Most of the stock market indices used in practice are of two types: equal weighted index and value weighted index.
An equal weighted index reflects the simple arithmetic average of the price relatives of the sample shares in a certain year (or month or week or on a particular day) with reference to a base year. A value weighted index reflects the aggregate market capitalization of the sample shares in a certain year (or month or week or on a particular day) in relation to a base year. Bombay Stock exchange Sensitive Index (popularly called Sensex) and S&P CNX Nifty Index (popularly called Nifty) are value-weighted indices.
With the repeal of the Capital Issues Control Act and the enactment of SEBI Act in 1992, the regulation of the primary market has become the preserve of SEBI. Further the Ministry of Finance, Government of India, has transferred most of the powers under the Securities Contracts (Regulations) Act to SEBI.
SEBI has taken a number of steps in the last few years to reform the Indian capital market. While SEBI has done a great deal, it has a long way to go in accomplishing its mission. It has to address challenges like the preponderance of speculative trading and market abuses.
The world’s biggest stock exchange in terms of market capitalization, the NYSE has fairly stringent listing requirements which seek to ensure that only large, financially strong companies get listed. Trading on the NYSE takes a place through a system of brokers and specialists.
NASDAQ is the biggest exchange of the world in terms of turnover. The light listing requirements of NASDAQ attracts young technology companies and the low listing costs at NASDAQ keeps them with that exchange when they have grown.
The stock market in the UK underwent a radical reform in 1986, referred to as the big bang which led to the emergence of a single electronic national market and the closure of regional exchanges. Equities are traded on this market using the Stock Exchange Automatic Quotation (SEAQ) System a quote driven system or the Stock Exchange Automatic Execution Facility (SAEF) and order driven system.
Many informed observers of the capital market have argued that there is a case for regulating the volume of trading in the capital market to check excessive speculation.
The government securities (G-secs) market is the largest segment of the long term debt market in India, a counting for nearly two-thirds of the issues in the primary market and more four-fifths of the turnover in the secondary market.
G-secs issued though an auction mechanism. Certain categories of prospective investors can submit non-competitive bids.
Transactions in G-secs are settled through the delivery versus payment (DVP) mode. Under this arrangement funds and securities are transferred simultaneously through the Public Debt Office (PDO) of the Reserve Bank of India. Historically the market for corporate debt instruments remained small and under developed for a variety of reasons. From the mid-1990s onward, this market has been enlivened thanks to the confluence of several conducive factors.
Presently corporate debentures in India are mostly placed privately. The private placement of a debenture issue is managed by a lead manager, who is also the advisor and investment banker for the issue Book building mechanism is commonly employed.
While the equity market in India has witnessed reasonably high trading volumes and liquidity the secondary market for corporate debt instruments historically has been very dull.
The money market is the market for short term funds. It comprises of the call and notice money market, repo market and the market for debt instruments such as treasury bills that have an original maturity of less than one year.
Call and notice money is the market for short term funds up to 14 days.
In a repo transaction, a holder of securities sells them with an agreement to repurchase the same after a certain period at a predetermined price which is higher than the sale price.
Treasury bills are short term debt instruments of the central government. They are issued at a discount and redeemed at par. Most buyers of treasury bills hold time till maturity and hence the secondary market activity is quite limited.
Commercial paper (CP) is an instrument of short term unsecured borrowing issued by non-baking companies. CPs are issued at a discount and redeemed at par.
Certificates of deposit (CDs) represent short term deposits which are transferable from one party to another, Banks and financial institutions are the major issuers of CDs. On maturity the CD holder will get the face value along with interest.