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  • Indian Derivatives Market (Things You Must Know Before Trading)

    Umesh Sharma 19 Nov 2020

     

      What Is a Derivative? | The Motley Fool

     

    Financial derivatives are not inherently good or bad, but they don't belong in every portfolio.

     

    What are Derivatives?

    Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. The derivative market was introduced in India in the year 2000 and since then it’s gaining great significance like its counterpart abroad.

    “Derivatives are financial securities and are financial contracts that obtain value from something else, known as underlying securities. Underlying securities may be stocks, currency, commodities or bonds, etc.”

     

    By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy,  lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated,  derivatives have strengthened these important linkages between global markets,

    increasing market liquidity and efficiency, and have facilitated the flow of trade and finance.

    What are Derivatives By Kotak Securities®

     

    Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation/trading, or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwardsfuturesoptionsswaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps.

     

    Derivatives 2 - Invesco investmentcampus

    Derivatives can either be exchange-traded or traded over the counter (OTC)

    Exchange refers to the formally established stock exchange wherein securities are traded and they have a defined set of rules for the participants. Whereas OTC is a dealer oriented market of securities, which is an unorganized market where trading happens by way of phone, emails, etc. 

    Why should you invest in the Derivatives Market?

    A derivative product can be structured to enable a pay-off and make good some or all of the losses if gold prices go up as feared.

                                            Derivatives Marketing and Derivative Trading | Kotak Securities®

    • Physical Settlement - Earn money on shares that are lying idle

    • Benefit from arbitrage

    • Hedging - Protect your securities against fluctuations in prices 

    • Transfer of risk

    • Trading

     

    Derivative Trading and Spot Market Volatility: Evidence from Indian Market

     

    Trading in Derivatives Market

    If you are new to Derivatives and have some prior knowledge of the stock market, then follow these simple steps before you start trading in derivatives.

    • Do your Research

    • Select stocks and Contracts as per your budget

    • Get Margin amount

    • Conduct Trade

    • Settlement

    Note: Trading in the derivatives market is very similar to trading in the cash segment of the stock markets. This has 3 key prerequisites –

    • Demat Account

    • Trading Account

    • Margin Maintenance

     

    What are the Types Of Derivatives?

    The main instruments for derivatives trading in India are future contracts, options contracts, swaps, etc. These instruments are originally meant for hedging purposes. However, their use for speculation can’t be ruled out. 

    Instruments Available in Derivatives Trading By Kotak Securities®

    1. What is a Forward Contract ?

    A forward contract or simply a forward is a non-standardized contract between two parties to buy or to sell an asset at a specified future time at an amount agreed upon today.  The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position

    Example :

    Suppose you need to buy some gold ornaments say from a local jewelry manufacturer XYZ Gold Inc. Further, assume you need these gold ornaments some 3 months later in the month of December. You agree to buy the gold ornaments at INR 54000 per 10 gram on 15 March 2020. The current price, however, is INR 53600 per gram.

    This will be the forward rate or the delivery price four months from now on the delivery date from the XYZ Gold Inc.

    This illustrates a forward contract. Please note that during the agreement there is no money transaction between you and XYZ Gold Inc. Thus during the time of the creation of the forward contract no monetary transaction takes place. The profit or loss to the XYZ Gold Inc. depends rather, on the spot price on the delivery date.

    Now assume that the spot price on delivery day becomes INR 54100 per 10 gram. In this situation, XYZ Gold Inc will lose INR 100 per 10 gram and you will benefit the same on your forward contract. Thus, the difference between the spot and forward prices on the delivery day is the profit/loss to the buyer/seller.

    1. How future contracts differ from forward contracts on the Indian derivatives market?

     

    Future Contract

    Forward Contract

    Traded on Organized Stock Exchange

    Over the Counter (OTC) in nature

    Standardized contract terms, hence more liquid

    Customized contract terms, hence less liquid

    Required margin payments

    No margin payments

    Follow Daily Settlement

    Settlement happens at the end of the period

     

    Along with some exceptions to forward contracts, there are future contracts. What makes future different forward contracts is that we trade futures on stock exchanges while forward on the OTC market. OTC or the over the counter market is a marketplace for typically forward contracts.

    1. What is an Option Contract?

    An option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller has the corresponding obligation to fulfill the transaction—that is to sell or buy—if the buyer (owner) "exercises" the option. The buyer pays a premium to the seller for this right. An option that conveys to the owner the right to buy something at a certain price is a "call option"; an option that conveys the right of the owner to sell something at a certain price is a "put option".

    Example:

    Consider the same example. Let us now suppose that the seller XYZ Gold Inc. believes that the spot price may rise above INR 54000 per 10 gram during the forward contract agreement with you. So to limit loss, XYZ Gold Inc. purchases a call option for Rs. 1050 at the exercise price of INR 54000 per 10 gram with the three months expiration date.

    The exercise price is technically known as a strike price. Similarly, the price of the call option is technically known as the option price or the premium.

    Actually, the call option gives the buyer the right to buy the gold at the strike price on the expiration date. However, there is no obligation to buy on the expiration date. He may or may not exercise his right on the expiration date. If the price is in the favor of the buyer he will exercise his rights and will receive the intrinsic value from the writer of the option.

    For instance, if the spot price decline below INR 53600 our XYZ Gold Inc will choose not to exercise the option. In this way, his loss would be limited to the premium of INR 1050 per 10 gram.

    In an alternative situation, when you expect the price to fall below the spot price in the future, you have the option to purchase put options. Buying a put option provides you the advantage to sell at the strike price on the expiration date. Here also you have no obligation to exercise your right.  

    1. What are Swaps?

    The swap contract involves an exchange of cash flows over time. Swaps are typically done between two parties. One party makes a payment to the other. This depends on whether a price is above or below a reference price. This reference price is the basis of the swap contract and is there is mention regarding it in the contract.

    Some Rules of investing/trading  in the Derivatives market

    • Always have a stop loss - if not, it would be like driving a car without the brakes

    • Always have a cap on your losses

    • Always have a definite profit target in your mind 

    • Never believe what people say as most of them aren’t qualified for it

    • Always go with the trend

    Who are the participants in derivatives markets?

    Price Risk Management: How We Use Derivatives -

    Arbitrageurs:

    This investor buys an asset at a cheaper rate from one market and sells it at a higher price in another market, where the investor is taking the minimum risk. This price gap is very brief and it narrows down quickly, and the arbitrageurs might lose the opportunity.

    Hedgers:

    Hedging is minimizing risk or loss. In the market, an investor who protects his investment from unfavorable price movements is called a hedger. Hedger tries to limit the risk by buying put options by paying a fixed amount known as premiums.

    Speculator:

    They are the risk-taker, they take high risk expecting higher gains in the short-term. They buy stock with an expectation of price rise and sell them at a high price level. This situation can make high gains for an investor though it also has a very high risk of losing your money.



     

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  • Harshad Mehta – The Big Bull of Indian Stock Market (A Scamster or a Scapegoat )

    Deepak Sharma 12 Nov 2020

    Harshad Mehta Was an Indian Stock Broker who is also referred to as the Big Bull of the Indian Stock Market. He is well known in the Indian Stock Market Circuit and well known for his wealth and luxurious life. He has been charged with multiple financial crimes in the 1992 securities market scam and using the money to manipulate the stock market by rigging the price of shares. It was alleged that Mr. Harshad Mehta was engaged in a massive stock market manipulation which was financed by worthless bank receipts which his firm Grow More Research and Asset Management brokered for “ready forward transactions between banks. It was considered as one of the greatest stock market scams which occurred in 1992 valued at over Rs 5000 crore by a man known as ‘The Big Bull’ of the Indian Stock market, Harshad Mehta. 

    The early life of Harshad Mehta in the Stock Market 

    Harshad Mehta started his early Stock market Career as a Jobber in a stockbroking firm in the early 1980s. Over a period of 10 years, he served in various positions of increasing responsibility at a series of broking firms. He actively started to trade in the stock market in 1986 through his own brokerage firm Grow More Research and Asset Management.  By 1990 he had risen to a position of The Big Bull of Indian Stock market by the Media and Financial Market fraternity. 

    Background of the 1992 Securities Scam

    Government  Securities paper scam

    Banks in India were not allowed to invest in the stock market in the early 1990s. However, they were allowed to retain a certain ratio of their total assets in government fixed interest bonds and securities to maintain their SLR ratio(Statutory Liquidity ratio). There was an extra clause that the average percentage bond holding over the week needs to be above the SLR ratio but the daily percentage need not be so which means banks would sell bonds at the earlier part of the week and would buyback at the end of the week. 

    The broker would act as a middleman for the banks. Harshad Mehta squeezed capital through loopholes in the banking system to address this requirement of banks as a market maker and pumped this money into the share market and rigged the share prices. In the early 1990s, Indian Banks were not highly efficient in securities operation and were relying on stockbrokers to find a deal as a market maker. Harshad Mehta was a smart broker and he was able to find the loophole in a very short span of time. Further, he promised the banks a higher rate of interest sometimes asking money to transfer into his personal account on the pretext of buying securities for them from other banks. Mr. Harshad Mehta used this money from his account to buy shares in huge quantities thereby hiking the demand for certain shares and skyrocketed the price. Some of the well-established companies like Cipla, ACC, Hindalco, Sterlite, and Videocon Industries He sold off when the price rose dramatically. He had single-handedly operated the price of ACC from 200/per share to 9000/per share in a span of 3 months. Imagine the euphoria he created with his aura in the Indian Stock Market as “The Big Bull”. In a span of one year from 1st April 1991 to 31st March 1992, the BSE Sensex has risen by a whopping 247% which is a historic record in a financial year in the Indian Equity market to date as of 31st October 2020.

    Bank Receipt scam

    The most lucrative instrument used by Harshad Mehta in a big way to pump money in the share market was Bank Receipt. Typically BR transaction was a ready forward deal wherein securities were not moved back and forth in reality. Instead, the borrower of money i:e the seller of securities issue BR to the buyer of securities. The BR confirms the sale of securities. It also acts as a receipt for the money received by the selling bank and promises the delivery of securities to the buyer. The seller holds the securities in trust (as a novation)of the buyer side. After figuring this method, he needed banks who could issue fake BRs or BRs not backed by securities. Once the fake BRs were issued, they were passed on to other banks and the bank in turn gave money to Mehta assuming that they were lending to other banks against govt. Securities which were not really the case as the BR were fake without backed by security. The stock market was overheated because of the buying spree from Mehta and Sensex had risen 247% in one year. 

    The outbreak of 1992 Securities Fraud:

    Sucheta Dalal, a young financial Journalist got the tipoff about the fake BRs fraud. Sucheta kept on digging about the amount of fake BRs used by Mehta to pump in the stock market. On 23rd April 1992, Sucheta Dalal exposed the scam of Harshad Mehta in Times of India. Once the scam was exposed Banks realized that they were holding Brs of no value at all. The chairman of Vijaya Bank committed suicide as he issued fake BRs to Mehta in lieu of commission from him knowingly.Mr. Mehta died at the age of 47, on 31st December 2001 due to cardiac arrest and left behind the biggest scam of Indian Stock Market and created the historic bull run of all times till date and hence came to be known as “The Big Bull of Indian Stock Market”.

    Inference of Harshad Mehta Scam:

    Some conclusion and evidence say that the activity was going on in the entire market and was used by all brokers in the stock market and he was made a scapegoat as he used to believe in a bull run and the rest of the brokers were against that. Due to Harshad Mehta, they have to suffer major losses. No doubt the method used by the entire market was unethical and after the scam exposed by Sucheta Dalal SEBI and the market, regulators made stringent rules and regulations so as to prevent the misuse of securities to manipulate the stock market.

     

     




     

     


     

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  • A Harshad Mehta Story (Scam 1992)

    Rohit Sharma 4 Nov 2020

    After the release of the web series named Scam 1992, the one name which is trending in India is Harshad Mehta. Now, Who Harshad Mehta is? What he did exactly? In this article, we will explain about him in brief. 

    One of the biggest scams that strikes hard to India in 1992 by Harshad Mehta AKA “Big Bull” of India. Harshad Mehta was born in a middle-class Jain family of Gujrat in 1954 and spent his childhood in Mumbai. He completed his Bachelor’s in commerce from Lajpatrai College in Mumbai. Harshad tried his luck in many jobs like a diamond, accountant, etc.he found his major fortune in the Indian stock market only. Mr. Mehta started his career after graduation as a salesman in the New India Assurance Company (NIACL). After a few years of hustle and after not getting the geek he showed his interest in the share market and joined a brokerage firm B.Ambalal & Sons where he worked as a jobber for the broker P. D. Shukla. As time passes people start recognizing him as Amitabh Bachan of the Stock market. In 1984, Harshad Mehta started his brokerage firm and named it Growmore Research and Asset Management. 

    He actively started his trading in the market in 1986 and by the year 1990, people started joining him and they were investing with his firm. In the mean years, he got some big shot clients like then minister Mr. P. Chidambaram. After getting a veteran in the market he started to manipulate the market, he manipulated the share price of Associated Cement Company (ACC) from Rs.200 to Rs.9000 in nearly just 3 months. 

    Now the question is where the scam started?

    Till 1990, banks were not allowed to invest in the equity markets. Yes, they were expected to post profits and retain a certain ratio (threshold) of their assets in the Government’s fixed interest Bonds. Mr. Mehta smartly brought the capital out of the banking window and pumped this money into the share market. He promised the banks a higher rate of interest than the normal ongoing. He asked them to transfer the amount into his account, under the belief of buying securities for them from other banks. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta got the idea from there only to use this money temporarily into his account to buy shares. Now he started to boost the price of certain shares of good already established companies like (ACC, Sterlite Industries, and Videocon ) when the market cruise on its best he Eventually sells the shares and passes on a part of the proceeds to the bank and keeps the rest into his pocket.

    To carry out the scam, the deliveries of security and payment were made through the help of the broker only, for example, one seller handed over the security to the broker and now the broker pass them to the buyer and the buyer gave the cheque to the broker, now the broker made the payment to the seller. The buyer and the seller would not even know who they had traded with, the broker is going to be the only mediator between these two

    Another instrument used in a big way was the Bank Receipt (BR). The confirmation of security sale is the BR, it's like a receipt received by the selling bank. i.e. the seller of securities gave the buyer of the securities a BR. A BR promises to deliver the securities to the buyer and also states that, in the meantime, the seller holds the securities in the trust of the buyer. Mehta cleverly found a bank that was providing him the fake BR or BRs not backed by any government securities. Too small and not very well known banks – the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) – came in handy for this purpose. Once these fake BRs were issued, once the money was invested in the share market and was sold in profits, he returned the money to the banks.

    This was all the tricks MR. Mehta was using it to boost the market and people started calling him the “Big Bull” of Dalal Street, this all kept on going for a long time until Sucheta Dalal showed her interest in it.

    Sucheta Dallas was a Young enthusiastic financial journalist, she got the tip about the SBI BR frauds. Sachet kept on digging about this and found all the scams of Harshad Mehta. 

    On 23rd April 1992, journalist Sucheta Dalal exposed the illegal ways of Harshad Mehta in Times of India about how Mr. Mehta was using the bank money into the share market.

    Just after the article Banks realizes that they were holding the BRs of no value at all. The chairman of Vijaya Bank committed suicide after the scam exposer came out, who was found guilty of having issued checks to Mehta and knew that he will lose all the reputation which he earned in the market.

    One late night under custody in Thane prison MR. Harshad Mehta. He complained of chest pain and was admitted to the Thane Civil Hospital. He died with the following pain, at the age of 47, on 31st December 2001, he left behind the biggest scam of the Indian finance history. 

    This man was the Harshad Mehta from a basic middle-class family who dreamed of a big house and dived into the ocean of the finance market and brought the tornado into that ocean. People built their fortune with Mr. Mehta, but in the end, he was the culprit and journalist Sucheta Dalal brought the light on to his scams of more than Rs 4000 crore.

     

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  • What are Industry Analysis and Company Analysis in Equity Stock Market

    Deepak Sharma 27 Oct 2020

    Industry Analysis in Stock market

    Michael Porter’s Five Force Model for Industry Analysis

    Horizontal Forces

    Threat of Substitutes

    The threat of New Entrants

    The threat of Established Rivals

    Vertical Forces:

    Bargaining Power of Suppliers

    Bargaining Power of Customers 

    Barriers to entry (threat of new entrants):

    Entry barriers in an industry can be understood by following simple industry characteristics.

    They would be high if:

    There are lots of licensing required in the business

    Patents and copyrights prevent new entrants

    Huge investments in specialized assets pose a challenge

    Strong Brands, strong distribution network, specialized execution capabilities, customer loyalty with existing products/services exist in the business.

    Attractive Industry from the Equity shareholders’ perspective:

    Low competition

    High barriers to entry

    Weak suppliers’ bargaining power

    Weak buyers’ bargaining power

    Few substitutes

    Pestle Analysis

    Pestle Analysis stands for Political, Economic, Socio-cultural, Technological, Legal, and Environmental Analysis for investment in Stock Market. Some models also extend this to include Ethics and Demographics, thus modifying the acronym to STEEPLED. This analysis is done more from the perspective of a business that is looking to set up a unit offshore and analyzing several countries to choose from in the share market. This model primarily analyses the external environmental factors that will act as influencers for a business.

    Boston Consulting Group (BCG) Analysis

    Stars: These are segments in a business where the market is growing rapidly and the company is having a large market share. This segment generates increasing cash for the business with the passage of time. Cera Sanitary ware could be a good example of a “star” with a large market share, continuous growth, and significant cash generation.

    Cash Cows: These are segments that require low cash infusion for investment to maintain market shares because of low growth prospects but at the same time steadily generate cash for the company from the established market share. Navneet Publications, which is into the business of books and notebooks, could be a good example of a “cash cow”. The industry grows at a predictable and steady rate each year.

    Question Marks Business segments in a fast-growing market but having a low market share. The right strategies and investments can help the market share of the business grow, but they also run the risk of consuming cash in the process of increasing market share and in the end turning out to be not enough cash generating. Tata Nano can be considered as an example of a question mark, which did not succeed; whereas, Bajaj Pulsar may be considered as an example of a question mark product that succeeded.

    Dogs: Business segments, which have slow growth rates and intensive competitive dynamics that lead to the low generation of cash are categorized as Dogs.

     

    Key Industry Drivers for Various Sectors in share Market:

    Telecom: A key parameter while analyzing this sector is the Average Revenue Per Unit (ARPU). It is calculated by total revenue divided by the number of subscribers and the higher it is, the better for the company. It must be noted that India has amongst the lowest ARPUs in the world. Other parameters like mobile penetration and spectrum costs are also important for the Telecom industry.

     IT/ BPO/ KPO: The IT sector in India grew primarily due to a large available pool of English speaking young talent at a low cost. IT companies earned in Dollars and spent in Rupees and made huge profits. Even today, the USDINR rate, the attrition rate among employees, the concentration of revenues with selected clients, the concentration of geographies, etc. are important parameters to watch out for in IT and related sectors.

    Retail: The retail sector saw a huge jump in the first decade of the new millennium. Retail store formats rely on low-cost procurement of goods from manufacturers and selling it on wafer-thin margins to a large number of people.

    Banking/ NBFC/ Housing: Monetary Policy by the RBI is the single largest impacting factor for this sector. NPA levels, provisioning norms, tight/loose regulatory reserve requirements all impact banks, and NBFCs.

    Media: Any media company depends upon content, hence a company generating its own content will have an advantage over others. Distribution companies would almost always be under pressure as there is intense competition in the sector and content providers to media companies would be charging a premium. Television Rating Points (TRPs) are the most widely tracked indicator in electronic media.

    COMPANY ANALYSIS 

    Qualitative Dimensions for Investments

    What does the company do and how does it do?

    Who are the customers and why do customers buy those products and services?

    How does the company serve these customers?

    There are over 6000 companies listed on Indian exchanges. It is not possible to track and understand all of them. Investors should consider buying shares of a few companies they understand rather than invest in a number of companies they don’t understand. Quoting Warren Buffet: Wide diversification is only required when investors do not understand what they are doing.

    Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis

    Every business has its own strengths and weaknesses. It is good for the analysts to clearly understand and document both of these to have a clear picture of the situation. Similarly, opportunities for the business and potential risks to the business can be documented by the analysts in the form of opportunities and threats. In a way, SWOT analysis is nothing but a way of documenting strengths, weaknesses, opportunities, and threats in one place in a concise manner.

    Sources of Information for Analysis

    Annual/Quarterly reports - Most easily available, reliable and consistent source of information

    Conference Call transcripts

    Investor Relation (or Company) Presentations

    Management interviews on the internet

    Company website

    Ministry of Corporate Affairs website

    Research Report from Credit Rating Companies

    Research Report from various other sources – media reports

    Parent Company’s annual report and website

    Competitors’ website including international competitors

    Print media reports on companies

    Discussion with suppliers, vendors, consumers, and competitors 


     

     

     

     

     

     

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  • What is the Secondary Market and Role of Market Participants?

    Deepak Sharma 26 Sep 2020

    What is the Secondary Market and Role of Market Participants?

     

    How does the Public Issue of Debt Securities take place?

    • The issue of debt securities is regulated by the provisions of the Companies Act and SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

    • A public issue of debt securities is possible by a company registered as a public limited company under the Companies Act, 2013. 

    • An unlisted company,  a company that has not made an initial public offer of its shares and listed the shares on a stock exchange, can still make a public issue of debentures and list them on a stock exchange.

    • The company files an offer document with SEBI and the Registrar of Companies which gives all the material information of the issue. 

     

    1. Dematerialization

    2. Coupon Rate

    3. Debenture Trustees

    4. Debenture Redemption Reserve

    5. Creation of Security

     

    What are the other methods of Issuing Securities other than Public issue?

    Private Placements in Equity and Debt

     

    • Private placement of securities is an offer made by a company to a select group of investors such as financial institutions, banks, and mutual funds. The advantage of the private placement as a way to issue securities and raise funds comes from the following:

    • Investors are better informed and there are fewer regulatory compliances in issuances to them.

    • Issuing securities are less time consuming and cost-efficient since there are fewer procedures to be followed.

    Qualified Institutional Placement

    • Qualified institutional placement (QIP) is a private placement of shares made by a listed company to certain identified categories of investors known as Qualified Institutional Buyers (QIBs). 

    • To be eligible to make such placement the shares of the company should have been listed on the stock exchange for a period at least one year before the notice of such an issue is given. 

    • QIBs include financial institutions, mutual funds, and banks among others.

    Institutional Placement Program (IPP)

     

    • An Institutional Placement Program is the issuance of fresh shares by a company or an offer for sale by a promoter to QIBs to meet the minimum shareholding requirement specified by stock exchanges in their listing requirements.

    • The company will specify a floor price or a price band for the bidding at least one day before the offer opens. 

    • The issue will remain open for a minimum period of one day and a maximum of two days.

     

    Issue of Specified Securities by Small and Medium Enterprises (SME)

    • A small and medium enterprise is defined as an issuer whose post-issue face value capital does not exceed Rs.10 crore and issuers whose capital exceeds Rs. 10 crores but not Rs. 25 crores.

    • The minimum application size shall not be less than Rs. 1 lakh.

    • A company whose shares are listed on a stock exchange and whose post-issue face value capital does not exceed Rs.25 crores may migrate the shares to an SME exchange after passing a special resolution to this effect.

     

    What are the Functions of Secondary Markets?

    • Liquidity - Secondary markets provide liquidity and marketability to existing securities. Investors can exit or enter any listed security by transacting in the secondary markets.

    • Price Discovery - Secondary markets enable price discovery of traded securities. The price at which investors undertake to buy or sell transactions reflects the individual assessment of investors about the fundamental worth of the security. The continuous flow of price data allows investors to identify the market price of equity shares. 

    • Information Signaling: This information-signaling function of prices works like a continuous monitor of issuing companies, and in turn forces issuers to improve profitability and performance. Efficient markets are those in which market prices of securities reflect all available information about the security.

    • Indicating Economic Activity: Secondary market trading data is used to generate benchmark indices that are widely tracked in the country. Movements in the index represent the overall market direction. 

    • The market for Corporate Control: Stock markets function as markets for efficient governance by facilitating changes in corporate control.  Potential acquirers could acquire a significant portion of the target firm’s shares in the market, take over its board of directors, and improve its market value by providing better governance.

     

    How is the Secondary Market Structure and Participants of it?

    The secondary market consists of the following participants:

    • Stock exchanges – entities that provide infrastructure for trading in securities.

    • Investors – individuals and institutions that buy and sell securities

    • Issuers - companies that issue securities

    • Financial intermediaries – firms that facilitate secondary market activity

    • Regulator – authority that oversees activities of all participants in the market

     

    • Stock Exchange:

    The core component of any secondary market is the stock exchange. The stock exchange provides a platform for investors to buy and sell securities from each other in an organized and regulated manner. The two leading stock exchanges in India are the BSE and the NSE.

    • Investors

     If investors buy and sell shares among themselves, such trades are called “off-market” and do not enjoy the benefits of regulatory and redressal provisions of the law. In order to get a competitive price and liquid markets in which transactions can be completed efficiently, investors come to the stock exchange through their brokers.

     

    • Issuers

    Issuers are companies and other entities that seek admission for their securities to be listed on the stock exchange. Equity shares, corporate bonds, and debentures as well as securities issued by the government are admitted to trading on stock exchanges. 

    • Secondary market transactions have three distinct phases: trading, clearing, and settlement.

    • The clearing is the process of identifying what is owed to the buyer and seller in a trading transaction and settlement is the mechanism of settling the obligations of counterparties in a trade.

    • Clearing corporation: The National Securities Clearing Corporation Ltd (NSCCL) is the clearinghouse for trades done on the NSE, the Indian Clearing Corporation Ltd (ICCL) is the clearinghouse for BSE and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL) is the clearinghouse for MCX-SX.

    • Depositories and Depository Participants: It should be held in an electronic or dematerialized form. 

    • National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are the two depositories in India. Investors have to open Demat accounts with depository participants (DPs), who are banks, brokers or other institutional providers of this service, to be able to trade in their securities.

    • Custodians

    Custodians are institutional intermediaries, who are authorized to hold funds and securities on behalf of large institutional investors such as banks, insurance companies, mutual funds, and foreign institutional investors (FIIs).

    • Regulation

    Secondary markets are regulated under the provisions of the Securities Contract Regulations Act, 1956 and SCR (Rules), 1957. SEBI is authorized by law to implement the provisions of this act and its rules. It has empowered stock exchanges to administer portions of the regulation pertaining to trading, membership, and listing.

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  • What is Elliott Wave Theory and its Importance in Swing Trading?

    Umesh Sharma 15 Sep 2020

    Elliott Wave Theory is one of the most renowned theories in technical analysis.this was developed by Ralph Nelson Elliot. This theory speaks about Waves (patterns). Elliot believed that mass psychology depicts the same recurring patterns in the financial markets. He discovered the underlying social principles and developed the analytical tools in the 1930s. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty"

    Elliott developed his market model theory before he realized that it also reflects the Fibonacci sequence. The Fibonacci sequence is also closely connected to the golden ratio of retracement and extension (1.618). Intraday and Swing Traders commonly use this ratio and related ratios in sequence as to establish support and resistance levels for market waves, ideally, it signals the price points which help define the parameters of an uptrend or downtrend.

     

    The Elliott Wave theory infers that layman trader’s psychology, or herd psychology moves between optimism and pessimism which occurs in natural sequences. These mood swings or behavior can be created in the form of patterns which show as an evidence in the price movements of markets at every degree of the trend either uptrend or downtrend or multiple time scale. This theory helps a swing trader to identify longer duration trade setup with signals of resumption, termination of an uptrend, downtrend, correction and extension of the trend.

    Elliott's final major work isNature's Law --The Secret of the Universe, which was published in June 1946, two years before his death.

    Elliott Wave Theory was popularized in the seventies by Robert Prechter and A.J.Frost with their book " Elliott Wave Principle"

    He speaks about waves in 5-3 moves, wherein five waves move in an upward direction of the main trend, known as impulse and three waves move in the corrective phase. These 3 moves are also referred to as ABC. The completed motive patterns include 89 waves, followed by a completed corrective pattern of 55 waves. This theory helps in gauging the upward trend and the corrections that are likely to happen in the future with very high probability.

    The classification of the wave at any degree can vary slightly however standard order of degree or duration would be approximately:

    Grand Super cycle: It can be of multi century (which historically not yet tested in swing trading as no data sets available in financial markets before 19th Century)

    Super cycle: It can be of Multi Decade (again reliability cannot be justified with datasets available given the fact that for any strategy to be tested in trading we need to have backtesting datasets of at least 4 to 5 times)

    Intermediate Cycle: The duration can range from a few weeks to a month which is majorly used or can be deployed by swing traders practically as the other cycles discussed before need extreme discipline and a very high degree of patience. Excuse Me!!! Markets test your patience and to work on Cycle or Super Cycle a trader himself knows how much discipline one needs to have to work on extremely long duration timeframes. Sometimes we need to be practical and realistic in approach. 

    Minor Cycle: The duration cycle can be of a week 

    Minute Cycle:  The duration will be of days and can be used by traders and can be deployed for a day or two

    Minuette Cycle: The duration will be of an hour and can be used by an intraday trader

    Subminuette: The duration will be of an hour and can be used by a scalper who wants to take trade setup for a few minutes of shorter durations.

     

     

    Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary or countertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters. Reactionary waves are labeled with even numbers and letters.

     

    All reactionary waves develop in corrective mode. If all actionary waves developed in motive mode, then there would be no need for different terms. Indeed, most actionary waves do subdivide into five waves. However, as the following sections reveal, a few actionary waves develop in corrective mode, i.e., they subdivide into three waves or a variation thereof. Detailed knowledge of pattern construction is required before one can draw the distinction between actionary function and motive mode, which in the underlying model introduced so far are indistinct.

    The following are the advantages of trading with Elliott wave theory in swing trading:

    1. Wave analysis identifies the trend

    2. It signal resumption of the trend

    3. It identifies the termination of the trend

    4. It provides a High probability risk reward ratio trade setup in swing trading

    5. It provides specific exit points when the trade setup fails.

    6. It identifies countertrend move within the trend

     

    We also have full fledge training programme for Elliott Wave Theory click here

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