Financial Market

PROJECT REPORT ON FINANCIAL MARKET

SUBMITTED BY JAY SAMANT Roll No. (12-12-48) FOR THE MASTERS DEGREE FINANCIAL MANAGEMENT (MFM)

BATCH: 2005-2008

UNDER THE GUIDANCE OF PROF. SUYASH BHATT

K.J. SOMAIYA INSTITTE OF MANGEMENT STUDIES & RESEARCH VIDYANAGAR, VIDYA VIHAR (E), MUMBAI- 400 077

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DECLARATION

I, Jay Samant, a student of MFM program, Semester V of the University of Mumbai of 2005 2008 batch at SIMSR do hereby declare that this report entitled Financial Markets has been carried out by me during this semester under the guidance of Prof. Suyash Bhatt as per the norms prescribed by the University of Mumbai, and the same work has not been copied from any source directly without acknowledging for the part/ section that has been adopted from published/ non-published works. I further declare that the information presented in this project is true and original to the best of my knowledge.

Dated: Place: Mumbai

JAY SAMANT

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CERTIFICATE

I, Prof. Suyash Bhatt hereby certify that Jay Samant studying in the Third Year of the Masters Degree in .MFM, batch 2005-08 at the K. J. Somaiya Institute of Management Studies & Research (SIMSR), has completed the project on Financial Markets under my guidance, as per the norms prescribed by the University of Mumbai, in the academic year 2007-08. I further certify that the information presented in this project is true and original to the best of my knowledge and belief.

Dated: Place: Mumbai

SUYASH BHATT

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ACKNOWLEDGEMENTS

It is a great pleasure for us to express our deep sense of gratitude towards our guide Prof. Mr. Suyash Bhatt. His able guidance and attention throughout the project work has been of immense help to us. We could properly complete our project work because of his because of his valuable guidance and supervision We would also like to thank DG Prof. P.V.

Narasimham for his suggestion and interest. We are also thankful to our teaching and non-teaching staff members and college liberty staff for providing us all the facilities throughout out project work.

(Jay Samant)

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CONTENTS Section 1 Title of the Section Introduction Definition 2 3 4 5 6 Who are the Major Players in Financial Markets? What Types of Financial Market Structures Exist?

Intermediation Financial Markets: Indian Financial Markets Changes and Challenges Market developments Barriers to changes and the experience of the equity markets Domestic outsourcing: latent opportunity? Indian it services market Indian bpo-ites market

7 8 8

Safe trading between strangers Market and financial institutions Types of financial markets Difference between the primary market and the secondary market Products dealt in the secondary markets Money Markets and Capital Markets

10 11 12

Primary and Secondary Markets Raising capital

Derivative products

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13 14 15 16

Development of exchange-traded derivatives The need for a derivatives market The participants in a derivatives market Types of Derivatives Factors driving the growth of financial derivatives

Currency markets Analysis of financial markets Financial markets in popular culture Bibliography

INTRODUCTION:

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In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets, where many commodities are traded and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, such as a gift economy. In Finance, Financial markets facilitate:

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets).

They are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets, financial markets facilitate borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (resale of previously issued stock shares), the U.S. government bond market (resale of previously issued bonds), and the U.S. Treasury bills auction (sales of newly issued T-bills). A financial institution

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is an institution whose primary source of profits is through financial asset transactions. Examples of such financial institutions include discount brokers (e.g., Charles Schwab and Associates), banks, insurance companies, and complex multi-function financial institutions such as Merrill Lynch. Definition The term Financial markets can be a cause of much confusion. Financial markets could mean: 1. Organisations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants. 2. The coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.

Financial markets can be domestic or they can be international. Financial markets serve six basic functions. These functions are briefly listed below:

Borrowing and Lending: Financial markets permit the transfer of funds (purchasing power) from one agent to another for either investment or consumption purposes.

Price Determination: Financial markets provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets.

Information Aggregation and Coordination: Financial markets act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers.

Risk Sharing: Financial markets allow a transfer of risk from those who undertake investments to those who provide funds for those investments. Liquidity: Financial markets provide the holders of financial assets with a chance to resell or liquidate these assets.

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Efficiency: Financial markets reduce transaction costs and information costs.

In attempting to characterize the way financial markets operate, one must consider both the various types of financial institutions that participate in such markets and the various ways in which these markets are structured.

Who are the Major Players in Financial Markets? By definition, financial institutions are institutions that participate in financial markets, i.e., in the creation and/or exchange of financial assets. At present in the United States, financial institutions can be roughly classified into the following four categories: "brokers;" "dealers;" "investment bankers;" and "financial intermediaries."

Brokers: A broker is a commissioned agent of a buyer (or seller) who facilitates trade by locating a seller (or buyer) to complete the desired transaction. A broker does not take a position in the assets he or she trades -- that is, the broker does not maintain inventories in these assets. The profits of brokers are determined by the commissions they charge to the users of their services (the buyers, the sellers, or both). Examples of brokers include real estate brokers and stock brokers.

Diagrammatic Illustration of a Stock Broker: Payment ------------>| ----------------Payment

|------------->

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Stock Buyer

Stock Seller

| Stock Broker |

<-------------|<----------------|<------------Stock Shares | (Passed Thru) | ----------------Stock

Shares

Dealers: Like brokers, dealers facilitate trade by matching buyers with sellers of assets; they do not engage in asset transformation. Unlike brokers, however, a dealer can and does "take positions" (i.e., maintain inventories) in the assets he or she trades that permit the dealer to sell out of inventory rather than always having to locate sellers to match every offer to buy. Also, unlike brokers, dealers do not receive sales commissions. Rather, dealers make profits by buying assets at relatively low prices and reselling them at relatively high prices (buy low - sell high). The price at which a dealer offers to sell an asset (the "asked price") minus the price at which a dealer offers to buy an asset (the "bid price") is called the bid-ask spread and represents the dealer's profit margin on the asset exchange. Real-world examples of dealers include car dealers, dealers in U.S. government bonds, and Nasdaq stock dealers.

Diagrammatic Illustration of a Bond Dealer: Payment ----------------Payment

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------------>| Bond Buyer | | Dealer

|-------------> | | Bond Seller

<-------------| Bond Inventory |<------------Bonds | ----------------| Bonds

Investment Banks: An investment bank assists in the initial sale of newly issued securities (i.e., in IPOs = Initial Public Offerings) by engaging in a number of different activities:

Advice: Advising corporations on whether they should issue bonds or stock, and, for bond issues, on the particular types of payment schedules these securities should offer;

Underwriting: Guaranteeing corporations a price on the securities they offer, either individually or by having several different investment banks form a syndicate to underwrite the issue jointly;

Sales Assistance: Assisting in the sale of these securities to the public.

Some of the best-known U.S. investment banking firms are Morgan Stanley, Merrill Lynch, Salomon Brothers, First Boston Corporation, and Goldman Sachs.

Financial Intermediaries:

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Unlike brokers, dealers, and investment banks, financial intermediaries are financial institutions that engage in financial asset transformation. That is, financial intermediaries purchase one kind of financial asset from borrowers -- generally some kind of long-term loan contract whose terms are adapted to the specific circumstances of the borrower (e.g., a mortgage) -- and sell a different kind of financial asset to savers, generally some kind of relatively liquid claim against the financial intermediary (e.g., a deposit account). In addition, unlike brokers and dealers, financial intermediaries typically hold financial assets as part of an investment portfolio rather than as an inventory for resale. In addition to making profits on their investment portfolios, financial intermediaries make profits by charging relatively high interest rates to borrowers and paying relatively low interest rates to savers.

Types of financial intermediaries include: Depository Institutions (commercial banks, savings and loan associations, mutual savings banks, credit unions); Contractual Savings Institutions (life insurance companies, fire and casualty insurance companies, pension funds, government retirement funds); and Investment Intermediaries (finance companies, stock and bond mutual funds, money market mutual funds). Diagrammatic Example of a Financial Intermediary: A Commercial Bank Lending by B Borrowing by B deposited ------| funds ------funds | -------

|<............. |

| <............. |

| F |.............> | B | ..............> | H | ------loan contracts Loan contracts issued by F to B ------deposit accounts Deposit accounts issued by B to H -------

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are liabilities of F and assets of B

are liabilities of B and assets of H

NOTE: F=Firms, B=Commercial Bank, and H=Households

Important Caution: These four types of financial institutions are simplified idealized classifications, and many actual financial institutions in the fast-changing financial landscape today engage in activities that overlap two or more of these classifications, or even to some extent fall outside these classifications. A prime example is Merrill Lynch, which simultaneously acts as a broker, a dealer (taking positions in certain stocks and bonds it sells), a financial intermediary (e.g., through its provision of mutual funds and CMA checkable deposit accounts), and an investment banker.

What Types of Financial Market Structures Exist? The costs of collecting and aggregating information determine, to a large extent, the types of financial market structures that emerge. These structures take four basic forms:

Auction markets conducted through brokers; Over-the-counter (OTC) markets conducted through dealers; Organized Exchanges, such as the New York Stock Exchange, which combine auction and OTC market features. Specifically, organized exchanges permit buyers and sellers to trade with each other in a centralized location, like an auction. However, securities are traded on the floor of the exchange with the help of specialist traders who combine broker and dealer functions. The specialists broker trades but also stand ready to buy and sell stocks from personal inventories if buy and sell orders do not match up.

Intermediation financial markets conducted through financial

intermediaries;

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Financial markets taking the first three forms are generally referred to as securities markets. Some financial markets combine features from more than one of these categories, so the categories constitute only rough guidelines.

Auction Markets: An auction market is some form of centralized facility (or clearing house) by which buyers and sellers, through their commissioned agents (brokers), execute trades in an open and competitive bidding process. The "centralized facility" is not necessarily a place where buyers and sellers physically meet. Rather, it is any institution that provides buyers and sellers with a centralized access to the bidding process. All of the needed information about offers to buy (bid prices) and offers to sell (asked prices) is centralized in one location which is readily accessible to all would-be buyers and sellers, e.g., through a computer network. No private exchanges between individual buyers and sellers are made outside of the centralized facility. An auction market is typically a public market in the sense that it open to all agents who wish to participate. Auction markets can either be call markets -- such as art auctions -for which bid and asked prices are all posted at one time, or continuous markets -- such as stock exchanges and real estate markets -- for which bid and asked prices can be posted at any time the market is open and exchanges take place on a continual basis. Experimental economists have devoted a tremendous amount of attention in recent years to auction markets. Many auction markets trade in relatively homogeneous assets (e.g. Treasury bills, notes, and bonds) to cut down on information costs. Alternatively, some auction markets (e.g., in second-hand jewelry, furniture, paintings etc.) allow would-be buyers to inspect the goods to be sold prior to the opening of the actual bidding process. This inspection can take the form of a warehouse tour, a catalog issued with pictures and descriptions of items to be sold, or (in televised auctions) a time during which assets are simply displayed one by one to viewers prior to bidding.

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Auction markets depend on participation for any one type of asset not being too "thin." The costs of collecting information about any one type of asset are sunk costs independent of the volume of trading in that asset. Consequently, auction markets depend on volume to spread these costs over a wide number of participants.

Over-the-Counter Markets: An over-the-counter market has no centralized mechanism or facility for trading. Instead, the market is a public market consisting of a number of dealers spread across a region, a country, or indeed the world, who make the market in some type of asset. That is, the dealers themselves post bid and asked prices for this asset and then stand ready to buy or sell units of this asset with anyone who chooses to trade at these posted prices. The dealers provide customers more flexibility in trading than brokers, because dealers can offset imbalances in the demand and supply of assets by trading out of their own accounts. Many well-known common stocks are traded over-the-counter in the United States through NASDAQ (National Association of Securies Dealers' Automated Quotation System).

Intermediation Financial Markets: An intermediation financial market is a financial market in which financial intermediaries help transfer funds from savers to borrowers by issuing certain types of financial assets to savers and receiving other types of financial assets from borrowers. The financial assets issued to savers are claims against the financial intermediaries, hence liabilities of the financial intermediaries, whereas the financial assets received from borrowers are claims against the borrowers, hence assets of the financial intermediaries. (See the diagrammatic illustration of a financial intermediary presented earlier in these notes.)

Indian Financial Markets Changes and Challenges

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As the central bank of the country the Reserve Bank is intimately concerned with the developments on the stock exchange because, first in the evolving financial sector, stock markets are part of the closely integrated financial system and second, the Bank plays an active role in some of the segments of the financial markets such as gilt market, forex market, and money market. Broadly speaking we are moving towards the second stage of market. Development, leading to greater integration of markets. Financial integration leads to reduction of speculative movements of funds that may occur due to arbitrage that market segmentation offers. In the process it ensures that intermediation is efficient and resource allocation is optimised. The chances of improving the effectiveness of polices are also enhanced as transmission mechanisms function more smoothly as market integration takes place. The Capital Market plays a critical role in the growth process. It helps to augment Capital formation. Professor Hicks writes interestinglyWhat happened in the Industrial Revolution is that the Range of fixed capital goods that were used in productionBegan noticeably to increase. But fixed capital is sunk; it is embodied in a particular form, from which it can only graduallybe released. In order that people should be willing to sink large amounts of capital it is the availability of liquid funds which is crucial. This condition was satisfied in England by the first half of the eighteenth century The liquid asset was there, as it would not have been even a few years earlier. The Securities industry matters very much. It acts as conduit for the transfer of long term funds. The growth of the primary market rests on the development of the secondary market which provides liquidity to the stocks. The primary market in India has Seen a sea change since early 1990s. New capital raised by the private sector was only around Rs.600 crore in 1981-82. There was a dramatic rise since the beginning of 1990s. The new capital raised rose to Rs 20,000 crore in 1992-93 and further to Rs26,000 crore in 1994-95.Since then there has been a decline however and the amount mobilised from the primary market 1996-97 was approximately Rs10,500 crore.

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MARKET DEVELOPMENTS In the context of a fairly rapid growth of the securities market, regulation of the market has also assumed importance. It is generally established that the regulation is necessary o ensure that the securities markets operate in a fair and orderly manner, The professionals in the securities industry deal justly with their customers, and That the corporate make public all information about themselves which investors need have to make intelligent investment. These are the tasks, which SEBI is addressing itself to. Development and regulation of markets is a tremendous challenge in the institutional development. Our task is not unlike that seen in many other countries all over the world in the last decade. When institutions are under development, regulation of financial markets is difficult. When the institutional design of a market is faulty, we observe a breakdown of market efficiency which causes great hardship to people in the country and distorts resource allocation. We have seen examples of such breakdowns in India as well. These difficulties are a reminder that the development of Indias securities industry should be viewed as a challenge of the liberalisation process. Markets do not exist in the vacuum; markets are composed of economic agents working within unspoken or explicitly specified rules of the game. Barter markets in primitive economic are an example of markets with very little complexity. Such markets spring up almost instantaneously when economic agents feel the benefits from exchange. But barter markets tend to be localized and cater to a small group of people. When it comes to driving resource allocation in a large country, the institutional content of important financial markets of an economy cannot be ignored and their healthy development cannot be taken for granted. It was and is a major objective of reforms in the financial sector to foster the creation of securities markets of highest quality.

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BARRIERS TO CHANGES AND THE EXPERIENCE OF THE EQUITY MARKETS An additional complexity in this process is whether the established status quo features a healthy set of markets or not. The international experience is that market mechanisms are profoundly difficult to change once they become well entrenched. The established network of exchanges, brokerage firms, traders, users and regulators are all typically committed to one style of functioning. They are composed of a large group of people who have made investments in their human capital that is tuned to the exiting design of markets and they often collectively act to block or slow down reforms and modernisation. For example, many OECD countries continue to use trading with market markers and open outcry, even thought the best practices available worldwide are clearly identified as computer- driven order matching. By international standards the experience of Indias equity markets is a singular one. Despite the existence of traditional equity exchanges, Indias equity market has now completely transformed the market mechanisms used in trading, clearing and settlement. The electronic trading on the equity market, in India is more modern that what is seen in many OECD countries and the transformation of clearing and settlement that we have seen on the equity markets over the last two years could easily have taken a decade in other countries. This transformation has swept away a host of market practices, which were once considered perfectly acceptable and should be viewed as a significant achievement of the liberalisation process. One indicator of the of the success of this transformation is the fact that the daily volume observed on the equity market in India today is typically four to five times larger than pre-1992 levels.

Domestic outsourcing: Latent opportunity?

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India continues to be in the limelight for the tremendous growth of its IT and BPO industry. However, even as IT services and BPO exports hog the limelight, there is a latent opportunity in the domestic market. According to Nasscom, the domestic IT services market grew at 29% to touch $4.5 billion, while the ITES-BPO services grew at 50% (on a smaller base) to reach $0.9 billion for FY 2005-06. The domestic IT services and ITES-BPO market is expected to grow to $5.6 billion and $1.2 billion respectively in FY 2006-07.

Source: Nasscom Indian IT services market Companies in telecom, retail, banking and financial services sectors are amongst the leading domestic buyers of IT outsourcing. Services offered in this space include application development and maintenance, IT infrastructure maintenance, network management etc. Some of the recent contracts include:

Idea Cellular awarded a 10-year IT and CRM outsourcing deal valued at $600 to $800 million to IBM. Bharti-IBM, Dabur-Accenture, Bank of India-HP are some of the other larger deals in the last three years.

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Other companies considering outsourcing their IT functions include Hutchison Essar (selected IBM as the vendor) and Reliance Communications (considering IBM, EDS and T-Systems for its $1.5 billion outsourcing contract).

The global firms such as IBM, Accenture and EDS are building capacity and eagerly eyeing and tapping the opportunity in the Indian market while the top guns of the Indian IT Services space including Infosys, TCS and Wipro are more focused on clients in the US and Europe. Though Wipro and TCS do have some domestic focus, IBM, Accenture and EDS have been beating the Indian firms in their own backyard! While domestic revenues of TCS and Wipro are less than 10% of their total IT revenues, Infosys does not have any domestic revenue. The US and Europe are the primary markets for the Indian IT players. Indian BPO-ITES market While the MNCs dominate the domestic IT services market, the BPO-ITES market is dominated by several mid-sized and small players. Some of the better-known players in the domestic ITES-BPO space include, Intelenet, Aegis, InfoVision and Tata Serwizsol. These vendors primarily cater to the domestic call center market. Banking and telecom have been the major verticals in the domestic ITES space. These sectors are also considered high growth areas:

The Indian market for cellular services has touched 115 million users by Feb 2007. One of the fastest growing cellular markets that adds more than 5.5 million new subscribers each month. This means a growing need for additional agents to handle customer calls.

The Indian banking sector is expected to grow between 20 to 25 per cent annually, according to the IBA (Indian Banks' Association). Apart from outsourcing their IT functions (estimates suggest that banks in India have spent more than $700 million on IT during FY06), most of the banks are also

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outsourcing other support services such as customer support, accounts and administrative support services. There are companies such as MphasiS, HTMT, and HCL who are catering to the international as well as domestic market. This is primarily to leverage their existing facilities during daytime and achieve a better capacity utilization. However, most others have deliberately stayed out of the domestic market, where price competition is severe. Abstract Business Process Outsourcing (BPO) is the fastest growing segment of IT outsourcing, as organizations see the opportunity it offers to outsource business processes with the following benefits: the ability to focus on core competencies; cost savings; improved business process quality; flexibility in terms of technology; and reduced time to market. 'The BPO Market Outlook' is a new management report that provides an introduction to horizontal BPO - such as CRM, human resources, finance and accounting, and procurement - profiling the major players, analysing market trends and outlining best practices to provide organizations with a platform for making the right BPO decisions. This new report will enable you to assess the BPO market and develop specific competitive strategies to increase efficiency and productivity whilst reducing costs. Some key findings from this report...

The market for F&A BPO is set to grow from $13.9 billion in 2005, to over $18.5 billion in 2008, at a CAGR of 10%. BPO can lead to savings of up to 30%, which can increase to 50% if the outsourced work is offshored. The BPO market is the single fastest growing area of the IT services sector. Growing 8% annually, spending on BPO services is expected to grow from $112.1 billion in 2005 to $144 billion in 2008, an increase of 40%.

F&A BPO is mainly a labor arbitrage play, which means the barriers to entry are lower and Indian offshore providers have been able to gain a strong foothold in the market.

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The HRO market is predicted to grow from just under $23 billion in 2004 to over $30 billion in 2008, at a CAGR of 7%. Procurement outsourcing (PO) is starting to gain market traction. India remains the largest provider of offshore BPO services, accounting for nearly half of the global offshore BPO market. However, China is expected to grow rapidly.

Going forward Indian players have not been able to capitalize on the domestic outsourcing market so far. One of the obvious reasons for the absence of large Indian vendors from the large domestic IT as well as ITES deals is the comparatively lower billing rates that domestic outsourcing offers vis--vis offshore. Going forward, we believe that while a few companies might look at the domestic market as an additional revenue stream, several other Indian players who have traditionally focused on the US or European markets, will continue to stay out of the domestic market. While the global IT majors will retain a significant share of the mega IT deal market, the smaller deals will be captured by smaller pure domestic players. Some industry experts believe that Indian IT majors are being short-sighted in not building domestic businesses. While in the near term, the size of the Indian market will remain miniscule, over the long term, it will become one of the larger and faster growing markets. At that time, will they rue their neglect of domestic customers? Only time will tell!

SAFE TRADING BETWEEN STRANGERS

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Clearing is a particularly important area which merits mention. Markets in their early stages often evolve as clubs where known counterparties deal amongst each other, in an attempt to avoid the credit risk of dealing with stranger. This is a particularly important issue in India given the slow redressal of disputes by the legal systems. It is well known that club markets effectively restrict entry and hurt the large-scale growth of market participation and liquidity. Hence novation, i.e. the introduction of a clearing house as counterparty to both legs of every trade as a concept assumes critical importance in financial markets. This concentrates a reat deal of risk taking upon the clearing house, something which is completely different from the traditional perception of clearing, which was simply about the movement of funds and securities. This is a useful illustration of the theme of institutional development that I emphasised earlier. The traditional clearinghouse is a challenge of risk measurement and containment. Our challenge in India is to develop strong institutions which have such skills. The modern clearing house enables safe trading between strangers, and hence fosters a huge increase in market participation and market liquidity. This is an important new phase in Indias financial markets. The Reserve Bank is fully conscious of the uniquely important role that the payments system plays in the creation of safe clearing systems, which require the minimum in working capital on the part of market participants. We will work towards creating electronic funds transfer (EFT) systems which are directly connected to all the important that we are planning to introduce is expected to be mainly to banks initially. The Final stage of trade is where securities change hands. Systems in India have been plagued by the use of physical paper certificates. Back office cost and fraud risk have been part of the transaction costs associated with such a system. On the other hand, the depository is an institution which maintains an electronic record of ownership of shares. Indias first depository was inaugurated in November 1996.Depository system would have achieved its goal only when a sufficient critical mass of paper has been converted into electronic holdings.

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MARKET AND FINANCIAL INSTITUTIONS In every economy, there is a problem of linking up savings of house hold to investment by firms. This allocation of funds as resources for the purpose of investment is a crucial function of the financial systems. There are two major alternative mechanisms through which such allocation of funds can be achieved. One is via banks and other financial institutions and the other via financial markets. For long, the Indian financial system was dominated by banks and other financial institutions. One of the major changes that has taken place in the last five years is the rise of financial market as an alternative route for resource allocation. What the country needs ultimately of course is an efficient system which minimises transaction costs. The information processing and transaction costs are different for banks and financial institutions on the one hand and the market on the other. Perhaps what is needed is an appropriate blend of the two, in the mobilisation and allocation of resources. There is a growing concern about the behaviour of the secondary and primary markets. After having been used to raising fairly substantial funds from the primary market, the corporate sector is faced with a situation where the amounts raised have dropped substantially during the last two years. Very often it is said that it is the high rate of interest which has led to less amount being raised in the primary market; in 1995-96 the contrary was the case. It was the shortfall in the amount raised in the capital market, which put considerable pressure on the banking system which led to the rise in the rate of interest. As I have repeatedly mentioned, the increase in the non -food credit made available by the banking system in 1994-95 and 1995-96 was Rs. 45,775 crore and Rs44,938 crore respectively. These were substantially higher than in the previous year. It is being repeatedly suggested that the only way by which the private corporate sector can raise more funds from the primary market is by ensuring that middle class for the disenchantment of the investor has been that the corporates have not lived up to their promises in the case of issues made in the early nineties. Ultimately confidence can be built only if the corporates perform well and the investor are convinced of the future profits of the

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issuers. This is as important as improving the functioning of the market. we need to go ahead with all the steps that are required to make our markets deep, liquid and efficient. But at the same time corporates must deliver on their promises. It gives me great pleasure to be here at a conference, which is thoughtfully organised around the themes of trading, clearing, settlements and derivatives. I am sure that this conference will make an important contribution towards the institutional development of the securities market, which is an integral part of the growth and development of the economy.

Types of financial markets The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. Difference between the primary market and the secondary market For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity

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markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. Products dealt in the secondary markets Following are the main financial products/instruments dealt in the secondary market:

Equity: The ownership interest in a company of holders of its common and preferred stock. The various kinds of equity shares are as follows Equity Shares: An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the

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event of liquidation, their claims rank below the claims of the companys creditors, bondholders / debenture holders.

Cumulative Preference Shares.

A type of preference shares on which

dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.

Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (upto twenty years).

Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/ charged against the asset of the company in favour of debenture holder.

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Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan.

The various types of Bonds are as follows Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesnt require any guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.

Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.

Markets have many different names in finance. Some of the most important ways to classify markets include the following:

Primary and Secondary Money Market and Capital Market Dealers and Organized Exchanges Spot and Forward Domestic versus Foreign Markets

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Euromarkets Foreign Exchange Markets

Money Markets and Capital Markets Financial markets are also categorized by the time period over which the funds are used. In finance these markets are classified as money and capital markets. Money Market The money market refers to the market for short-term high-quality debt instruments. This market classification refers to the market for debt issued with a maturity of one year or less. The value of the money market is to allow firms to invest or borrow funds for short periods of time. For the investor, the money market provides a useful place to invest extra cash that would be earning no interest if held in cash or checking accounts. For the borrower, the money market provides one of the lowest cost sources of funds to meet short-term cash needs. The following is a list of primary securities found in the money market:

Treasury bills: Every Thursday the U.S. Treasury sells 91-day and 182-day Treasury securities called Treasury bills. These are sold at a discount from their par value. A Treasury auction of 91-day bills might result in a price of 98.683% of par value, (e.g., a $1,000 par value bond would sell for $986.83), which would provide an interest rate of 5.21%.

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Federal agency discount notes: These are similar to Treasury bills but issued by agencies of the U.S. Federal Government such as Federal Home Loan Banks, Federal National Mortgage Association, and the Federal Home Loan Mortgage Association.

Commercial paper:

These are unsecured promissory notes issued by

corporations. Most commercial paper has an original maturity of less than 270 days and are sold on a discounted basis like Treasury bills.

Negotiable certificates of deposit: This is a deposit of a commercial bank or thrift institution that has a specified term and maturity date. These securities are traded in secondary markets and are often issued in bearer form which means the holder receives the principal and interest at maturity.

Repurchase agreements (repos): A repurchase agreement is a financial contract is which the holder of a security sells it to an investor with a promise to repurchase after a specified period of time, usually 1 to 14 days. The repo is for all intents and purposes a type of collateralized borrowing and the interest rates reflect the short-term maturity and low risk of the agreement. Security dealers use repos to finance some of the inventory of securities they hold for sale.

Banker's acceptances (BAs): A BA is an order to pay a specified amount of money to the holder of the instrument on a given date. These are usually used in foreign trade transactions in which the seller wants to insure they will be paid for the goods sent. A commercial bank issues the BA to the seller in place of the buyer, who pays for the BA, and whose credit rating may not be as strong as the bank.

The money market is generally referred to as a wholesale market.

This means that

most of the transactions are very large in size, typically over $1 million. Traders on Wall Street and elsewhere can buy and sell these securities in lots as high as $100 millions because of the large supplies available.

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Individuals and small firms can participate in the money market through money market mutual funds (MMFs). MMFs are open-end mutual funds that invest only in money market instruments. MMFs got their start in the mid-1970s when money market instrument interest rates rose to above what commercial banks and thrifts were permitted by regulation to pay for deposits. While this regulation limiting deposit interest rates was eliminated in the early 1980s, the MMFs were well established and continue to compete for funds successfully against depository institutions. Many MMF provide checking writing privileges that make them very competitive with the money market deposits of depositories.

Capital Market The capital market is the market for long-term funds with maturities in excess of five years. The largest capital markets include common stocks, bonds and mortgages. Capital market funds are used for more permanent financing purposes. The primary financial assets found in the capital markets include

Treasury bonds: These are bonds and notes issued by the U.S. Treasury. Notes have original maturities of 1-10 years while bonds have maturities of 10-30 years. Because these securities are backed by the taxing authority of the U.S. government, they are considered risk free.

Federal agency bonds: These are bonds and notes issued by government agencies. Corporate long-term bonds: These are bonds issued by corporations in which the borrowing terms are spelled out in a bond indenture. The indenture spells out term, interest rate, collateral offered, if any, and any restrictive covenants affecting the borrower.

State and local bonds (municipal bonds): These are bonds issued by local, county and state governments and agencies of these government units. These bonds are typically used to finance schools, public buildings, and transportation infrastructure.

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Common stock: Common stock is a contract evidencing ownership in a corporation. Stock gives the owner a residual claim on the income and assets of the company after all debt obligations are paid off and the right to vote for directors and on other important issues.

Preferred stock: This stock usually provides an investor a fixed dividend return and a preference before common stock holders in event of sale or liquidation of the firm.

Mortgages: Mortgages are long-term loans collateralized by real property. Mortgages are used to finance residential and nonresidential properties such as office buildings, shopping centers, warehouses, and other income-producing real estate.

Financial assets with maturities in the one- to five-year maturity class do not meet the customary definitions of either the money or capital market. They are referred to as the intermediate market. There is sometimes ambiguity as to which market they should be classified in. Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

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The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

FAQs regarding Stock Market 1. I cannot do short selling as my psychological set up is only for buying and then selling. What do you suggest me to do? Ans. 70% of investors have never indulged in short selling as the thought of selling doesn't appeal to their psychological set up. Rather most of investors are optimistic people who only think that stocks can go up. In fact the short sellers are very highly skilled traders. Some people think of short sellers as wealth destroyers whereas on the other hand they give a lot of liquidity to the stock markets. The reality is that stock markets are cyclic in nature and they tend to go up and down. In fact it has been seen that generally the fall is more steeper than the rise. If you wish to short sell the stock, you need to borrow from someone to sell it in the stock market and later buy back the stock and return to the person from whom you borrowed. In the Indian Stock Market you can trade in futures of stock as well as in index and can short sell them and later cover them before the expiry. An interesting fact about short seller is that, they are the buyers when market falls as they will buy their shorts which gives a cushion to the market. Different stocks exchanges in different countries have their own rules with regard to short selling and at times when there is too much of negative news, short selling is banned for sometime.

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2. How could I achieve success in stock market? Ans. There are two steps to achieve success in the stock market. 1.) How not to lose :- When you learn what to do and what not to do in order to lose nothing means you have won the half battle. Only then you can learn how to gain or what to do in order to win. A new investor should do paper trading in order to get the market knowledge before actually entering into the market. 2.) How to gain :- How to gain requires deep understanding about the market trends and fluctuations . A new investor can safeguard himself by taking the route of mutual fund. 3. Is it sound to invest in a particular sector or one should go for the best possible combination of stocks of different sectors? Ans. It is better to invest in a basket of sectors if you are investing for a long term as it will spread your risk across the sectors with the result that any loss in one sector will be compensated with the profit in the other sector. "Never put all the eggs in the same basket" 4. What is the future of BPO (Business Process Outsourcing) industry in Indian market? How will the listing of shares of call centers in stock exchange effect other sectors? Ans. Future of BPO sector is very good in India, as India is a low cost service provider . It also has abundant manpower skills which are highly qualified and are available at one third (1/3) to one fifth (1/5) the cost in developed countries. BPO stocks are likely to do good. The direct call center stocks have still not been listed on the stock exchanges but companies like Wipro, Infosys, HCL etc. having BPO centers which are already listed on the stock exchange are already doing very well.

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5. Insurance and stock market are two entirely opposite markets. How far it is justified for insurance companies to invest into stock market?ake profit on your advice? Ans. t sounds very strange that insurance companies who are not supposed to be taking risk directly in stock market invest in stock markets which is a very risky field. But insurance companies have to deploy their funds and give return to their investors or policy holders. The insurance companies invest very little percent (15% in the equity as per Insurance Regulatory and Development Authority norms) in the risky market. 6. What is put call ratio (PCR)? Ans. Put call ratio (PCR) can be judged for a particular stock or index or all the available option stocks. In the Indian stock market context investors generally talk more about the PCR of nifty which can be found by the total number of nifty puts divided by total numbers of nifty calls (Nifty Puts/ Nifty Calls). The data can be available from the Nse site. PCR ratio has not been able to give clear guidance of the trend of Indian stock market.

7. How much capital one should invest in stock trading? Ans. Capital to invest for a person depends upon the certain circumstances. 1.) Time and efforts one plans to put into :- One should see for oneself what kind of a trader one is. If you are a full time trader and this is your only profession then probably you will have to invest more than 80% of your capital. But if you are a part time investor then you should invest your disposal surplus money only. 2.) Experience in the market :- If you are transacting from years , you will continue along the same lines, by applying new techniques to your operations whereas if it is a new field for you or just a hobby, you should move slowly.

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3.) Capacity to invest (or to bear the risk) :- Some people are at a young age so they can afford to be more risky whereas if you are on the verge of retirement then probably you will have to take less risk so less investment in the stock market.

8. Should I go in for margin trading i.e. trade in risky instruments like futures as I have to pay very less margin? Ans. Margin trading means you have x amount of money and wish to have a 4x or 5x exposure in the market. Margin trading will make you more risky and with more risk there is a more opportunity for a faster gain. If you wish to take risk, you should be clear as to what risk you can take and how much you can afford. In a future stock buying or selling, the margin transaction will make you buy more stocks than you have money to pay for. My strong advice to you is to always maintain stop loss i.e. the maximum loss after which you need to close the position because if a trade goes against you then your entire margin can be wiped out. Try and not disposable money in margin trading. play with more than 10% of your

9. I could do a little experiment but the trading game is not one for me as I want to have a proper system for trading. What do you think about it? Ans. Yes, you are right. Trading in stock markets is not something of a game as the loss and profit is in real terms, chances of a new comer making a loss is more than 80%. Before actually trading with your hard cash, it is better that you develop some sort of a system which you have tested on the previous trading days, assuming the previous trading days you treated as if you are trading live. For example, if you wish to develop a system which says that whenever a 25 day moving average (DMA) crosses a 40 day moving average (DMA) from below, you are going to buy that stock and when a 25 DMA is going to cut the 40 DMA from top you are going to sell. Now you should test whether this crossover of 25 DMA and 40 DMA gave

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profitable trades in last six months or not. If

you find that in last six months this

crossover gave you profits, then this is a small system developed for you and then you blindly follow the system and start making profits. While doing system trading, you need to be quite confident on your system as if you are not confident then you would not be able to take all trades as you might get panicky once the system generates negative trades giving losses. This system trading has its own advantages as you are able to take objective decisions and do not get confused as to whether you should buy or sell. You may refine and make your system better with practice.

10. What do you mean by positive and negative divergence? Ans. Positive and negative divergence basically refers to the technical charts in which the stock and the indicator in question move in different directions and it is the indicator which gives you the hint towards direction which the stock is likely to take. You cannot understand the positive and negative divergence without really seeing the chart in front of you.

11. How can I buy shares? Ans. There are two ways to buy shares. 1.) Primary market :- When a company makes a new issue of shares and offers directly to the public is known as primary market. It is also called an initial public offering (IPO). The investors either apply on the basis of the issue price or need to bid by the book building process. 2.) Secondary market :- Buying shares of a company which is already listed in the stock exchange is called secondary market. The shares in secondary market are bought through brokers.

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12. What should be the kind of psychology or traits one should not have while trading in the stock market?2 Ans. A good trader should not be a pessimist and unsure of himself. One who lacks confidence is sure to meet his end very soon. One should not be interested in trying to listen to gossip, believe in rumors and should rather base his investment decisions on solid fundamental and technical information. There is no easy answer to tell whether one is doing right or wrong in the stock market. But if you are giving losses that should be sufficient to tell that you are going wrong. The entry and exit are the most important points for an investor to take care of because if the initial entry is made at higher prices, then the panic and risk associated with higher prices is there.

13. What is an IPO? Ans. When a company either listed or non listed (brand new) comes out with its new issue and invites public to buy directly from them rather buying from brokers is called initial public offering (IPO).

14. Why companies come out with an IPO? Ans. Companies need money for growth and expansion, purchasing new machinery, building infrastructure or even repay their debt. Therefore companies ask people to invest and issue IPO. People who invest get returns in the form of dividend declared by the company at the end of every financial year or are able to sell the stock in the stock market when the market price of the stock goes up and hence make profit out of it.

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15. What is the benefit of picking up shares from IPO rather than buying from stock market? Ans. Often companies issue their shares at par or at economic rate to attract public and when the shares get listed in the stock exchange generally the prices go up. Short term traders immediately sell those shares and make profits. Long term investors wait for their eggs to hatch properly before selling. 16. What if I don't want to sell my shares soon? Ans. IPO also offers investors the chance to grow with the growing company. Investors get dividend as a reward for investing at the end of every financial year. Sometimes companies also offer premium shares to the existing share holders as a bonus.

17. Buying from primary market is quiet complex process, application often gets rejected. So, why I should go through a difficult process? Ans. Good company often gets over subscription (demand for shares more than number of shares offered). In this scenario the company either rejects some applications and return the entire amount within 21 days or allot shares on pro rata basis (partial allotment) and adjust the surplus money in the subsequent calls. Sometimes the companies have a green shoe option whereby they retain a certain extra percentage of money and issue slightly more shares than original.

18. What is the procedure of applying shares through IPO? Ans. IPO are generally heavily advertised in the media and newspaper because companies want to ensure the success of their issue. Through this advertisement Companies also get a good publicity for their product. One must go through the prospectus very carefully as every detail about the subscription is clearly mentioned in it.

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The information is also available on company's site or SEBI web site. Fill up the application form carefully. Application form are available at any broker's office or on some street kiosks in the financial area of a city. Fill it up and deposit along with application money in the form of cheque or bank demand draft. If you get subscription pay the subsequent call money on time in order to get relief from penalty or forfeiture.

Primary and Secondary The primary market is where financial assets are created. Primary markets include such transactions as the origination of new car loans or business loans. It also involves the underwriting of new common stocks or bonds sold to investors through investment banking firms. When the Treasury sells newly-issued bonds, they are sold in the primary market as well. Once a financial asset has been created, any trading of it is said to occur in the secondary market. financial markets. Secondary markets are the U.S.s largest and most organized The commonly used terms "stock market" and "bond market" are

usually references to their secondary markets. The largest secondary markets in the United States are those for U.S. Treasury securities, common stocks, and mortgagebacked securities.

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Raising capital To understand financial markets, let us look at what they are used for, i.e. what is their purpose? Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Relationship between lenders and borrowers Lenders Financial Intermediaries Financial Markets Borrowers Interbank Individuals

Individuals Banks

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Insurance Companies Pension Mutual Funds

Companies Funds

Stock Money Bond

Exchange Companies Market Central Government Market Municipalities Public Corporations

Foreign Exchange

Suppliers of Funds: -- surplus (savings) units are Lenders: house holders companies governments rest of world

Demanders of funds: -- deficit units. are Borrowers: house holders companies governments rest of world

Who give $ Financial market Receive in return financial assets or instruments

Who receive $

Who issue financial instruments

Lenders Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

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puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares.

Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Borrowers Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the public sector borrowing requirement (PSBR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation.

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Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets. Raising Capital: Our goal is to advise our clients on the most appropriate capital at the lowest cost of capital for our clients from any market or any instrument available. We leverage our global network of affiliates and our expertise in knowing which markets or instruments offer the best options for our clients. Our expertise lies in our excellent network of financial intermediaries and the innovativeness of our solutions.

Equity Capital IPOs in India IPOs in Key Financial markets like London, Singapore, Hong Kong Private Equity/Real Estate Funds Debt Capital Debt/Bond offerings in India Debt/Bond offerings in Asian markets Debt/Bond offerings in Global markets

Raising Capital - The Rationale Here are the key reasons you should consider raising capital even if you don't need funds

"Monetization" of the business- Most businesses are not "unitized" i.e. if the founders need to raise capital by selling a part, it is usually not possible. By raising capital for sources like Private Equity, IPOs, foreign listings, a founder

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"monetizes" the company and can buy or sell the company is "units" rather than the entire business

"Price Discovery" - What is the business worth? Traditional benchmarks thow up valuations that are based on Earnings, assets etc. They rarely throw up benchmarks which are based on the buyer's eargerness to buy. By raising capital, the founder "discovers the price" of the company since those who buy into it not just look at the company's valuation but the country's growth, the interest in the country's paper etc

De risking- Usually, entrepreneurs have their entire capital invested in one business (including pledging the own personal assets). Raising capital allows you to "de risk" your personal capital from the ups and downs of the business

Foreign Listings - Foreign listings take advantage of the easy availability of capital in a particular market at a particular point of time and/or the interest in that country

Companies may look to list to take advantage of cheaper capital or for raising their profile in regional or global markets We assist companies across Asia, specially India, Thailand, Malaysia, Indonesia and Philippines with considering raising capital from markets like London AIM Market Singapore Stock Exchange Dubai International Financial Exchange

Raising Capital - Representative List of Transactions We have assisted companies with identifying the right intermediaries to raise capital in any financial market where it is available at the cheapest cost. Here are some examples:

10% founder stake sale in Hotel company through Private Equity Private Equity capital for stent company in India Private Equity capital for pharmaceutical drying equipment manufacturer in India

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Private Equity capital for OEM heavy vehicle body building company Private Equity Advisory to one of India 's largest specialized printing company Private Equity Advisor to Mumbai based pediatric hospital chain Private Equity Advisory to Infrastructure/Construction company Private Equity, Real Estate Fund and global capital raising advisory for Real Private Equity advisory to a pharmaceutical packaging company Private Equity advisory to a top 20 Life Sciences company Top tier Real Estate company with interests in Commercial, Residential, Hotels Stent company in India Pharmaceutical drying equipment manufacturer in India OEM heavy vehicle body building company Specialized Printing company Manufacturer of Pharmaceutical packaging Top 20 pharmaceutical company (Active Pharmaceutical Ingredient

Estate company with interests in commercial, residential, IT Parks and hotels

and IT Parks

Manufacturer) For Unlisted Companies: Founders of unlisted companies usually have their entire capital locked up in their business. Our objective is to "unlock" the founder's capital while keeping their control over their business. Towards that goal, we assist unlisted companies with

Preparing for IPOs/Public Offers both internally and externally including but not limited to identifying merchant bankers etc Act as advisors to assist unlisted companies in negotiating with VCs/PEs & Institutional investors

Get companies ready for Institutional Funding - Before companies can look for institutional investment, they need to prepare the company in terms of valuation, liquidity etc. Institutional investors use certain objective benchmarks like liquidity and market capitalization to enter, and a company must get ready to meet these benchmarks. We

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will work with you over a period of 6-12 months on a fixed fee basis to prepare you for an institutional investment. That would require Valuation roadmaps, strategy and Institutional Investor Relations advise.

Derivative products

During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk. Financial markets are, by nature, extremely volatile and hence the risk factor is an important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Financial Derivatives have been in existence in the markets for over 150 years in fact the first reference to some form of the modern day Financial Derivative is found in the Futures markets that were function in Chicago in the 1850s. Over the years a more fomalised structure came into place the most significant fillip in this regard was the seminal work of Fisher Black and Myron Scholes in 1973. Since then, the development of Financial Derivatives and its extensive use in the Financial sector has been synonymous with the stupendous growth in the financial sector itself. The 1980s and the 1990s saw tremendous growth in the Financial Sector and a lot of it was directly fuelled by the growth and development of the use of derivates in this area.

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Development of exchange-traded derivatives Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: 1. They help in transferring risks from risk adverse people to risk oriented people 2. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. They increase the volume traded in markets because of participation of risk averse people in greater numbers 5. They increase savings and investment in the long run The participants in a derivatives market Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture.

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Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, 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.

Types of Derivatives Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.

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Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating. Factors driving the growth of financial derivatives 1. Increased volatility in asset prices in financial markets, 2. Increased integration of national financial markets with the international markets, 3. Marked improvement in communication facilities and sharp decline in their costs, 4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and 5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

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Futures Index Products Underlying Instrument Type S&P CNX Nifty Maximum of 3month cycle. At any point in time, there will be 3 contracts available : as 1) near month, 2) mid month & Same 3) Trading Cycle far month index as duration futures Last Thursday of Same the Expiry Day index expiry month futures Permitted lot size is Contract Size Price Steps thereof Re.0.05 Same futures Re.0.05 200 & multiples index trading Index Futures Options Individual

on Options Individual

on

Securities. Securities 30 securities 30 securities by stipulated SEBI American by SEBI

S&P CNX stipulated Nifty European

Same as index Same as index futures futures

Same as index Same as index futures futures

as As stipulated by As stipulated by NSE (not less NSE (not less than Rs.2 lacs) than Rs.2 lacs)

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Theoretical value of the options contract arrived based Base First Price- previous day of closing day BlackScholes at on previous underlying day Same as Index closing value of security options close Daily settlement Same as Index price options

trading Nifty value model Base Price- Daily settlement daily Subsequent price

price Operating ranges for are kept at

Operating ranges for are ranges are kept kept at 99% of at + 20 % the base price Lower of 1% of marketwide position limit for Same futures as positions individual

Operating ranges Price Bands kept at + 10 %

99% of the Operating are base price

20,000 units stipulated Quantity Freeze 20,000 units or or greater greater open

or Rs.5 crores

Currency markets

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Seemingly, the

most obvious buyers and

sellers

of

foreign

exchange

are

importers/exporters. While this may have been true in the distant past, whereby importers/exporters created the initial demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS.[1] The picture of foreign currency transactions today shows: Banks and Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists

Analysis of financial markets Financial Market Analysis deals with the performance of a particular financial market(s). The performance of a financial market depends upon the performance of the total number of securities that are traded in that market. On a given day when the market closes with the prices of most of its securities on the higher side, then it could be said to have performed well. This is reflected in a market indicator called Index which tracks the performance of some of the more popular and steady securities that are traded in that particular financial market. As a result, analysis of the financial markets has become one of the main activities covering a very large number of factors both within the market and outside it. For instance, when the government of the country where the market is located, announces a new policy measure aimed at deregulating a particularly stifling part of an industry segment, it may have a positive impact on the financial market. Financial market analysts cannot anticipate such factors and therefore the impact of these factors do not come under the main purview of financial market analysis. However, most analysts do set aside some space for the impact of extraneous factors on the market and they do so in equal measure for both positive as well as negative factors.

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Financial market analysis has become a highly specialized activity confined to select groups of experts known as technical analysts. In most cases they are professionally trained in financial analysis and are reasonably familiar with the tools used to analyze a particular market. In certain other cases they are economists or veteran investors with a special interest in financial market analysis and market economics. The number of factors that directly or indirectly impact the financial markets are increasing rapidly with more analysts digging deeper into the circumstances that influence financial market behavior. On the other hand, the integration of information technology in market analysis is increasingly meeting the challenge posed by the complexities of financial market analysis. Some of the most important types of analysis affecting financial markets are:

Fundamental Analysis Securities Market Analysis Securities Market Technical Analysis Index Momentum Analysis Securities Momentum Analysis Securities Chart Analysis Market Analysis Market Trend Indicators

Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not orrelated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian

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distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatiliy, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely that what one would calculate using a Gaussian distribution with an estimated standard deviation.

Financial markets in popular culture Gordon Gekko is a famous caricature of a rogue financial markets operator, famous for saying "greed ... is good". Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view. Stories that make the headlines involve the incompetent, the lucky and the downright skillful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example. Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.

Bibliography:

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Introduction http://en.wikipedia.org/wiki/Financial_market

Types of financial markets http://digitu.com/crse-f1/fm-006.html

Types of financial markets http://www.munothfinancial.com/stock_faq.php

Financial markets & institutions http://www.econ.iastate.edu/classes/econ308/tesfatsion/finintro.htm

Raising Capital http://northbridgeindia.com/Raising.aspx

Derivative product: http://en.wikipedia.org/wiki/Financial_market

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