Domestic Stock Markets

8/13/2019 Domestic Stock Markets

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Domestic Stock Markets

India has two major stock exchanges andRegional Exchanges

Several other exchanges: MCX-SX (Approved)

OTCEI

PXI

Indian Energy Exchange

MCX

NCDEX

Small companies, or those which do notmeet listing requirements may be tradedon the OTCEI


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NSE and BSE

Parameters NSE BSE

Establishment 1992 1875Year of Operations Debt and equities in

1994Derivatives in 2000

Floor trading toelectronic trading in1995Derivatives in 2000

Business Model Transaction fees Transaction fees

Listed Companies 2,000 5,000

Settlement Cycle T+2, rolling settlement T+2, rolling settleme

Market Model Price/time prioritymodel. Fullyautomated, screen-based trading system

Price/time prioritymodel. Fullyautomated, screen-based trading syste


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Types of Indices and Averages

The methods of index or average construction

Price Weighted

Capitalization Weighted

Stocks Day 1 Day 2

ABC (100 shares) 60 62

DEF (200 shares) 25 22

XYZ (300 shares) 43 45


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Price-weighted Average

A price-weighted average is calculated by adding up the prices othe index constituents and dividing by a divisor.

The divisor begins as the number of constituents, but will changeover time (to maintain price continuity) as:

Constituents change

Stocks are split or pay a big stock dividend

Divisions are spun off

On day 1, we start our average by adding up the prices anddividing by 3, to get a value of 42.67


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Capitalization-weighted

A capitalization-weighted index is weighted by the total value ofthe outstanding shares (price x shares) rather than stock price

The BSE Sensex is an index composed of 30 companies with thebase April 1979 = 100.

What is the composition of Nifty? What is the base?


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Capitalization-weighted

Calculated by dividing the total market cap of the stocks in theindex by the index divisor

The divisor is determined at inception by dividing the total marketcap by the desired beginning level of the index.

The divisor will occasionally be adjusted for splits, changingconstituents, spin-offs, etc.

Divisor

QP

IndexValue

N

i

ii

1


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Calculation

Suppose that we want to set the initial index value at 100.

First calculate the divisor

Now, calculate the index for each day.

Note that the split has no impact on the divisor.

239100

23900

100

300432002510060

Divisor

100

239

23900

239

3004320025100601

Day


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Clearing and Settlement


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What is a Depository?

A depository is like a bank wherein the deposits are securities (viz.shares, debentures, bonds, government securities, units etc.) inelectronic form.

There are two depositories in India which provide dematerializationof securities.

The National Securities Depository Limited (NSDL)

Central Depository Services (India) Limited (CDSL).

Dematerialization is the process by which physical certificates of aninvestor are converted to an equivalent number of securities inelectronic form and credited to the investors account with his

Depository Participant (DP).


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Clearing Corporation

A Clearing Corporation is a part of an exchange or a separateentity and performs three functions, namely, it clears and settles alltransactions

completes the process of receiving and delivering shares/funds to thebuyers and sellers in the market, it provides financial guarantee for alltransactions executed on the exchange and provides risk managemenfunctions

National Securities Clearing Corporation (NSCCL), a 100% subsidiaryof NSE, performs the role of a Clearing Corporation for transactionsexecuted on the NSE

Documents

Domestic Stock Markets