The Basics of the National Stock Exchange Products - Research Paper Example

1) Purpose of stock exchange a) Raising Capital The main purpose of stock exchange is to raise capital for a company, where it will be a huge amount for a single investor to invest. Thus stock exchanges are used to raise capital by selling shares to the public. b) Performance Indicator of Economy The prices of shares depend on the market forces. When the economy, in general, is stable and growing the share prices tends to rise or remain stable. During the time of recession, the stock prices go down due to the lower profitability of companies. In the times of depression, the case will be severe. Therefore, a stock exchange performance can be termed as an indicator of the performance of the economy. c) Capital for Government Projects The government needs money for the infrastructure development like construction of roads, sewage facilities, Water works etc. these works can be financed by selling another type of securities called bonds. These bonds can be sold to the public, thus financing the projects. d) Savings Mobilization for Investment The savings which are the idle money can be mobilized to the investment in stock, which will give higher returns and improved economic expenditure. These benefits in economic sectors such as agriculture, industry, commerce etc e) To Create Investment Opportunities for Small Investors Not all can afford to buy much number of shares. The stock exchange provides shares as many as one can buy, so that the small investors can participate in the market. This will distribute the investment burden on the entrepreneurs. f) Corporate governance: By having a wide spread of owners , companies tend to improve on thieir management system, standards and efficiency in order to satisfy the damands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. 2) History of National Stock Exchange (NSE), India: National stock exchange in India was established in 1994. The NSE is a national exchange integrating the country's stock markets through automated on-line screen operations and electronic clearing and settlement. The exchange's products include equities, exchange-traded funds, stock futures, index futures, interest rate futures and options. The National Stock Exchange of India (NSE) is one of the largest and most advanced stock exchanges in the world. The NSE is the world's third largest stock exchange in terms of transactions. It is located in Mumbai. The leading financial institutions at the behest of the government of India promoted the national stock exchange, India. NSE was recognized as stock exchange in April 1993 under the securities contract regulation act 1956. It stated operations in the wholesale debt market in November 1994. The capital market segment of NSE commenced operations in November 1994, while operations in the derivatives. 3) Products of NSE: a) Shares: Shares represent ownership of a company. When an individual buys shares in your company they become one of the owners of the company. Shareholders choose who runs a company and are involved in making key decisions such as whether a business should be sold. While shares are most obviously associated with the stock market, the small businesses share the amount of the investment by themselves by making friends, family members as the shareholders, thus obtaining the lump-sum amount required for the investments. b) Derivatives: Derivatives are a generic term for a variety of financial instruments. Unlike financial instruments such as stocks and bonds, a derivative is usually a contract rather than an asset. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership Futures and options are two commonly traded types of derivatives. An options contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a futures contract is obligated to buy or sell the asset. c) Commodities: Commodities are objects that come out of the earth such as orange juice, wheat, cattle, gold and oil. People buy and sell commodities based on speculation. For instance, if I thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible. If I was correct, the price of coffee would be driven up drastically because the crop had been destroyed by weather, making the surviving harvest worth more. Almost all commodity speculators trade on margin which results in substantial risk to the invested principal. The odds are heavily against anyone hoping to build permanent wealth in the commodity markets. 4) Trading: The NSE, India is the fully computerized, on-line trading system used in the WDM segment of the Exchange has changed the way of trading in the Indian securities market. The system has helped increase in trading speed, thus saving time; it has also managed to incorporate the critical aspect of security in its functioning. The Exchange provides a facility for screen based trading with order matching facility. The members are connected from their respective offices at different locations to the main system at the NSE premises through a high-speed, efficient satellite tele-communication network. The trading system is an order-driven, automated order matching system, which does not reveal the identity of parties to an order or a trade. This helps orders whether large or small to be placed without the members being disadvantaged by disclosure of their identity. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match it remains in the system and is displayed to the whole market, till a fresh order which matches, comes in or the earlier order is cancelled or modified. The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system. Several time-related, price-related or volume-related conditions can easily be placed on an order. The trading system also provides complete on-line market information through various inquiry facilities. Detailed information on the total order depth in a security, the best buys and sells available in the market, the quantity traded in that security, the high, the low and last traded prices are available through the various market screens at all points of time. 5) Major index: S&P CNX Nifty S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL1. IISL is India's first specialized company focused upon the index as a core product. CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus C stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index. The S&P prefix belongs to the US-based Stnadard & Poor's Financial Information Services. The average total traded value for the last six months of all Nifty stocks is approximately 45.24% of the traded value of all stocks on the NSE Nifty stocks represent about 57.92% of the total market capitalization as on April 10, 2007. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.08% S&P CNX Nifty is professionally maintained and is ideal for derivatives trading. Criteria for Inclusion: Average market capitalisation of Rs.5,000 million or more during the last six months Liquidity: Cost of transaction (impact cost) of less than 0.75% for more than 90% of trades, over six months. At least 12% floating stock (not held by promoters of the company or their associates). 6) Costs of Trading: Shares: a) Brokerage cost of 0.5% b) Service tax at 12% of the brokerage cost c) Security transaction cost of 0.12% d) Stamp duty of Rs. 1.00 per transaction. Derivatives: a) Brokerage cost of 7.5% b) Service tax at 12% of the brokerage cost c) Security transaction cost of 2.5% d) Stamp duty of Rs. 1.00 per transaction Commodities: a) Brokerage cost of 7.5% b) Service tax at 12% of the brokerage cost c) Security transaction cost of 2.5% d) Stamp duty of Rs. 1.00 per transaction 7) Regulations: The controls on the issue of capital by the companies are regulated by the transparent guidelines and regulations issued by the securities exchange board of India under the SEBI2 Act, 1992. 1) SEBI has issued elaborate guidelines on matters relating to public issues, rights issues, bonus issues, issues on debentures, underwriting, private placement, pricing of issues. Under the SEBI guidelines, no prior approval is required by the companies for raising capital through public issues, rights issues, in the capital market. A company while raising its capital through issues in the capital market must give due regard to the guidelines and clarifications issued by SEBI and the provisions of the companies act, 1956. 2) As per the guidelines of SEBI, all application forms for shares and debentures should be accompanied by a memorandum containing salient features of a prospectus like general information of the company, terms and particulars of the issue, company's management, risk factors as perceived by the management, etc. 3) A company proposing to issue securities on rights basis should send a 'letter of offer' to the shareholders giving adequate disclosure as to how the additional payment for these shares. Under the SEBI guidelines, companies are allowed to issue capital provided the issues are in conformity with the published relating to the disclosure and other matters relating to investors protection. 8) Education about the Products: The investors will get much information on the basics of the national stock exchange products in the official website. However, if further detailed information is required, investors can go through the material provided by the stock exchange in the form of books. A certified exam known as "NSE's Certification in Financial Markets" is conducted all over India by the national stock exchange. By preparing for these exams, investors can gain knowledge on various products and services provided by NSE Word count: 1715 Bibliography 1) Capital Market Module - National Stock Exchange of India Limited 2) Futures and Options - R. Mahajan Internet Sources 1) www.nseindia.com Read More