Financial Markets¶

Mechanism that facilitates trade of financial securities between

• savers/investors/lenders (have money, need return)

and

• borrowers (need money, have risks)

Zero-sum game

Functions¶

• Provide liquidity (key function)

• Avoids need for coincidence of wants

• Price discovery

• Reduce total costs due to benefits of scale

• Base for capital formation

• Economic stability

• Innovation

• Helps in continuous flow of money

Type¶

Idk¶

Idk¶

Why are bonds preferred over equity

• Retaining ownership & control
• Equity may cause noise in valuation, due to large number of players
• Tax deductibility

Call money

Money Market Instruments¶

IDK¶

Sources of Corporate Debt¶

• Sorted in order of least risky to more risky
• Also, Sorted in order of least return to highest return

IDK¶

Primary Market¶

• Initial Public Offering
• Follow-up public offering

Secondary Market Instruments¶

Exchanges may be order-driven and quote-driven

Indian Stock Exchanges¶

• Volume of trades: 92.7%, 7.3% BSE
• Volume of trades market: 97.2% NSE, 1.8% BSE

---
title: Stocks Trade Volume Share in India
---
pie
"NSE": 92.7
"BSE":  7.3
"Others": 0

---
title: Derivatives Trade Volume Share in India
---
pie
"NSE":      97.2
"BSE":       1.8
"Others":  1.0

International¶

US Stock Market¶

• Stock Exchanges
• New York Stock Exchange (Blue Chip Industrial Companies, 2800, hybrid-both broker and dealer market)
• Nasdaq (Technology-driven Companies, 3300, totally electronic, dealer market)
• Stock Indices
• Dow Jones Industrial Average (DJIA, Top 30 Comp from NYSE and Nasdaq, Price Weighted)
• S&P 500 (Top 500 Comp headquartered in the US, Market Weighted)
• Nasdaq Composite (Top 2500 Comp of Nasdaq, be it headquartered in the US or Outside, Market Weighted)
• Russell 2000 (Small Cap Companies)

Advantages of US Market¶

• Fractional investment: Mutual funds are basically from this idea
• Selection effect: The fact that these companies are on the US stock market means they have already been successful on their local domestic market
• Geographical diversification
• US and US-listed companies tend to have global operations
• US market has outperformed other markets
• Exposure to high tech companies
• Avoid currency depreciation wrt the global principal reserve currency (which is currently US Dollars)

Disadvantages of US Market¶

• Set
• High charges
• Bank’s fixed remittance charges (1500 - 2000)
• GST
• Exchange Rates
• High brokerage and maintenance charges
• Tax Issues (DTAA)
• STCG within 24 months: 30%
• LTCG after 24 months: 20%.

UAE Stock Market¶

• Abu Dhabi Securities Exchange (ADX) (2000)
• ADX General Index is a capitalization-weighted index which represents the performance of all the listed companies (92 securities) on the exchange (A base value of 1000 as of June 2001)
• Regulated by the Securities and Commodities Authority (SCA)
• Dubai Financial Market (DFM) (2000)
• Dubai Financial Market General Index (DFMGI) (119 securities)
• Modified capitalization-weighted index (maximum capitalization cap of 20%)
• NASDAQ Dubai (2005)
• Middle East's international financial exchange (70 securities)
• Dubai Financial Market holds two-thirds and Borse Dubai holds one-third of the shares in NASDAQ Dubai
• Regulated by Dubai Financial Services Authority (DFSA)

Sukuk¶

"sharia compliant" bonds

Sukuk is an Islamic instrument that provides the same commercial equivalent to a conventional bond, the difference being that it is structured in a sharia compliant manner and represents proportionate undivided ownership in the underlying asset or investment.

sequenceDiagram

participant i as Investor<br/>(Lender)
participant s as SPV<br/>(Special Purpose Vehicle)
participant b as Originator<br/>(Borrower)

i ->> s: Investment
s ->> b: Loan<br/>(Investment Proceeds)
b ->> s: Sale of Asset(s)
b ->> s: Lease & Principal Payments
s ->> i: Returns<br/>(Lease & Principal Payments proceeds)
s ->> b: Repurchase of assets

Trading Platforms¶

• IND
• Money
• Vested
• Groww
• Stockal
• Winvesta

Capital Market Participants¶

Retail investment in Developed nations > in India, but trade volume is lower¶

Indian stocks have lower return than risk-free returns, so Indian retail investors actually incur losses. India is still a developing country, and hence stock investing is being popular.

In developed nations, they prefer investing indirectly through mutual funds.

Participant Objectives¶

Arbitrage is the ‘invisible hand of market’ that corrects the

Bond Market¶

Terms of the bond are called as ‘bond indenture’

Thinking point: The share of corporate bonds in India in bond market is very low compared to other countries.

Indian Stock Markets¶

LPG: Liberalization, Privatization, Globalized

Ponzi Schemes¶

Financial schemes

Why are US markets & institutions the best¶

• Entrepreneurial ambitions; no societal discouraging like in India
• Supportive financial system, such as supportive IBC

IBC¶

IBC: Insolvency & Bankruptcy Code

Defines the liberty for corporates

If a company is insolvent and you are not able to repay loans, within a period of 90 days, the lenders can request for the company’s liquidation.

Stock Market Indices¶

Indian¶

Both are Market Value-Weighted

Trading Schedules¶

Transaction Process¶

• Trading
• Post Trading Activities: Clearing & Settlement

Agencies

Orders¶

Order Types¶

Depository¶

• Demat Account
• Depository Services
• NSDL: National Securities Depository Ltd
• CDSL: Central Depository Services (India) Ltd

Bear vs Bull¶

The origin of these expressions is unclear, but one reason could be that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward

Broker vs Dealer Market¶

IDK¶

Financial Year¶

Why does financial year in India start in April: This is to follow the agricultural cycles

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