Tag: #stock exchange

Stock Market

Shares –

A share is the division of the total capital of the company in certain number of units. The owners of these shares are the owners of the company. The person having shares in a particular company are termed as the shareholders of that company. The amount required by the company to start the business is acquired by these shareholders. The denominated value of a share is called its face value. The total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares. The income received from the ownership of shares is a dividend.  The shares are collectively known as “stock”.

Stocks –

Stock is all of the shares into which ownership of the corporation is divided. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Stock Market –

A stock market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses. These may include securities listed on a public stock exchange, as well as stock that is only traded privately by stock holder, such as shares of private companies which are sold to investors through equity crowd-funding platforms. Investment in the stock market is most often done via stockbrokerages and electronic trading platforms. Investment is usually made with an investment strategy in mind. Stocks can be categorized by the country where the company is domiciled.

A stock exchange is an exchange where stockbrokers and traders can buy and sell shares (equity stock), bonds, and other securities. Many large companies have their stocks listed on a stock exchange. This makes the stock more liquid and thus more attractive to many investors. The exchange may also act as a guarantor of settlement. These and other stocks may also be traded “over the counter” (OTC), that is, through a dealer. Some large companies will have their stock listed on more than one exchange in different countries, so as to attract international investors.

Stock exchanges may also cover other types of securities, such as fixed-interest securities (bonds) or (less frequently) derivatives, which are more likely to be traded OTC. Trade in stock markets means the transfer (in exchange for money) of a stock or security from a seller to a buyer. This requires these two parties to agree on a price.  Equities (stocks or shares) confer an ownership interest in a particular company.

Participants in the stock market range from small individual stock investors to larger investors, who can be based anywhere in the world, and may include banks, insurance companies, pension funds and hedge funds. Their buy or sell orders may be executed on their behalf by a stock exchange trader.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This method is used in some stock exchanges and commodities exchanges, and involves traders shouting bid and offer prices. The other type of stock exchange has a network of computers where trades are made electronically. A potential buyer bids a specific price for a stock, and a potential seller asks a specific price for the same stock. Buying or selling at the market means you will accept any ask price or bid price for the stock. When the bid and ask prices match, a sale takes place, on a first-come, first-served basis if there are multiple bidders at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace. The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

NSE –

National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai, Maharashtra. NSE was established in 1992 as the first dematerialized electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facilities to investors spread across the length and breadth of the country. Vikram Limaye is Managing Director and Chief Executive Officer of NSE.

National Stock Exchange has a total market capitalization of more than US$2.27 trillion, making it the world’s 11th-largest stock exchange as of April 2018.  NSE’s flagship index, the NIFTY 50, a 50 stock index is used extensively by investors in India and around the world as a barometer of the Indian capital market. The NIFTY 50 index was launched in 1996 by NSE.  However, Vaidyanathan (2016) estimates that only about 4% of the Indian economy / GDP is actually derived from the stock exchanges in India.

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on 12 June 2000. The futures and options segment of NSE has made a global mark. In the Futures and Options segment, trading in NIFTY 50 Index, NIFTY IT index, NIFTY Bank Index, NIFTY Next 50 index and single stock futures are available. Trading in Mini Nifty Futures & Options and Long term Options on NIFTY 50 are also available.  The average daily turnover in the F&O Segment of the Exchange during the financial year April 2013 to March 2014 stood at ₹1.52236 trillion (US$21 billion).

On 29 August 2011, National Stock Exchange launched derivative contracts on the world’s most-followed equity indices, the S&P 500 and the Dow Jones Industrial Average. NSE is the first Indian exchange to launch global indices. This is also the first time in the world that futures contracts on the S&P 500 index were introduced and listed on an exchange outside of their home country, USA. The new contracts include futures on both the DJIA and the S&P 500 and options on the S&P 500.

On 3 May 2012, the National Stock exchange launched derivative contracts (futures and options) on FTSE 100, the widely tracked index of the UK equity stock market. This was the first of its kind of an index of the UK equity stock market launched in India. FTSE 100 includes 100 largest UK listed blue chip companies and has given returns of 17.8 per cent on investment over three years. The index constitutes 85.6 per cent of UK’s equity market cap.

On 10 January 2013, the National Stock Exchange signed a letter of intent with the Japan Exchange Group, Inc. (JPX) on preparing for the launch of NIFTY 50 Index futures, a representative stock price index of India, on the Osaka Securities Exchange Co., Ltd. (OSE), a subsidiary of JPX.

Moving forward, both parties will make preparations for the listing of yen-denominated NIFTY 50 Index futures by March 2014, the integration date of the derivatives markets of OSE and Tokyo Stock Exchange, Inc. (TSE), a subsidiary of JPX. This is the first time that retail and institutional investors in Japan will be able to take a view on the Indian markets, in addition to current ETFs, in their own currency and in their own time zone. Investors will therefore not face any currency risk, because they will not have to invest in dollar denominated or rupee denominated contracts.

In August 2008, currency derivatives were introduced in India with the launch of Currency Futures in USD–INR by NSE. It also added currency futures in Euros, Pounds, and Yen. The average daily turnover in the F&O Segment of the Exchange on 20 June 2013 stood at ₹419.2616 billion (US$5.9 billion) in futures and ₹273.977 billion (US$3.8 billion) in options, respectively.

First impressions: Upcoming IPO of LIC

On the 1st February of the year, Govt released the budget for the year 2020 including various points and some new things to kick start. One of the major news was about the disinvestment of the LIFE INSURANCE CORPORATION. The government has decided to give an Initial Public Offering for his stake of some of its holdings. LIC was established in 1956 which is fully owned by the Govt. of India. “Listing on the stock exchanges disciplines the company, provides access to financial markets and unlocks value,” Finance Minister Nirmala Sitharaman said in her Budget 2020 speech. “It also gives an opportunity for retail investors to take part in the wealth so created.”

LIC has total assets and costs is around 36 lakh crores. This IPO plays a major role in Finance of India for this. After the COVID-19 situation, this becomes the most important yet vulnerable in equity market case. Govt has some more divesting plans including the BPCL and Air India in the 2nd half of FY 2020-21. However both are running sluggish but LIC expected to list soon. Govt. has set some targets and hopes from this move in future financial years which are following:

  • Disinvestment Target – Rs 2.1 lakh crores.
  • Expected IPO size of around 1 to 1.2 lakh crores for LIC.
  • IPO size of approx. 20k-25k crores for Air India.
  • Estimated IPO size of 50k-60k crores for BPCL.
  • Test of Indian share market’s depth.

Market depth will be stake for test because usually market crashes after some big IPO comes. Asset monetization is the big factor for reviving the economy after some crisis times. Latest fall in market was when SBI Card IPO was offered and hence market attracted towards it and rest of market saw a big down.

As year 2020 has seen a low phase of century in all terms like economy, socialites and life threat due to COVID-19. People are very cautious about their money and they are taking each step only after they are double sure, and they feel necessity to do so. Market has surge and it is not getting levelled in coming months.  A report suggests that economy has fall about odd 20% which will take a year or two to resurface. Looking at situation the only place people are hoping is for their insurance and other covers. Which is good sign for LIC and also for market and economy. Public is caring for their health crisis and hence it may result in good for LIC if it works well.

First year business of LIC before IPO is around 75.9% of market share. (we have not considered the first quarter as its not confirmed and also it is full of disruptions). It has registered the growth of 25% in this year. While Policies wise, it has share percent of 68.7%. However private companies also saw a growth rate of nearly 10% which is little better than their previous performances. LIC has total of 1.2lakh employees including its agents. This factor plays an important role for their brand value and reach to each people in India.

Unlike other finance options, Insurance and other schemes has seen a growth over the COVID-19 period as peoples are scared about their money. They are not willing to invest in other things like equity, debt bonds and commodity. They are looking for an option for future which can return money with a little but sure profit. They also want security for various reasons including any sudden emergency and problems. LIC while has some brilliant figures in terms of returns and claim settlement overall. LIC has more than 99% ratio of successful claim settlements. LIC has become the brand over the years. In the backward areas like village which have not grown as fast as cities, they feel LIC as the only Insurance provider. Infect they will misinterpret you if you say take some insurance. They will feel you are saying to buy LIC, such is the depth of trust in PAN India.

LIC is so successful that it has nearly 1lakh crore of unclaimed settlements in total. This is the amount which has not ever been claimed. This says all about their service and value. Total Asset Under Management is around RS 31lakh crores. LIC has revenue of Rs. 3.37 lakh crores and their net Income is 30,000 crores. While other private companies have total revenue of 1000 crores to 2000 crores. Media discussions estimates the market cap of Rs 10 to 12 lakh crores. Embedded value of LIC focuses on net profit growth a company has to offer his share holders in future. While the LIC has structure to offer 95% of his earning as bonus to their policy holders and employees, while remaining 5% goes to the government of India. This structure is quite old and not preferable as per the guidelines of SEBI. It has to be changed to get Under the equity market and SEBI.

LIC is a very big company on paper which is now preparing to appear for public. It is expected to come as a bang, but somewhere down the line company has lost its market hold over the years. It has reduced to 70% from 90% in last two decades. Which is something to ponder on. This will play a big role for shareholders, if they are thinking to go long term with the LIC. Also, an investor should dive deep into such aspects before taking a stake in LIC. The reason to check for such reason is that company is earning profits, but it has not yielding any growth. But due to increasing inflation shareholder needs that extra edge to compete with price hike in future.

Insurance sector contributes almost the 3.7 % of total GDP of India. While this ratio raises to 6.5% of total GDP of World. This shows the actual path it has still to cover to stay at normal scale of worldwide. Insurance sector has natural growth of 10-11% per annum. Total Asset Under Management is around 40 lakh crores and due to this natural growth, equity of insurance companies is increasing with a boom. The growth which company will do as their extra amount of good work and better performance will add ap the total effect in market and their market cap to grow faster. That’s why shares are enjoying such good run and investors are taking benefits of these parts quite well. Thing to watch out now is how other market players of insurance will sustain when LIC IPO gets introduced. That will tell the story of market in future whether we are balanced enough or we are still vulnerable on market stands.

INVESTMENT FUTURE CONTRACT IN DEPTH

A Future Contract is a contract between two parties where both agrees to buy or sell the underlying asset at a predetermined price and the specified date in future. It’s also known as a derivative because future contracts derive their value from an underlying asset. The underlying asset in the future contract could be commodities ,stocks, currencies, interest rates and bond. The future contract is a standardized agreements which held at a recognized stock exchange. A futures contract provides both a right and an obligation to buy or sell a standard amount of a commodity, security or currency on a specified future date at a price agreed when the contract is entered into.

There are two types of people who trade whether buy or sell, future contracts: Hedgers and Speculators. In simple words Hedging means reduction of risk. An investor who is looking at reducing his risk is known as a Hedger. A Hedger would typically look at reducing his asset exposure to price volatility and in a derivative market, would usually take up a position that is opposite to the risk he is otherwise exposed to. Speculators are those class of investors who willingly take price risks to profit from price changes in the underlying.

Futures contracts are considered an alternative investment, as they typically do not have any positive correlation with stock market prices. Commodity futures trading offers investors access to another asset class of investments. Futures trading offers advantages such as low trading costs, but carries greater risk associated with higher market volatility. Futures contracts are useful for risk-tolerant investors. Investors get to participate in markets they would otherwise not have access to. Margin requirements for most of the commodities and currencies are well-established in the futures market. Thus, a trader knows how much margin he should put up in a contract.

Initial Public Offers in India

Initial Public Offer (IPO) is a process through which an unlisted Company can be listed on the stock exchange by offering its securities to the public in the primary market. The objective of an IPO may be relating to expansion of existing activities of the Company or setting up of new projects or any other object as may be specified by the Company in its offer document or just to get its existing equity shares listed by diluting the stake of existing equity shareholders through offer for sale.   

The companies going public raises funds through IPO’s for working capital, debt repayment, acquisitions, and a host of other uses. When a firm proposes a public issue or IPO, it offers forms for submission to be filled by the shareholders. Public shares can be bought for a limited period only and as per the law, any IPO should be traded openly only for minimum 3 days and maximum 21 days.   

Some major benefits accruing to the firms going for an IPO are as under :  

• Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernization and upgrade of production facilities, implementation of capital-intensive projects) and acquisitive expansion. If retained earnings and debt funding are insufficient, IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. It provides access to a massive, timeless pool of capital and boosts the investment credibility of the business.

• Formation of a public market for the company’s shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO (this route is often taken by the minority financial investors such as venture or private capital funds) and at a later stage (this is often preferred by the majority shareholders).

• Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO or afterwards.

• Listing on a recognized stock exchange means that the business will receive wide media coverage, usually a very favorable one, thus increasing the company’s visibility and recognition of its products and services. The company’s activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the company’s business partners.

• A company having low-transparency businesses with an inadequate financial reporting after listing on a recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit. Partners and contractors of a public company feel more confident about its financial state and organizational capabilities as compared to those of a non-transparent private business.

• Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, ESOP –Employee Stock Option Plan). Equity-based incentive schemes stimulate the key personnel to become more efficient in their work in order to support the company’s growth rates and profitable development, which in turn increase the operational and financial efficiency of the company and its market value.

• Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model. During the IPO implementation process, certain internal changes take place, including modification of the organizational structure; selection of the key personnel and delegation of responsibilities; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business. Normally, such extensive internal efforts result in significant improvements of the communication system, management and controls; they also help eliminate any previously hidden shortcomings in the internal functioning of the business.  

However, before launching its IPOs, a company must disclose all the relevant information to the public and its prospective investors. For that matter, company making a public issue of securities has to file a Draft Red Herring Prospectus (DRHP) with capital market regulator Securities and Exchange Board of India, or SEBI through an eligible merchant banker prior to the filing of prospectus with the Registrar of Companies (RoCs). The issuer company engages a Sebi registered merchant banker to prepare the offer document. Besides due diligence in preparing the offer document, the merchant banker is also responsible for ensuring legal compliance. The merchant banker facilitates the issue in reaching the prospective investors by marketing the same. The Indian regulatory framework is based on a disclosure regime. SEBI reviews the draft offer document and may issue observations with a view to ensure that adequate disclosures are made by the issuer company/merchant bankers in the offer document to enable investors to make an informed investment decision in the issue.   

DRHP provides all the necessary information an investor ought to know about the company in order to make an informed decision. It contains details about the company, its promoters, the project, financial details, objects of raising the money, terms of the issue, risks involved with investing, use of proceeds from the offering, among others. However, the document does not provide information about the price or size of the offering.  

Generally, the stock of any fundamentally sound company would go up after being listed in an exchange. Hence, as far as investors particularly retail ones are concerned, the IPO is the only place where they can get the stock at the lowest possible price. Hence if they buy stocks in an IPO, they can sell it off at a higher price and make a profit.

However, there are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India. They are :  

• Promoters, their reliability and past records

• Firm producing or facilitating services

• Product offered by the firm and its potential

• Whether the firm has entered into a collaboration with technological firm

• Status of the associates

• Historical record of the firm providing the Initial Public Offerings

• Project value and various techniques of sponsoring the plan

• Productivity estimates of the project

• Risk aspects engaged in the execution of the plan

• Authority that has reviewed the plan  

Thus, IPO is an opportunity for the company as well as the investors looking for long term capital and investments. But, less than 5% of India’s household savings of around $ 300 billion are invested in stocks and mutual funds, according to India’s central bank, depriving companies of a huge pool of potential funding for investments. Indians have typically preferred to put their money in gold jewelry and real estate. Some investors moved into stocks after markets began to boom in 2005, but a collapse in prices after 2008, allegations of wrongdoing and a number of IPOs that fell sharply after listing have turned many investors off. Moreover, Individual investors remain wary of equities. India’s benchmark Sensex gained 26% in 2012, but remains near where it traded at the end of 2007, leaving many investors without gains. Indian Capital Market had traded a long way but it needs more extended participation by the investors to make stock exchange a investment trading platform rather than a speculation platform.