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2Stock and Commodity MarketsStock andCommodity MarketsAs per New Syllabus for Sixth Semester, BBM,Bangalore University w.e.f. 2012-13Dr. Preeti SinghM.Com., Ph.D., Delhi University,Professor & Programme Director(B.Com. Hons.,)Jagannath International Management School,New Delhi.MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

Primary Market and Secondary Stock Market 3AuthorNo part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording and/or otherwise without the prior written permission of the publisher.First Edition : 2015Published by:Branch Offices:New now:Ahmedabad:Ernakulam:Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.comDTP by:“Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road,Darya Ganj, New Delhi - 110 002.Phone: 011-23270392, 23278631; Fax: 011-23256286Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.Phone: 0712-2738731, 3296733; Telefax: 0712-2721216No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands,Madhava Nagar, Race Course Road, Bengaluru - 560 001.Phone: 080-22286611, 22385461, 4113 8821, 22281541No. 3-4-184, Lingampally, Besides Raghavendra SwamyMatham, Kachiguda, Hyderabad - 500 027.Phone: 040-27560041, 27550139New-20, Old-59, Thirumalai Pillai Road, T. Nagar,Chennai - 600 017. Mobile: 9380460419First Floor, “Laksha” Apartment, No. 527, Mehunpura,Shaniwarpeth (Near Prabhat Theatre), Pune - 411 030.Phone: 020-24496323/24496333; Mobile: 09370579333House No. 731, Shekhupura Colony, Near B.D. ConventSchool, Aliganj, Lucknow - 226 022.Phone: 0522-4012353; Mobile: 09307501549114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G.Road, Navrang Pura, Ahmedabad - 380 009.Phone: 079-26560126; Mobile: 0937708884739/104 A, Lakshmi Apartment, Karikkamuri Cross Rd.,Ernakulam, Cochin - 622011, Kerala.Phone: 0484-2378012, 2378016; Mobile: 093871221215 Station Square, Bhubaneswar - 751 001 (Odisha).Phone: 0674-2532129; Mobile: 09338746007Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302,IIIrd Floor, Near Humpty Dumpty School, Indore - 452007 (M.P.).Mobile: 09303399304108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank,Kolkata - 700 010. Phone: 033-32449649; Mobile: 7439040301House No. 15, Behind Pragjyotish College, Near SharmaPrinting Press, P.O. Bharalumukh, Guwahati - 781009 (Assam).Mobile: 09883055590, 08486355289, 7439040301SunandaPrinted at:M/s. Aditya Offset Process (I) Pvt. Ltd., Hyderabad. On behalf of HPH.Bhubaneswar :Indore:Kolkata:Guwahati:

4Stock and Commodity MarketsPREFACEThis book is a comprehensive study in stocks and commoditiesenvironment in India. Many changes have taken place since the neweconomic reforms in 1991. India is now working towards globalization,deregulation and liberalization. This book provides information of thelatest developments in the markets in India and in other countries.The book comprising of five units, Unit I incorporates thestructure of the financial markets, commodities market and thedifference between stock market and commodities market. Unit IIdiscusses the history, membership and functions and organizations ofstock markets including important stock markets like NSE and BSE. Italso provides the role of SEBI in the securities markets and a briefdescription of derivatives in the market.Unit III is an attempt to explain the method of trading that takesplace in stock markets.Unit IV and V are completely devoted to the commodities market.While Unit VI discusses the functions, types of transactions anddifferences between physical and futures markets. Unit VII discusses thepattern of trading that takes place in commodities market.The book within the structure of the first edition is written insimple language for students and teachers of management, economics,chartered accountants and masters in finance and commerce graduates.The chapters of the book begin with a chapter plan. It has manytypes of questions both objective type and long questions and everychapter has a summary in the form of points to remember at the end ofeach chapter.Thanks are due to Brajendra Kumar for his untiring work insupporting me for library and data search and typing the manuscript ofthis book. I would also like to thank my publishers Himalaya PublishingHouse Pvt. Ltd. for their support and continuing relationship with me.Preeti Singh

Primary Market and Secondary Stock Market5SYLLABUSOBJECTIVEThe objective is to provide students with a conceptual framework of stockmarkets and commodity markets, functionaries in these markets and their mode oftrading.Unit 1: An Overview of Capital and Commodities Markets10 HrsPrimary Market, Secondary Market (Stock Market), Depositories, PrivatePlacements of Shares/Buyback of Shares, Issue Mechanism. Meaning ofCommodities and Commodities Market, Differences between Stock Market andCommodities Market.Unit 2: Stock Market12 HrsHistory, Membership, Organization, Governing Body, Functions of StockExchange, Online Trading, Role of SEBI, Recognized Stock Exchanges in India(Brief Discussion of NSE, BSE and Nifty). Derivatives on Stocks: Meaning, Types(in Brief).Unit 3: Trading in Stock Market14 HrsPatterns of Trading and Settlement – Speculations – Types of Speculations –Activities of Brokers – Broker Charges – Settlement Procedure, National SecuritiesDepository Ltd. (NSDL), Central Securities Depository Ltd. (CSDL) (in Brief).Unit 4: Commodities Market14 HrsEvolution, Commodity Derivatives, Commodity Exchanges – Regional andNational and International, Functions, Role, Objectives and Types – Types ofTransactions in Commodity Market – Spot, Future and Forward Options Markets.Unit: 5 Trading in Commodity Markets10 HrsPatterns of Trading and Settlement, Price Discovery, Efficiency ofCommodity Markets – Size of Commodity Markets in India – Benefits ofCommodity Markets.Skill Development Prepare the list of recognized stock exchanges in India.

6Stock and Commodity Markets Prepare the process chart of online trading of share and debentures. Prepare the chart showing Governing Body of the Commodities Market. Prepare the list of commodities traded on commodity market. Enlist the role of NSDL and CSDL.

Primary Market and Secondary Stock Market7CONTENTSUNIT IAN OVERVIEW OF CAPITAL AND COMMODITIES MARKETS1. Primary Market and Secondary Stock Market3 – 232. Issue Mechanism in Primary Securities Market 24 – 433. Commodities Market44 – 52UNIT IISTOCK MARKET4. Role of Securities and Exchange Board of India 55 – 685. Stock Market6. Derivatives69 – 107108 – 144UNIT IIITRADING IN STOCK MARKET7. Trading in Stock Market147 – 167UNIT IVCOMMODITIES MARKET8. Commodities Market: Role and Organization 171 – 197UNIT VTRADING IN COMMODITIES MARKETS9. Trading in Commodities MarketSkill Development201 – 216217 – 219

8Stock and Commodity MarketsDETAILED CONTENTSUNIT I: AN OVERVIEW OF CAPITAL ANDCOMMODITIES MARKETS1. Primary Market and Secondary Stock Market3 – 231.1 Background of Financial System1.2 Primary/New Issue Market1.3 Secondary/Stock Market1.4 Participants in the Securities Market1.5 Other Financial Markets1.6 Financial Instruments1.7 Financial Engineering Instruments1.8 Security Market Indices1.9 Sources of Financial Information1.10 The Relationship of the New Issue Marketand Stock Exchange1.11 Points to Remember1.12 Questions1.13 Objective Type Questions1.14 Multiple Choice Questions2. Issue Mechanism in Primary Securities Market 24 – 432.1 Functions of the New Issue/Primary Market2.2 Mechanics of Floating New Issues2.3 Issue of Capital in New Issue Market2.4 Intermediaries in the Process of New Issue2.5 Points to Remember

Primary Market and Secondary Stock Market92.6 Questions2.7 Objective Type Questions2.8 Multiple Choice Questions3. Commodities Market44 – 523.1 Meaning of Commodities3.2 What is a Commodity Market?3.3 Importance of Commodity Market3.4 Regulatory Mechanism of CommodityMarkets in India3.5 Distinction between Stock Market andCommodities Market3.6 Points to Remember3.7 Questions3.8 Multiple Choice QuestionsUNIT II: STOCK MARKET4. Role of Securities and Exchange Board of India 55 – 684.1 Introduction4.2 Guidelines for Investor Protection4.3 Investor Protection and Guidelines forCompanies4.4 Listed Companies and Model Code ofConduct4.5 Investor Grievances4.6 Departments of SEBI and their Activities4.7 OMBUDSMAN 20034.8 National Stock Exchange and ArbitrationFacilities4.9 Investor Education4.10 Prohibition of Fraudulent and Unfair TradePractices Relating to Securities MarketRegulation4.11 Prohibition of Insider Trading4.12 Disclosure of Interest

10Stock and Commodity Markets4.13 MAPIN4.14 Investors' Protection Fund4.15 Points to Remember4.16 Questions4.17 Objective Type Questions5. Stock Market69 – 1075.1 Secondary/Stock Markets5.2 Functions of Stock Markets5.3 Historical Background5.4 Governing Body of a Stock Exchange5.5 Membership Rules in a Stock Exchange5.6 Listing of Securities5.7 Important Stock Markets in India: NSE, BSE,OTCEI, ISE, NCDEX5.8 Developments in the Stock Market5.9 Points to Remember5.10 Questions5.11 Multiple Choice Questions6. Derivatives108 – 1446.1 Derivatives6.2 Types of Derivatives– Commodity, Financial, Basic, Complex,Exchange Traded6.3 Characteristics of Derivatives6.4 Participants in Derivatives Market6.5 Financial Derivatives6.6 Types of Transactions6.7 Forward Contracts6.8 Options6.9 Futures6.10 Swaps6.11 Derivatives Market In India6.12 Points to Remember

Primary Market and Secondary Stock Market6.136.1411QuestionsIllustrationsUNIT III: TRADING IN STOCK MARKET7. Trading in Stock Market147 – 1677.1 Introduction7.2 Depository System or Paperless Trading(DEMAT)7.3 Broker System of Trading of Securities7.4 Types of Orders7.5 Kinds of Trading Activities7.6 Types of Speculators7.7 Settlement of Contracts Procedure7.8 Settlement and Clearing Procedure7.9 Points to Remember7.10 Questions7.11 Multiple Choice QuestionsUNIT IV: COMMODITIES MARKET8. Commodities Market:Role and Organization 171 – 1978.1 Evolution of Commodity Market in India8.2 Commodity Derivatives8.3 Membership8.4 Commodity Exchanges In India – Regionaland National8.5 International Commodity Exchanges8.6 Objectives of Commodity Exchange8.7 Functions of Commodity Exchange8.8 Organization of Commodity Exchange8.9 Role of Commodity Exchange8.10 Differences between Physical and FuturesMarket8.11 Types of Transactions8.12 Market Positions

12Stock and Commodity ty OptionsFeatures of Commodity OptionsCall and Put OptionsOption StylesTypes of OptionsOptions Strike PricePoints to RememberQuestionsMultiple Choice QuestionsUNIT V: TRADING IN COMMODITIES MARKETS9. Trading In Commodities Market9.1 Introduction9.2 Patterns of Trading9.3 Types of Orders9.4 Broker and Trader9.5 Participants in the Market9.6 Clearing9.7 Settlement9.8 Efficiency of Commodity Markets9.9 Size of Volumes of Commodities9.10 Benefits of Commodity Markets9.11 Points to Remember9.12 Questions9.13 Multiple Choice QuestionsSkill Development201 – 216217 – 219

Primary Market and Secondary Stock MarketUNIT IAN OVERVIEW OF CAPITAL ANDCOMMODITIES MARKETSChapter 1 : Primary Market and SecondaryStock MarketChapter 2 : Issue Mechanism in PrimarySecurities MarketChapter 3 : Commodities Market13

14Stock and Commodity Markets

Primary Market and Secondary Stock Market15Chapter1PRIMARY MARKET ANDSECONDARY STOCKMARKETCONTENTS OF THIS 1.14Background of Financial SystemPrimary/New Issue MarketSecondary/Stock MarketParticipants in the Securities MarketOther Financial MarketsFinancial InstrumentsFinancial Engineering InstrumentsSecurity Market IndicesSources of Financial InformationThe Relationship of the New Issue Market and StockExchangePoints to RememberQuestionsObjective Type QuestionsMultiple Choice Questions

16Stock and Commodity Markets1.1 BACKGROUND OF FINANCIAL SYSTEMThe primary and secondary stock market forms the Indiansecurities market which is part of the financial system of a country. Itconsists of a network of financial markets, institutions, investors,services and regulators. A well fortified structure is able to encouragepublic and institutional support leading to an organized network ofsupporting financial markets. A vibrant and diversified system plays animportant role in mobilizing the savings of different classes of people,whose investment objectives differ widely in terms of their expectedreturns, depending upon their ability to take risk.The financial system deals with the finances of the people of thecountry. Its main product is money and credit and through these twovariables it is able to bring about activity and in turn economicdevelopment of a country.A financial system comprises of the following agencies:1. Financial Markets: These are capital marketcomprising of New Issue Market and Stock Exchange,Government Securities Market, Foreign ExchangeMarket and Government Securities Market.2. Financial Institutions: Such as development banks,life insurance companies, general insurance companies,mutual funds, leasing companies, chit funds, postoffices. These are also called financial intermediaries.3. Banks: The central bank of a country is the apex bank.In India, it is the Reserve Bank of India. It regulatesthe monetary policy of a country and the supportingcommercial banks engaged in money and creation ofcredit.4. Financial Instruments: These are long-term andshort-term in nature. These are shares, debentures,treasury bills, mutual fund schemes, commercialpapers, treasury bills, units, post office schemes. Theseare in the nature of assets and claims.5. Market Regulators: These are necessary to bring indiscipline in the market by making certain laws, rules

Primary Market and Secondary Stock Market17and regulations and procedures. In India, someregulatory authorities are the Securities ExchangeBoard of India (SEBI), Reserve Bank of India (RBI),Insurance Regulatory Authority of India.6. Market Participants: The market participants areindividuals, corporate organizations, government,intermediaries and regulators.The Indian securities market consists of the new issue marketwhere securities are issued first and the stock market which trades in thesecurities after they have been placed through the new issue market.1.2 PRIMARY/NEW ISSUE MARKETThe Primary Market is also called New Issue Market. In thismarket, securities are sold for the first time. In India, manydevelopments have taken place in this market. The New Issue Market inthe past issued fixed price shares. Currently, most of the shares arebeing issued through the book building method based on demand andsupply of the security. Bids are made by people interested in thepurchase of shares and then according to the price that is fixed sharesare allotted within 30 days of the closing of the issue. The New IssueMarket mobilizes the savings of the investors.1.3 SECONDARY/STOCK MARKETThe Stock Market provides the sale and purchase of securities onlyafter their allotment and listing with SEBI and Stock Market in whichtrading is desired. In India, there are 23 stock markets. The mostimportant are National Stock Exchange (NSE) and Mumbai StockExchange (BSE). Two other well-known stock markets are the Over theCounter Exchange of India (OTCEI) and Inter-Connected StockExchange (ICSE). The stock market has an index. The most importantindex is the SENSEX. This is made up of 30 stocks traded most activelyin the market. It gives the information as to whether the market ismoving in an upward trend or is falling downwards. In India there isscreen based trading through the depository system. The distinctionbetween Primary Market and Secondary Market is given in Table 1.

18Stock and Commodity MarketsTable 1: Primary Market and Secondary MarketPrimary MarketSecondary MarketPrimary Market helps in mobilizationof savings of individuals. Bankers,stock brokers, and merchant bankersoperate for the success of the issue.It is market for purchase and sale ofsecurities and is represented byshare brokers. After the issue ofsecurities in the primary market,they are listed on the stockexchange.This market is called the New IssueMarket. All securities are first issuedthrough this market. It is the marketfor IPOs or Initial Public offering.When the security has beenregistered in the New Issue Marketall subsequent trades take place inthe secondary market popularlycalled the Stock Exchange afterlisting of shares.This market helps in raising funds forindustry or corporate organizations.The stock market helps in lendingliquidity and marketability to suchsecurities.1.4PARTICIPANTS IN THE SECURITIESMARKETThe role of the participants in the financial markets is to create aflow of funds from savers to investors. They are the main link betweenthe savings efficient to savings deficient organizations. The link consistsof financial institutions and intermediaries, individuals, firms andcorporate organizations, government and market regulators.The following are identified as participants in the market:1. Individual. Individual purchasers and sellers ofsecurities. The trend in many countries has shown theincreased participation of households and thepopularity of stocks in the life of a general household.2. Corporate organization. Corporate organizationshelp in the flow of funds in the market. Organizationsraise their funds for expansion of their business orbecause they require funds for business activity.Surplus organizations lend funds to the deficitorganizations.

Primary Market and Secondary Stock Market193. Government. Government plays multiple roles in themarket. It borrows funds or lends funds through its giltedged securities. From the point of view of security, itis excellent as it is ‘near gold’ as the name gilt-edgedsuggests. Interest is, however, low and so investors donot look for it as a good investment. Government alsoplays the role of a regulator and controller by making amonetary policy and by appointing a regulator formaking rules and regulations for protection of theinvestors. Many countries call it a Securities ExchangeCommission. In India, it is called the SecuritiesExchange Board of India.4. Regulators. Regulators may be appointed byGovernment in some countries but is usually anindependent board which frames rules and regulationsespecially because trading has now become ahousehold word and people are able to make money onstocks or lose money because of the high risk. Alsomarket scams and frauds take place, so regulatorsbecome important in capital markets.5. Intermediaries. The market intermediaries help in theprocess of transfer of funds from savers to investors.These intermediaries are brokers, underwriters,clearing houses, depositories, mutual funds,investment companies, lead managers, portfoliomanagers, credit rating agencies, Reserve Bank ofIndia.Market intermediaries/participants operate in the securities marketof a country. The objective of these intermediaries is to link the saversand the investors. In an economy, the financial intermediaries transformsurplus wealth into productive outlets. The saving deficits are linkedwith the saving surplus units by offering different kinds of financialassets by the intermediaries. The chief intermediaries are given belowand their role is discussed in detail in Chapter 2: Merchant banker Underwriters

20Stock and Commodity Markets Lead managersShare brokersDepositoriesPortfolio managersInvestment bankersCredit rating agenciesMutual fundsInvestment companiesRegistrar and share transfer agents1.5 OTHER FINANCIAL MARKETSThe financial markets are classified into the following categories:(a)(b)(c)(d)Organized and Unorganized MarketMoney Market and Capital MarketPrimary Market and Secondary MarketForeign Exchange MarketThe distinctive features of these markets are discussed below:(a) Organized and Unorganized Market: An organized market isa formal financial market that operates under rules, regulations andguidelines set by regulatory authorities such as Securities ExchangeBoard of India, Reserve Bank of India, Insurance Regulatory Authority,Mutual Fund Regulations, and Central Government Policies.Unorganized market is an informal market that operates withoutany standardization and control of any regulatory authority. In India, itis operated by moneylenders and traders. There are high rates of interestand it operates mainly in rural areas. Such informal markets also exist inurban areas and they are outside the purview of government control.Table 2 shows the distinction between organized and unorganizedmarket.Table 2: Organized and unorganized marketOrganized MarketUnorganized market

Primary Market and Secondary Stock Market21A market operating with rules andregulations.Non-standardized procedures. Variablerates of interest and transactions.Control of a recognized controller(example: SEC).No control on transactions as no rulesoperate.It is a formal recognized market likeNew Issue Market and StockExchangeIt is operated by money lenders andtraders. It is also called an informalmarket.Institutions play an important rolein collection of savings of people inthe intermediation process.There is no large institution but thereare some chit funds and lotteries inoperation in an informal manner. Ratesof interest are exorbitant.(b) Money Market and Capital Market: Money market consistsof financial assets which have a maturity of less than 1 year. The assetscan be converted into cash quickly and the transaction cost is low. Theyare considered to be a substitute for cash and bring about liquidity. Themarket deals with short-term funds between savers and investors thathave a short-term requirement of funds due to deficit or surplus of fundsespecially for working capital needs. Some examples are commercialpapers, bills, CDs and inter-corporate lending and borrowing. Theparticipants in this market are large corporate organizations, mutualfunds, life insurance companies and companies. The volume oftransactions is very high.The Call Money Market deals in loans, which have very shortmaturity and are highly liquid. The loans are payable on demand, at theoption of either the tender or the borrower and the maturity period variesfrom one day to fourteen days. While in UK and USA, there are separatecall money markets, in India, they are associated with the presence ofthe stock exchange. The call loans are given:(a) To the bill market;(b) For inter-bank uses;(c) For dealing in stock exchanges and bullion markets;and(d) To individuals for trade purposes to save interest oncash credits and overdrafts.Capital market is a market for financial assets that have long-termmaturities such as shares, debentures and mutual fund investments. The

22Stock and Commodity Marketscapital market has two separate demarcations. These are the primarymarket/new issue market where shares are sold for the first time andsecondary market/stock market where trading takes place. These areorganized markets with SEBI as the main regulator.Table 3: Money Market and Capital MarketMoney MarketCapital MarketIt is a market for financial assets ofless than one year maturity.It is a market for long-term financialinvestments.It is a market for those assets, whichcan be converted into cashimmediately at a small easurybonds,commercial papers and bills and CDsIt is a market for shares, debenturesand mutual fund investments. Thereare 23 stock exchanges in India. NSEand BSE are the most popular.SENSEX is the most popularindicator.It is a market whose participants arelarge institutional investors who dealin short-term instruments. There isno separate category for call moneymarket like primary market andsecondary market. All short-termtransactions are executed.Capital market is categorized asPrimary Market or New Issue Marketfor first time issue of securities andStock Exchange or Secondary Marketfor sale of second hand securities.Individual investors and institutionsboth operate in the market.The volume of transaction is veryhigh.Volume of transactions is high but lessthan money market.(c) Inland and Foreign Exchange Market: The ForeignExchange Market is for transacting business between different countries.The different kinds of activities are inter-bank dealings betweenAuthorized Dealers (ADs) exchange brokers and Central Bank. Businesswith banks abroad is part of Foreign Exchange Market. ADs openbranches in the overseas market to carry out business abroad. Apartfrom ADs, the Central Bank also licenses hotels and other individuals asAMCs or Authorized Money Changers. The money changers arecategorized as: (i) full-fledged money changers, and (ii) restrictedmoney changers. The restricted money changers can purchase onlyforeign currency notes, coins and travellers’ cheques whereas the formercategory has a right to both purchase and sale to the public.Foreign institutional investment has an important role to play in acountry. These are pension funds, investment trusts, asset managementcompanies and portfolio managers. They usually invest in developing

Primary Market and Secondary Stock Market23countries because they are able to get higher rates of interest than intheir own developed infrastructure. Companies also raise funds throughthe floatation of their bonds and equities in the euro capital markets. Thetwo instruments which are popularly floated by them are GlobalDepository Receipts and Foreign Currency Convertible Bonds.Foreign capital has also come into India through trust companieswhich raise funds for investments in Indian securities. The first offshorefund was floated by the UTI in collaboration with Merrill LynchInternational better known as India Fund; Morgan Stanley floated IndianMagnum Fund and India Investment Fund. Can Bank floated theHimalayan fund in collaboration with Indo-Suez InvestmentManagement Asia. SBI Mutual Fund floated Asian convertibles.Jardinal Flemming floated the India Pacific Fund. Many more fundswere also floated. These are Bombay Fund, India Opportunities Fund,India Liberalization Fund, and Lloyd George India Fund.1.6 FINANCIAL INSTRUMENTSFinancial Investments consist of ownership securities debtsecurities and Mutual Fund units. They are:Ownership securities consist of:1. Equity shares2. Preference sharesDebt securities are listed in the following way:1. Non-convertible debentures2. Convertible debentures3. Deep discount bondsMutual Fund Securities are called units. They have:1.2.3.4.Income schemesGrowth schemesEquity schemesMoney market schemesFinancial instruments help in the process of intermediation. Achoice of financial instruments to cater to the needs of the different

24Stock and Commodity Marketstypes of investors will provide dynamism in trade of the securities in thefinancial markets. An array of securities creates development in thefinancial system. As discussed in Chapter 1, an economy devoid offinancial instruments is financially backward.The following instruments are traded in the Indian capital market.Financial instrument consists of ownership securities, debt securities,mutual funds units and financial engineering securities.Equity SharesThe shares are ownership securities. Investors find equity sharesthe best type of investment as the shares can be traded. The investorparticipates in the earnings of the company and receives dividends. Theequity share value increases and during inflation it acts as a hedge,increasing the importance of such shares. The equity shares also havecapital appreciation. They are, however, very risky shares as the pricescan also fall and there can be losses.Preference SharesPreference shares are fixed dividend bearing instruments. They arecalled hybrid instruments because they have the features of both theequity shares and bonds. They have certain important features likecumulative dividends and are redeemable after some years.Debentures/BondsThere are many kinds of debentures/bonds in the Indian capitalmarket. These are redeemable, perpetual, convertible, registered andbearer issues. They have a fixed interest called ‘coupon’ rate. These aredebt securities and the holders do not have any right to attend the annualgeneral meeting of the company. They are also not allowed to vote inany issues.1.7 FINANCIAL ENGINEERING INSTRUMENTSThese are new type of securities which combine different featuresin one security. They are called innovative instruments. It is called ahybrid security as it creates different types of cash flows from onesecurity. In India, for example, financial institutions like ICICI, IFCI,and IDBI had issued Deep Discount Bonds with different maturity

Primary Market and Secondary Stock Market25periods. These are redeemable at full value and issued at a discount inthe face value. Interest is not paid. The total redeemable value is paid atthe end of the period. Corporate organizations have also createdsecurities through financial engineering. Reliance Petroleum gaveinvestors different options for interest, redemption, right shares in theiroptionally convertible debentures. Unit Trust of India through its mutualfund operations issued an open-ended equity linked funds with a set ofsix equity linked funds to provide maximum returns and flexibility inswitching between these funds.Many companies have tried to innovate to give a choice to theinvestors. The financial institutions and development banks in Indiahave also issued such securities. The following are some financialengineering securities issued in India.Participating Debentures have been issued by companie

Primary Market and Secondary Stock Market 11 6.13 Questions 6.14 Illustrations UNIT III: TRADING IN STOCK MARKET 7. Trading in Stock Market 147 - 167 7.1 Introduction 7.2 Depository System or Paperless Trading (DEMAT) 7.3 Broker System of Trading of Securities 7.4 Types of Orders 7.5 Kinds of Trading Activities 7.6 Types of Speculators

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