Download pdf - Capital Inflows and Share Market

7/28/2019 Capital Inflows and Share Market

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Capital Markets


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Apna Sapna Money-Money


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EEB 3

Money doesn't

create man but

it is the manwho created

money.

-Warren Buffet


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Indian Economy A Snapshot

We are large

We are young

We are a difficult and a complex market

One of the fastest growing in the world

Services sector contributing over 60% to GDP

Where forces of competition are at work

Innovation driving enterprises

Economic reforms well on course entering second phase


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Sustained GDP Growth

High GDP Growth

Growth Gap Over The World

DemographicsHalf the population below 25 yrs

ConsumerismRetail credit, low interest rates,

changing aspirations

InfrastructureDevelopment of roads, ports,

telecom

ReformsFDI

Global

competitiveness

Exports

Outsourcing

Indian Equities

Long term prospects are intact


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Agenda

Understanding the Financial Market

Stock Exchanges

Equity investments/Stock index/IPOs/Bonds

Trading/Speculation

Bonus/Rights/ ADRs/GDRs

Pricing of shares Options and futures

Basic Terms and how the Securities market functions

Stock analysis

Investing philosophies

What moves the Stock markets The year for the markets

Impact of FII inflow.


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Financial System

7


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Why Financial Intermediaries

Pooling and allocation of funds

Lower transaction costs

Risk Management Saving and investment function


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Need for regulation of FM- since it pools

funds of common investors. How is the

regulation done:

Restrictions on entry

Disclosure norms

Restriction on assets and activities

Deposit insurance

Limits on competition

Restriction on interest rates


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Overview

Financial Market

Money Market Capital Market Debt M Forex M

Primary Market

Secondary Market

Commercial PaperC of Deposit

Treasury Bills

G-sec

Call/Notice

Repo

G-Sec (Central/State)

Bonds: Govt./ Corporate


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Money Markets

Commercial Paper

Short term unsecured Promissory note

Issued by Corporates and FIs Tenor 15 days to 1 year

Certificate of Deposit

Issued by banks in 5 lac denominations

Tenor 30 days to 3 years

Treasury Bills

Issued by RBI at a discount of face value

Tenor 14/90/182 and 364 days

Markets for Debt instruments with a maturity upto 1 year

Allows banks to manage liquidity


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Primary and Secondary market

A market where Company/issuer

Raises capital directly from the

Investor.

The sale proceeds are realized

Directly by the issuer

A market where listed securities

Are traded.

PRIMARY SECONDARY


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Primary Market Issuances

Issues by Indian Co. in India

Types/ offer document/ Requirements/Categoriesof investors/pricing of an issue/IPO / intermediaries

in the issue/ Role of SEBI

Issues by Foreign Co. in India

IDRs/ Co. eligibility for IDRs

IPO Grading

Business Prospects//Financial

Position/Management Quality/ Corp Governance/Compliance and litigation history

ASBA


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Secondary Market

Difference with P market

Role of SEBI MIRSD

MRD

DNPD

Products in the Secondary Market

Role of a broker

Risk Management system @ SEBI

Categorization of shares

VaR based margining system

Mark to Market

Upfront Collection of Margins

Index based circuit breakers


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Dematerialization

Conversion from physical form

Maintained by Depository

NSDL

CDSL

Depositories appoint DPs

711 registered DPs( 266 NSDL/ 445 CDSL) Min NW of 100 Cr for establishing Depository.


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Adv of Depositories/ Dematerialization

Safe and convenient

Immediate transfer No stamp duty

No risk of bad delivery

Nomination facilityAutomatic credit of bonus shares

Other info Rematerialization / Pledging possibility/

charges in opening Demat A/c


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CRAs

Function/ denotation

Registered CARE

ICRA

CRISIL

Fitch Ratings India

Brickworks Ratings India

Delisting of shares

Compulsory Delisting

Voluntary Delisting


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Buyback of shares

Conditions ( > 10% needs approval)

Why

Surplus idle cash

Price stabilization

Expected bright future

Takeover/ Acquisition/ Mergers


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Stock exchanges :A serious business

What are stock exchanges all about ? Change agents/facilitators

Transformation from the small businesses to

corporate houses (breaking ownership)

Ownership and convertibility


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How old are Stock exchanges as

institutions ? 1460,Antwerp,Belgium

1602,Amsterdam Stock Exchange


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What are the broad characteristics of

Stock exchanges in India ? Traditionally an association of Brokers

23 recognized SEs(4 national,19 regional) BSE/NSE/OTCEI/ISE

BSE-1870

OTCEI:1990 focus on enterprising promoters (IT)

Structure of BSE (Creation of NSE)


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Demutualization or Corporatization of

Stock Exchanges ? Ownership

Management Membership

Corporate model


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What is the Interconnected stock

Exchange of India ? Impact of technology,connectivity,online trading

Shift of trading to NSE & BSE Created in 1999 by 14 Regional SEs


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What are the obligations of the companies

vis--vis the Stock Exchanges ? Rules as laid down by SEBI

Quarterly/annual reports/board meeting/dates ofAGMs/Price sensitive information/Bonus/rights


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What is a securities market ? Where securities are bought and sold

Entire system (people/institutions/organizations that

enable the trading process)

Security Ownership or creditor ship

Transferability

Securities Market

Capital Market Money Market


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Product offerings in SEs

Capital Market Equities

Indices

Mutual funds

ETFs

IPOs

Security lending and borrowing scheme

Derivatives

Equity/Currency/Interest

Debt Market Retail Debt Market

Wholesale Debt Market

Corporate Bnds


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About Equities:(Trading) Trading(NEAT/BOLT)

Market Timing Market Segments(Rolling Settlement/Limited

Physical market/Institutional Segment/Qualified

Foreign Investor/Block trading)

Securities available for trading Shares

Debentures(PCD/FCD/OCD/NCD/Warrants/Bonds

ETFs

Circuit Breakers

10%: one hour halt

15%: two hour halt

20% : trading suspended for the day


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About Trading(Risk Management)

Value at Risk Margin(Scrips graded)

Mark to market

Penalty for margin violation

About Trading(Clearing and settlement)

T+2


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Indices

Why need for an Index

Functions of the index

Track performance

For comparison of returns

Enable risk management

Application in CAPM

Major Indices

Broad market wide/Sectoral/Thematic


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Indices

How is sensex calculated

Some Index Concepts

Impact Cost

Beta

Total Returns Index

Investible Weight Factors( free float)

Concept of Index Funds

Concept of ETFs


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Capital for Growth

Ways for a Co. to raise capital

Bank

Consortium of Banks

Venture Capitalist

Bonds

Debentures

Primary Market

Public Issue

Rights Issue

Private Placement

Debt Ownership rights


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What is a capital market ? Institutions engaged in providing long term capital:

primary market/secondary market/term lending

institutions/banks/Bonds/investors


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What is money market ? Market for short term funds:Primary

market/secondary market/GOI(G-secs and T Bills)


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What are primary and secondary markets ?

Co. who make the security issues

And the public

Buyers and sellers of securities

Primary Secondary


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Equity investments :your share of ownership

What are Stocks and Securities ? Generic terms for instruments of ownership and

lending


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What are Ordinary shares ? Fractional ownership

Dividends out of operating surplus

Last to receive claims (life and liquidation of

business)

Voting right


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What are Preference Shares ? Preference over ordinary shares

Usually rate of dividend is fixed at time of issue

Participative and non participative

Cumulative and non cumulative

Redeemable or irredeemable

Convertible preference shares


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What are Non voting Shares ? Savings shares

Usually earn higher dividends

Golden shares

Preferred by promoters


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Shares issued at par and shares issued at

a Premium ? Face value

Earlier fixed at 10 and 100 rs.dispensed in 19999 Can be any integer

Norms for issuing shares at premium

Shares at discount

Authorized and subscribed capital

Buyback of shares possible(1999)


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Implication of different par values to investors ? Dividends linked to face value

Par

value

Premium M.P Dividend

declared

Dividen

d (%)

10 30 500 5 50%

10 30 500 5 1%


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Reading daily stock quotation in a financial daily ?

Company Pr.close open high Low

Wipro 1554 1555 1584 1530

close volume value trades P/E

1552.45 142397 220540 6504 39.5

M-Cap 52 W H/L Dividend(%)

36172 1861/791 1045%


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Stock index: A barometer of the stock

markets

What are Stock indices and how are they

calculated ? A number tracking the movement of the market

against a benchmark index.

Calculated by tracking the constituent members

Base year:Sensex 1st april 1979:NSE 1st april 1995


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Calculation of the index

Stock index calculation

Index value=Index on previous dayTotal M-Cap Of current date

Total M-Cap of previous day

M.Cap = No. of O/S * M.P * free float index

M-Cap weighted


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Stock index: A barometer of the stock

markets

What is free float index? Shares readily available for trading

Excludes promoters holdings,govt holding,FI holding

eg

O/S shares 100

Promoters 30

Govt 20

FI/MF 15

Free float 35

Free float index .35%

Companies are mandated to submit periodically constitution

Of O/S shares


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Sensex The Barometer of Capital Market

In 1986,BSE came out with the first Stock index

A basket of 30 Companies was taken

The base year of Sensex is 1978-79 and the base value is 100

Was calculated based on Full Market Capitalization methodology In Sept 2003, Free float Market Capitalization methodology wasintroduced.

Regular adjustments for Bonus, Rights and Newly issued Capital.

The BSE set up in 1875 with 318 persons becoming members


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Companies part of Sensex

Bajaj Auto (1996) Maruti Udyog Ltd (2004)

Mahindra & Mahindra Ltd (2007)

Hero Honda Motors Ltd (2002)

SBI (1996)

ICICI Bank Ltd (2002)

HDFC Ltd (2002)

HDFC Bank Ltd (2003)

Infosys Technologies (1998)

Satyam Computers (2000)

Tata Consultancy Services (2005)

Wipro Ltd (2003)

Ranbaxy Lab (1996)

Cipla Ltd (2001)

Novartis ( 1998)

BHEL (1996) Larsen & Toubro Ltd (2004)

DLF (2007)

BSES (1996)

Tata Power Co Ltd (2003)

National Thermal Power Corp

(2005) Guj Ambuja Cement (1996)

Reliance Petroleum (2000)

HPCL (1996)

ONGC Ltd (2003 )

Reliance Communications (2006)

Bharati Tele ventures (2003)

Auto Banks Tech Pharma Infra

4 4 4 3 12


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SensexScrip Selection Criteria

Listed History

Listing of at least 3 months

Trading Frequency

Scrip should have been traded on each day in the last 3 months

Final Rank Scrip should figure in the final rank of 100 companies basis market cap

Market Cap Weight age

Scrip weightage should be at least 0.5 % of the index

Industry Representation

Balance representation of companies

Track Record

The company should have an acceptable track record


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IPOs and Public Issues

What are IPOs ?

First time issue of a security in the primary market


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How are IPOs priced by companies ? Time lag between commencing business and issuing

shares: thus a premium

Pricing difficult and based on a number of factors

Pricing

Fixed Price Book building method

Investors aware of the price offer investors unaware of the offer price


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Public issue of 10,000,000 equity shares of Rs.10 par value at a price of

Rs.24 (premium of Rs.14 ) each aggregating to Rs.2400 million

Public issue of 72,243,300 equity shares of Rs.10 par value at a price of

Rs ( *) each aggregating Rs. (*) million

Floor price: Rs.115 per share

Fixed Price IPO

Book Building IPO

Price Band


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How does it affect an investor when acompany tries to price its public issue ashigh as possible ?

Issued at the average market price for a similarproduct or company

Par value 10

Premium 90

Issued price 100Dividend 3

Cost of equity ??

Investor expectation 16%

Par value 10

Premium 90

Issued price 100

Returns generated by Co. 9%

Investor expectation 16%

M.P of share will drop to 56.25

(9/.16)


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What is prospectus/offer document ? Co. intending to issue shares files a prospectus with

the SE containing

Financial statements, company track record,

management background, litigations if any, objectiveof raising capital..

Cooling period

Red herring prospectus (approved by SEBI)


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Role of investment banker in an IPO ?

Investor Company

Roles

Lead Manager Underwriter

Draft preparation

Price calculation

Road showsShares allotment

Money refund

Post issue support

Assurance


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Underwriters assurance to companies on

subscription ? Associated risk

Why companies appoint underwriters ? Insure under subscription

Firm commitment( U/W buys the entire offer)

Best efforts (U/W does not guarantee)


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Life cycle of IPO

IPO process initialization

Appoints lead manager

Appoints registrar

Appoints Syndicate members

Lead Manager Prepares draft offer prospectus

Submits with SEBI

SEBIProspectus review

Approves the draft

Lead Manager

Submits prospectus to SEs,Registrar

Decides issue date and price band

Red herring prospectus sent to syndicate

members


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Knowing the IPO

Investor Bidding

Public issue opens

Syndicate members update bidding info

Physical forms sent to Registrar

Lead Manager Based on bids, issue price finalizedSEBI and SEs informed

Registrar

Processing IPO applications

Finalizes pattern for share allotment

Transfers shares in Demat account

Lead Manager-Stock listing The issue is listed on the stock exchange

Green House Option

IPO Book B ilding


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Bid price(per share) No. of shares bid Cumulative shares

501 200 200

400 2000 2200

250 7900 10100

200 46500 56600

150 607400 664000

140 856100 1502300

135 2548700 4051000

130 31929600 35980600

Order Book

IPO-Book Building


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Dutch auction book building ? Allocation is as per the bid by investors


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Does book building help in price and

demand discovery ? Yes

Private placement for price discovery


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What is Greenshoe Option ? Retaining over subscribed capital by issuing

additional shares

Stabilizing agent


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Bonds and Debentures

What are G-Secs and T-Bills ? Issued by RBI on behalf of GOI

G-Secs(1-20 years):T-Bills (14-364 days)

Transactions by institutional investors

All T-Bills are deep discount in nature

Most secure


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What are Debentures Represemnts smallest unit of borrowing

Are securitized

Face value is usually Rs.100

Coupon rate

Holders receive fixed coupon interest

Have no voting rights


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What are Bonds ? Similar to a debenture

Is an American term


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Basic determinants of Bonds/Debentures

? Issuer

Investor Principal

Maturity date (short term/intermediate/long

term/perpetual /extendibles/callable/puttable/sinking)

Coupon(fixed/floating/step up/step down))

Secured(senior/subordinated)


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Different kinds of Debentures in the

market ? Fully convertible debenture(FCD)

Partially converted Debenture(PCD) Optionally convertible Debenture(OCD)

Non convertible Debenture(NCD)

Redeemable or Non redeemable

Fixed rate/Floating Rate

Secured/Unsecured


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Can Bonds be international in character ? Yes

Foreign/Eurobonds


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Call and Put options in Bonds/Debentures

? Call- Exercised by Co.(falling interest)

Put- exercised by investor (rising interest)


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Zero coupon or Deep discount Bond ? Offered at a discount and is redeemed at face value


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Features of floating rate debentures ? Rate changes with the benchmark rate

Mumbai Inter Bank Offer Rate(Mibor) : Average inter

bank borrowing rate in Mumbai

Mumbai inter bank Bid Rate(Mibid) : Average lendingrate of Banks in Mumbai

Indian Benchmark (INBMK ): One year T-Bills

London Inter Bank Offer Rate (Libor )

Spread is governed by Bond Credit Rating


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What is pre issue trading in Govt.

Securities ? Trading in G-Sec even before they are issued (when

issued securities)


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What kind of risks do bonds and

debentures entail ? Low risk as compared to shares

Credit or default risk(political/economic risks)

Currency risk

Interest risk


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Role of credit agencies ? Credit Rating and Information Services of Indiia Ltd

(CRISIL)

Investment information and Credit Rating Agency Ltd

(ICRA) Credit Rating,Advisory and Information Services Ltd

(CARE)

Duff and PhelpsCredit Rating India (DCR India)

ONICRA Credit Rating Rating Agency

Standard &Poor (S&P),Moodys Investor

Services,Fitch Ratings.

AAA,AA,A,BBB.BB,B,C,D.


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Trading in stock Exchanges

How are shares traded in stock exchanges

? Through Broker Members (stiff selection Criteria)

Brokers transact on behalf of investors

OPEN Outcry---- Electronic Trading

BOLT ( BSE Online Trading System)

NEAT ( National Exchange for Automated Trading )

Trading Methods

Cash Market (cash Account) Margin Trading


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Trading in cash Market.How ? Delivery based: delivery or payment for the purchase

takes place before the next settlement date

Non-delivery based : Day trading (Intra day), buy andsell and take reverse positions. Accounts for 80% of

cash market trade.

Open position implies a bought or sold position


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Trading In Stock Exchanges

Order placed with Broker

BOLT

Order Book (generates unique number)

System matches bid and ask prices and executes order

Tick Size


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Types of orders in cash market ? Time related : day order,GTC (Good Till

cancelled),GTD (Good Till date),IOC(Immediate or

Cancel)

Price related : Limit( ceiling and floor price),Marketprice order ( best price),Stop loss Order ( Trigger

price and the limit price )

Quantity related.


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Settlement of transactions ? Transfer of money from buyer to seller and transfer

of securities from seller to buyer on settlement date

T+2

All settlement, pay in and pay out by Clearing houses

National Securities

Clearing Corporation

(NSCCL)

Bank Of India Shareholding Ltd

(BOISL)

Clearing Houses


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What is Margin trading ? Possible to buy shares even if one does not have the

required money or sell without owning them

Investment amount 100000Current M.P. Rs.50 per share

Cash market 2000 shares

Margin trade(50%) 4000 shares

Assume price goes up Rs.70 per share

Investment value cash market Rs.140000

Investment value margin trade Rs.280000


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How does one engage in Margin Trading ? Short selling: borrows stocks in anticipation of price

fall.

Investor Broker

shortsell

2000 [email protected] BOLT

Order executedRs.100000(2000*50)Margin accountOf investor

Lender/Broker

M.P /share falls to Rs.30 in two days, the investor purchases

2000 shares for Rs.60000 and returns to the Broker.


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Margin maintenance with Broker

Maintenance Margin with decrease in market value for a long position (T+1)

a Margin available on account of initial margin Rs3500

b Loss arising due to decline in share price

(Rs50-

Rs.37.50)*200

shares Rs.2500

c effective available margin a-b Rs.1000

d Required margin (35%)

0.35 * Rs.37.50

*200 shares Rs.2625

e Additional Margin Required d-c Rs.1625

f Margin available after margin call c+d Rs.2625

Investor places order for 200 shares @ Rs.50 per share


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Margin maintenance with BrokerInvestor places order for 200 shares @ Rs.37.50 per share

Maintenance Margin with increase in market value for a long position (T+2)

a Margin available Rs2625

b Gain due to increase in share price

(Rs42.5-

Rs.37.50)*200

shares Rs.1000

c effective available margin a+b Rs.3625

d Required margin (35%)

0.35 * Rs.42.5

*200 shares Rs.2975

e Additional Margin Required c-d Rs.650

f Margin available after margin call d-e Rs.2325


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Can one keep ones long or short positionopen indefinitely ?

NO.

Have to be squared off on the settlement day

T di i k E h


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What was Badla trading ? Antiquated form of margin trading

Carrying forward a transaction

Banned badla between 1994 and 1996,reintroduced

as modified carry forward System in 1996,banned in2001.

New settlement period adopted.

T di i t k E h


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What happens if the electroniccommunication fails during trading hours ?

Layers of protection

equinox

S l ti i St k E h


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Speculation in Stock Exchanges

What is speculation ? Anticipating price fluctuations/benefitting from

operations

Trading beyond their boundary of wealth

S l ti i St k E h


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Is all price volatility due to speculation ? Not ALL

Inside information (employees/senior members/FIIs)

Floating stock(power of FIIs)

S l ti i St k E h


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How does SEBI control price volatility ? Circuit Breakers

Acts like an electric circuit

Shares Circuit

2%

Trading suspended for

the day

5%

10%

Index Circuit

10% 30 min

15% 2 hours

20% suspended

S l ti i St k E h


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Classification of securities by SEBI ? BSE: 6 GROUPS(SHARES),2 Groups (debt)

S l ti i St k E h


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Customer recourse to complaints ? Investor grievances cell(report published every 14

days)

Listed companies to appoint compliance Officers

Insider trading

D t i li ti


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Dematerialization

What is dematerialization of shares ? Physical shares converted to an equivalent number

of shares in electronic form

Eliminates risks:bad deliveries/postal delays/handling

problems/forgery/loss in transit/loss to fire/theft No stamp duty on transfer

Benefits credited immediately

S l ti i St k E h


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How are physical shares dematerialized ?

Investor Depository account

Registrar and Transfer agent

Physical shares

Confirms authenticity and

Records ownershipDP credits

account

S l ti i St k E h


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Can dematerialized shares beremamaterialized ?

Yes

promoters

Bonus Rights and share Splits


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Bonus ,Rights and share Splits

What is Bonus issue ? Business owes its share holders the surplus(retained

earnings)

Transfer of money from retained earnings to share

capital accountPre Bonus Post Bonus

SH equity(1.5

lac @Rs.10)

15,00,000 SH equity(1.8

lac @ Rs.10)

18,00,000

Reserves 5,00,000 Reserves 2,00,000

NW 20,00,000 20,00,000

If bonus issued 5:1, then an additional 30,000 shares are issued.



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Benefit of a Bonus issue to shareholders ? No real change in the fortune of the company or the

investor



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Why do companies make a Bonus Issue ? Reduce the traded price (infosys)

Prevent from charges of making profits at investors

expense

Information signaling



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What is Stock split ? Share divided into a number of shares of lower face

value

Change in denomination of shares

Stock split( 5 for 1)

Pre and Post Stock split Balance Sheet

Liabilities Assets Liabilities Assets

Share Capital 100 . Share Capital 100 ..

(10 million

shares of

Rs.10 each)

(50 million

shares of

Rs.2 each) ..

Reserves 200 200



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What is buyback of shares ? Opposite of issuing shares

Surplus capital/lack of investment opportunity

Buyback price is higher

Introduced in 1998

Does when shares are undervalued



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What is reverse split ? Consolidation (stock split in reverse)



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What is rights issue ? Existing shareholders given first right to subscription

ADRS and GDRs


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ADR S and GDR s

What are ADRs and GDRs ? Shares of Indian companies listed and traded in

foreign SEs

DRs are issued by Foreign Investment Banks

Process similar to IPO DR ratio

DRs have a face value

Companies restricted by GOI to tap DR market



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Effect of DRs on domestic share prices ? DR gives credibility to company

Different investors and thus a price variation

Arbitrage opportunity

Difference in price: perception on information



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Two way fungibility ? Interchangeability or substitutability

Miscellaneous


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Miscellaneous

Who are Bulls, Bears and Stags ? Bulls: anticipation of increase in prices

Bears : anticipation of fall in prices

Stags : Uninterested

Miscellaneous


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Miscellaneous

Book closure and Record dates ? Security holders keep changing: to ascertain who

receives benefits

Miscellaneous


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Miscellaneous

What is Block trading ? Sale and purchase of large quantities of shares

Separate window/ fixed time slot

Miscellaneous


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Miscellaneous

What are Penny Stocks ? Quoting below par

Weak fundamentals /BIFR referred

Large fluctuations

Pricing Of shares


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Pricing Of shares

How does the market price the Shares ? Perception of millions of investors

Intrinsic value/Fundamental value (cash flowsdiscounted)

P = ------------------

D

( k g )

P = Market price at time 0

D= dividend per share at the end of first period

K= rate of return expected by investors

g= constant rate of growth in dividends per share per period

Pricing Of shares


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Pricing Of shares

How does market incorporate effect ofdifferent information on share prices ?

Level of the economy

At the level of the given industry

At the level of the firm

Pricing Of shares


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Pricing Of shares

Market price of a share in different SEs ? Generally small

Arbitrage

Stock Analysis


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Stock Analysis

Technical Analysis Fundamental Analysis

Studies trading historyStudies price movements

Studies volume movements

Assumes market memory

The W formation

Quantitative factorsQualitative factors

Tools Of Fundamental analysis


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Tools Of Fundamental analysis

Earnings Profit, the bottom line Earnings per Share Earnings/Outstanding shares

trailing/current/forward

Price to Earnings ratio Stock Price/EPS

markets willingness to pay for the

companys earnings. Price to Earnings Growth P/E / (projected growth in earnings)

looks at growth prospects

Price to Sales Stock Price / Sales Price per Share

young companies with little earnings

Price to Book Ratio Share Price / BV per Share

BV= Assets Liabilities

Dividend Payout Ratio Dividends per Share / EPS

What a Company pays to Investors

Example


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Example

A BSales 1000000 50000

NP 1000 1000

Stock price 20 40

# shares 10000 5000

BV 45000 55000

BV/Share 4.5 11

Dividend 20000 15000

Dividend/Share 2 3

Earnings Profit 1000 1000

EPS Earnings/No.of shares 0.1 0.2

P/E Price/EPS 200 200

PEG p/e / Projected g in earnings 13.33333 10

P/S Stock price/sales price per share 0.2 0.8

P/B Stock price/book value per share 4.444444 3.636364DPR DPS/EPS 20 15

DY annual div per share/stock price per share 0.1 0.075

Derivatives


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Derivatives

Futures Options

Instruments whose value is derived

From the value of underlying securities-

Commodities/precious metals/ bonds

Contract between two parties Gives the buyer the right to buy

For settlement of a trade at future date Gives the seller the right to sell

Prefixed quantity and price Call : option on RIL @ 150/= to buy after

No money changes hands 3 mths.. He pays a premium.

Near month/middle month/far month Put : option on RIL @ 130/= tosell after 3 mths.

Common Terms


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Common Terms

What is Market Cap ?

Outstanding share * Stock priceDoes it reflect the true value of a Company ?

What is Book value of a Company ?

Assets - Liabilities

What is Enterprise Value ?

Take over value of a Company

(M.Cap + Pref Shares + Debt ) Cash and Cash equivalents

Eg. M.Cap 20 Cr

Pref Shares 5 CrO/S Debt 2 Cr

Cash 1 Cr

Common Terms


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Common Terms

What is Large Cap and Small Cap Cos ?

What is Credit Rating?

Given by a rating organization to evaluate credit worthiness of

the issuer

CRISIL/ICRA/CARE/ONICRAS&P/Moodys

SOStructured Obligation

Issue Size 10 Cr 3 Cr

Mar Cap 25 Cr 5 Cr

# S.holders 1000

Large Small

Investing Philosophies


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Investing Philosophies

Growth Investors Look for rising stars

Look for high growth potential companies

Willing to bet on young companies

Value Investors

Overlooked by Markets Under priced relative to the value of the company

Looks for companies with low P/E ratio

Looks for a long term time horizon

Income Investors

Simple and conservative Companies are generally large and well established

Preferred by people near retirement age

Age Risk Returns Time Horizon

Liquidity

What moves the Stock Market


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What moves the Stock Market

Uncertainty Demand Supply

Bank Interest rates

Interest rates on Bonds

Earnings Oil /Energy prices

War/Terrorism

Crime/Fraud

Serious political domestic unrest

Risk Management


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s a age e t

Quantitative Qualitative

ROA = NP/Total assets

ROI = NP / (long term debt+ equity)

ROE = NP / Shareholders equity

Dependence on key suppliers

Dependence on key Customers

Dependence on a Key Product

Management Disposition

Investment categories..


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g

CATEGORY APPLICATION ALLOCATION %

Retail Rs.1,00,000 10%

Non-Institutional bidders >Rs.1,00,000 15%

Qualified Institutional

bidders

High value 50%

Deciding the price band ?

Role of lead manager ?

Role of Registrar ?Draft offer document ?

Floor price and cut off price ?

How long is issue open ?

Market lot size and min order Quantity

Can a minor apply in IPO ?

Offer document Red Herring prospectus

Debt Market


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Govt. Securities (G Secs /Gilts) Issued by RBI on behalf of Govt.

Requires approval of Parliament

Tenor 1-20 years

Mainly issued through auction route

Bonds Debentures

Secured against assets Not secured by specific assets

Discounted/Interest on maturitySLR/Non SLR Bonds

Bond Prices Interest Rates

Credit Quality

Fully convertiblePartially convertible

Non convertible

CALL AND PUT OPTION

Opportunities for Foreign Investors..


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pp g

Direct Investment-Can have a majoritystake except in a few restricted industries

Investment in Euro issues-ADRs/GDRs

Investment through Stock Exchanges Important guidelines

Portfolio investment in a single company by allFIIs /NRIs with a ceiling 30/40% of issued capital

In a company ,holding by a single FII/NRI limited toa ceiling of 10% of the total issued capital.

Registered FII to trade only for delivery

Markets so far


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Global Events Sub prime crisis

Domestic Events CRR Hike: raised twice during the year, current 8.5%

Sharp rupee appreciation:

P- Notes

Understanding P-Notes


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g

Contract issued by FIIs

Issued to investors

Not registered with SEBI

Do not want their identity to be disclosed

The investor does not get physical delivery

SEBI guidelines as to who can invest in P Notes

Company incorporated according to local laws

Financial institution which is monitored by a Central Bank

Member of a recognized Stock Exchange

The ConcernOf the 1056 FIIs registered ,only 34 issue P-Notes

75% of floating stock is now in FII hands52% of FII investment is through P-Notes

compared to 20 % in 2004

The Big Five Morgan Stanley, Merrill Lynch ,Citigroup Global Markets

Goldman Sachs and CLSA Merchant Bankers

Concerns


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Political instability Huge inflow

US Economy-Credit and mortgage sector

Crude prices- 75% of Indias requirement is imported

Input Pressure- average increase in price ofcommodities in the last yr 20-25%

Higher valuations- are the stocks reflecting their actualworth ?

Category RetailInvestor

IndianFunds

FIIs

% Free float 10% 15% 75%

Follow the rulesWarren Buffet


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Business Rules Understanding the business-life cycle of company, customers,

competition, Govt. rules, raw material supplies etc

Management Rules A management that knows how to make money, can make

money and will keep on making money.

Financial Rules Top and the bottom line

Return on equity :how the company is using shareholdersmoney to make money

Market Rules Value of a business : estimated cash flows expected over the

life of the business discounted at an appropriate rate.


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Thank

You..