Dividends and Bonuses:

Dividend:

A dividend is a portion of a company's earnings that is distributed to shareholders. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies with a more established profit usually offer dividends to shareholders. Here's how dividends work in more detail:

• Declaration Date: The company's board of directors declares a dividend payment on this date. They will announce the size of the dividend, the ex-dividend date, and the payment date.

• Ex-Dividend Date: If you buy the stock on or after this date, you will not receive the next dividend payment. Instead, the seller will. The share price typically drops by approximately the amount of the dividend on this day.

• Record Date: The company checks its records to determine who the shareholders of the company are.

• Payment Date: The company distributes dividends to the shareholders on record as of the record date.

In India, dividends are often paid annually after the end of the fiscal year, though some companies may choose to offer interim dividends during the year.

Bonus Share Issue:

A bonus share issue, also known as a scrip issue or a capitalization issue, is a stock dividend issued by a company to its current shareholders. It is generally based on the number of shares that a shareholder owns. Here's how bonus issues work in more detail:

• Declaration of Bonus Issue: The company's board of directors will decide and announce the bonus issue ratio, such as 1:1, which means one bonus share for each share held.

• Purpose: Companies issue bonus shares to encourage retail participation and increase the company's share capital. It is done when companies are short on cash but want to reward investors.

• Effect on Share Capital: Bonus issues convert the company's retained earnings into share capital; therefore, it does not change the equity of the company but dilutes the share price.

• Adjustment of Share Price: Post the bonus issue, the share price is adjusted. For example, if the share price was INR 200 before a 1:1 bonus issue, it will theoretically halve to INR 100 because the number of shares has doubled. However, market sentiment will also affect the new share price.

• Tax Implications: In India, bonus shares are not taxed at the time of issue. However, they will have tax implications when sold, based on the period of holding.

Both dividends and bonus issues can have implications for investor sentiment. Dividends are viewed positively because they represent company profitability and financial health, while bonus issues can be seen as a sign that the company is reinvesting in its own growth. However, bonus issues do not represent an actual increase in the value of the company; they just increase the number of shares while reducing the share price proportionally.

Cum Dividend(Cumulative Dividend) vs Ex-Dividend(Excluding Dividend):

Cum Dividend:

"Cum dividend" means "with dividend." If a stock is purchased when it is cum dividend, it is bought along with the right to receive the most recently declared dividend. The buyer will be entitled to the dividend payout on the distribution date. Here's how it works:

• Cum Dividend Period: This is the time period between the announcement of the dividend and the ex-dividend date. During this period, the stock has not yet gone ex-dividend, and the seller still has the right to the dividend.

• Stock Price: Typically, the price of the stock during the cum dividend period may be higher because it includes the value of the upcoming dividend.

Ex-Dividend:

"Ex-dividend" means "without dividend." If a stock is purchased on or after its ex-dividend date, it is bought without the right to receive the most recently declared dividend. Here's how it works:

• Ex-Dividend Date: This is usually one business day before the company's record date. To receive the declared dividend, an investor must be the holder of a record of the stock before the ex-dividend date. If you buy the stock on or after the ex-dividend date, you will not receive the upcoming dividend payment.

• Stock Price: On the ex-dividend date, the stock price is typically reduced by the amount of the dividend to reflect the fact that new buyers will not receive the dividend.

Example:

Suppose a company named "Green Energy Ltd." announces a dividend of INR 10 per share on July 1st, with an ex-dividend date set for July 15th.

• If an investor purchases shares of Green Energy Ltd. on or before July 14th (cum dividend period), they will buy the shares cum dividend and are entitled to the INR 10 per share dividend.

• If the investor purchases the shares on July 15th or after (ex-dividend period), they will not be entitled to the dividend. The share price on the ex-dividend date would typically drop by about INR 10, reflecting the value of the dividend that will be paid out to eligible shareholders.

Understanding the distinction between cum dividend and ex-dividend is crucial for investors who are interested in dividend income, as it determines whether or not they will receive the dividend payment.

Record date vs ex-dividend date difference

The record date, set by the company's board of directors, is the cut-off date used to determine which shareholders are eligible to receive a dividend or distribution. The key role of the record date in the context of dividends is to clarify and finalize the list of shareholders who will be paid.

Here’s the role of the record date in the process:

1. Establishing Eligibility: After the ex-dividend date, the company needs a specific date to look at its list of shareholders to determine who will receive the dividend. Anyone who owns the stock as of the record date will be entitled to the dividend.

2. Settlement Period: When a stock is bought or sold, the transaction does not settle immediately. In most markets, including India, the settlement takes T+2 trading days (Transaction day plus two days). So, if you buy a stock one day before the ex-dividend date, you will still be the owner of the record when the record date arrives because the trade will have settled.

3. Communication with Registrars: The record date is used to communicate with the registrars and transfer agents of the company. They manage the list of all the registered shareholders and ensure that the dividend payment goes to the right investors.

Here’s how the ex-dividend date and the record date work together:

• The ex-dividend date is typically set one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not be listed as the owner of the stock on the record date, and therefore, you won't receive the dividend.

• If you purchase the stock before the ex-dividend date, the transaction will settle by the record date, and you will be listed as the owner of the stock and eligible for the dividend.

In essence, the record date serves as the company's way of "taking attendance" to see who gets a dividend. It ensures the dividend distribution is organized and shareholders who own the stock before the ex-dividend date receive their due share.

Primary Market, IPO with Example:

Primary Market

The primary market is the part of the capital market where new securities are issued and become available for trading by individuals and institutions. The key characteristics of the primary market include:

1. New Issue Market: Securities are sold for the first time, either to raise fresh capital or to allow existing owners to monetize their investments.

2. Direct Transactions: Companies issue these securities directly to investors, which contrasts with the secondary market where investors trade among themselves.

3. Various Instruments: Apart from shares, the primary market includes bonds, debentures, and other financial instruments.

4. Underwriting Process: Often, companies employ investment banks to underwrite the securities. Underwriters guarantee the sale of a certain number of shares and buy any unsold shares.

5. Price Determination: The price of these new securities may be fixed or determined through a process such as book building.

IPO

An Initial Public Offering (IPO) is a process in which a private company offers shares to the public in a new stock issuance, thus becoming a publicly traded company.

1. Pre-IPO Preparation: This includes appointing underwriters, preparing a prospectus, getting approvals from regulatory authorities, and setting the IPO price.

2. Book Building and Pricing: Book building is a common method for pricing an IPO. It involves collecting bids from investors to understand the demand and deciding the final price based on this data.

3. Allocation of Shares: After pricing, shares are allocated to investors, including institutional and retail investors.

4. Listing and Trading: Post-IPO, the company's shares are listed on a stock exchange and can be freely traded in the secondary market.

Example: ABC Tech's IPO Journey

Let's consider a hypothetical example of a company, ABC Tech, going through an IPO:

1. Preparation: ABC Tech, a successful tech startup, decides to go public to raise capital for expansion. It partners with an investment bank, XYZ Capital, to guide the IPO process.

2. Regulatory Compliance: ABC Tech files a Draft Red Herring Prospectus (DRHP) with SEBI, outlining its financials, business model, and plans for the raised funds.

3. Roadshow: ABC Tech’s management conducts roadshows, presenting to potential institutional investors to generate interest.

4. Pricing the IPO: Using the book-building method, ABC Tech and XYZ Capital set a price band for the shares based on investor feedback and market conditions.

5. Public Offering: The IPO is opened to the public, and investors submit bids within the price band.

6. Final Pricing and Allocation: After the bidding process, ABC Tech finalizes the IPO price. Shares are allocated to various investors, including retail and institutional buyers.

7. Listing on Stock Exchange: ABC Tech’s shares are listed on the National Stock Exchange (NSE), and trading commences, marking its transition into a publicly traded company.

This journey from a private entity to a publicly traded company illustrates how the primary market functions, particularly through an IPO, enabling companies to access capital from a broader investor base.

Demat Account vs. Trading Account

Understanding the distinction between a Demat account and a Trading account is crucial for anyone involved in stock market investments. While these accounts are distinct, they often work in conjunction to facilitate the buying and selling of securities in the stock market.

Demat Account

1. Function: A Demat (short for Dematerialized) account is used to hold shares and securities in electronic format. It's essentially a digital locker for your securities.

2. Purpose: It facilitates the electronic holding of shares and securities and eliminates the need for physical paper shares. It's used to hold not just stocks but also bonds, mutual funds, and other financial instruments.

3. Role in Transactions: When you buy shares, they are credited to your Demat account. When you sell them, they are debited from this account.

Trading Account

1. Function: A Trading account acts as a link between your bank account and your Demat account. It is used to buy and sell shares in the stock market.

2. Purpose: Whenever you want to buy or sell shares, you use your Trading account to place the order. It facilitates the actual transaction of buying and selling.

3. Role in Transactions: When you buy shares, money is debited from your bank account and transferred through the Trading account. The shares are then credited to your Demat account. Conversely, when you sell shares, they are debited from your Demat account and sold through your Trading account, with the proceeds going to your bank account.

Combinations with the Same Broker

1. Both Accounts with the Same Broker:

   • Advantages:

     • Seamless transactions, as both accounts are integrated.

     • Easier to manage as both accounts are on the same platform.

     • Sometimes, brokers offer discounted or waived fees for having both accounts with them.

   • Disadvantages:

     • Limited to the services and charges of a single broker.

     • Less flexibility in terms of comparing different brokerage rates and services.

2. Accounts with Different Brokers:

   • Advantages:

     • Flexibility to choose different service providers based on their strengths.

     • Potential for better deals or services in specialized areas.

   • Disadvantages:

     • Might involve more complex management and coordination between accounts.

     • Possible extra costs or fees for inter-broker transactions.

Most investors prefer having both a Demat and a Trading account with the same broker for the sake of convenience and ease of transaction. This integrated approach makes it simpler to monitor investments and move funds or shares seamlessly between accounts. However, choosing whether to hold these accounts with the same broker or with different service providers depends on the individual's specific needs, investment style, and preferences for service and cost.

Bonds vs Shares vs Debentures:

Bonds, shares, and debentures are all types of financial instruments used by companies to raise capital, but they have different characteristics and implications for investors.

1. Bonds:

   • Nature: Bonds are debt instruments issued by corporations and governments. When you buy a bond, you are lending money to the issuer in exchange for interest payments and the return of the bond's face value at maturity.

   • Returns: Bondholders receive regular interest payments (known as coupons) and the return of the principal amount at maturity.

   • Risk: Generally considered lower risk compared to shares, as they typically provide fixed income.

2. Shares:

   • Nature: Shares or stocks represent ownership in a company. Shareholders are part owners of the company and their investment returns are linked to the company's performance.

   • Returns: Shareholders may receive dividends, which are a share of the company's profits. The value of shares can also increase, providing capital gains.

   • Risk: Higher risk, as the returns are not guaranteed and depend on the company's performance and market conditions.

3. Debentures:

   • Nature: Debentures are a type of long-term debt instrument that is not secured by physical assets or collateral. They rely on the creditworthiness and reputation of the issuer.

   • Returns: Like bonds, debentures pay regular interest and repay the principal at maturity.

   • Risk: Can be riskier than secured bonds since they don't have collateral backing, but risk levels can vary based on the issuer's credit rating.

Key Differences:

• Security: Bonds can be secured or unsecured. Debentures are typically unsecured. Shares are not debt instruments and do not provide the same type of security or fixed income.

• Ownership: Shares represent ownership in a company, while bonds and debentures do not.

• Returns: Bonds and debentures typically offer fixed returns (interest payments), whereas shares offer variable returns (dividends and capital appreciation).

• Risk: Shares generally carry higher risk due to market volatility and the variable nature of returns. Bonds and debentures tend to be more stable, but debentures carry more risk than secured bonds.

In summary, the choice between these instruments depends on the investor's risk tolerance, investment objectives, and the financial health of the issuing entity.

Lecture 3

Pre-market opening and its significance:

In the Indian stock market, pre-market opening refers to a session before the regular market trading hours begin on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This session is used to discover the opening price and to absorb significant news that may have emerged since the market last closed. The pre-market session in India typically occurs between 9:00 AM and 9:15 AM IST.

Here's the breakdown of the pre-market session:

1. Order Collection Period (9:00 AM to 9:08 AM):

   • During this time, traders can place orders to buy or sell stocks. They can also modify or cancel their orders.

   • No orders are executed during this period; they are just collected in the system.

2. Order Matching and Trade Confirmation Period (9:08 AM to 9:12 AM):

   • After order collection, the orders are matched and the opening prices are calculated based on these orders.

   • The system follows a multilateral order matching system, where the equilibrium price (opening price) is determined based on demand and supply to maximize the number of shares to be traded.

   • No new orders can be placed during this period; only previous orders can be modified or canceled.

3. Buffer Period (9:12 AM to 9:15 AM):

   • This period acts as a buffer to facilitate the transition from the pre-market session to the normal market session.

   • It ensures any issues can be addressed before the market opens for regular trading at 9:15 AM.

Importance of Pre-Market Opening:

1. Price Discovery: It helps in establishing a fair and orderly price discovery mechanism. By processing all the accumulated orders at one time, it reflects the impact of significant events that have occurred since market close the previous day.

2. Absorbing News: If there was major news after the market closed the previous day or before it opened, the pre-market session allows for that news to be factored into the opening prices.

3. Volatility Management: It can reduce market volatility by allowing the market to absorb the impact of information and orders in a controlled environment.

4. Market Readiness: It helps traders get an idea of market sentiment and price levels before the regular trading session begins.

Example:

Let's say that after the market close, a major IT company announced quarterly results that were significantly above market expectations.

• Traders and investors will react to this news, and there might be a surge in buy orders for this company's stock.

• During the pre-market session the next day, these buy orders will start coming in, pushing the equilibrium price higher. So, if the stock closed at INR 500 the previous day, due to positive sentiment, it might open at INR 520 based on pre-market orders.

• The opening price determined during the pre-market session will then be the price at which the stock starts trading once the regular market session begins at 9:15 AM.

The pre-market session thus provides a platform for traders to react to overnight news and helps in maintaining a stable trading environment by containing large gaps in prices between market close and open.

Frequently used terms in stock market i.e.terminology:

1. AMO (After Market Order): This is an order placed after trading hours have closed for the day. Investors place these orders for the next trading day. AMO is beneficial for those who cannot actively participate during regular market hours.

2. LTP (Last Traded Price): This is the price at which the last trade occurred. It's continuously updated during market hours as each new trade is executed.

3. Bid Price: This is the highest price that a buyer is willing to pay for a stock. It constantly changes as buyers submit different prices they are willing to pay.

4. Offer Price (or Ask Price): This is the lowest price at which a seller is willing to sell their stock. Like the bid price, it changes as sellers adjust their expected selling price.

5. Limit Order: When you place an order to buy or sell a stock at a specific price or better. For a buy limit order, the order will be executed only at the limit price or a lower one, while for a sell limit order, at the limit price or higher.

6. Market Order: An order to buy or sell a stock immediately at the best available current price. A market order guarantees execution but does not guarantee the execution price.

7. Stop Loss Order: This is an order placed to sell a stock when it reaches a certain price. It is used to limit an investor's loss on a security position.

8. Stop Limit Order: A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

9. BSE (Bombay Stock Exchange): The BSE is an Indian stock exchange located at Dalal Street, Mumbai, and is one of the two principal stock exchanges in India.

10. NSE (National Stock Exchange): The NSE is the leading stock exchange in India, located in Mumbai. It is one of the two main stock exchanges in India, alongside the BSE.

11. Volume: This refers to the number of shares or contracts traded in a security or an entire market during a given period.

12. Open Price: The price at which a stock starts trading when the market opens for the day.

13. Close Price: The price at which a stock ends trading at the closing of the market.

14. Intraday High/Low: The highest and lowest price at which a stock has traded during the trading day.

15. 52-Week High/Low: The highest and lowest price at which a stock has traded during the last 52 weeks.

Clearing house:

Clearing houses play a critical role in the financial markets by ensuring the smooth execution and settlement of trades, thus reducing the risk of default by either party involved in a transaction. Here's a detailed look at their role:

What is a Clearing House?

A clearing house is an intermediary between buyers and sellers of financial instruments. It is an agency or separate corporation of an exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.

Roles of Clearing Houses:

1. Trade Clearing: Once a trade is executed, the clearing house steps in to "clear" the transaction, meaning it acts as the counterparty to both the buyer and the seller. By doing so, it assumes the risk of a default, which increases the integrity and reliability of the market.

2. Settlement of Trades: Clearing houses are responsible for the settlement of trades, which is the actual transfer of the ownership of the securities from the seller to the buyer and the corresponding payment from the buyer to the seller. This usually occurs a couple of days after the trade is executed (known as T+2 in many markets).

3. Maintenance of Margin: They maintain margin accounts and collect margin money to ensure that market participants adhere to the margin requirements. This protects against credit risk, as the margin serves as collateral against the positions taken.

4. Market Surveillance: Clearing houses monitor trading to ensure that trading occurs in an orderly, transparent, and fair manner.

5. Delivery Management: They manage the delivery of the actual underlying asset when it comes to commodity trading or ensure the proper delivery of shares in stock trading.

6. Risk Management: By acting as a central counterparty, clearing houses can net off positions, reducing the amount of capital required to be held by each party and reducing systemic risk.

Example of a Clearing House:

In India, the National Securities Clearing Corporation Limited (NSCCL) is a clearing house for securities traded on the National Stock Exchange (NSE). It guarantees the settlement of all bonafide transactions that occur on the exchange. This includes equities, derivatives, and other instruments. Similarly, the Indian Clearing Corporation Limited (ICCL) does the same for the Bombay Stock Exchange (BSE).

Importance of Clearing Houses:

Clearing houses are vital for the stability and efficiency of the financial markets. They ensure trust in the market by guaranteeing trades, which allows traders to operate without the fear of counterparty risk. This, in turn, encourages market participation and liquidity. Without clearing houses, the risk of trading would be much higher, and many potential market participants would likely stay away, reducing market liquidity and making it more difficult for buyers and sellers to execute their trades.

In the Indian stock market, the depository system handles the electronic storage and transfer of securities. This system has significantly simplified the process of trading in securities, which was previously cumbersome and prone to risks when it was paper-based.

Depositories and DPs(Brokers):

Depositories:

A depository is an institution that holds financial securities (like stocks and bonds) in electronic form. In India, there are two main depositories:

1. National Securities Depository Limited (NSDL): The first depository to be established in India, facilitating the holding and transfer of securities electronically.

2. Central Depository Services Limited (CDSL): Another depository in India which functions similarly to NSDL.

Depositories interact with clients through intermediaries known as Depository Participants (DPs).

Depository Participants (DPs):

Depository Participants are agents of the depository and serve as the access point for investors to avail depository services. Any investor wishing to transact in the electronic securities market needs to open a Demat account through a DP. These DPs can be financial institutions, banks, brokers, or any entity eligible as per the regulations set by the depository and SEBI (Securities and Exchange Board of India).

Role of Depositories and DPs:

• Dematerialization: Converting physical certificates of securities into electronic form.

• Rematerialization: The reverse process of converting electronic securities into physical form.

• Maintaining Holdings: Keeping a record of the holdings in the electronic form in a Demat account.

• Facilitation of Trading: Enabling the seamless transfer of ownership of securities through electronic book entries which occur during the settlement of trades.

• Corporate Actions: Assisting in the administration of corporate actions like dividends, interest, or capital gains to the account holders.

Register of Members:

The register of members is a list of the company's shareholders, which is traditionally maintained by the company itself or by a registrar on behalf of the company. In the electronic trading environment, while the register of members is still legally required, the actual holding of shares is typically reflected in the records of the depository.

Transfer of Register of Members:

When a transaction occurs, the change in ownership of shares is reflected in the Demat accounts, which are managed by DPs. The depositories then update their records, which are considered the definitive record of share ownership. Periodically, depositories provide companies with updated lists of their shareholders for the company's register of members.

The Flow:

1. An investor opens a Demat account through a DP.

2. When buying shares, the investor places an order through a trading account with a broker, and upon execution of the trade, the exchange confirms the details to the clearinghouse.

3. The clearinghouse finalizes the settlement date and updates the depository.

4. The depository adjusts the holdings electronically, crediting the buyer's Demat account and debiting the seller's Demat account through the respective DPs.

5. For the company's official records, the depository periodically sends an updated list of shareholders to the company or its registrar to update the register of members.

This entire process ensures a streamlined and efficient system for trading securities and maintaining an accurate, up-to-date record of share ownership, which is crucial for both corporate governance and the facilitation of corporate actions.

Register of members Information:

The details of shareholders in electronic form are primarily held by the depositories in India, namely the NSDL and CDSL, rather than by the stock exchanges. Here's how the information flows:

Flow of Shareholder Information:

1. Investors and Trading: Investors trade through brokers on stock exchanges (NSE, BSE). When a trade is executed, the exchange records the transaction details, but not the ownership information of the securities.

2. Clearing House: After the trade, the stock exchange's clearinghouse steps in to handle the settlement process. The clearinghouse ensures that securities are delivered to the buyer and the sale proceeds to the seller. The clearinghouse knows which broker is buying or selling but not the ultimate client details.

3. Depositories: The depositories (NSDL and CDSL) have the actual accounts of the individual investors, similar to a bank holding accounts for its customers. Each investor's account, known as a Demat account, is maintained by Depository Participants (DPs), who are the intermediaries between investors and the depositories.

4. Depository Participants: DPs could be banks, brokers, or financial institutions authorized by the depositories to offer Demat services. Investors open Demat accounts with DPs, and the DPs maintain records of investors' holdings on behalf of the depositories.

5. Transfer of Ownership: When a trade is settled, the respective brokers send the details to the clearinghouse, which in turn communicates with the depositories to update the ownership of the shares. The depositories then adjust the holdings in the seller's and buyer's Demat accounts accordingly.

6. Company's Register of Members: While companies have a legal obligation to maintain a register of their members, in the case of electronic holdings, they rely on the depositories to provide the details. Periodically, companies will request the list of their shareholders from the depositories. The depositories provide this list, which the companies or their registrars and transfer agents use to update the official register of members.

Example:

Let's say Mr. Sharma buys 100 shares of "ABC Ltd." on the BSE through his broker.

1. Mr. Sharma places the order, and his broker executes the trade on the BSE.

2. The trade details (but not Mr. Sharma's personal details) are recorded by the BSE and passed to the clearinghouse.

3. The clearinghouse arranges for the settlement, which includes the transfer of shares to Mr. Sharma's broker and the payment to the selling broker.

4. Mr. Sharma's broker communicates with the DP to ensure Mr. Sharma's Demat account is credited with the 100 shares of ABC Ltd.

5. The DP updates Mr. Sharma's holdings in his Demat account, which is then reflected in the depository's records.

6. ABC Ltd. periodically requests a list of its shareholders from the depository (NSDL or CDSL, depending on where the shares are held).

7. The depository provides ABC Ltd. with the updated list, and ABC Ltd. updates its register of members accordingly.

In this flow, stock exchanges facilitate the trading of shares, clearinghouses ensure the settlement of trades, depositories maintain the record of holdings, and companies maintain a register of members based on the information provided by the depositories. The detailed personal information of individual shareholders is not held by the stock exchanges but by the depositories through the DPs.

Classification of Investors Information stored at DPs and Depositories:

r individual investors and provides them with access to their accounts for transactions.

Flow of Information:

1. Investor Provides Information to DP: When an investor opens a Demat account, they provide their personal information to the DP.

2. DP Transmits Information to Depository: The DP then transmits the investor's information to the depository to create the account. The DP is responsible for maintaining and regularly updating the investor's information.

3. Depository Holds Information on Holdings: The depository holds information about the investor's securities holdings and transaction history. When a transaction occurs, the depository updates the records of which DP holds which securities on behalf of their clients.

4. Reporting to Investors: The DP provides the investor with statements and updates regarding their Demat account, which includes the holdings and transactions made.

In essence, the depository holds the securities and oversees the actual transactions and updating of records, while the DP maintains the investor's Demat account and acts as the investor's point of contact for any services related to their Demat account.

Note: Under the Takeover Regulations of the Securities and Exchange Board of India (SEBI), any person who acquires shares or voting rights which entitle them to 5% or more of the voting rights in a company must disclose their aggregate shareholding to the company within two working days.

Lecture 4

Types of orders:

In the stock market, there are various types of orders that investors can use to buy and sell stocks. Here is a detailed explanation of the orders you've listed:

1. Market Order: This is an order to buy or sell a stock immediately at the best available current price. It does not guarantee the price at which the trade will be executed. For example, if you place a market order to buy 100 shares of Company X, the order will be filled at the prevailing market price which could be different from the last traded price due to market fluctuations.

2. Limit Order: A limit order is an order to buy or sell a stock at a specific price or better. For a buy limit order, the order will only execute at the limit price or lower; for a sell limit order, it will only execute at the limit price or higher. For instance, if you want to buy shares of Company Y but only at $10 per share or less, you would place a limit order set at $10.

3. Stop Loss Order: A stop loss order is designed to limit an investor’s loss on a position. It converts to a market order when the stock reaches a certain price. For example, if you own shares of Company Z that are currently trading at $50 and you want to limit your loss to 10%, you would set a stop loss order at $45. If the stock price falls to $45, the order becomes a market order and sells at the next available price.

4. Good Till Cancelled (GTC) Order: This order stays active until the investor cancels it or the trade is executed. GTC orders are useful if you do not want to have to re-enter the same order every day. So if you place a GTC order to buy 100 shares of Company A at $20, the order will remain open until it is filled, you cancel it, or the brokerage firm's time limit for GTC orders expires.

5. Good Till Day (GTD) Order: This is like a GTC order, but it expires at the end of the trading day if it has not been filled. If you think the price of a stock will drop during the day and you want to buy it at that lower price, you could use a GTD order.

6. After Market Order (AMO): These are orders that are placed after the stock market has closed for the day. They are executed when the market opens the next trading day. For example, if you place an AMO to buy 100 shares of Company B after the market has closed, your order will be placed in the queue for execution at the opening price the next trading day.

7. Immediate or Cancel (IOC) Order: An IOC order requires all or part of the order to be executed immediately, and any unfilled parts of the order are cancelled. It does not remain active in the market for a long time. This can be useful in fast-moving markets where prices can change rapidly. For instance, if you place an IOC order to buy 1,000 shares of Company C, as many shares as are available at your set price or better will be purchased immediately, and the rest of the order will be cancelled.

These order types allow investors to have a greater control over the prices at which they buy and sell stocks, as well as how long their orders remain active in the markets. It’s important to know these differences to effectively plan and execute trading strategies

Few Reasons for the drastic change in Gap Up and Gap down opening:

Gaps up and gaps down in stock prices refer to a significant price move that occurs after the market closes and before it reopens the next trading day. Here's an in-depth explanation of both phenomena:

1. After Market Hours Order: Orders placed after the market closes are known as after-hours orders. These orders are queued to be executed when the market opens the next day. If a large number of buy orders accumulate overnight, they can create a demand that exceeds supply at the previous day’s closing price. This can result in a gap up, where the stock opens significantly higher than it closed the previous day. Conversely, an accumulation of sell orders can lead to a gap down.

   • Example of Gap Up: Suppose Company A reported better than expected earnings after the market closed. Investors might place after-hours orders to buy the stock. The following day, the stock could open at a much higher price than it closed due to the high demand from positive sentiment.

   • Example of Gap Down: Conversely, if Company A had reported a scandal involving its executives after the market closed, investors might rush to sell their shares. The stock might then open at a significantly lower price than its previous close due to the sudden increase in supply from negative sentiment.

2. Any Bad News or Good News: News and events that occur when the market is closed can have a significant impact on stock prices. These can include earnings reports, economic data releases, geopolitical events, regulatory updates, or any other information that can materially affect the perceived value of a company.

   • Example of Gap Up Due to Good News: If Company B discovers a new technology that is expected to dramatically increase future profits, and this discovery is announced after market hours, investors might anticipate higher future earnings and the stock’s value might gap up at the next opening.

   • Example of Gap Down Due to Bad News: If Company C is hit with a lawsuit that could lead to substantial fines and this is announced after the market has closed, the stock might gap down the next day as investors reassess the potential risks and future earnings of the company.

In both cases, the price change is not gradual but rather happens suddenly, creating a gap on the stock’s price chart. The gap reflects the new equilibrium price level according to the collective sentiment of the market participants in response to the new information. Gaps can also be caused by technical factors such as liquidity and order flow imbalances. Investors and traders should be aware that gaps can introduce volatility and risk, as well as potential opportunities in the market.

Short Selling:

Short selling is a trading strategy that speculates on the decline in a stock or other securities price. It is used when a trader believes that a stock's price will decline, allowing them to buy it back at a lower price to make a profit.

Here's how short selling works in the Indian stock market, along with an example and the consequences of not squaring off the position by the end of the day:

Short Selling in the Indian Stock Market:

1. Borrowing the Stock: To short sell, you must first borrow the shares from a broker, which is typically done through a margin account.

2. Selling the Borrowed Stock: Once borrowed, you sell the stock at the current market price.

3. Buying Back to Cover: Later, you aim to buy the stock back at a lower price. If the price drops as you expect, you can buy back the shares at the lower price and return them to the broker while keeping the difference as profit.

4. Squaring Off: In the Indian stock market, you must square off your short positions by the end of the trading day (intraday short selling) because India does not currently allow retail investors to carry short positions overnight in the equity segment. Failing to do so can lead to penalties or the broker initiating a square-off.

Example: Suppose you believe that shares of Company XYZ, which are currently trading at INR 200, will decline in price. You borrow 100 shares and sell them at the current price of INR 200 per share, receiving INR 20,000 (100 shares * INR 200). If the price drops to INR 180, you can buy back the 100 shares for INR 18,000, return the shares to your broker, and your profit will be the difference, which is INR 2,000 (excluding brokerage fees and other charges).

Consequences of Not Squaring Off:

• Margin Call: If you don't square off your position by the market close, the broker will either square off the position on your behalf or carry it over to the next day if that is a service they offer. Carrying forward a short position is not typically allowed in the Indian equity market, so this would likely result in a penalty.

• Potential for Losses: If the stock price increases instead of decreasing, you will be forced to buy back at a higher price, incurring a loss. Plus, if you fail to square off, you could face additional losses the next day if the price continues to rise.

• MTM (Mark to Market) Settlement: If the broker squares off the position, any losses based on the closing price of the stock will be charged to your account.

Example of Consequences: Continuing with the earlier example, if you fail to square off your position and the stock of Company XYZ closes at INR 210, the broker will square off your position at this price. You sold at INR 200, so you will incur a loss of INR 10 per share, totaling INR 1,000 (100 shares * INR 10). If the broker charges a penalty or the price continues to increase the next day before the broker squares off the position, your losses could be even greater.

Short selling can be risky, as losses can be theoretically unlimited (since there's no cap on how high a stock price can go), and the obligation to return borrowed shares can compel short sellers to buy back at unfavorable prices. Always understand the terms and conditions laid out by the broker and the regulations set by the market authorities, like SEBI in India, before short selling.

You

Consequences of Not Squaring Off in greater detail with example. 1. If investor failed to squareoff his position before market ends. Then broker has to sell it on his behalf in 3:30 to 4(After market hours). What happens if he still gets profit here. It will go to IEPF right. Also I want how much penalty will be lived on investor. And how would the other investor who bought the shared but didn`t receive it benefit from this etc. I want a case wise study with examples

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In the Indian stock market, the failure to square off a short position can lead to several consequences. Here's a detailed breakdown of what can happen if an investor does not square off a short position, including potential penalties and the distribution of any profits:

1. Auto Square Off by Broker: If an investor fails to square off their intraday short positions, the broker will automatically attempt to close the position during the last 30 minutes of the trading session. This is often referred to as the 'auto square off' time. Brokers do this to ensure that all intraday positions are closed before the market closes.

2. Potential Profit or Loss:

• If the broker squares off the position at a price that is still below the short sale price, the investor will make a profit. However, if the square off price is higher, the investor will incur a loss.

• It's important to note that any profit made after an auto square off is still credited to the investor's account. It does not go to the Investor Education and Protection Fund (IEPF). The IEPF is for unclaimed dividends, matured deposits, shares, etc., not for profits from auto-squared-off trades.

3. Penalties and Charges:

• Brokers may charge a penalty for the auto square off, which is often a flat fee or a percentage of the trade. This is in addition to the regular brokerage fees.

• There could also be additional regulatory or exchange-imposed penalties for failure to meet margin requirements or for causing settlement issues.

4. Auction Process: If the broker is unable to square off the position in the after-market hours due to lack of liquidity or no matching orders, the position is then subject to the auction market the next day. The auction market is designed to settle the failure of delivery of shares.

• Profit in Auction: If the shares are bought at a lower price in the auction than the short-sold price, the profit (after deducting penalties and auction charges) is credited to the investor.

• Loss in Auction: If the auction price is higher, the investor bears the loss, which includes the auction price difference plus penalties and charges.

5. Impact on the Buyer:

• Failed Delivery: If an investor has bought the shares but does not receive them because the original seller (the short seller) failed to deliver, the buyer will receive the shares through the auction process.

• Benefit from Auction: If the shares are purchased at a higher price in the auction, the buyer is entitled to receive the difference between the auction price and the original buy price. This is known as 'auction penalty' and is credited to the buyer from the seller who failed to deliver the shares.

Case Study Example: Let's consider an investor who short sells 100 shares of Company XYZ at INR 200 per share, expecting the price to drop. However, by the end of the trading day, the investor forgets to square off the position.

1. Auto Square Off: The broker tries to close the position in the after-hours trading from 3:30 to 4:00 PM but fails due to lack of liquidity.

2. Auction Market: The next day, the shares are bought in the auction at INR 210 per share. The short seller is now responsible for the auction price.

3. Penalties: The broker charges a penalty of INR 500 plus a 0.05% auction penalty on the transaction value (100 shares * INR 210), which amounts to INR 105.

4. Total Cost: The total cost to the short seller is the auction price difference (INR 1,000) plus the penalties (INR 605), totaling INR 1,605.

5. Impact on the Buyer: The buyer was supposed to get shares at INR 200 but had to get them at INR 210 from the auction. The buyer receives an auction penalty of INR 1,000 from the short seller.

In the above scenario, the short seller faces a loss and additional penalties, while the buyer benefits from the auction penalty. The actual amounts and procedures can vary depending on the brokerage firm’s policies and the specific circumstances of the trade. It's critical for investors to be aware of the rules and potential consequences outlined by their brokers and the stock exchange.

More on the Auction Process:

The auction process in the Indian stock market is designed to resolve situations where there has been a short delivery — that is, when the seller fails to deliver the shares to the buyer after the trade. Here is a step-by-step explanation of the auction process and the implications for the short seller:

Step 1: Triggering of the Auction Process If a short seller fails to deliver the shares by the settlement day, the exchange puts the required number of shares up for auction.

Step 2: The Auction Market During the auction, other market participants have the opportunity to offer the required shares at a competitive price. The auction usually takes place on the trading day following the day of the short delivery.

Step 3: Price Determination The shares are bought at the auction price, which can be higher or lower than the original transaction price. The price range for the auction is typically between the highest and lowest prices of the stock on the auction day or a percentage range of the closing price of the stock on the day of the auction, as determined by the exchange.

Step 4: Penalties and Charges to the Short Seller

• Auction Penalty: If the auction price is higher than the short-sold price, the short seller has to pay the difference. This penalty is meant to compensate the buyer who did not receive their shares.

• Close-Out Penalty: In addition to the auction price difference, the short seller may also have to pay a close-out penalty. The rate of the close-out penalty is subject to the exchange's regulations and can vary.

• Brokerage and Transaction Charges: The short seller will still have to pay brokerage fees and other transaction charges on the original short-sold trade.

• Additional Broker Penalties: Brokers may also impose their own penalties for the inconvenience and risk they face when a client fails to cover a short position.

Example of Auction Process and Penalties:

Let's say an investor short-sells 100 shares of Company XYZ at INR 500 per share, expecting the price to fall. However, the price rises, and the investor decides not to square off, hoping the price will come back down. At the end of the settlement period, the investor has failed to deliver the shares.

The stock goes to auction, and the lowest price in the auction is INR 520 per share. The shares are bought at this price to fulfill the delivery obligation to the buyer.

Calculation of Charges and Penalties:

• Auction Price Difference: The investor sold at INR 500 but had to buy at INR 520 in the auction, resulting in a penalty of INR 20 per share, which totals INR 2,000 (100 shares * INR 20).

• Close-Out Penalty: Assume the exchange imposes a close-out penalty of 0.5% of the value of the shortfall. The penalty would be 0.5% of (100 shares * INR 520) = INR 260.

• Brokerage and Transaction Charges: Assume the brokerage and transaction charges on the original trade were INR 200.

• Broker Penalty: The broker imposes a flat penalty fee of INR 500 for failing to square off the position.

The total cost to the short seller would be the sum of these charges and penalties: INR 2,000 + INR 260 + INR 200 + INR 500 = INR 2,960.

Consequences for the Buyer:

The buyer was supposed to receive the shares at INR 500 but received them at INR 520. The auction penalty of INR 2,000 (100 shares * INR 20) is credited to the buyer's account to compensate for the higher price paid in the auction.

The buyer’s net position is intended to be neutralized; they receive the shares they bought, albeit at a higher price, and the difference paid is refunded to them. This means the buyer is kept financially indifferent to whether they received the shares at the initial trade price or the auction price.

It's important to note that these figures are illustrative. Actual penalties and charges will depend on the exchange's rules, the broker's policies, and the specific circumstances of the trade. The exchange regulations may change over time, so traders should ensure they are familiar with the current rules.

Lecture 5

Types of stop loss orders:

1. Stop Loss Market Order

2. Stop Loss Limit Order

In the Indian stock market, like in other markets, stop loss orders are used to limit losses in trading. There are primarily two types of stop loss orders: Stop Loss Market (SLM) and Stop Loss Limit (SLL). Let's delve into each type with examples:

1. Stop Loss Market (SLM) Order:

   • Definition: An SLM order is an instruction to sell (or buy, in case of a short position) a stock once it reaches a certain price, known as the stop loss price. When this price is hit, the order becomes a market order, meaning it will be executed at the best available price in the market.

   • Example: Suppose you buy a stock at INR 100 and you want to limit your loss to INR 5. You set an SLM order with a stop loss at INR 95. If the stock price falls to INR 95, your SLM order is triggered and the stock is sold at the best available price, which may be slightly less than INR 95 due to market fluctuations.

2. Stop Loss Limit (SLL) Order:

   • Definition: In an SLL order, two prices are set: the stop loss trigger price and the limit price. When the stock hits the trigger price, the order is converted to a limit order, which will be executed only at the limit price or better.

   • Example: You buy a stock at INR 100 and set a stop loss trigger at INR 95 and a limit price at INR 94. If the stock drops to INR 95, the order is activated, but it will only be executed if the stock can be sold at INR 94 or more. If the stock price falls too fast and goes below INR 94 before the order can be filled, it may not be executed.

To illustrate these concepts, let's create a simple graph for each type of order:

1. A graph for the SLM order will show the purchase price, the stop loss trigger, and the potential execution price range, indicating the uncertainty in the execution price once the stop loss is triggered.

2. For the SLL order, the graph will highlight the purchase price, the stop loss trigger, and the limit price, showcasing how the order will only be executed within a specified price range.

Let's create these graphs for a clearer understanding.

Here is a graph illustrating the scenario of a Stop Loss Limit Order (SL-L) for a stock purchased at INR 100, with a stop loss trigger at INR 95 and a limit price at INR 94:

• The blue line represents the stock price over time.

• The orange dashed line at INR 95 is the stop loss trigger. When the stock price touches this line, the stop loss order is activated.

• The green dashed line at INR 94 is the limit price. The order will only be executed if the stock can be sold at this price or higher.

• The red shaded area between INR 95 and INR 94 represents the non-execution zone. If the stock price falls into this area too quickly and then drops below INR 94, the order may not be executed, as the conditions for the limit order are not met.​

"Slippage" in a stop loss market order refers to the difference between the expected price of a trade and the price at which the trade is actually executed. This can occur when the market price of a stock moves rapidly and the final trade price is different from the stop price at which the order was triggered. Here's how it works in the context of a stop loss market order:

Understanding Slippage in Stop Loss Market Orders

1. Order Placement:

   • You place a stop loss market order on a stock. For instance, if you bought the stock at ₹100, you might set your stop loss at ₹95 to limit your potential loss.

2. Triggering the Order:

   • The order is triggered when the stock price falls to the stop loss level (₹95 in our example).

3. Market Order Conversion:

   • Once triggered, the stop loss order immediately converts into a market order.

4. Execution of Market Order:

   • The market order is executed at the next available market price. However, if the stock price is falling rapidly, the next available price could be significantly lower than ₹95.

5. Slippage Occurrence:

   • If the next available price is, for example, ₹93, even though your stop loss was at ₹95, this ₹2 difference is the slippage.

Factors Contributing to Slippage

• High Volatility: In highly volatile markets, prices can change very quickly, increasing the likelihood of slippage.

• Low Liquidity: Stocks with low trading volumes can have larger gaps in bid and ask prices, leading to more significant slippage.

• Market Gaps: When a stock opens significantly higher or lower than its previous close (often due to after-hours news), slippage can occur if stop loss orders are triggered at market open.

Impact of Slippage

• Increased Losses: Slippage can lead to larger than expected losses, as the execution price may be worse than the stop loss price.

• Market Risk: It introduces an element of unpredictability in order execution, especially in fast-moving or thin markets.

To mitigate the impact of slippage, some traders use stop loss limit orders instead of stop loss market orders, though this comes with the risk that the order may not be executed if the price moves past the limit price too quickly. However, in highly volatile markets, even stop loss limit orders might not completely protect against slippage.

Take away points:

• It is always recommended to use the Stop Loss market order because in the Stop Loss limit mark if the Limit value is skipped the order won`t be executed.

• In Stop Loss market, Limit Order and Trigger price are the same. So your stock will be traded at Limit Order value in most cases i.e. above 90%. Very rarely in a volatile market, you will get slippage to a slight extent.

Circuit Filters:

Circuit filters in the Indian stock market are regulatory mechanisms designed to prevent excessive volatility in individual stock prices or the broader market. These are essentially price bands set by stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) to limit the maximum movement a stock or index can have within a day. Here's a detailed explanation:

How Circuit Filters Work

1. Price Bands: Circuit filters are set as percentage bands around the previous day's closing price of a stock or index. These bands can be 2%, 5%, 10%, or 20%, depending on factors like the stock's volatility and market segment.

2. Upper and Lower Limits: The bands create an upper and lower limit for the stock price. If a stock's price hits the upper circuit, it means it has reached the maximum permitted limit to move upwards for the day, and similarly for the lower circuit.

3. Trading Halt: When a stock hits these limits, trading in that stock is temporarily halted. The duration of the halt can vary based on the extent of the price movement and the time of day it occurs.

Examples

• Example 1: A stock closed at ₹100 the previous day. If it has a 10% circuit filter, it can’t move beyond ₹110 (10% above ₹100) or fall below ₹90 (10% below ₹100) on the next trading day. If it reaches either of these limits, trading in the stock is paused.

• Example 2: For broader market indices like the Nifty or the Sensex, circuit filters prevent extreme market movements. For instance, if the Nifty hits a circuit limit of 10%, trading on the entire exchange is halted for a certain period.

Purpose of Circuit Filters

• Prevent Excessive Volatility: They help in curbing excessive speculative movement in stock prices.

• Investor Protection: By preventing sudden and extreme price movements, circuit filters offer a degree of protection to investors.

• Cooling Period: The trading halt provides a cooling-off period for the market participants to assess the situation and make informed decisions.

Limitations

• Liquidity Impact: These filters can sometimes impact the liquidity of a stock, as trading halts may prevent execution of orders.

• Sentiment Amplification: In some cases, the anticipation of a circuit filter being hit can exacerbate market sentiments, leading to panic selling or buying.

Circuit filters are an important part of the risk management framework in the Indian stock market, helping to maintain orderly trading and investor confidence, especially during periods of high volatility. However, they are just one of the tools used by exchanges and regulators to manage market risks and are complemented.

Lecture 7

Exception for Circuit Filters:

The circuit filter mechanism in the Indian stock market is designed to prevent excessive volatility in stock prices. These circuit breakers temporarily halt trading on a stock if its price moves beyond a certain threshold in a trading session. However, there are notable exceptions to this rule:

1. Stocks Listed in Futures and Options (F&O): Stocks that are a part of the futures and options segment typically do not have circuit filters. This is because F&O stocks are usually highly liquid and are considered to have efficient price discovery mechanisms due to the nature of derivatives trading. For example, if a stock like Reliance Industries is part of the F&O segment, it won't have a circuit filter applied to it on a typical trading day. The absence of circuit filters in F&O stocks allows for unhindered price movement based on market dynamics.

2. First Day of Listing in the Market: On the first day of listing, newly IPO'ed (Initial Public Offering) stocks do not have circuit filters. This is to allow the market to find an equilibrium price for the new stock. For instance, when a company like Zomato first got listed on the stock market, its shares did not have a circuit filter on the first day. This means the stock price could move freely without any trading halts due to price limits. From the next trading day onwards, circuit filters are usually applied based on the guidelines set by the exchange.

These exceptions are in place to ensure that certain stocks, which are either highly liquid or new to the market, can find their true market value without the restrictions imposed by circuit filters. It's important to note that while these exceptions allow for greater price movement, they also potentially increase the risk of higher volatility in these stocks. Investors and traders should be aware of these aspects when dealing in such stocks.

Examples from the history:

In the Indian stock market, individual stocks hitting their upper or lower circuit limits is not an uncommon occurrence. These circuits are a regulatory mechanism to prevent excessive volatility in a single trading session. They are set at different percentages (like 2%, 5%, 10%, 20%) depending on the stock and the exchange's rules. When a stock hits these limits, trading in that stock is temporarily halted. Here are a couple of notable examples from Indian market history:

1. Reliance Power in 2008: On the day of its listing in February 2008, Reliance Power's stock hit the lower circuit due to the stock opening significantly below its IPO price. The market sentiment was heavily affected by the global financial crisis, leading to a rapid decline in the stock's price. Trading was temporarily halted as it hit the circuit limit, which was an effort to stabilize trading and provide a cooling-off period for market participants.

2. Yes Bank in 2020: In March 2020, Yes Bank shares faced severe volatility and hit lower circuit limits multiple times. This was primarily due to the financial troubles the bank was facing, leading to a crisis of confidence among investors. The rapid decline in share price triggered circuit breakers, pausing trading to curb panic-selling.

When a stock hits these circuit limits, the stock exchange temporarily halts trading in that stock. This pause can last from a few minutes to the remainder of the trading session, depending on the rules of the exchange and the time of occurrence. The halt provides a cooling-off period for traders and investors to absorb information and make more informed decisions, thereby reducing panic-driven market movements.

Broader market-level circuit breakers

Broader market-level circuit breakers, also known as index-based market-wide circuit breakers, are designed to halt trading across the entire stock market to prevent excessive market volatility. These are triggered when the benchmark indices (like NSE's Nifty or BSE's Sensex) hit predetermined trigger limits. The duration of the halt depends on the percentage of the fall and the time of occurrence.

Here's a brief overview of how these circuit breakers work:

Example:

let's go through an example to explain how market-wide circuit breakers work in the Indian stock market when the index hits upper circuit limits of 10% and then 15%.

Example Scenario:

1. 10% Upper Circuit Hit: Suppose on a trading day, due to extremely positive market sentiment or some major positive news, the Nifty index surges and hits a 10% gain at 11 AM. This triggers the first level of the market-wide circuit breaker.

   • What Happens: Trading on the stock exchange is halted for 45 minutes. All trading in stocks and index derivatives is paused. This halt allows the market participants to calm down, assess the situation, and make informed decisions rather than getting carried away by the initial euphoria.

2. Trading Resumes: After 45 minutes, trading resumes. Let's say the market sentiment continues to be overwhelmingly positive.

3. 15% Upper Circuit Hit: Now, imagine the index continues its upward trajectory and hits a 15% gain at 1:30 PM.

   • What Happens: This triggers the second level of the market-wide circuit breaker. Given the time of the day (1:30 PM), trading is halted again, this time for 45 minutes.

If, after trading resumes, the index were to increase by 20%, trading would be halted for the remainder of the day, regardless of the time.

Key Points:

• The purpose of these halts is to ensure that market participants have enough time to understand the prevailing market conditions and make decisions accordingly. It also helps in preventing panic-driven decisions.

• It's important to note that these circuit breakers are applied both ways - for both rapid increases (upper circuits) and decreases (lower circuits) in the market index.

• These mechanisms are in place to ensure that market movements remain orderly and to protect investors from excessive volatility.

This example is hypothetical and illustrates how the circuit breaker system is designed to function in response to significant market movements. In real-world scenarios, the exact response would depend on the specific circumstances and the timings of the index movements.

Historical Examples:

1. Global Financial Crisis (2008): During the global financial crisis in 2008, Indian stock markets experienced significant volatility. On January 21, 2008, the BSE Sensex plunged by over 1400 points (approx 7%) within minutes of opening, triggering a market-wide circuit breaker. Trading was halted to curb the panic selling amid global financial turmoil.

2. Election Results (2004 and 2009): Indian markets have also reacted sharply to political events. For example, in 2004, when the Congress party's unexpected victory in the general elections was announced, the markets initially reacted negatively, leading to a sharp fall in the indices. However, specific details on whether circuit breakers were triggered are not readily available. Similarly, in 2009, the markets reacted positively to the election results, with the Sensex soaring, but again, specific instances of circuit breakers being triggered are not well-documented.

These circuit breakers serve as a check against extreme market volatility, providing time for investors to digest information and make more rational decisions. They are an essential part of the regulatory framework to maintain orderly trading conditions and protect investor interests in turbulent times.

Lecture 8

Market Capitalisation:

Market Capitalisation = Number of shares × Market price per share. Top market cap - reliance industries, TCS, HUL. It is the total market price of the company at a given point of time it is calculated as above.

Small, Mid, and Large-cap:

In the context of the Indian stock market, stocks are often categorized based on their market capitalization, which is the total market value of a company's outstanding shares. This categorization helps investors understand the size of the company and its potential risk and growth profiles. The terms "Large Cap", "Mid Cap", and "Small Cap" are used to distinguish these categories:

Ring Trading:

The concept of "ring trading" often refers to a form of market manipulation, which is illegal in most jurisdictions, including India. Ring trading involves a group of traders creating artificial trading activity, typically by executing pre-arranged trades among themselves. This creates an illusion of high trading volume or price movement in a particular stock or set of stocks, potentially misleading other investors. It is illegal. Learn it for educational purposes only.

To illustrate the process of ring trading, let's consider a hypothetical example. Please remember, that this is an illegal practice and is used here only for educational purposes to explain how it works.

Hypothetical Example of Ring Trading

Participants:

• Trader A, Trader B, Trader C, and Trader D – all part of a colluding group.

Objective:

• To artificially inflate the price of a stock, say "XYZ Ltd.," to create a false impression of high demand and trading activity.

Process:

1. Pre-arrangement: These traders agree in advance to buy and sell shares of XYZ Ltd. among themselves at predetermined prices, higher than the current market price.

2. Execution:

   • Step 1: Trader A buys 1,000 shares of XYZ Ltd. from Trader B at a price higher than the current market rate.

   • Step 2: Trader B then buys the same 1,000 shares back from Trader A at a slightly higher price.

   • Step 3: This process is repeated, involving Trader C and Trader D, each time incrementally increasing the price.

3. Result:

   • This creates an illusion of high trading volume and a rising price trend for XYZ Ltd.

   • Observing this activity, other investors might believe that XYZ Ltd. is in high demand and start buying shares, further driving up the price.

4. Exit:

   • Once the price is sufficiently inflated, the colluding traders sell their shares to external investors at inflated prices and make a profit.

Why It's Illegal:

• Market Manipulation: This activity is deceptive, as it does not reflect genuine supply and demand.

• Misleading Investors: Other investors are misled into believing that there is genuine interest in XYZ Ltd., which can lead to financial losses when the price corrects itself.

• Legal Ramifications: If detected, the traders involved would face serious legal consequences, including fines and possible imprisonment.

Regulators like SEBI use sophisticated surveillance systems to detect such patterns of trading that indicate market manipulation, including ring trading. These practices are illegal because they undermine market integrity and harm investor trust.

Orders based on quantity:

Note: Just know about them you will not use these only richer people use this.

Orders like market orders, limit orders, and stop-loss orders are indeed categorized based on price conditions. They dictate how an order should be executed in terms of price. On the other hand, there are order types that are specifically based on the quantity of shares to be transacted. Let's clarify these:

1. All or None (AON): This order type ensures that the entire quantity of the order must be executed, or none at all. It is particularly useful for small-cap or thinly traded stocks where partial fills can be problematic.

2. Minimum Fill (MF): A Minimum Fill order allows the investor to specify a minimum quantity that must be filled from the total order quantity. Any unfilled portion remains active until it can be filled or is canceled.

3. Discretionary Quantity (DQ): This type of order allows the investor to display only a portion of the order quantity to the market. For example, an investor might place an order for 1,000 shares but choose to display only 100 shares at a time. This is often used in large orders to avoid influencing the market.

These quantity-based order types are designed to give investors more control over the execution of their trades, particularly in terms of the number of shares bought or sold. They are especially relevant in scenarios where order size can impact market prices or when trading in less liquid stocks. Each of these order types serves a specific purpose and is used based on the investor's strategy and market conditions.

Nifty and Sensex:

Nifty

Nifty, officially known as the Nifty 50, is a major stock market index in India. It represents 50 of the largest and most actively traded stocks listed on the National Stock Exchange (NSE). The Nifty 50 covers 13 sectors of the Indian economy and offers a snapshot of India's large-cap market segment.

Key Points:

• Broad Representation: It's used as a benchmark for the Indian stock market and reflects the market's general movements.

• Diverse Sectors: Includes companies from various sectors like IT, Banking, Pharmaceuticals, etc.

• Market Cap Weighted: The weight of each stock in the Nifty is based on its market capitalization, meaning larger companies have a greater impact on the index's movement.

Sensex

The Sensex, short for the Sensitive Index, is another major stock market index in India, maintained by the Bombay Stock Exchange (BSE). It comprises 30 well-established and financially sound companies listed on the BSE.

Key Points:

• Oldest Index: It’s one of the oldest market indices in India.

• Top Companies: Includes leading companies from different sectors.

• Indicator of Market Health: Like the Nifty, the Sensex is a barometer for market sentiment and reflects the performance of the broader Indian economy.

Comparison and Usage

Both the Nifty and the Sensex are used by investors and analysts to understand the overall trends in the Indian stock market. They are indicators of market health and are used as benchmarks for mutual funds and portfolios. When you hear "the market is up" or "the market is down," it usually refers to these indices.

• Nifty = NSE’s 50 key stocks

• Sensex = BSE’s 30 key stocks

For new investors, understanding these indices is important because they give you a quick overview of the market’s performance. If the Nifty or Sensex is up, it generally means that the overall stock market is doing well, and vice versa. They are also good starting points for learning about different sectors and large-cap stocks in India

General Market movement

In the context of stock market indices like the Nifty 50 or the Sensex, the amount by which the index can go up or down on a given day isn't fixed and can vary widely based on a range of factors. However, understanding what's considered a "normal" fluctuation versus an extraordinary one requires context:

Factors Influencing Daily Fluctuations:

1. Market News: Economic announcements, earnings reports, policy changes, and global events can significantly impact market movements.

2. Economic Data: Inflation rates, GDP growth, unemployment figures, etc., can influence investor sentiment.

3. Global Markets: Trends in global markets, including the US, Europe, and Asia, often impact Indian markets.

4. Political Events: Elections, policy changes, and geopolitical tensions can cause market volatility.

Understanding the Scale of Movements:

1. Small Movements: Daily movements of around 0.5% to 1% in either direction are often considered normal in healthy markets.

2. Moderate Fluctuations: Movements of 1% to 2% might be seen on days with significant news or events but are still relatively common.

3. Large Movements: Fluctuations beyond 2% in a single day are less common and might indicate significant market news or events.

Historical Context:

• Normal Days: On typical trading days without major news or events, indices might move modestly, reflecting the usual market dynamics of buying and selling.

• Volatile Periods: During periods of high volatility (like financial crises, pandemics, etc.), movements can be much larger, sometimes even exceeding 5-10% in extreme cases.

Investor Perspective:

• Short-Term Traders: Might be more concerned with daily fluctuations as they can impact trading strategies.

• Long-Term Investors: Generally focus on longer-term trends and may be less concerned with daily market movements.

Calculate the Nifty 50 value(with small example stocks) and compare why Sensex is greater than Nifty:

To calculate the value of an index like Nifty 50, which uses a free-float market capitalization-weighted method, we need the market capitalization of each stock in the index and the base market capitalization of the index. I'll demonstrate with a simplified example using 5 hypothetical stocks.

Simplified Example to Calculate Nifty 50 Value:

1. Choose 5 Stocks: Let's assume we have 5 stocks in our simplified index: A, B, C, D, and E.

2. Market Capitalization: Calculate the market capitalization for each stock. Market Cap = Stock Price × Number of Outstanding Shares.

3. Total Current Market Capitalization: Sum the market caps of all 5 stocks.

4. Base Market Capitalization: Assume a hypothetical base market capitalization. This would typically be the total market cap of these stocks at a specified base date.

5. Calculate the Index Value:

   Index Value=(Total Current Market Cap of the IndexBase Market Cap)×Base Index ValueIndex Value=(Base Market CapTotal Current Market Cap of the Index​)×Base Index Value

6. Base Index Value: For Nifty 50, it is 1000.

Let's assume the following data for our 5 stocks (all figures are hypothetical):

• Stock A: Price = INR 100, Outstanding Shares = 1,000

• Stock B: Price = INR 200, Outstanding Shares = 500

• Stock C: Price = INR 50, Outstanding Shares = 2,000

• Stock D: Price = INR 150, Outstanding Shares = 1,500

• Stock E: Price = INR 250, Outstanding Shares = 800

Calculation:

1. Calculate the current market cap for each stock.

2. Sum these market caps to get the total current market cap of the index.

3. Use a hypothetical base market cap (say INR 10 million).

4. Apply the formula for the index value.

After calculating the Nifty 50 value with these 5 stocks, we will address why the Sensex value is typically numerically higher than the Nifty 50.

Let's proceed with the calculations.

Based on the hypothetical data provided:

• The total current market capitalization of our simplified Nifty 50-like index with 5 stocks is INR 725,000.

• Using the formula, the calculated index value is 72.5.

Why Sensex Value Is Typically Higher Than Nifty 50:

To understand why the Sensex value is often numerically higher than the Nifty 50, we need to consider their respective base market capitalizations and base index values:

1. Base Market Capitalization:

   • Nifty 50 and Sensex have different base market capitalizations. The base market cap for Nifty 50 is calculated based on a later date (1995) compared to Sensex (1978-79). Generally, the later the base year, the higher the base market capitalization due to the growth of the economy and the stock market over time.

2. Base Index Value:

   • The base index value for Nifty 50 is 1000, whereas for Sensex, it is 100. A higher base index value for Nifty 50 means its index value starts from a higher number.

3. Market Capitalization Weighting:

   • Both indices use a market capitalization-weighted method, but due to the different sets of stocks and base market caps, their index values differ.

4. Number of Stocks:

   • Sensex is composed of 30 stocks, while Nifty 50 comprises 50 stocks. The fewer number of stocks in Sensex, combined with a lower base index value, can lead to a higher numerical value for the index, especially when a few large-cap stocks perform exceptionally well.

In summary, the difference in their numerical values is more a reflection of their different base years, base index values, and compositions, rather than a direct comparison of performance or size. It's important to compare indices in terms of percentage changes over time rather than their absolute numerical values for a more meaningful analysis

Queries on Nifty:

Can We Buy Nifty 50 Units?

You cannot directly buy "units" of Nifty 50 as it is an index, not a financial product. However, you can invest in the Nifty 50 indirectly through various financial instruments that replicate the performance of the index. These include:

1. Index Funds: These are mutual funds that replicate the composition of the Nifty 50, aiming to mirror its performance. An index fund investing in the Nifty 50 would hold the same 50 stocks in the same proportions as the index.

2. Exchange-Traded Funds (ETFs): Nifty 50 ETFs are traded on the stock exchange and track the Nifty 50 index. They offer the flexibility of trading like a stock while providing the diversification of an index fund.

Who Owns It?

The Nifty 50 index is owned and managed by the NSE Indices Limited, a subsidiary of the National Stock Exchange of India. It's a statistical measure reflecting the aggregate value of the 50 stocks that make up the index.

How Are the 50 Stocks Determined?

The selection of the 50 stocks in the Nifty 50 is based on several criteria:

1. Market Capitalization: Stocks are generally large-cap, reflecting the larger and more stable companies in the Indian market.

2. Liquidity: The stocks should have high trading volumes and low impact costs.

3. Free-Float Market Capitalization: This method considers only those shares available for trading in the market, excluding promoter holdings, government holdings, and other locked-in shares that cannot be freely traded.

4. Sector Representation: The index aims to represent various sectors of the Indian economy.

How Often Do They Change?

The composition of the Nifty 50 is not constant. It is reviewed periodically (usually semi-annually) to ensure it accurately reflects the current state of the Indian economy and stock market. During these reviews, stocks may be added or removed based on the criteria mentioned above.

Any changes made are usually announced in advance to provide market participants time to adjust their portfolios. These periodic reviews ensure that the index remains relevant and representative of the market conditions.

In summary, while you can't buy Nifty 50 directly as it's just an index, you can invest in it indirectly through index funds or ETFs that track its performance. The ownership and management of the index itself lie with NSE Indices Limited, and the index's composition is subject to periodic review to maintain its relevance and accuracy.

Sectoral indices with examples:

The National Stock Exchange (NSE) of India offers various sectoral indices, each representing a specific sector of the Indian economy. These indices provide a segmented view of the market, allowing investors to track the performance of particular industry sectors. Here are some of the popular sectoral indices on the NSE:

1. Nifty Bank: This index represents the banking sector and includes major banks listed on the NSE. It's one of the most watched sectoral indices in India, given the significant role of banking in the economy.

2. Nifty IT: Reflecting the Information Technology sector, this index comprises companies that provide IT services, software products, and other related services. Considering the importance of the IT sector in India, especially for exports, this index is closely monitored.

3. Nifty Auto: This index tracks companies involved in the automobile industry, including manufacturers of cars, trucks, motorcycles, and other vehicles, as well as auto parts and equipment.

4. Nifty Pharma: Representing the pharmaceutical and healthcare sectors, this index includes companies involved in the production and development of pharmaceuticals, medical equipment, and other health-related services.

5. Nifty FMCG (Fast-Moving Consumer Goods): It includes companies involved in the production, distribution, and sale of consumer packaged goods like food, beverages, personal care products, and household items.

6. Nifty Metal: This index represents the metal and mining sector, including companies involved in the extraction and processing of metals.

7. Nifty Infrastructure: Comprising companies that are primarily involved in infrastructure activities, this index includes sectors like power, telecom, energy, ports, airports, roads, and railways.

8. Nifty Realty: Reflecting the real estate sector, this index includes companies involved in residential and commercial real estate development.

9. Nifty Energy: It includes companies from the energy sector, such as those involved in power generation, distribution, and renewable energy sources.

10. Nifty Financial Services: This index encompasses companies providing financial services, excluding banks. It includes insurance companies, housing finance companies, NBFCs (Non-Banking Financial Companies), and other financial services entities.

Each of these sectoral indices allows investors to gauge the performance of a specific sector of the Indian economy. They are useful for investors looking to invest in particular market segments or for those aiming to diversify their portfolios across different sectors. These indices are also used by fund managers for creating sector-focused mutual funds and exchange-traded funds (ETFs).

Examples:

As of my last update in April 2023, I can provide a general overview of some of the prominent companies in each sector on the NSE. However, it's important to note that the "top performing" companies can vary over time based on market conditions, financial performance, and other factors. For the most current and detailed information, I recommend consulting financial news sources or the NSE's official website. Here's an overview based on typical market leaders in various sectors:

Nifty Bank

1. HDFC Bank

2. ICICI Bank

3. State Bank of India

4. Axis Bank

5. Kotak Mahindra Bank

Nifty IT

1. Tata Consultancy Services (TCS)

2. Infosys

3. Wipro

4. HCL Technologies

5. Tech Mahindra

Nifty Auto

1. Maruti Suzuki

2. Mahindra & Mahindra

3. Tata Motors

4. Bajaj Auto

5. Ashok Leyland

Nifty Pharma

1. Sun Pharmaceutical Industries

2. Dr. Reddy's Laboratories

3. Cipla

4. Lupin

5. Aurobindo Pharma

Nifty FMCG

1. Hindustan Unilever

2. ITC

3. Nestle India

4. Britannia Industries

5. Dabur India

Nifty Metal

1. Tata Steel

2. JSW Steel

3. Hindalco Industries

4. Vedanta

5. Jindal Steel & Power

Nifty Infrastructure

1. Larsen & Toubro

2. Bharti Airtel

3. Power Grid Corporation of India

4. NTPC

5. GAIL (India)

Nifty Realty

1. DLF

2. Godrej Properties

3. Oberoi Realty

4. Prestige Estates Projects

5. Brigade Enterprises

Nifty Energy

1. Reliance Industries

2. NTPC

3. Power Grid Corporation of India

4. Tata Power

5. Adani Green Energy

Nifty Financial Services

1. HDFC

2. Bajaj Finance

3. Bajaj Finserv

4. HDFC Life Insurance Company

5. SBI Life Insurance

Please remember, these lists are based on general market knowledge as of early 2023 and are subject to change. The performance of companies can vary, and new companies may enter the top rankings while others may drop out. For investing decisions, always perform up-to-date research or consult with a financial advisor.

Lot size:

"Lot size" refers to the standardized number of units of an asset that are traded in various financial markets, including the primary, secondary, and derivatives markets like futures and options. The concept of lot size varies depending on the market and the type of security being traded.

Lot Size in the Primary Market:

1. Initial Public Offerings (IPOs): In the primary market, during an IPO, companies issue shares to the public for the first time and specify a lot size. This lot size is the minimum number of shares an investor can apply for. It standardizes the application size for retail investors and ensures broader participation.

Lot Size in the Secondary Market:

1. Equity Trading: In the secondary market, particularly in stock trading, the lot size is typically 1 share. This means that investors can buy or sell shares in any quantity, with the minimum transaction size being one share. This flexibility allows investors of all sizes to participate in the market, making it accessible to retail investors who might want to trade in smaller quantities.

2. Bond Trading: For bond trading, lot size might still apply, where bonds are traded in specific denominations or lot sizes. However, the concept of lot size is more relevant and frequently applied in bond markets than in equity markets.

Importance of Lot Size:

• Standardization and Accessibility: In the primary market, lot size helps in standardizing the application process for IPOs and makes it more accessible to a wider range of investors.

• Flexibility in Equity Trading: In the secondary market, a lot size of 1 in equity trading offers greater flexibility, allowing investors to buy or sell as few as one share, accommodating various investment strategies and capital sizes.

In summary, the concept of lot size varies between the primary and secondary markets. In IPOs, it helps standardize applications, while in the secondary market, a lot size of 1 in equity trading provides flexibility and accessibility to investors. The lot size is an important factor that influences investment decisions, particularly in terms of the quantity of securities to be bought or sold.