Capital Market. About Stock Market “Stock market” is a term used to describe the physical...

Capital Market

About Stock Market

• “Stock market” is a term used to describe the physical location where the buying and selling of stocks take place.

• The correct term to be used in pertaining to the physical location for trading stocks is “stock exchange.”

• The Stock market in India consists of about approx. twenty two stock exchanges.

• The stock exchanges constitute a market where securities issued by the Central & State Govt., Public bodies & Joint Stock companies are traded.

Types of Market

• Primary Market – In this new issues of equity & debt are arranged either publicly or privately.

• Secondary Market – The market where existing securities are traded.

• Future Market – It is a market of contracts where goods are bought & sold at specified prices & times.

• Options Market – It is similar to future market i.e. it is a contract that gives the right, & not the obligation, to trade a stock at a certain price before the specified date.

• Defensive Shares – These are the shares of stabilized & mature companies. Over the years these companies have standard practices for dividend payments.

• Cyclical Shares – These are the shares of companies engaged in trade cycle. During boom they do extremely well & during recessionary phase, they hit the bottom.

• Discount Shares – These are the shares whose market price is lower than the par value or book value.

• Growth Shares – These are the shares of those companies whose assets, sales turnover & profits are growing rapidly.

Types of Share

SENSEX

SENSEX

• BSE Sensex is a value-weighted index composed of 30 stocks.

• It consists of the 30 largest and most actively traded stocks, representative of various sectors.

• SENSEX is calculated using the "Free-float Market Capitalization" methodology

• The base period of SENSEX is 1978-79 and the base value is 100 index points.

• SENSEX is calculated every 15 seconds.

BSE Sensex

• The index is calculated based on a free-float capitalization method; does not consider restricted shares.

• The Free float Adjustment factor, or FAF for short, represents the proportion of shares that is free floated as a percentage of issued shares and then its rounded up to the nearest multiple of 5% for calculation purposes. To find the free-float capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply its free-float factor.

• The free-float factor is determined by the percentage of floated shares to outstanding. For example, if a company has a float of 4 million shares and outstanding shares of 5 million, the percent of float to outstanding is 80%. A company with an 80% free float falls in the 75-80% free-float factor, or 0.80, which is then multiplied by its market cap. For example: $120 million (12 million shares at $10/share) x 0.80 = $96 million.

2005 2006 2007 2008

Number of Listed Companies 4,730 4,763 4,796 4,887

Domestic Market Capitalization (in $ million) 386,321 553,074 818,879 1,819,101

Value of Shares Traded (in $ million) 118,248 158,982 214,488 343,776

Average Daily Turnover (in $ million) 466 633 858 1,370

Average Value of Trades (in $ thousand) 0.5 0.6 0.7 0.7

New Capital Raised from Initial Public Offerings (in $ million)

2,918 1,319 5,601 9,643

New Capital Raised from Secondary Public Offerings (in $ million)

392 7,179 1,320 2,074

Number of Trading Days 254 251 250 251

How capital is raised through shares/stocks?

Issued Capital Reserved Capital

Paid up capital1. Registration for Authorized Capital.

2. Amount divided into number of small units/shares.

3. The units which are issued for sale out of authorized capital are called Issued Capital or Initial Public Offering.

How capital is raised through shares?

Issued Capital Reserved Capital

Paid up capital4. Out of Issued Capital, units which are actually

sold are called Paid-up Capital.

5. Shareholders

How capital is raised through shares?

Issued Capital Reserved Capital

Paid up capitalExample –

Authorized Capital – Rs. 1 Crore

Issued Capital – Rs. 50 Lakhs

Paid-up Capital – Rs. 35 Lakhs

About Book Building

• Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company.

• It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The Process:

• The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. • The Issuer specifies the number of securities to be issued and the price band for orders. • The Issuer also appoints syndicate members with whom orders can be placed by the

investors. • Investors place their order with a syndicate member who inputs the orders into the

'electronic book'. This process is called 'bidding' and is similar to open auction. • A Book should remain open for a minimum of 5 days. • Bids cannot be entered less than the floor price. • Bids can be revised by the bidder before the issue closes. • On the close of the book building period the 'book runner evaluates the bids on the basis

of the evaluation criteria which may include - – Price Aggression – Investor quality – Earliness of bids, etc.

• The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities.

• Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process.

• Allocation of securities is made to the successful bidders. • Book Building is a good concept and represents a capital market which is in the process

of maturing.

Initial Public Offerings• Corporates may raise capital in the primary market by way of an

initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.

• This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: – 100% of the net offer to the public through the book building route. – 75% of the net offer to the public through the book building process and

25% through the fixed price portion. – Under the 90% scheme, this percentage would be 90 and 10

respectively.

Features Fixed Price process Book Building process

Pricing Price at which the securities are offered/allotted is known in advance to the investor.

Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.

Demand Demand for the securities offered is known only after the closure of the issue

Demand for the securities offered can be known everyday as the book is built.

Payment Payment if made at the time of subscription wherein refund is given after allocation.

Payment only after allocation.