Download The Role and functions of a stock exchange

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Money doesn't
create man but
it is the man
who created
money.
-Warren Buffet
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WELCOME To ALL OF YOU – IFS Course
RAHUL JAIN
(Striving for excellence)
BCOM (H), MBA, FCS
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Overview of Indian Financial
System and Economic
Development
By- Rahul Jain
(PGPM (MBA), FCS)
[email protected]
www.learningfinancialmanagement.pbworks.com
Ph: 9811228852
Our Strategy for Learning
Concepts, Practice and Class Discussion
Punctuality, Participation and Preparation
Judgment challenge
Learning to communicate ideas
Learning from each other
Learning through discovery
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Outline
• Overview of financial markets
• Institutional infrastructure
• Role and functions of stock
exchange
Some Important rules
Switch off your Mobiles
Attendance rules will be strictly applied
Non completion of Assignment will lead to
strict disciplinary measures
Students can gather additional bonus
points by being a “Performer” 4 times in
the whole course.
Students falling in the “Improvement
category” would be penalized.
Website activity
Each one of you write your bio in your
course page. For example Foundation
students will write in Foundation Batch
course page.
Bio will be written as per following
guidelines:
– Include your name, prior education background and institute’s
name
– Include your hobbies, 2 strengths and 2 unique talents
– Include your achievements
– Include what you want to learn from this course
www.learningfinancialmanagement.pbworks.com
The Financial System
Financial System — set of markets, individuals
and institutions which trade in those markets
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Channels funds from lenders to borrowers
Creates liquidity and money
Provides a payments mechanism
Provides financial services such as insurance and
pensions
– Offers portfolio adjustment facilities
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Financial System
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Constituents of Financial
System
Regulation of the Financial
System
To increase the information available to investors:
To ensure the soundness of financial intermediaries (and
the overall financial system):
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Restrictions on entry
Disclosure
Restrictions on Assets and Activities (e.g. Basel II)
Deposit Insurance
Limits on Competition
Restrictions on Interest Rates
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Financial Markets
Markets in which funds are transferred from
people who have an excess of available
funds to people who have a shortage of
funds
– Example: lenders/savers and
borrowers/investors
– Important effects on economic performance
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Structure of Financial
Markets
Debt and Equity Markets
– U.S. markets (2005): debt $41 trillion, equity $18 trillion
– Different return profiles
Primary and Secondary Markets
– Investment Banks underwrite securities in primary markets
– Brokers and dealers work in secondary markets
Exchanges and Over-the-Counter (OTC) Markets
Money and Capital Markets
– Money markets deal in short-term (< 1 yr) debt instruments
– Capital markets deal in longer-term (> 1 yr) debt and
equity instruments
Growing internationalization of financial markets
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Overview of Financial
Markets
Types of financial markets
• Money markets
• Capital markets
• Debt Market
• Hybrid
The Hierarchy of Markets
Asset backed
securities &
derivatives
Corporate bonds &
equities
Government bond
market
Gov’t T Bills
Money market
Instruments
• Equities
Most popular investing
instruments
Stocks and shares
Bonus issues
Rights issues
• Debt
Corporate
Government
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Financial Market
Money market
Commercial
Credit
banks
unions
Primary
Mkt Inst
Primary
market
Firms raise
capital
Short term
instruments debt
Capital
market
Stock
exch
ange
equity
Public
Private
placement
Insurance
cos
NIS
Second
ary
market
Investors
trade
securities
issued in
primary
market
Risk-Return Trade off
India- Young and Restless
Indian Economy and Capital
Market at a glance
Second fastest growing economies after
China with an average annual growth rate
of more than 8 per cent in the last three
years
India’s growth rate has surpassed some of
the developed economies
GDP at current market prices is over US
$778 billion
Indian Economy – A Snapshot
 One of the fastest growing in the world
 Consumption growth fuelling economic growth – consumption
expenditure forming 78% of GDP
 Services sector contributing over 60% to GDP
 Emerging as a
hub of manufacturing excellence. new growth
engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses
 Where forces of competition are at work
 Innovation driving enterprises
 Economic reforms well on course – entering second phase
Indian Economy and Capital
Market at a Glance
9040 brokers in cash segment and 1064 in
derivative segment of the market
122 investment bankers in the market
58 under writers to support primary issues
34 foreign venture capital funds
120 Portfolio managers
Indian Economy and Capital
Market at a Glance
Business Week says that of 100 emerging
market firms which are rapidly globalising
21 are Indian firms
Economists project India to become the
third largest economy in the world by 2040
Indian capital market regulator has
acquired international credibility in the
least possible time
Indian Economy and Capital
Market at a Glance
India has a disclosure based regime of
regulation
Disclosure and Investor Protection
guidelines available
India’s accounting standards are closer to
international standards
India has a well laid down legal framework
Indian Economy and Capital
Market at a Glance
India has T+2 rolling settlement as
opposed to T+3 in NYSE.
In India the transactions are totally
electronic on a real time basis.
India has several protective safeguards for
the retail investor such as grading system
of public offering, retail quota at 25 per
cent etc.
Indian Economy and Capital
Market at a Glance
As an integral part of risk management
trading and exposure limits, various
margins and mark to market margins are
in vogue
Clearing houses in place
Almost 100 per cent risk free electronic
settlement through depository system
SEBI has a surveillance and enforcement
system in place
Indian Economy and Capital Market at a Glance
 India - one of 10 fastest-growing population of HNWIs globally
 There are at least 23 Indian citizens amongst the richest people on
the planet
 Non Resident Indians can invest in all Indian Asset Classes
 Salary increases in India – 13.9% is the highest in the world
 Increasing Investment avenues – Art, Realty Funds, Commodities
 The number of companies listed on the Bombay Stock Exchange,
at more than 6,000, is second only to NYSE.
 Each year 2,500 tonnes of gold is mined (fifth of the world's gold
output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is
consumed in India alone.
Indian Equities
Long term prospects are intact
Demographics
Half the population below 25 yrs
Consumerism
Infrastructure
Retail credit, low interest rates,
changing aspirations
Development of roads, ports,
telecom
Reforms
FDI, Tax reforms
Sustained GDP Growth
Global
competitiveness
Exports
Outsourcing
High GDP Growth
Growth Gap Over The World
Money Market Instruments
Short-term debt is traded in the money markets.
Short-term is any debt instrument sold with a life
that is 365 days or shorter.
Typically, money market securities have the
following features:
– No stated rate of interest – instead, sold at a price
that is at a discount from the par or face value of the
security.
Examples include:
– Treasury bills
– Commercial Paper
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Short-Term Debt and the Money
Market
Commercial Paper
Short-term debt instruments, usually unsecured, issued
by corporations.
Involve credit risk because the financial health of a
corporation can deteriorate and jeopardize the
repayment of the amount borrowed.
– Sold at a discount from their face value
– Maturities less than a year
Because of the credit risk, usually there is only a market
for commercial paper offered by the most credit worthy
corporate issuers.
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GASCI Seminar 2005
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Bank Financing
Short-Term Financing
Banks are an important source of
financing
They provide:
– Lines of Credit in support of working capital
needs
– Term Loans in support of longer term
investment in equipment
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Market infrastructure
• Stock exchange
• Clearing and settlement
• Education and training
• Investors’ protection
• Rating agency
Intermediaries
Financial intermediaries may stand in between
ultimate lenders and ultimate borrowers
• Merchant Bankers
• Stock brokers
• Advisors
• Banks
• Mutual Funds etc
Function of Financial
Intermediaries: Indirect Finance
Why is there indirect finance, i.e., what is the
rationale for financial intermediation?
1. Lower transaction costs
2. Risk management
3. Asymmetric information
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1. Transaction Costs
Transaction Costs — resources (time/money)
used in carrying out the exchange of assets,
goods or services
Economies of scale
– Reduction in transaction costs per dollar of
transaction
– Example: legal costs for “blueprint” contract
Liquidity services
– Coordination across deposit-taking and lending
activities
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2. Risk Management
Risk sharing
– Asset transformation
Risk transformation: sell low-risk assets and use
acquired funds to buy riskier assets
Maturity transformation: convert funds lent for a
short-period into loans of longer duration
Diversification — the holding of multiple
(not perfectly correlated) assets
– Take advantage of portfolio effects
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3. Asymmetric Information
Asymmetric distribution of information between agents
– Example: borrower has better information about investment
project than the lender
Economic incentives matter
Adverse Selection (before the transaction)
– Example: more likely to select risky borrower
Moral Hazard (after the transaction)
– Example: activities making loan repayment by borrower less
likely
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Role and Functions of
a stock exchange
Established for the purpose of
assisting, regulating and
controlling business of buying,
selling and dealing in securities
Role and Functions of
a stock exchange cont’d
• Provides a market for the trading of
securities to individuals and
organizations seeking to invest their
saving or excess funds through the
purchase of securities
Role and Functions of
a stock exchange cont’d
Provides a physical location
for buying and selling
securities that have been
listed for trading on that
exchange
Role and Functions of
a stock exchange cont’d
Establishes rules for fair
trading practices and
regulates the trading
activities of its members
according to those rules
Role and Functions of
a stock exchange cont’d
The exchange itself does
not buy or sell the
securities, nor does it set
prices for them
Fair
The exchange assures that
no investor will have an
undue advantage over other
market participants
Efficient market
This means that orders
are executed and
transactions are settled
in the fastest possible
way
Transparency
Investor make informed and
intelligent decision about
the particular stock based
on information
Transparency cont’d
Listed companies must
disclose information in
timely, complete and
accurate manner to the
Exchange and the public on
a regular basis
Transparency cont’d
Required information include
stock price, corporate conditions
and developments dividend,
mergers and joint ventures, and
management changes etc
Doing business
People who buy or sell
stock on an exchange do
so through a broker
Doing business cont’d
The broker takes your order
to the floor of the exchange
looks for a broker
representing someone
wanting to buy/sell
• If a mutually agreeable price
is found the trade is made
Price
At any point in time, the
price of previously
issued stock is
determined by the ebb
and flow of supply and
demand
Listing requirements
There are specific
requirements for allowing a
public company to list its
securities on the Stock
Exchange these are set out
in the legislation
Benefits of listing
• Visibility
• Market support
• Investors confidence
• Increased demand for products and
services
• Overall increase in profitability
Once traded
• Aura of reliability
• Accuracy in reporting financial
data
• Reputation
• Strength
Delisting
Stock exchange can delist companies
for a number of reasons including :• Merger with another company
• Solvency problems
• Name change company asked to be
removed
• Failure to comply with exchange rules
Desirable Characteristics
of a stock market
Liquidity
Ability to sell an asset
quickly at a fairly
known price Low
transactions costs
Desirable Characteristics
of a stock market cont’d
• Availability of information
Market efficiency
• Prices react quickly to new
information
• Small price fluctuations
• Narrow price spread
Financing the exchange
• Transaction fees paid by members for
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each order executed
Fees paid by firms when their securities
are originally listed
Annual fees by firms
Entrance fees from new members
sale of historic trading and market
information
Major challenges for the
Exchanges
• Cross border trading
• Issuers and investors are
expanding their horizons beyond
their home markets
• Investors becoming much more
demanding
•Regulatory improvement
Transparency and Corporate
Governance
Protection to
minority
Shareholders
Corporate
Governance
Disclosure
Enhance
market
confidence
Strong
industry
regulator
Owners
Ownership of the
company is by the
public in the form of
shares one share,
one vote
Board is elected by
shareholders to
represent the best
interests of the owners
Managers
Board hires and fires the
management of the
company
Assignment – I – 11th July
A) Individual Assignment- 3minute
presentation on Financial News Analysis
(Refer Economic times and other business
news papers/ magazine) –Compulsory for
first 5 roll numbers. Also submit a report on
A4 size paper (Give intext citations)
B) Individual Assignment – 2 minute
presentation on Key learnings of the
previous class. (Compulsory for all)
C) Name of Groups (Maximum 7 students)
Some important points
Academic Honesty
– Individual Work Only, Allows for Group
Discussion of Concepts and Problems
– Do Not Copy Work
– Reference Any Source
– When Confused Ask Instructor
Contact me: Rahul Jain (9811228852,
[email protected],
Yahooid:rahulkjain16)