study of financial market and share trading from investor

8/4/2019 Study of Financial Market and Share Trading From Investor

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“STUDY OF FINANCIAL MARKET AND SHARE

TRADING FROM INVESTOR’S POINT OF VIEW”

EXECUTIVE SUMMARY

The project I am undergoing in Edelweiss broking ltd is “study of financial market

and share trading from investors point of view” This process of understanding the

investment opportunity was scheduled to be held from 20 nd May 2011 to 20th July

2011. Here I thought different products promoted and sold by Edelweiss , so as to

make me understand these products in a better way. In this project I am supposedto understand the various Financial Instruments offered by the various Companies

in India and then suggest our client the best product that suits his/her needs. The

main objective of the project is to study the various financial policies available in

the market and suggest the customer the best amongst them. For execution of the

project methodology adopted is the collection of data through unstructured

questionnaire, processing and analyzing the data. This project represents

information regarding company’s brand awareness and the customer perceptions

about the various services which the organization provides.

Edelweiss broking ltd is the online share trading services.Through edelweissbroking ltd you can trade in share markets, commodities,currency,equitymarket,mutual fund and other products and prepare charts and research to create aninvestment portfolio for your personal services. The objective of the project is tostudy the financial market and share trading from investor’s point of view forinvestment and also to analyze the investor’s who are investing in Edelweissbroking ltd and what do they think about the charges and services that theyprovide.



INTRODUCTION

India Financial Market promotes the savings of the economy, providing aneffective channel for transmitting the financial policies. It is a well-developed,competitive, efficient and integrated financial sector. There are large number of buyers and sellers of the financial product, the prices are fixed by the market forcesof demand and supply within the Indian Financial Market. The other markets of theeconomy assist the functioning of the financial market in India. The Financial

Market in India focuses on these features:

Real-time India Financial Indices – BSE 30 Index, Sector Indexes, Stock Quotes,Sensex Charts, Bond prices, Foreign Exchange, Rupee&Dollar Chart

Indian Financial Market news

Stock News – Bombay Stock Exchange, BSE Sensex 30 closing index, S&P CNX-Nifty NSE, stock quotes, company information, issues on market capitalization,corporate earning statements, Indian Business Directory

Fixed Income – Corporate Bond Prices, Corporate Debt details, Debt tradingactivities, Interest Rates, Money Market, Government

Securities, Public Sector Debt, External Debt Service

Foreign Investment – Foreign Debt Database composed by BIS, IMF, OECD,&World Bank, Investments in India & Abroad

Global Equity Indexes – Dow Jones Global indexes, Morgan Stanley EquityIndexes

Currency Indexes – FX & Gold Chart Plotter, J. P. Morgan Currency Indexes

National and Global Market Relations

Mutual Funds



Insurance

Loans

Forex and BullionA clear insight with information‟s on the Indian Financial Market will thus be the

most useful tip for the investors and the marketers of both India and the foreigncountries.To get more details on India Financial Market please look through the followinglinks.

SHARESIn finance a share is a unit of account for various financial instruments including

stocks, mutual funds, limited partnerships, and REIT's. In British English, theusage of the word share alone to refer solely to stocks is so common that it almostreplaces the word stock itself.In simple Words, a share or stock is a document issued by a company, whichentitles its holder to be one of the owners of the company. A share is issued by acompany or can be purchased from the stock market.By owning a share one can earn a portion and selling shares can get capital gain.So, return is the dividend plus the capital gain. However, one can also run a risk of making a capital loss if he/she have sold the share at a price below your buying

price.A company's stock price reflects what investors think about the stock, notnecessarily what the company is "worth." For example, companies that aregrowing quickly often trade at a higher price than the company might currently be"worth." Stock prices are also affected by all forms of company and market news.Publicly traded companies are required to report quarterly on their financial statusand earnings. Market forces and general investor opinions can also affect shareprice.

Quick Facts on Stocks and Shares

Owning a stock or a share means that a person is a partial owner of the company,and he gets voting rights in certain company issues Over the long run, stocks havehistorically averaged about 10% annual returns However, stocks offer no guaranteeof any returns and can lose value, even in the long run Investments in stocks cangenerate returns through dividends, even if the price



How does one trade in shares?Every transaction in the stock exchange is carried out through licensed memberscalled brokers.To trade in shares, one can have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain smallinvestors. These brokers have a network of sub-brokers who provide them withorders.The general investors should identify a sub-broker for regular trading in shares andplace his order for purchase and sale through the sub-broker. The sub/broker willtransmit the order to his broker who will then execute it .

What are active Shares ?Shares in which there are frequent and day-to-day dealings, as distinguished frompartly active shares in which dealings are not so frequent. Most shares of leading

companies would be active, particularly those which are sensitive to economic andpolitical events and are, therefore, subject to sudden price movements. Somemarket analysts would define active shares as those which are bought and sold atleast three times a week. Easy to buy or sell.

D-MAT ACCOUNTD-mat refers to a dematerialized account.Though the company is under obligation to offer the securities in both physical andd-mat mode, a person has the choice to receive the securities in either mode.If one wish to have securities in d-mat mode, then he/she need to indicate the nameof the depository and also of the depository participant with whom he/she havedepository account in application.It is, however desirable that a person hold securities in d-mat form as physicalsecurities carry the risk of being fake, forged or stolen.Just as a person have to open an account with a bank if he want to save the money,

make cheque payments etc, Nowadays, a person need to open a d-mat account if hewant to buy or sell stocks.So it is just like a bank account where actual money is replaced by shares. Youhave to approach the DPs (remember, they are like bank branches), to open a d-mataccount. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will be shown in a person‟s d-mataccount. So he don't have to possess any physical certificates showing that he own



these shares. They are all held electronically in his account. As he buy and sell theshares, they are adjusted in his account. Just like a bank passbook or statement, theDP will provide him with periodic statements of holdings and transactions.

Is a d-mat account a must?Nowadays, practically all trades have to be settled in dematerialized form.Although the market regulator, the Securities and Exchange Board of India (SEBI),has allowed trades of up to 500 shares to be settled in physical form, nobody wantsphysical shares any more. So a d-mat account is a must for trading and investing.Most banks are also DP participants, as are many brokers.You can choose your very own DP. To get a list, visit the NSDL and CDSLwebsites and see who the registered DPs are. A broker is separate from a DP. Abroker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients. A DP will just give you an account to hold those

shares. One should not have to take the same DP that his broker takes. He canchoose by own.

STOCK EXCHANGEA stock exchange, share market or bourse is a corporation or mutual organizationwhich provides "trading" facilities for stock brokers and traders, to trade stocks andother securities. Stock exchanges also provide facilities for the issue andredemption of securities as well as other financial instruments and capital eventsincluding the payment of income and dividends. The securities traded on a stock

exchange include: shares issued by companies, unit trusts and other pooledinvestment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least forrecordkeeping, but trade is less and less linked to such a physical place, as modernmarkets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market andsubsequent trading is done in the secondary market. A stock exchange is often themost important component of a stock market. Supply and demand in stock marketsis driven by various factors which, as in all free markets, affect the price of stocks

(see stock valuation).There is usually no compulsion to issue stock via the stock exchange itself, normust stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded.Increasingly, stock exchanges are part of a global market for securities.



History of stock exchangesIn 11th century France the courtiers de change were concerned with managing andregulating the debts of agricultural communities on behalf of the banks. As thesemen also traded in debts, they could be called the first brokers.Some stories suggest that the origins of the term "bourse" come from the Latinbursa meaning a bag because, in 13th century Bruges, the sign of a purse (orperhaps three purses), hung on the front of the house where merchants met.House Ter Beurze in Bruges However, it is more likely that in the late 13th centurycommodity traders in Bruges gathered inside the house of a man called Van derBurse, and in 1309 they institutionalized this until now informal meeting andbecame the "Bruges Bourse". The idea spread quickly around Flanders andneighboring counties and "Bourses" soon opened in Ghent and Amsterdam.The house of the Beurze family on Vlamingstraat Bruges was the site of the worldsfirst stock Exchange, circa 1415. The term Bourse is believed to have derived from

the family name Beurze.In the middle of the 13th century, Venetian bankers began to trade in governmentsecurities. In 1351, the Venetian Government outlawed spreading rumors intendedto lower the price of government funds. There were people in Pisa, Verona, Genoaand Florence who also began trading in government securities during the 14thcentury. This was only possible because these were independent city states ruledby a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest inbusiness ventures and get a share of their profits - or losses. In 1602, the DutchEast India Company issued the first shares on the Amsterdam Stock Exchange. Itwas the first company to issue stocks and bonds. In 1688, the trading of stocksbegan on a stock exchange in London.The role of stock exchangesStock exchanges have multiple roles in the economy, this may include thefollowing:

Raising capital for businessesThe Stock Exchange provides companies with the facility to raise capital for

expansion through selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rationalallocation of resources because funds, which could have been consumed, or kept inidle deposits with banks, are mobilized and redirected to promote business activitywith benefits for several economic sectors such as agriculture, commerce and



industry, resulting in a stronger economic growth and higher productivity levelsand firms.

Facilitating company growthCompanies view acquisitions as an opportunity to expand product lines, increasedistribution channels, hedge against volatility, increase its market share, or acquireother necessary business assets. A takeover bid or a merger agreement through thestock market is one of the simplest and most common ways for a company to growby acquisition or fusion.

Redistribution of wealthStocks exchanges do not exist to redistribute wealth. However, both casual andprofessional stock investors, through dividends and stock price increases that mayresult in capital gains, will share in the wealth of profitable businesses.

Corporate governanceBy having a wide and varied scope of owners, companies generally tend toimprove on their management standards and efficiency in order to satisfy thedemands of these shareholders and the more stringent rules for public corporationsimposed by public stock exchanges and the government. Consequently, it isalleged that public companies (companies that are owned by shareholders who aremembers of the general public and trade shares on public exchanges) tend to havebetter management records than privately-held companies (those companies whereshares are not publicly traded, often owned by the company founders and/or theirfamilies and heirs, or otherwise by a small group of investors). However, somewell-documented cases are known where it is alleged that there has beenconsiderable slippage in corporate governance on the part of some publiccompanies (Pets.com (2000), Enron Corporation (2001), One. Tel (2001),[[Sunbeam Products| Sunbeam]] (2001), Web van (2001), Adelphia (2002), MCIWorldCom (2002), or Parmalat (2003), are among the most widely scrutinized bythe media).

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in sharesis open to both the large and small stock investors because a person buys thenumber of shares they can afford. Therefore the Stock Exchange provides theopportunity for small investors to own shares of the same companies as largeinvestors.

Government capital-raising for development projects



Governments at various levels may decide to borrow money in order to financeinfrastructure projects such as sewage and water treatment works or housingestates by selling another category of securities known as bonds. These bonds canbe raised through the Stock Exchange whereby members of the public buy them,thus loaning money to the government. The issuance of such bonds can obviate theneed to directly tax the citizens in order to finance development, although bysecuring such bonds with the full faith and credit of the government instead of withcollateral, the result is that the government must tax the citizens or otherwise raiseadditional funds to make any regular coupon payments and refund the principalwhen the bonds mature.

Barometer of the economyAt the stock exchange, share prices rise and fall depending, largely, on marketforces. Share prices tend to rise or remain stable when companies and the economy

in general show signs of stability and growth. An economic recession, depression,or financial crisis could eventually lead to a stock market crash. Therefore themovement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

REGION STOCKEXCHANGE MARKETVALUE(TRILLIONS OFUS DOLLARS)

TOTAL SHARETURNOVER(TRILLIONS OFUS DOLLARS)

Africa JSE Securitiesexchange

$0.94 $0.35

Americas NASDAQ $4.39 $12.40Americas Sau Paulo stock

exchange$1.40 $0.48

Americas Toronto stock

exchange

$2.29 $1.36

Americas/europe NYSE Euronext $20.70 $28.70

Asia Pacific Australian securitiesexchange

$1.45 $1.70

South asia Bombay stock exchange of india

$1.61 $0.26



Asia Pacific Honk kong stock exchange

$2.97 $1.70

Asia pacific Korea Exchange $1.26 $1.66South Asia National Stock

Exchange Of India

$1.46 $0.56

Asia Pacific Shanghai stock exchange

$3.02 $3.56

Asia Pacific Shezhen stock exchange

$0.74 $1.86

Asia Pacific Tokyo stock exchange

$4.63 $5.45

Europe Frankfurt Stock Exchange(Deutsche Börse)

$2.12 $3.64

Europe London stock exchange

$4.21 $9.14

Europe Madrid stock exchange(Bolsas yMercado’s

Espanalos

$1.83 $2.49

Europe Milas stock exchange

$1.13 $1.98

Europe Moscow interbank

currency exchange

$0.97 $0.49

Europe Nordic stock exchange group

$1.30 $1.60

Europe Swiss exchange $1.33 $1.58

EXCHANGES IN INDIAThe Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are

the country's two leading Exchanges. There are 20 other regional Exchanges,connected via the Inter-Connected Stock Exchange (ICSE). The BSE and NSEallow nationwide trading via their VSAT systems.

IndexAn Index is a comprehensive measure of market trends, intended for investors whoare concerned with general stock market price movements. An Index comprises



stocks that have large liquidity and market capitalization. Each stock is given aweight age in the Index equivalent to its market capitalization. At the NSE, thecapitalization of NIFTY (fifty selected stocks) is taken as a base capitalization,with the value set at 1000. Similarly, BSE Sensitive Index or Sensex comprises 30selected stocks. The Index value compares the day's market capitalization vis-a-visbase capitalization and indicates how prices in general have moved over a periodof time.

How Orders are executedSelect a broker of ones choice and enter into a broker-client agreement and fill inthe client registration form. Place the order with his/her broker preferably inwriting. Get a trade confirmation slip on the day the trade is executed and ask forthe contract note at the end of the trade date.

Need Of A BrokerAs per SEBI (Securities and Exchange Board of India.) regulations, only registeredmembers can operate in the stock market. One can trade by executing a deal onlythrough a registered broker of a recognized Stock Exchange or through a SEBI-registered sub-broker.

Contract NoteA contract note describes the rate, date, time at which the trade was transacted andthe brokerage rate. A contract note issued in the prescribed format establishes alegally enforceable relationship between the client and the member in respect of trades stated in the contract note. These are made in duplicate and the member andthe client both keep a copy each. A client should receive the contract note within24 hours of the executed trade. Corporate Benefits/Action

Book-Closure/Record DateBook closure and record date help a company determine exactly the shareholdersof a company as on a given date. Book closure refers to the closing of register of the names or investors in the records of a company. Companies announce book closure dates from time to time. The benefits of dividends, bonus issues, rights

issue accruing to investors whose name appears on the company's records as on agiven date, is known as the record date.An investor might purchase a share-cum-dividend, cum rights or cum bonus andmay therefore expect to receive these benefits as the new shareholder. In order toreceive this, the share has to be transferred in the investor's name, or he wouldstand deprived of the benefits. The buyer of such a share will be a loser. It isimportant for a buyer of a share to ensure that shares purchased at cum benefits



prices are transferred before book-closure. It must be ensured that the price paidfor the shares is ex-benefit and not cum benefit.

Book closure v/s record dateIn case of a record date, the company does not close its register of security holders.Record date is the cut off date for determining the number of registered memberswho are eligible for the corporate benefits. In case of book closure, shares cannotbe sold on an Exchange bearing a date on the transfer deed earlier than the book closure. This does not hold good for the record date.

No-Delivery PeriodWhenever a company announces a book closure or record date, the Exchange setsup a no-delivery (ND) period for that security. During this period only trading ispermitted in the security. However, these trades are settled only after the no-

delivery period is over. This is done to ensure that investor's entitlement for thecorporate benefit is clearly determined.

Ex-dividend dateThe date on or after which a security begins trading without the dividend (cash orstock) included in the contract price.

Ex-dateThe first day of the no-delivery period is the ex-date. If there is any corporatebenefits such as rights, bonus, dividend announced for which book closure/recorddate is fixed, the buyer of the shares on or after the ex-date will not be eligible forthe benefits.

Bonus IssueWhile investing in shares the motive is not only capital gains but also aproportionate share of surplus generated from the operations once all otherstakeholders have been paid. But the distribution of this surplus to shareholdersseldom happens. Instead, this is transferred to the reserves and surplus account. If

the reserves and surplus amount becomes too large, the company may transfersome amount from the reserves account to the share capital account by a merebook entry. This is done by increasing the number of shares outstanding and everyshareholder is given bonus shares in a ratio called the bonus ratio and such an issueis called bonus issue. If the bonus ratio is 1:2, it means that for every two sharesheld, the shareholder is entitled to one extra share. So if a shareholder holds twoshares, post bonus he will hold three.



SplitA Split is book entry wherein the face value of the share is altered to create agreater number of shares outstanding without calling for fresh capital or alteringthe share capital account. For example, if a company announces a two-way split, itmeans that a share of the face value of Rs 10 is split into two shares of face valueof Rs 5 each and a person holding one share now holds two shares.

Buy BackAs the name suggests, it is a process by which a company can buy back its sharesfrom shareholders. A company may buy back its shares in various ways: fromexisting shareholders on a proportionate basis; through a tender offer from openmarket; through a book-building process; from the Stock Exchange; or from oddlot holders. A company cannot buy back through negotiated deals on or off the

Stock Exchange, through spot transactions or through any private arrangement.Clearing and Settlement

Settlement cycleThe accounting period for the securities traded on the Exchange. On the NSE, thecycle begins on Wednesday and ends on the following Tuesday, and on the BSEthe cycle commences on Monday and ends on Friday.At the end of this period, the obligations of each broker are calculated and thebrokers settle their respective obligations as per the rules, bye-laws and regulationsof the Clearing Corporation.If a transaction is entered on the first day of the settlement, the same will be settledon the eighth working day excluding the day of transaction. However, if the sameis done on the last day of the settlement, it will be settled on the fourth workingday excluding the day of transaction.

Rolling SettlementThe rolling settlement ensures that each day's trade is settled by keeping a fixedgap of a specified number of working days between a trade and its settlement. At

present, this gap is five working days after the trading day. The waiting period isuniform for all trades.

When does one deliver the shares and pay the money to broker?As a seller, in order to ensure smooth settlement you should deliver the shares toyour broker immediately after getting the contract note for sale but in any case



before the pay-in day. Similarly, as a buyer, one should pay immediately on thereceipt of the contract note for purchase but in any case before the pay-in day.

Short sellingShort selling is a legitimate trading strategy. It is a sale of a security that the sellerdoes not own, or any sale that is completed by the delivery of a security borrowedby the seller. Short sellers take the risk that they will be able to buy the stock at amore favorable price than the price at which they "sold short."

AuctionAn auction is conducted for those securities that members fail to deliver/shortdeliver during pay-in. Three factors primarily give rise to an auction: shortdeliveries, un-rectified bad deliveries, un-rectified company objections

Is there a separate market for auctions?The buy/sell auction for a capital market security is managed through the auctionmarket. As opposed to the normal market where trade matching is an on-goingprocess, the trade matching process for auction starts after the auction period isover.

What happens if the shares are not bought in the auction?If the shares are not bought at the auction i.e. if the shares are not offered for sale,the Exchange squares up the transaction as per SEBI guidelines. The transaction issquared up at the highest price from the relevant trading period till the auction dayor at 20 per cent above the last available Closing price whichever is higher. Thepay-in and pay-out of funds for auction square up is held along with the pay-out forthe relevant auction.

What is bad delivery?SEBI has formulated uniform guidelines for good and bad delivery of documents.Bad delivery may pertain to a transfer deed being torn, mutilated, overwritten,defaced, or if there are spelling mistakes in the name of the company or thetransfer. Bad delivery exists only when shares are transferred physically. In

"Demat" bad delivery does not exist.

What are company objections?A list documenting reasons by a company for not transferring a share in the nameof an investor is called company objections. Rejection occurs due to a signaturedifference, or fake shares, or forgery, or if there is a court injunction preventing thetransfer of the shares.



What should one do with company objections?The broker must immediately be notified. Company objection cases should bereported within 12 months from the date of issue of the memo for the originalquantity of share under objection.

Who has to replace the shares in case of company objections?The member who has sold the shares first on the Exchange is responsible forreplacing the shares within 21 days of the Exchange being informed. Companyobjection cases that are not rectified or replaced are normally auctioned.

How does transfer of physical shares take place?After a sale, the share certificate along with a proper transfer deed duly stampedand complete in all respects is sent to the company for transfer in the namebuyer.Once the transfer is registered in the share transfer register maintained by the

company, the process of transfer is complete.

BOMBAY STOCK EXCHANGEThis stock exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native share and stock brokers association", as a voluntary non profit makingassociation. It has an evolved over the years into its present status as the premiere stock exchange in the country. It may be noted that the stock exchanges the oldest one in Asia,even older than the Tokyo Stock exchange which was founded in 1878.The exchange,while providing an efficient and transparent market for trading in securities, upholds theinterests of the investors and ensures redressed of their grievances, whether against thecompanies or its own member brokers. It also strives to educate and enlighten the

investors by making available necessary informative inputs and conducting investoreducation programmers‟. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 publicrepresentatives and an executive director is the apex body, which decides the policies andregulates the affairs of the exchange. The Executive director as the chief executive officeris responsible for the day today administration of the exchange. The average dailyturnover of the exchange during the year 2000-01(April-March) was Rs 3984.19crs andaverage number of daily trades 5.69 lacs. However the average daily turnover of the



exchange during the year 2001-02 has declined to Rs. 1244.10crs and number of averagedaily trades during the period to 5.17lacs. The average daily turnover of the exchangeduring the year 2002-03 has declined and number of average daily trades during theperiod is also decreased. The Ban on all deferral products like BLESS AND ALBM inthe Indian capital markets by SEBI w. e. f July 2, 2001, abolition of account period

settlements, introduction of compulsory rolling settlements in all scraps traded on theexchanges w .e .f Dec 31, 2001, etc., have adversely impacted the liquidity andconsequently there is a considerable decline in the daily turnover at the exchange. BSE INDICES

In order to enable the market participants, analysts etc., to track the various ups anddowns in the Indian stock market, the Exchange has introduced in 1986 an equity stock index called BSE-SENSEX that subsequently became the barometer of the moments of the share prices in the Indian stock market. It is a " Market capitalization-weighted "index of 30 component stocks representing a sample of large, well established andleading companies. The base year of Sensex is 1978-79. The Sensex is widely reported in

both domestic and international markets through print as well as electronic media.Sensex is calculated using a market capitalization weighted method. As per thismethodology, the level of the index reflects the total market value of all 30 componentstocks from different industries related to particular base period. The total market valueof a company is determined by multiplying the price of its stock by the number of sharesoutstanding. Statisticians call an index of a set of combined variables( such as price andnumber of shares) a composite Index. An Indexed number is used to represent the resultsof this calculation in order to make the value easier to work with and track over a time. Itis much easier to graph a chart based on Indexed values than one based on actual valuesworld over majority of the well-known Indices are constructed using " Market

capitalization weighted method ".In practice, the daily calculation of SENSEX is done bydividing the aggregate market value of the 30 companies in the Index by a number calledthe Index Divisor. The Divisor is the only link to the original base period value of theSENSEX. The Divisor keeps the Index comparable over a period of time and if thereference point for the entire Index maintenance adjustments. SENSEX is widely used to

describe the mood in the Indian Stock markets. Base year average is changed as per the

formula new base year average = old base year average*(new market value/old market

value)

NATIONAL STOCK EXCHANGEThe NSE was incorporated in Nov 1992 with an equity capital of Rs. 25 crs. TheInternational securities consultancy (ISC) of Hong Kong has helped in setting up NSE.ISC has prepared the detailed business plans and installation of hardware and softwaresystems. The promotions for NSE were financial institutions, insurances companies,banks and SEBI capital market ltd, Infrastructure leasing and financial services ltd andstock holding corporation ltd.



It has been set up to strengthen the move towards professionalization of the capitalmarket as well as provide nationwide securities trading facilities to investors.NSE is notan exchange in the traditional sense where brokers own and manage the exchange. A twotier administrative set up involving a company board and a governing aboard of theexchange is envisaged.NSE is a national market for shares PSU bonds, debentures and

government securities since infrastructure and trading facilities are provided

NSE – NIFTY

The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new Indexwhich replaces the existing NSE-100 Index , is expected to serve as an appropriate Indexfor the new segment of futures and options." Nifty " means National Index for Fifty Stocks.The NSE-50 comprises 50 companies that represent 20 broad Industry groups with anaggregate market capitalization of around Rs. 1,70,000 crs. All companies included in the

Index have a market capitalization in excess of Rs 500 crs each and should have tradedfor 85% of trading days at an impact cost of less than 1.5%.The base period for the indexis the close of prices on Nov 3, 1995 which makes one year of completion of operation of NSE‟s capital market segment. The base value of the Index has been set at 1000. NSE - MIDCAP INDEX

The NSE midcap Index or the Junior Nifty comprises 50 stocks that represents 21 boardIndustry groups and will provide proper representation of the midcap segment of theIndian capital Market. All stocks in the Index should have31

market capitalization of greater than Rs. 200crs and should have traded 85% of the

trading days at an impact cost of less 2.5%.The base period for the index is Nov 4, 1996 which signifies two years for completion of operations of the capital market segment of the operations. The base value of the Indexhas been set at 1000.Average daily turn over of the present scenario 258212 (Laces) andnumber of average daily trades 2160 (Laces).OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated under section 25 of the Companies Act in Oct 1990 and startedfunctioning from Sept 1992. OTCEI has been setup to meet a long felt need for a secondtier market where companies will small paid up capital with less than onerous conditionscould have the advantage of listing.It was promoted by All India financial institutions, Merchant banks, Subsidiaries of public sectors banks, and established as a recognized stock exchange under sec 4 of theSecurities contracts (regulation) Act. OTC exchange is now nationwide and operates formore than 400 cities in India through the nation wide information dissemination network,internet. Any city in India can receive the scrip prices of OTCEI in text. OTCEI's centralcomputer Bombay and then broadcast generates scrip prices on in text.



LIST OF STOCK EXCHANGENAME OF THE STOCK EXCHANGES YEARBombay stock exchange,Ahemadabad share and stock brokers associationCalcutta stock exchange association Ltd,Delhi stock exchange association Ltd,Madras stock exchange association Ltd,Indore stock brokers association,Bangalore stock exchange,Hyderabad stock exchange,Cochin stock exchange,Pune stock exchange Ltd,U.P stock exchange association Ltd,Ludhiana stock exchange association Ltd,Jaipur stock exchange Ltd,

Gauhathi stock exchange Ltd,Mangalore stock exchange Ltd,Maghad stock exchange Ltd, Patna,Bhubaneshwar stock exchange association Ltd,Over the counter exchange of India, Bombay,saurasthra kutch stock exchange Ltd,Vsdodara stock exchange Ltd,Coimbatore stock exchange Ltd,The meerut stock exchange Ltd,National stock exchange Ltd,

Integrated stock exchange

18751957

195719571957

EQUITY TRADINGFunds brought into a business by its shareholders is called equity. It is a measure of astake of a person or group of persons starting a business.When a person buys company's equity, he/she are in effect financing it, and beingcompensated with a stake in the business. You become part-owner of the company,entitled to dividends and other benefits that the company may announce, but without any

guarantee of a return on your investments.Fundamental Analysis

The analysis of factual information like financial figures, balance sheet, and otherinformation publicly available is known as fundamental analysis. This information isused to derive a fair price of the share of the company. The faithful fundamentalistsbelieve that the market incorporates all facts relating to the financial performance of thecompany. But a systematic analysis will ensure a more accurate valuation of the price.



Fundamental analysts use tools such as ratio analysis (P/E, MV/BV) and discounted cashflow analysis in order to arrive at the fair value of a company and hence its share.FINANCIAL RATIOS

A ratio is a comparison of two figures. They are culled from the financial statements of acompany. These help in assessing the financial health of a company. It could be a ratio

between an item from a balance sheet versus another item on the balance sheet. Or itcould be a ratio between one figure of the balance sheet with a figure from Profit andLoss account or it could be comparison of one year's figure with a figure from theprevious year.For example Return on Equity = Net profit (A Profit and a Loss figure) divided by NetWorth (a balance sheet figure) in percentage terms.What are the various kinds of financial ratios?

There are many financial ratios. Some of the better known include:Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet its currentobligations. Liquidity ratios by establishing a relationship between cash and other current

assets to current obligations give measure of liquidity.e.g. Current ratio [CR] = Current Assets/Current liabilities.A high CR ratio (>2.5) indicates that a company can meets its short term liabilities.Leverage Ratios: Leverage ratio indicates the proportion of debt and equity in financingthe firm's assets. They indicate the funds provided by owners and lenders.e.g. ----- Debt-equity ratio (D-E ratio) total long term debt/net worth.A high D-E ratio indicates that the company's credit profile is bad.Activity Ratios: Activity ratios are employed to evaluate the efficiency with which firmsmanage and run their assets. They are also called turnover ratios.e.g-- Sales Turnover ratio = sales/total assets .

A Sales Turnover ratio indicates how much business a company generates for everyadditional rupee invested.Profitability Ratios: These ratios indicate the level of profitability of the business withrelation to the inputs or capital employed. Some better-known profit ratios includeoperating profit margin (OPM). Operating profit margin is a measure of the company'sefficiency, either in isolation or in comparison to its peers.What is EPS, P/E, BV and MV/BV?

Earnings Per Share (EPS): EPS represents the portion of a company's profit allocated toeach outstanding share of common stock. Net income (reported or estimated) for a periodof time is divided by the total number of shares outstanding during that period. It is oneof the measures of the profitability of common shareholder's investments. It is given byprofit after tax (PAT) divided by number of common shares outstanding.Price Earning Multiple (P/E): Price earning multiple is ratio between market value pershare and earning per share.Book Value (BV): (of a common share) The company's Net worth (which is paid-upcapital + reserves & surplus) divided by number of shares outstanding.Market value to book value ratio (MV/BV ratio): It is the ratio between the market priceof a security and Book Value of the security.



What is technical analysis?

Technical analysis is the study of historic price movements of securities and tradingvolumes.Technical analysts believe that prices of the securities are determined largely by forces of demand and supply. Share prices move in patterns which are easily identifiable. Crucial

insights into these patterns can be obtained by keeping track of price charts, leading topredictions that a stock price may move up or down. The belief is that by knowing thepast, future prices can predict.CLEARING AND SETTLEMENT

Settlement cycle is the accounting period for the securities traded on the Exchange. Onthe NSE the cycle begins on Wednesday and ends on the followi€ng Tuesday, while on

the BSE the cycle commences on Monday and ends on Friday. At the end of this period,the obligations of each broker is calculated and the brokers settle their respectiveobligations as per the rules, bye-laws and regulations of the Clearing Corporation.NSE settlement cycle at a glance

Date Particulars Activity1-7 Wednesday-Tuesday Trading Period

8 Wednesday Custodians report tradeswhich they will notsettle.Such trades willbe added to the memberobligation.

13 Monday Pay-in of securities,

delivery of documentsby the delivery membersat the Clearing House.

14 Tuesday Pay-in funds bymembers through theClearing Bank.Shortageidentification atClearing House.

15 Wednesday Pay-out day forSecurities and Funds.Auction for shortages.

17 Friday Auction pay-in day forSecurities and Funds.Bad delivery reportingby the receivingmember to the ClearingHouse and intimation tothe delivering member.



18 Saturday Auction pay-out. Pick-up of bad deliveries for

rectification.20 Monday Bad delivery

rectification/replacement by the deliveringmember.

22 Wednesday Auction for bad deliverynot rectified/replaced.

23 Thursday Bad delivery auctionpay-in.

24 Friday Bad delivery auctionpay-out.

BSE settlement cycle at a glanceDay Activity

Monday to Friday Trading on BOLT and dailydownloading of statement showingdetails of transactions and marginstatement, at the end of each tradingday.

Saturday Carry Forward Session (for „A‟ GroupSecurities) and downloading of moneystatement.

Monday Marking the mode of delivery – physical or demat

Wednesday Pay-in of physical securities.

Thursday Delivery of securities in the ClearingHouse as per prescribed time slots upto1:00 p.m.only. Debiting of members‟

bank accounts having payable position

at 5:00 p.m. Reconciliation of securities delivered and amountsclaimed.

Friday Pay-out (Physical securities only)

Saturday Funds pay-out



If a transaction is entered on the first day of the settlement, i.e. Monday, the same will besettled on the eighth working day excluding the day of transaction. However, if the sameis done on the last day of the settlement, i.e., Friday, it will be settled on the fourthworking day excluding the day of transaction.Settlement cycle is the accounting period for the securities traded on the exchange. On

the NSE the cycle begins on Wednesday and ends on the following Tuesday, while on theBSE the cycle commences on Monday and ends on Friday. At the end of this period, theobligations of each broker are calculated and the brokers settle their respectiveobligations as per the rules, bye-laws and regulations of the clearing corporation.Rolling Settlement

The rolling settlement ensures that each day's trade is settled by keeping a fixed gap,between a trade and its settlement, of a specified number of working days. At present thisis five working days after the trading day. The waiting period is uniform for all trades.

MECHANICS OF DERIVATIVE MARKETSSome derivatives are traded on organized exchanges while others are traded only in OTC

markets. Exchange-traded derivatives have standardized features and are not tailored tothe needs of individual buyers and sellers. For example, in S&P 500 stock index futureswhich are traded on the Chicago Mercantile Exchange, the value of the futures contractsis tied to the Standard & Poor‟s Composite Stock Price Index. The futures have standard

maturity and the Exchange prescribes rules for settlement “of any outstanding contractsin cash~of Ihe expiration dates‟ IrT contrast, u‟l‟u derivatives are customized_Tp meet

the specific needs .of the counterparty. Financial Swap is a good example of OTCderivative. OTC market, remains predominantly a telephone market. Notwithstanding theadvantages and disadvantages of such market; it remains a significant market,contributing to the volumes and innovation as well.

Latest Developments in India

Recently, SEBI has authorized mutual funds to trade on derivatives, subject toappropriate disclosures. The guidelines permit derivative trading for hedging andportfolio balancing.The positions of the mutual funds in the derivative markets will have to be fully protected(covered) by holding underlying securities/cash and cash equivalents/options and/orobligations to require the underlying assets to honor the obligations contracted in thederivatives market. Since derivatives can be used by the mutual funds as a risk

management tool, up to 100% of scheme‟s net assets, in the debt component, can be usedfor derivative trading.

FUTURESConsider yourself as a farmer growing com. Say, the month running is April, and yourcrop is likely to harvest in the month of July. There is an uncertainty about the price youwill receive for the corn. In the years of low supply or scarcity of corn, you might obtaina relatively high price - especially if you are not in a hurry. In the years of oversupply of



corn, you may have to dispose at lower prices. In the latter case, you are exposed to agreat deal of risk.On the other hand, consider a merchant who has an ongoing requirement for corn. In theyears of oversupply, he could fetch the corn at a competitive rate. But, in years of scarcity, he is exposed to price risk, as the prices may be highly exorbitant.

As you are uncertain about the price that you are likely to receive, you will be happy if you can know the price you are likely to receive beforehand with certainty. The futuresmarket will enable you to enter into a contract, and lock the price. „Futures‟ contracts are

legally binding agreements to buy or sell a commodity sometime in the future. The„contract‟ specifies the quantity, price and the date of delivery (negotiable to you and the

merchant), and will enable you both to eliminate or minimize the risk, which otherwisewill be faced due to uncertain price fluctuations of the future price of corn.MECHANISM OF FUTURES MARKETSFutures contracts are traded in auctions markets, where the prices are order driven. Inthese markets, each broker and trader can buy at the lowest offered price and sell at the

highest bid price and the liquidity is maintained by the participation of these buyers andsellers. Some of these buyers and sellers are hedgers, seeking to protect their investments,some are speculators who are risk-takers seeking to trade in pursuit of profit incidentallykeep bid and ask prices close together and to provide efficient trading in the system.Futures contracts are designed in such a way so that their prices should always reflect theprices of underlying cash market. The activities of speculators and arbitragers also bring price alignment. In “calendar spreading” traders sell the current delivery-month contractand buy a later delivery-month contract, or vice-versa. This reduces price variancebetween the futures contracts. Arbitrage also helps keep the cash and futures pricesaligned. For example, futures contracts seem to be overpriced in relation to the

underlying commodity, arbitrageurs will sell the futures contract and simultaneously buythe commodity, thereby making a profit on the difference.CONTRACT SPECIFICATIONS FOR FUTURES

The Asset

A futures contract between two parties „should specify in some detail the exact nature of the asset, price, contract size, delivery arrangements, delivery months, tick size, limits ondaily price fluctuation and trading unit.The delivery of the asset needs to be specified at the time of entering into a contract.When the underlying asset is a commodity, there may be variations in the quality of whatis available in the market. It, therefore, becomes important to specify the grade of thecommodity that is to be delivered. For example, on CBOT, one of the specifications forcorn futures contract, the standard grade is „No.2 Soft

The Price

The price agreeable to the buyer and the seller at the time of delivery of the futurecontract is specified at the time of agreement. The futures prices quoted are convenientand easy to understand. For example, corn prices on the Chicago Mercantile Exchange(CME) are quoted per bushel. The treasury bonds and notes on futures on CBOT arequoted in dollars with two decimals.



The Contract Size

This specifies the amount of the asset that has to be delivered under one contract. If thesize of the contract is too large, many investors cannot use the exchange for hedging orfor speculative purposes. This is because speculators may not wish to take large positionsdue to risk. However, if the contract size is too small, trading becomes expensive due to

the cost associated with trading.Delivery Arrangements

The place for delivery needs to be specified at the time of the contract to avoidcontroversy. The location or place of delivery becomes a major issue when thetransportation costs are significant. However, if any alternative delivery locations arespecified, the price received by the seller is sometimes adjusted according to the placechosen by him. Sometimes alternatives are specified for the grade of the asset that will bedelivered or for the delivery locations.Delivery Months

A futures contract is referred to by its delivery month. For example, July corn, means that

the contract is for delivery in the month of July. The delivery months vary from onecontract to the other depending upon the underlying asset, and also on the needs of market participants. For certain contracts the delivery period runs throughout the month.Trading on contracts generally ceases a few days before the last day on which thedelivery can be made. The date on which the contracts cease to trade is specified by theexchange.tick SizeThe contract also specifies the minimum price fluctuation or tick size. For example, insoybean contract, one tick is ¼ cent per bushel as the minimum size of contract forsoybean is 5000 bushels, which gives a tick size of $12.50 per contract.

Limits on Daily Price MovementsThe daily price movement limits are specified by the exchange. If the price moves up bya limit, it is referred to as limit up and if it moves down by a limit, it is referred to as limitdown. The prime purpose of the daily price limits is to prevent large price fluctuationsthat may occur due to excessive speculations and also to safeguard the interests of genuine traders. The* limits are set by the exchange authorities. However, the price limitsbecome artificial when the price of the underlying commodity is advancing or decliningrapidly.Option

An option is a contract in which the seller of the contract grants the buyer, the right topurchase from the seller a designated instrument or an asset at a specific price which isagreed upon at the time of entering into the contract. It is important here to note that theoption buyer has the right but not an obligation to buy or sell. But, if the buyer decides toexercise his right, the seller of the option has an obligation to deliver or take delivery of the underlying asset at the price agreed upon. The seller of the option is also called thewriter of the option.



FACTORS INFLUENCING OPTION PRICESThe value of an option depends on six factors:1. The spot price or current price of the underlying asset.

2. The exercise price or strike price of the option.3. The time-to-maturity or time-to-expiration.4. Volatility of the underlying asset or volatility in the price of underlying asset.5. The risk-free rate of interest.6. Dividends expected during the life of the option, in case of dividend paying stocks.f(S0,E,oUrpd)Where, C0 = Value of call option P0 = Value of put option E = Exercise price S0 = Price of underlying stock f = function cj2 = Price volatility of underlying stock t = Time-to-expiration rf = Risk-freeinterest rate

d = Cash dividendCurrent Stock Price

When a call option is to be exercised in the future, its net flow will be the amount bywhich the stock price exceeds the strike price. Hence, the value of the call optionincreases with increase in the stock price while its value decreases whenever the stock price declines. For a put option, the net flow on exercise is the amount by which its strikeprice exceeds the stock price. Therefore, the value of a put option decreases with anincrease in the stock price while, its value increases whenever stock price declines.Strike Price

The value of a call option increases with decline in strike price. On the other hand, valueof the call option decreases when strike price increases. This happens because the valueof a call option depends on the difference between stock price and strike price as statedearlier. Similarly, the difference between the strike price and the stock price determinesthe value of a put option. Therefore, payoff from a put increases with an increase in thestrike price, while the payoff decreases with a decline in the strike price.

Time-to-Expiration

The impact of “time-to-expiration” on the stock prices varies depending on whether theoption is American or European. In case of American option, whether call or put, theholder has a right to exercise the option any time during the life of the option. The longerthe “Time-to-expiration”, the greater the opportunity to exercise. Hence if the “Time-to-

expiration” is longer, then the option price will be higher. However, this does not holdgood for European options since the option holder can exercise the option only onmaturity. Therefore, no definitive relationship can be established between the time-to-expiration and the option price in case of European options.Volatility

The volatility of a stock price represents the uncertainty attached to its future movement.As volatility increases, the chance that the stock will perform very well or very poorly



increases. For the owner of a stock, these two possibilities neutralize each other.However, this is not true for a call or a put option holder. The call option holder gainsfrom price increase but has fixed downside risk in case of price decline. Again a putoption owner benefits from the price decline but has limited risk in case of the upwardmovement in the stock price. Hence the value of both call and put increases as volatility

increases.Risk-free Interest Rate

The impact of risk-free interest rate on the price of an option cannot be clearly defined.Whenever interest rates in the economy rise, the expected growth rate of the stock priceincreases but the present value of all the future cash flows to be received by the owner of the option declines. Because of these effects the value of a put option decreases as the risk-free interest rate increases. For the calls, the increase inthe growth rate of the stock price enhances its value however much the present valueeffect tends to decrease it. Therefore, the first effect tends to push the price while thesecond effect tends to reduce it. It can be shown that the effect of the former always

dominates the latter. Thus, the price of call always increases as the risk-free interest rateincreases. It is quite important to mention here that the above effects have beenconsidered with other variables remaining unchanged. Generally, whenever interest ratesrise (fall), stock prices tend to fall (rise). The net effect of an interest rate change alongwith stock price change may differ from the results described above.Dividends

The value of stock increases in anticipation of dividend declaration and the same declinesafter the record date. Hence the price of a European call option whose expiry date isbeyond the record date tends to decline whereas that of a put option tends to increase. Incase of American options, the impact on the price will be similar to the impact described

earlier with reference to stock price.The impact of dividend on the price of options is essentially a consequence of the impactof dividend on stock price.IPO

An IPO is an abbreviation for Initial Public Offer. When a company goes public for thefirst time or issues a fresh stock of shares, it offers it to the public directly.This happens in the primary market. The primary market is where a company makes itsfirst contact with the public at large.Book Building

Book Building is a process used for marketing a public offer of equity shares of acompany and is a common practice in most developed countries. Book Building is so-called because the collection of bids from investors is entered in a "book". These bids arebased on an indicative price range. The issue price is fixed after the bid closing date.Book Built

A company that is planning an initial public offer (IPO) appoints a category-I MerchantBanker as a book runner. Initially, the company issues a draft prospectus which does notmention the price, but gives other details about the company with regards to issue size,past history and future plans among other mandatory disclosures. After the draft



prospectus is filed with the SEBI, a particular period is fixed as the bid period and thedetails of the issue are advertised. The book runner builds an order book, that is, collatesthe bids from various investors, which shows the demand for the shares of the companyat various prices. For instance, a bidder may quote that he wants 50,000 shares at Rs.500while another may bid for 25,000 shares at Rs.600. Prospective investors can revise their

bids at anytime during the bid period, that is, the quantity of shares or the bid price or anyof the bid options. Usually, the bid must be for a minimum of 500 equity shares and inmultiples of 100 equity shares thereafter. The book runner appoints a syndicate member,a registered intermediary who garners subscription and underwrites the issue.

On what basis is the final price decided?

On closure of the book, the quantum of shares ordered and the respective prices offeredare known. The price discovery is a function of demand at various prices, and involvesnegotiations between those involved in the issue. The book runner and the companyconclude the pricing and decide the allocation to each syndicate member.

When is the payment for the shares made?The bidder has to pay the maximum bid price at the time of bidding based on the highestbidding option of the bidder. The bidder has the option to make different bids likequoting a lower price for higher number of shares or a higher price for lower number of shares. The syndicate member may waive the payment of bid price at the time of bidding.In such cases, the issue price may be paid later to the syndicate member within four daysof confirmation of allocation. Where a bidder has been allocated lesser number of sharesthan he or she had bid for, the excess amount paid on bidding, if any will be refunded tosuch bidder.Is the process followed in India different from abroad?

Unlike international markets, India has a large number of retail investors who activelyparticipate in IPOs. Internationally, the most active investors are the Mutual Funds andOther Institutional Investors. So the entire issue is book built. But in India, 25 per cent of the issue has to be offered to the general public. Here there are two options to thecompany. According to the first option, 25 per cent of the issue has to be sold at a fixedprice and 75 per cent is through Book Building. The other option is to split the 25 percent on offer to the public (small investors) into a fixed price portion of 10 per cent and areservation in the book built portion amounting to 15 per cent of the issue size. The restof the book built portion is open to any investor.What is the advantage of the Book Building process versus the normal IPO marketingprocess?The Book Building process allows for price and demand discovery. Also, the costs of thepublic issue is reduced and so is the the time taken to complete the entire process.How is Book building different from the normal IPO marketing process as practiced inIndia?Unlike in Book Building, IPOs are usually marketed at a fixed price. Here the demandcannot be anticipated by the merchant banker and only after the issue is over the response



is known. In book building, the demand for the share is known before the issue closes.The issue may be deferred if the demand is less.

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