Introduction to Stock Market

What is Stock Market ?

Its Just a place where buyers & Sellers meet. only the nature of the goods dealt

with is different from here.

Primary Market & Secondary Market

• In the primary markets securities are bought by the way of public issue directly from the company.

• In the secondary market shares are traded among investors.

What are derivatives?

Listed derivatives

Future exchange

Security exchange

warrants

Structures products

Futures& options

Derivatives

• A derivative is an instrument whose value is derived from the value of one or more basic variables called bases(underlying asset,index,reference) in a contractual mannner.

• It has no independent value.• Its value is entirely derived from the value of the

underlying asset.• The underlying asset can be

equity,commodity,or any other asset.

• For ex. When we say a reliance future or a reliance

options,these carry a value only because of the value of reliance.

• Financial derivatives such as options future,forwads and swaps inherit value directly from their parents.

• Derivative can be classified into exchange traded and over the counter etc.based on the market in which they trade.

What kind of people are involved in derivative market?

• Speculators: People who buy & sell securities to earn the profit.For.ex. If the stock price of reliance expected to grow up to 400 in one month. One can buy future of reliance at 350 and make profits.

• Hedgers: people who buy or sell to minimize their losses.In equity derivatives hedging is an act of protecting or guarding the investment against an undesired price moment.

• For ex. Suppose a long term investor owns a portfolio of stocks worth Rs .10 lacks.Although he is optimistic about the stocks he has in the portfoliohe is not very comfortable with the overall movement of the market.Such an investor can hedge his portfolio by selling index futures(like nifty future)and thereby removing the risk of macro variables from his portfolio.

Spot Market

• The spot market is also called cash market.• It is a market in which commodities or

securities or goods are sold for cash and delivered immediately.

• For ex.Mr.Mahesh wants gold and he approaches ramesh who is a gold trader-they agree on a price and gold is given to mahesh in exchange for cash.

Forward contracts

• For Ex.Person 1:Hope the monsoon are good this year.Person 2:sir I would like to buy your crop.Person 1:I havnt even reaped the harvest yet.And I don’t know weather the rain gods bless

me this year.Person 2:but still, u can always sell your crop to

me.

• I will buy your crop 3 month hence @rs.15 per kg.

• In a forward contract,two parties irrevocably agree to settle trade at a future date for a stated price and quantity.

• No money changes hands at the time trade is agreed uopn.

• It is a contract to be undertaken in a future date.

• For ex. • Suppose a buyer mahesh and seller ramesh

agree to do a trade in 100 gms of gold on 31st december,2014 at rs.160000.

• Here 160000 is the forward price of 31st december2014.

Future contract

• A future conract ,unlike the privatley –traded forward contractis publicaly traded.

• Future market were designed to solve the problems that exist in forward markets.

• A future contract is a standardized contract to buy or sell an underlying on a specified date for a pre-determined price and is traded on a exchange.

Options.

• Options are derivative products,which,if you buy,entitles you with certain rights.

• Call option: It gives right to buy a share (at a specific price).

• Put option:It gives you right to sell (pre-difine price)

For Ex.If you buy a DLF 240 call option,you are entitled to buy DLF Shares at a price of 240 RS.per share.

• This specific price is called strike price.