Introduction to Securities Markets: formula sheet

Key formulas

Primary market

Issuer ← money ← Investor (new securities issued)

Capital reaches the issuer. Examples: IPO, FPO, rights issue, private placement.

Secondary market

Investor ↔ Investor (existing securities traded)

The issuer receives no money. It provides liquidity and price discovery.

Savings and investment

Savings = Income − Consumption

Savings becomes investment when it is put into assets to earn a return.

Core functions of the securities market

Mobilise savings, allocate capital, provide liquidity, enable price discovery, spread risk

Exam options often swap these with functions of a bank or a regulator.

Equity versus debt: relationship to issuer

Equity = owner (residual claim) | Debt = lender (fixed claim)

In liquidation, lenders are paid before shareholders.

Money market versus capital market

Money market: maturity up to 1 year | Capital market: maturity above 1 year

Equity shares have no maturity and sit in the capital market.

Instrument-to-category map

T-bills, commercial paper, certificates of deposit, call money → money market | G-secs, bonds, debentures → debt (capital market) | Futures, options → derivatives

Treasury bills are issued for 91, 182 and 364 days. Government securities have longer tenures.

Derivative value

Derivative value = f(price of underlying asset)

A derivative is a contract and not an ownership claim on the underlying.

Broker

Broker = member of exchange who executes trades for clients

Trading function. Registered with SEBI and a member of the exchange.

Depository and DP

Depository (NSDL, CDSL) → DP → investor's demat account

Investors cannot open an account with the depository directly. They go through a DP.

Clearing corporation

Clearing corporation = trade guarantee + settlement

It becomes the counterparty to trades and manages risk through margins and a settlement guarantee fund.

Custodian

Custodian = safekeeping + settlement support for institutions

Mainly serves FPIs, mutual funds and other large institutions. It does not trade on its own.

Sub-broker vs authorised person

Sub-broker registration discontinued; now called authorised person

SEBI ended sub-broker registration. Earlier sub-brokers act as authorised persons of a broker, who stays responsible for them.

Settlement date under rolling settlement

Settlement day = T + n working days (equity: n = 1)

T is the trade day. Count only working days. Exchange holidays and weekends are excluded.

Three stages of a trade

Trading → Clearing → Settlement

Order matters. Questions often ask which stage a given activity belongs to.

Order matching priority

Price priority first, then time priority

Best price wins. At equal price, the earlier order is matched first.

Central counterparty role

Buyer ↔ Clearing Corporation ↔ Seller

Also called novation. The clearing corporation guarantees performance of the trade.

Depositories in India

NSDL and CDSL

Investors reach them through depository participants (DPs), not directly.

Index value

Index = (Current free-float market cap of basket ÷ Base market cap) × Base value

Used by Sensex and Nifty 50. Weights come from free-float market cap, not price.

Free-float market cap

Free-float market cap = Share price × Number of free-float shares

Free-float shares exclude promoter and other locked-in holdings.

Free-float market cap (using factor)

Free-float market cap = Price × Total shares × Free-float factor

Free-float factor is the fraction of shares available to the public, between 0 and 1.

Index return

Index return (%) = (Closing level − Opening level) ÷ Opening level × 100

Price index return excludes dividends. Total return indices include them.

Index sizes

Sensex = 30 stocks (BSE); Nifty 50 = 50 stocks (NSE)

Frequent direct MCQ.

Quick revision

• The primary market is where securities are issued for the first time; the secondary market is where existing securities are traded.
• Equity represents ownership; debt represents a loan to the issuer with interest and repayment.
• A depository holds securities in electronic form, and depository participants are its agents for investors.
• A clearing corporation guarantees and manages the settlement of trades done on an exchange.
• A custodian safeguards securities and handles related settlement and servicing for institutional clients.
• A stock exchange provides the platform for trading; a broker places orders on it for clients.
• A market index measures the movement of a group of securities and acts as a benchmark.
• SEBI is the main regulator of the securities market in India and was set up to protect investors and develop the market.
• Read the role in each question carefully: many options differ only in which institution performs the function.
• Check the settlement cycle and terms against your workbook rather than from memory when in doubt.
• Wrong answers carry a penalty of 10% of the question's marks, so skip only if you have no basis to choose.

Common mistakes

• Saying the issuer receives money when shares are traded on an exchange. Fix: Only primary market issues bring money to the issuer. Secondary trades only change ownership.
• Calling an IPO a secondary market activity because it ends in a listing. Fix: The IPO itself is the primary market. Trading after listing is secondary.
• Treating dividends on equity as fixed or guaranteed. Fix: Interest on debt is contractual. Dividend is declared at the company's discretion and can be nil.
• Classing commercial paper or certificates of deposit as capital market instruments. Fix: Both are short-term debt instruments and belong to the money market.
• Saying the stock exchange settles and guarantees trades. Fix: The exchange matches orders. The clearing corporation guarantees and settles.
• Thinking an investor opens a demat account directly with NSDL or CDSL. Fix: The account is opened through a DP. The depository only keeps records through DPs.
• Saying the exchange guarantees settlement. Fix: The clearing corporation is the central counterparty and guarantees settlement. The exchange provides the trading platform.
• Counting Saturday and Sunday in T+1. Fix: Count working days only. A trade on Friday settles on Monday, if Monday is a working day.
• Saying Sensex is an NSE index or Nifty belongs to BSE. Fix: Remember S for Sensex and BSE as the older pair, and Nifty with NSE (National Stock Exchange).
• Believing the index is calculated from share prices alone. Fix: The weights are free-float market caps. A high-priced small company can matter less than a lower-priced large one.

Exam tips

• Expect direct definition questions. Learn the one-line definitions of primary market, secondary market, savings and investment.
• Watch for options that attribute money flow to the wrong party. Use the who-gets-the-money test.
• Read each option fully. NISM options often differ by a single word.
• The XXI-A paper has negative marking of 10% of the marks for a question, so eliminate clearly wrong options and then answer if you can narrow it down.
• Focus on the owner, lender, pool, contract tag. Most classification questions can be solved with it.
• Watch for absolute words like always, never and guaranteed. They usually signal a wrong option.
• Remember the one-year line for money market instruments, and list T-bills, commercial paper, certificates of deposit and call money.
• The PMS Distributors exam is all MCQ with 10% negative marking, so guess only after you have removed at least one option.