stock market operations[1]

7/31/2019 Stock Market Operations[1]

1/29

Stock MarketStock MarketOperationsOperations

Stock MarketStock MarketOperationsOperations


2/29

Basic Types of

Transaction Long Purchase

Margin Trading

Short Selling


3/29

Long PurchaseThe long purchase is a transaction inwhich investors buy securities in the hopethat they will increase in value and can be

sold at a later date for profit.For e.g., Maahi expects the share priceto rise Rs. 100 per share within 2 years. Heplaced a limit order around Rs.60 a lot(100shares). If the share price rise to say 120,he will get profit from his long purchase; ifprice dropped below 60 he will get lossfrom it.


4/29

Margin TradingMost of security purchases do not haveto be made on a cash basis; borrowed fundcan be used instead. This activity is

referred to as MARGIN TRADINGfor e.g., If an investor uses 75%

margin, it means that 75% of theinvestment position is being financed with

the persons own capital and the balance(25%) with borrowed money.


5/29

Advantages of Margin

Trading Magnified return.

Greater diversification of security

holdings. More trading with less amount

(capital)


6/29

Disadvantages of Margin

TradingThe major disadvantage of margintrading is that the price of the

security may fall rather than rise,resulting in magnified losses ratherthan gains.


7/29

Making Margin

Transaction Initial Margin It stipulates the minimum amount of

equity that must be provided by theinvestor at the time of purchase.


8/29

Making Margin

Transaction Maintenance Margin It is the absolute minimum amount of

margin (equity) that an investor mustmaintain in the margin account at alltimes


9/29

Making Margin

Transaction Basic Margin FormulaMargin= Value of Securities Debit Balance

Value of Securities

= V D

V


10/29

= V DV

For e.g. 100 shares purchased at Rs. 40 with 70% initialmargin.

So Debit balance will be 30% and capital 70% (debitbalance 40*100*30%=1,200

Now value of security increases with Rs. 65, the margin %will be calculated as follows

=(65*100) (1,200) = 6500 1200 = .815 = 81.5%(65*100) 6500


11/29

It can be observed that the margin inthe investment position has now risen

to 81.5%. When the price of the stockgoes up, the investors margin alsoincreases. When the price of security

goes down, the margin will bedecreased.


12/29

Return on Invested

Capital

Return on InvestedCapital from a

Margin Transaction=

Total

currentIncomereceived

Totalinterestpaid on

margin loan

MarketValue of

securitiesat a purchase

MarketValue of

securitiesat sale

Amount of equity invested

- -+


13/29

Return on Invested Capital

for example: Yatin wants to buy 100 equity shares at Rs. 50 pershare bcoz he feels it will be rise to Rs.75 within 6 months. Theequity share pays Rs. 2 per share in annual dividends (though withthe six month holding period, Yatin will receive only half of thatamount, or Rs. 1 per share. Yatin is going to buy the equity shareswith 50% margin and pay 10% interest on the margin loan. Yatin

hopes that the share price will go Rs.75 after 6 months, expectedreturn will be calculated as follows

Return on InvestedCapital from a

Margin Transaction

100(100shares

*1 dividend)

125(2500 X 10%

X6/12)

5000(100 X 50)

7500(100 X 75)

2500(100 X 25)

5000 X 50%

- -+

=

= 2475/2500

= .99 = 99%

99 % is for the Six months so for 1 year 99 X 2 = 198, means 198% return for the year


14/29

Short SellingShort selling is used when a decline insecurity prices is anticipated. Thetechnique enables investors to profit fromfalling security prices.

Short selling is generally defined as thepractice of selling borrowed securities.


15/29

Uses of Short Selling To seek speculative profits when theprice of a security is expected to

drop. To protect a profit by hedging their

position.


16/29

Carry Forward Facility

and the theory of Badla The carry forward facility enablesinvestor to defer or postpone hiscommitments to the next settlementperiod.

Under this system payment for the extrashares made by obtaining loan from

financiers, the interest charged by them iscalled badla


17/29

Clearing ProcedureThe transaction in secondarymarket are processed through three

distinct phases.TradingClearing

Settlement


18/29

The clearing process involvesdetermination of what counter-partiesowe, and what counter-parties are due toreceive on the settlement date. It isessentially the process of determination ofobligations, after which the obligations are

discharged by settlement.


19/29

NSE

Custodian/CMs

NSCCLDepositories Clearing Bank

1

2 34 11510

8

6

9

7

Clearing and Settlement Process at NSE


20/29

1. Stags

2. Wolves

3. Lame ducks

Kinds of Speculators


21/29

1.Stags

These are those members who areneither but or sell securities insecondary market. They simply applyfor subscription to new issuesexpecting to sell them at a higherprice later when such issues are

quoted on the stock exchange. Theymight sell security even before listingin GRAY market.


22/29

2. WolvesThese are those members who arevery fast speculators and quickly

perceives the trend of market. Theytrade in bulk and for small pricedifference.


23/29

3. Lame ducksThese are bear member who sellultimately short by making wrong

moves. Generally they sell securitieswithout having it and hence caught inthe wrong foot.


24/29

Types of Speculative Transacti

1. Option Dealing for hedging2. Wash Sales

3. Cornering4. Rigging the market5. Blank Transfer
http://stockmarketwiki.blogspot.com/2009/01/types-of-speculative-transactions.htmlhttp://stockmarketwiki.blogspot.com/2009/01/types-of-speculative-transactions.html


25/29

1. Option Dealing for hedging

Options are used for hedging purposeto limit the loss in portfolio. Thushedging is a device which protectsagainst losses due to price fluctuation.


26/29

2. Wash Sales

It is a device by which a speculator isable to reap huge profits by creatingmisleading pictures in the market.Actually its a fictitious transaction inwhich member sells huge quantity andbuy the same from other brokers.


27/29

3. Cornering

It refers to the process of holdingthe entire supply of a particularsecurity by an individual or a group ofindividuals with a view to dictate theshort-seller and earn profits bycatching short seller.


28/29

4. Rigging the market

It refers to the process of creating anartificial condition in the market, whereby, themarket value of a particular security is pushedup. It is due to strong Bull Run created by suchmembers. They initially buy the securities in bulkat higher prices which shows picture like thatthe security is in Bull Run.


29/29

5. Blank Transfer

It facilitates speculative activitiesthrough carry-over or Badlatransaction. When the transferor(Seller) simply signs the transferform without specifying the name ofthe transferee (Buyer) is called blanktransfer.

stock market operations[1]

Documents