment:
This segment at NSE commenced its operations on August 29, 2008,
with the launch of currency futures trading in US Dollar-Indian Rupee
(USD-INR). Trading in other Market Segments Whole sale debt
market Capital Maket Futures & Options Currency Derivatives 6
currency pairs like Euro-INR, Pound Sterling-INR and Japanese Yen-
INR was further made available for trading in February 2010. ‘Interest
rate futures’ was another product made available for trading on this
segment with effect from August 31, 2009.
1.2 NEED OF THE STUDY:
❖ Different kinds of investors to invest in equity & derivative and to
face high risk and get high returns.
❖ Company proves to an option for the investors.
❖ Studying the performance of investing equity & derivative for few
months considering their analysis.
1.3 SCOPE OF THE STUDY:
The present study attempts to answer some of the research questions
on the functions of derivatives which have not been explored in depth.
However there are certain areas where this study can be extended
further. In Chapter-4 we have examined the information contained in
the pricing error of stock futures in isolation. However, an examination
of considering deviation from both the stock options implied price and
the stock futures implied price in conjunction, may provide a better
insight on such information content. During our study period the stock
options trading in India remain insignificant compared to total trading in
equity derivatives but the proportion is observed increasing around the
end of our study period i.e. year 2019 onwards. There is scope to
consider studying both futures and options on stocks in Indian market
regarding their informational role and contribution in price discovery
1.4 OBJECTIVE OF THE STUDY:
Any investor’s vision is a long term investment and short term investment and
gets high returns by bearing high risk. For that objectives need to be climbed
successfully. So the objectives of this project are,
1) To find the RIGHT SCRIPT to buy and sell at the RIGHT TIME.
2) To get good return.
3) To study the role of derivatives and equities in Indian financial market
4) To know how derivatives can be used for hedging.
5) To know the outcome of Equity and Derivative.
6) How to achieve Capital appreciations.
1.5 METHODOLOGY OF THE PROJECT:
Defining objective won‘t suffice unless and until a proper methodology is
to achieve the objectives.
1) Analysing and observing the investment opportunities.
2) Analysing the performance of Equity and Derivative
market with the help of NAV, EPS, P/E ratio etc.
1.6 LIMITATIONS OF THE STUDY:
This project was restricted for two months; hence exhaustive data is not
available upon which conclusions can be relied.
1) Investment in Securities carry risk so investment in Equity &
Derivative is also carrying risk on the basis of the market.
2) Factors affecting the Market Price of Investment may be due to
Market forces, performance of the companies is not possible, and
so all the data is not available.