Internal Project Amit 1

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Amit kumar Choudhury, MBA, SOM Page 1

DECLARATION

I hereby declare that this project work entitled Role of BhSE in Indian security marketis my

work, carried out under the guidance of my faculty guides PROF.ABHAYA KUMAR

MUDULI and my company guide Mr. BIPIN BIHARI DUTTA. This report neither full nor in

part has ever been submitted for award of any other degree of either this management college or

any other management college.

(AMIT KUMAR CHOUDHURY)

Regn. No.110202mbr040, MBA,

CSREM, PARALAKHEMUNDI


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CERTIFICATE

This is to certify that the Summer Internship Project titled ROLE OF BhSE IN INDIAN

SECURITY MARKETa bona fide work ofMr. AMIT KUMAR CHOUDHURY is original

and has been done under my supervision in partial fulfillment of the requirement for the award of

MBA, for the period of two months from 12th

April 2012 to 12th

June 2012. This report neither

full nor in part has ever before been submitted for awarding of any degree of either this college

or any other college. I am pleased to say that his performance during the period was extremely

satisfactory.

FACULTY GUIDE

PROF. ABHAYA KUMAR MUDULI



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LETTER OF APPRECIATION

This is to certify that Mr.AMIT KUMAR CHOUDHURY pursuing MBA(20112013) from

CSREM, PARALAKHEMUNDI has successfully completed his project A ROLE OF BhSE

IN INDIAN SECURITY MARKETfrom 12th April 2009 to 12th June 2009. We appreciate his

commitment, determination and performance during the project and bound to be valuable asset

for any organization.

I am pleased to say his performance and Sincerity at work during the period was good.

FACULTY GUIDE

PROF. ABHAYA KUMAR MUDULI



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ACKNOWLEDGEMENT

To Have Knowledge is a Power; To Impart Knowledge is a Super-

Power

It gives me immense pleasure to express my deep sense of gratitude to Dr. (Prof) Anita patra,

PGP coordinator, CSREM, Paralakhemundi, for his valuable guidance and consistent

supervision throughout the course.

I am also thankful to Mr.Bipin bihari dutta, my Company Guide Bhubaneswar stock exchange

limited, Bhubaneswar, for his valuable guidance for preparing the Final Report and also for

providing the necessary facilities.

I am extremely thankful to Prof. Abhaya Kumar Muduli Faculty Guide of CSREM,

Paralakhemundi for their timely guidance and support throughout the project work.

This study could not have been successful without the valuable input of the investor. Finally I am

indebted to our other faculty members, my friends and my parents who gave their full-fledged

co-operation for successful completion of my project.

It was an indeed learning experience for me.

(AMIT KUMAR CHOUDHURY)

Regn No.110202mbr040, MBA,



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INDEX

Contes Page No.

1. Executive Summary-------------------------------------------------------------------- 6

2. Introduction ----------------------------------------------------------------------------- 83. Company profile ----------------------------------------------------------------------- 104. Literature review ------------------------------------------------------------------------135. Trading ---------------------------------------------------------------------------------- 28

6.

Trading procedure --------------------------------------------------------------------- 30

7. Corporation broker & proprietor broker ------------------------------------------328. Government interference in operation of a stock exchange---------------------- 339. Primary market & secondary market----------------------------------------------- 3510.Derivative trading ----------------------------------------------------------------------3711.Role of Regional Stock Exchange with special reference to BHSE -------------4712. Conclusion ------------------------------------------------------------------------------5013. findings & Recommendation ---------------------------------------------------------5114.Books ------------------------------------------------------------------------------------ 5215.Bibliography -----------------------------------------------------------------------------5216.Semi- structured Questions ------------------------------------------------------------ 53


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EXCUTIVE SUMMARY

This project is carried out in the partial fulfillment of the master degree course of business

administration. This project is about the Role of Bhubaneswar stock exchange in Indian securitymarket The process started from learning the industrial objective. A company likes

Bhubaneswar stock exchange which provides services for stock brokers and traders to

trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and

redemption of securities and other financial instruments, and capital events including the

payment of income and dividends. Securities traded on a stock exchange include shares issued

by companies, unit trusts, derivatives, pooled investment products and bonds

The complete project is prepared on the basis of the companies past records i.e. the financial

reports, companys website, and other sources.

The objective of this project is to find out role of Bhubaneswar stock exchange in the security

market.

These are the certain points are as follows:

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there

is a central location at least for record keeping, but trade is increasingly less linked to such a

physical place, as modern markets are electronic networks, which gives them advantages of

increased speed and reduced 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 and

subsequent trading is done in the secondary market. A stock exchange is often the most

important component of a stock market. Supply and demand in stock markets are driven by

various factors that, 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, nor must stock be

subsequently traded on the exchange. Such trading is said to be offexchange or over-the-counter.

This is the usual that derivatives and bonds are traded. Increasingly, stock exchanges are part of a

global market for securities.
http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Stock_valuationhttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Stock_valuationhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stock_broker


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CHAPTER- 1


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Introduction

A stock exchange is a form ofexchange which provides services for stock brokers and traders to




by companies, unit trusts, derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there

is a central location at least for record keeping, but trade is increasingly less linked to such a

physical place, as modern markets are electronic networks, which gives them advantages of

increased speed and reduced 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 and

subsequent trading is done in the secondary market. A stock exchange is often the most

important component of a stock market. Supply and demand in stock markets are driven by

various factors that, 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, nor must stock be

subsequently traded on the exchange. Such trading is said to be offexchange or over-the-counter.

This is the usual that derivatives and bonds are traded. Increasingly, stock exchanges are part of aglobal market for securities.

Functions of stock exchange

1. Provides ready and continuous market

2.

Provides information about prices and sales

3. Provides safety to dealings and investment:

4. Helps in mobilization of savings and capital formation

5. Barometer of economic and business conditions
http://en.wikipedia.org/wiki/Exchange_(organized_market)http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Stock_valuationhttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CHMQFjAF&url=http%3A%2F%2Fwiki.answers.com%2FQ%2FFunctions_of_stock_exchange&ei=ceHxT8SmDI_krAeQpMG9DQ&usg=AFQjCNHCyVhzRkzYQO_ERrTb73r18jmt0A&sig2=Fk-1jT1GbKGhUVFyN60Q-ghttp://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CHMQFjAF&url=http%3A%2F%2Fwiki.answers.com%2FQ%2FFunctions_of_stock_exchange&ei=ceHxT8SmDI_krAeQpMG9DQ&usg=AFQjCNHCyVhzRkzYQO_ERrTb73r18jmt0A&sig2=Fk-1jT1GbKGhUVFyN60Q-ghttp://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CHMQFjAF&url=http%3A%2F%2Fwiki.answers.com%2FQ%2FFunctions_of_stock_exchange&ei=ceHxT8SmDI_krAeQpMG9DQ&usg=AFQjCNHCyVhzRkzYQO_ERrTb73r18jmt0A&sig2=Fk-1jT1GbKGhUVFyN60Q-ghttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Stock_valuationhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Exchange_(organized_market)


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6. Better Allocation of funds

OBJECTIVES OF THE STOCK EXCHANGE

To facilitate, assist, regulate or control the business of buying, selling or dealing in

shares and securities within the meaning of Securities Contracts (Regulation) Act, 1956

(SCRA).

To spread equity culture among the investing public by a trading platform for dealing in

stocks, shares and like securities through the SEBI registered stock-brokers.

To render assistance, support and services to the investing public in the interest of the

securities market.

To make the investing public aware about the securities market through seminars,

workshops and investors education programmers.

To take all such promotional steps and actions for orderly development of and smooth

functioning of the securities market activities.

Contribution made by Bhubaneswar stock exchange for growth of security market

At present there are 23 recognized stock exchanges functioning in the country. Till the

introduction of on-line trading in the security market of the country Bhubaneswar stock

exchange of India playing an important role with regard to provided platform to facility the

business of buying and selling of share and security through the SEBI registered stock-

exchange-broker under the framework of necessary control and regulations in the respective state

of jurisdiction. Promotion and spreading of equity culture among the investing public through

seminars/workshop/investors educations programs. Assisting entrepreneurs/corporate house to

raise resources by issuing security market and facilitating dealings in those issued instruments in

the secondary market.


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Company profile

Bhubaneswar stock exchange ltd. (BhSE) has been functioning as a recognized stock exchange

in India spreading the culture of equity in state of odisha for about 20 year. It was initially

incorporated on 17th of April 1989 as a public company limited by guarantee with an object to

facilitated , assist , regulate, or control the business of buying and selling or dealing in stock and

share like security within the meaning of security contract (regulation ) act 1956. Ministry of

finance, Govt of India granted recognition to BhSE on the 5th

of June 1956 for an initial period of

5 years. There after recognition of BhSE is being renewed from time by SEBI.

Subsequently, pursuant to the amendment to the security contract (regulation) act 1956 during

the year of 2004 by the Govt of India in order to provide for corporatization and demutualization

of the stock exchange of the country , BhSE in compliance to the requirement of the corprisation

first in order to get itself a corporised entity, was a company limited by guarantee to a company

limited by share on 9th of December 2005 by way of fresh in corporation diluted its share

capital to public in compliance with the requirement of demutualization in order to ensure at

least 51% of paid up share capital are held by the person other than the stock broker share holder.

A stock exchange is a form of exchange which provides services for stock brokers and traders to




by companies, unit trusts, derivatives, pooled investment products and bonds.

Management

The affaire of the BhSE are controlled and supervised by the BODs under the provision of MOA

and AOA, rules, regulation, and bye laws of stock exchange framed in line with Companies Act

1956 and security contract regulation act 1956 and SEBI Act 1992. The day affairs are managed

by CEO of the stock exchange. The BODs of stock exchange comprises of 8 directors such as 2


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public interest director who appoint SEBI constituted panel, 3 share holder and 2 trading member

directors who are appointed by the share holder and a whole time CFO who is the ex-officio of

the board

Research objective

o To know how security trading is done in the stock market.

o To know the on line trading procedure of stock exchange

o To know role of corporate brokers and how are they different from proprietor brokers.

o To know the interference of government in operation of stock exchange

o To know the role of stock exchange in primary market and secondary market

o To know the role of stock exchange in Derivative Trading

o To know the role of Regional Stock Exchange with special reference to BHSE for

economic development of the country.

Scope of training:

Scope for equity investment is very high in view of high saving rate and this proportionately low

investment in equity and develop economies with rising income in the hands of middle class the

future scope is tremendous.

Method of Data collection

Secondary sources;-

It is the data which has already been collected by someone or any organization for some other

purpose or research study has been collected from various sources

Books

Journal

Magazine & Internet sources


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Location of training

All the activity were carried out at Bhubaneswar stock exchange (BhSE)

Time: 60 days

Limitation of study

LIMTITED TIME;

The time provided to conduct the study was 2 month, which is very less.

LIMITED RESOURCES;

Limited resources are available to collect the information regarding topic

VOLATALITY

Share market is so much volatile and it is difficult to forecast and thinking about whether

you trade through online or offline.

PRICEING

While pricing the option, no of days considered by market for volatility calculation was

not known.


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Literature review

In general, the financial market divided into two parts, Money market and capital market.

Securities market is an important, organized capital market where transaction of capital is

facilitated by means of direct financing using securities as a commodity. Securities market can

be divided into a primary market and secondary market.

PRIMARY MARKET

The primary market is an intermittent and discrete market where the initially listed shares are

traded first time, changing hands from the listed company to the investors. It refers to the process

through which the companies, the issuers of stocks, acquire capital by offering their stocks to

investors who supply the capital. In other words primary market is that part of the capital

markets that deals with the issuance of new securities. Companies, governments or public sector

institutions can obtain funding through the sale of a new stock or bond issue. This is typically

done through a syndicate of securities dealers. The process of selling new issues to investors is

called underwriting. In the case of a new stock issue, this sale is called an initial public offering

(IPO). Dealers earn a commission that is built into the price of the security offering, though it

can be found in the prospectus.

SECONDARY MARKET

The secondary market is an on-going market, which is equipped and organized with a place,

facilities and other resources required for trading securities after their initial offering. It refers to

a specific place where securities transaction among many and unspecified persons is carried out

through intermediation of the securities firms, i.e., a licensed broker, and the exchanges, a

specialized trading organization, in accordance with the rules and regulations established by the

exchanges.


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A bit about history of stock exchange they say it was under a tree that it all started in

1875.Bombay Stock Exchange (BSE) was the major exchange in India till 1994.National Stock

Exchange (NSE) started operations in 1994.

NSE was floated by major banks and financial institutions. It came as a result of Harshad Mehta

scam of 1992. Contrary to popular belief the scam was more of a banking scam than a stock

market scam. The old methods of trading in BSE were people assembling on what as called a

ring in the BSE building. They had a unique sign language to communicate apart from all the

shouting. Investors weren't allowed access and the system was opaque and misused by brokers.

The shares were in physical form and prone to duplication and fraud.

NSE was the first to introduce electronic screen based trading. BSE was forced to follow suit.

The present day trading platform is transparent and gives investors prices on a real time basis.

With the introduction of depository and mandatory dematerialization of shares chances of fraud

reduced further. The trading screen gives you top 5 buy and sell quotes on every scrip.

A typical trading day starts at 10 ending at 3.30. Monday to Friday. BSE has 30 stocks which

make up the Sensex .NSE has 50 stocks in its index called Nifty. FII s Banks, financial

institutions mutual funds are biggest players in the market. Then there are the retail investors and

speculators. The last ones are the ones who follow the market morning to evening; Market can bevery addictive like blogging though stakes are higher in the former.

ORIGIN OF INDIAN STOCK MARKET

The origin of the stock market in India goes back to the end of the eighteenth century when long-

term negotiable securities were first issued. However, for all practical purposes, the real

beginning occurred in the middle of the nineteenth century after the enactment of the companies

Act in 1850, which introduced the features of limited liability and generated investor interest in

corporate securities.

An important early event in the development of the stock market in India was the formation of

the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present

day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in


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Ahmadabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of

ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during

depressing times subsequently.

Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life. Without a

stock exchange, the saving of the community- the sinews of economic progress and productive

efficiency- would remain underutilized. The task of mobilization and allocation of savings could

be attempted in the old days by a much less specialized institution than the stock exchanges. But

as business and industry expanded and the economy assumed more complex nature, the need for

'permanent finance' arose. Entrepreneurs needed money for long term whereas investors

demanded liquidity the facility to convert their investment into cash at any given time. The

answer was a ready market for investments and this was how the stock exchange came intobeing.

Stock exchange means any body of individuals, whether incorporated or not, constituted for the

purpose of regulating or controlling the business of buying, selling or dealing in securities. These

securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in

or of any incorporated company or other body corporate.

(ii) Government securities.

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are

the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges.

However, the BSE and NSE have established themselves as the two leading exchanges and

account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal

in size in terms of daily traded volume. The average daily turnover at the exchanges has

increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273


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crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market

capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000

crore. Most key stocks are traded on both the exchanges and hence the investor could buy them

on either exchange. Both exchanges have a different settlement cycle, which allows investors to

shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30

stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex

is the older and more widely followed index.

Both these indices are calculated on the basis of market capitalization and contain the heavily

traded shares from key sectors. The markets are closed onSaturdays and Sundays. Both the

exchanges have switched over from the open outcry trading system to a fully automated

computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National

Exchange Automated Trading) System.

It facilitates more efficient processing, automatic order matching, faster execution of trades and

transparency; the scrip's traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z'

groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The

'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrip's arethe blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups

and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories,

Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and

primary market is the Securities and Exchange Board of India (SEBI) Ltd.

Brief History of Stock Exchanges

Do you know that the world's foremost marketplace New York Stock Exchange (NYSE), started

its trading under a tree (now known as 68 Wall Street) over 200 years ago? Similarly, India's

premier stock exchange Bombay Stock Exchange (BSE) can also trace back its origin to as far as

125 years when it started as a voluntary non-profit making association.


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News on the stock market appears in different media every day. You hear about it any time it

reaches a new high or a new low, and you also hear about it daily in statements like 'The BSE

Sensitive Index rose 5% today'. Obviously, stocks and stock markets are important. Stocks of

public limited companies are bought and sold at a stock exchange. But what really are stock

exchanges? Known also as the stock market or bourse, a stock exchange is an organized

marketplace for securities (like stocks, bonds, options) featured by the centralization of supply

and demand for the transaction of orders by member brokers, for institutional and individual

investors.

The exchange makes buying and selling easy. For example, you don't have to actually go to astock exchange, say, BSE - you can contact a broker, who does business with the BSE, and he or

she will buy or sell your stock on your behalf.

Electronic trading

Electronic trading eliminates the need for physical trading floors. Brokers can trade from their

offices, using fully automated screen-based processes. Their workstations are connected to a

Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs).

The orders placed by brokers reach the Exchange's central computer and are matched

electronically.

Exchanges in India

The 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 NSE allow nationwide trading via their VSAT

systems.

Index


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An Index is a comprehensive measure of market trends, intended for investors who are

concerned with general stock market price movements. An Index comprises stocks that have

large liquidity and market capitalization. Each stock is given a weight age in the Index equivalent

to its market capitalization. At the NSE, the capitalization of NIFTY (fifty selected stocks) is

taken as a base capitalization, with the value set at 1000. Similarly, BSE Sensitive Index or

Sensex comprises 30 selected stocks. The Index value compares the day's market capitalization

vis--vis base capitalization and indicates how prices in general have moved over a period of

time.

Execute an order

Select a broker of your choice and enter into a broker-client agreement and fill in the client

registration form. Place your order with your broker preferably in writing. Get a trade

confirmation slip on the day the trade is executed and ask for the contract note at the end of the

trade date.

Need a broker

As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can

operate in the stock market. One can trade by executing a deal only through a registered broker

of a recognized Stock Exchange or through a SEBI-registered sub-broker.

Contract note

A contract note describes the rate, date, time at which the trade was transacted and the brokerage

rate. A contract note issued in the prescribed format establishes a legally 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 and the client both keep a copy each. A client should receive

the contract note within 24 hours of the executed trade. Corporate Benefits/Action.


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Split

A Split is book entry wherein the face value of the share is altered to create a greater number of

shares outstanding without calling for fresh capital or altering the share capital account. For

example, if a company announces a two-way split, it means that a share of the face value of Rs

10 is split into two shares of face value of Rs 5 each and a person holding one share now holds

two shares.

Buy Back

As the name suggests, it is a process by which a company can buy back its shares from

shareholders. A company may buy back its shares in various ways: from existing shareholders on

a proportionate basis; through a tender offer from open market; through a book-building process;

from the Stock Exchange; or from odd lot holders.

A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot

transactions or through any private arrangement.

Settlement cycle

The accounting period for the securities traded on the Exchange. On the NSE, the cycle beginson Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on

Monday and ends on Friday. At the end of this period, the obligations of each broker are

calculated and the brokers settle their respective obligations as per the rules, bye-laws and

regulations of the Clearing Corporation. If a transaction is entered on the first day of the

settlement, the same will be settled on the eighth working day excluding the day of transaction.

However, if the same is done on the last day of the settlement, it will be settled on the fourth

working day excluding the day of transaction.

Rolling settlement

The rolling settlement ensures that each day's trade is settled by keeping a fixed gap 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 is uniform for all trades. In a Rolling


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Settlement, all trades outstanding at end of the day have to be settled, which means that the buyer

has to make payments for securities purchased and seller has to deliver the securities sold. In

India, we have adopted the T+5 settlement cycle, which means that a transaction entered into on

Day 1 has to be settled on the Day 1 + 5 working days, when funds pay in or securities pay out

takes place.

What are the advantages of Rolling Settlements?

As mentioned earlier, this is the system practiced in developed countries. Pay outs are quicker

than in weekly settlements, and investors will benefit from increased liquidity. The other benefit

of the modified system is that it keeps cash and forward markets separate. In the current system,

the trader has five days to square off his transaction which leads to a high level of speculation as

people even without funds tend to "play" the market. During volatile markets, especially in a

bearish market, this often leads to a payment problem which has dogged the Indian stock

exchanges for a long time. It provides for a higher degree of safety, and once mechanisms such

as futures and stock-lending become popular, it would result in quality speculation and genuine

investor interest.

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 to your 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 the receipt of the contract note for purchase

but in any case before the pay-in day.

Short selling

Short selling is a legitimate trading strategy. It is a sale of a security that the seller does not own,

or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers

take the risk that they will be able to buy the stock at a more favorable price than the price at

which they "sold short."


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The selling of a security that the seller does not own, or any sale that is completed by the

delivery of a security borrowed by the seller, Short sellers assume that they will be able to buy

the stock at a lower amount than the price at which they sold short.

Auction

An auction is conducted for those securities that members fail to deliver/short deliver during pay-

in. Three factors primarily give rise to an auction: short deliveries, un-rectified bad deliveries,

and un-rectified company objections

Separate market for auctions

The buy/sell auction for a capital market security is managed through the auction market. As

opposed to the normal market where trade matching is an on-going process, the trade matching

process for auction starts after the auction period is over.

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 is squared up at the highest

price from the relevant trading period till the auction day or at 20 per cent above the last

available Closing price whichever is higher. The pay-in and pay-out of funds for auction square

up is held along with the pay-out for the relevant auction.

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 the transfer. Bad delivery exists only when shares are

transferred physically. In "Demat" bad delivery does not exist.

Stock & Exchange Board of India


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REGULATION OF BUSINESS IN THE STOCK EXCHANGES

Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of stock

exchanges. The SEBI has been inspecting the stock exchanges once every year since 1995-96.

During these inspections, a review of the market operations, organizational structure and

administrative control of the exchange is made to ascertain whether:

the exchange provides a fair, equitable and growing market to investors

the exchange's organization, systems and practices are in accordance with the Securities

Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed there under

the exchange has implemented the directions, guidelines and instructions issued by the

SEBI from time to time

The exchange has complied with the conditions, if any, imposed on it at the time of

renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.

During the year 1997-98, inspection of stock exchanges was carried out with a special focus on

the measures taken by the stock exchanges for investor's protection. Stock exchanges were,

through inspection reports, advised to effectively follow-up and redress the investors' complaints

against members/listed companies. The stock exchanges were also advised to expedite the

disposal of arbitration cases within four months from the date of filing.

During the earlier years' inspections, common deficiencies observed in the functioning of the

exchanges were delays in post trading settlement, frequent clubbing of settlements, delay in

conducting auctions, inadequate monitoring of payment of margins by brokers, non-adherence to

Capital Adequacy Norms etc. It was observed during the inspections conducted in 1997-98 that

there has been considerable improvement in most of the areas, especially in trading, settlement,

collection of margins etc.

Dematerialization

Dematerialization in short called as 'demat' is the process by which an investor can get physical

certificates converted into electronic form maintained in an account with the Depository

Participant. The investors can dematerialize only those share certificates that are already


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registered in their name and belong to the list of securities admitted for dematerialization at the

depositories.

Depository: The organization responsible to maintain investor's securities in the electronic form

is called the depository. In other words, a depository can therefore be conceived of as a "Bank"

for securities. In India there are two such organizations viz. NSDL and CDSL. The depository

concept is similar to the Banking system with the exception that banks handle funds whereas a

depository handles securities of the investors. An investor wishing to utilize the services offered

by a depository has to open an account with the depository through Depository Participant.

Depository Participant: The market intermediary through whom the depository services can be

availed by the investors is called a Depository Participant (DP). As per SEBI regulations, DP

could be organizations involved in the business of providing financial services like banks,

brokers, custodians and financial institutions. This system of using the existing distribution

channel (mainly constituting DPs) helps the depository to reach a wide cross section of investors

spread across a large geographical area at a minimum cost. The admission of the DPs involves a

detailed evaluation by the depository of their capability to meet with the strict service standards

and a further evaluation and approval from SEBI. Realizing the potential, all the custodians in

India and a number of banks, financial institutions and major brokers have already joined as DPs

to provide services in a number of cities .

Advantages of a depository services:

Trading in demat segment completely eliminates the risk of bad deliveries. In case of transfer of

electronic shares, you save 0.5% in stamp duty. Avoids the cost of courier/ notarization/ the need

for further follow-up with your broker for shares returned for company objection No loss of

certificates in transit and saves substantial expenses involved in obtaining duplicate certificates,

when the original share certificates become mutilated or misplaced.

Lower interest charges for loans taken against demat shares as compared to the interest for loan

against physical shares. RBI has increased the limit of loans availed against dematerialized

securities as collateral to Rs 20 lakh per borrower as against Rs 10 lakh per borrower in case of

loans against physical securities. RBI has also reduced the minimum margin to 25% for loans


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against dematerialized securities, as against 50% for loans against physical securities. Fill up the

account opening form, which is available with the DP. Sign the DP-client agreement, which

defines the rights and duties of the DP and the person wishing to open the account. Receive your

client account number (client ID).

This client id along with your DP id gives you a unique identification in the depository system.

Fill up a dematerialization request form, which is available with your DP, Submit your share

certificates along with the form; write "surrendered for demat" on the face of the certificate

before submitting it for demat) Receive credit for the dematerialized shares into your account

within 15 days.

What is online trading?

Buying and selling securities using the Internet or broker-provided proprietary software that

works through the Internet. Online trading is distinguished from wireless trading, a nascent area

of service where brokerage customers can trade via cell phones, pagers, and hand-held

organizers.

Definition of online trading

The act of placing buy/sell orders for financial securities or currencies with the use of a

brokerage's internet-based proprietary trading platforms. The use of online trading increased

dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers

and internet connections.

1. Equity Trading

The best way to amass wealth is by investing in the stock market. However, it can be a

risky proposition considering the high risk-return trade off prevalent in the stock market.

Therefore before investing, the clients should know how to go about it. By opening an account

with Fair Wealth, an investor can avail additional benefits like access to various intraday and

fundamental calls.


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2. Commodity Broking

Investment in commodities is advisable in the portfolio, as it is generally considered as defensive

because stocks and bonds witnesses adverse performance during times of inflation. It offers

advisory services with enhanced research and knowledge aims to capitalize the immense

potential of the commodities market

3. Derivatives Trading

Fair wealth Securities; have endeavored to make trading in derivatives simpler. It strives to

educate new entrants in the derivatives trading market so that they are more equipped with

knowledge and techniques.

4. Portfolio Management Services

Its Portfolio Management Service is well suited for high-net worth customers who want to

invest in Indian Equities and desire to create wealth over longer period After understanding

varied risk appetites and financial goals of individuals Fair wealth has created an Investment

Strategy called Wealth- MAX Strategy

5. Research

Fair Wealth carries out extensive research in equity and commodity

Equity Research It has a dedicated research team which is engaged in analyzing the Indian

economy and corporate sectors to identify multi-bagger stocks. It provides Weekly Techno

Funda Calls based on the weekly outlook. Their team also provides positional and medium term

calls. Ita technical team provides various intraday, BTST and Weekly Calls based on their

analysis. It also comes out with a report called Market Pulse on a daily basis. Daily Market

Outlook which is a daily newsletter is well-known among the industry. Besides this,

we are also into Derivative research which covers Call-Put Strategy and Covered Callstrategy.

Commodity Research: The commodity research team enables the investors to tapappropriate

opportunities in the commodity market.


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6. Risk Management through Life and General Insurance

It has a sizable presence in the distribution of 3rd party financial products like Life Insurance and

General Insurance Products. It provides expert Advisory on Life Insurance and

GeneralInsurance. The distribution network is backed by in-house back office support to

provide prompt and efficient customer service Major Competitors of Fair Wealth Securities Ltd


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CHAPTER- 2


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WHAT IS TRADING?

The act of buying and selling world currencies. Currency trading is most often engaged in

by banks and other institutions, for the purposes ofinternational trade. Individual

investors may engage in currency trading as well, attempting to benefit from variations inthe exchange rates of the currencies.

Different type of trading:

The stock market serves as a reliable indicator the actual value of the companies that issue

stocks. Stock values are based on verifiable financial data such as growth, assets, and sales

figures. The stock market is considered to be a good choice for long term investments since this

reliability that well-run companies should continue to grow and provide dividends for their

stockholders.

Short-term investors are also given opportunities in the stock market. Market skittishness, even

without a financial basis, can cause the rapid fluctuation of prices. Investor psychology, on the

other hand, can also cause the prices of the stocks to either fall or rise.

The suspicions of investors about a companys value increase can be ignited by news reports,

economic conditions, and rumors. When the price of a stock either rise or fall, some investors

will quickly jump on the bandwagon to cause an even faster price acceleration. Eventually

though, the market will correct itself. Savvy short-term investors who watch the market closely

see these kinds of situations as great opportunities for profitable trading.

Short-term trading is divided into 3 categories:

Position Trading

Swing Trading

Day Trading
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Position Trading

The longest term trading style among the three is position trading. Compared with the other

styles, the stocks in position trading can be held for a relatively longer period of time. Position

traders are expected to hold on to their stocks for anywhere from 5 days to 6 months because

they watch out for the fundamental changes in the value of the stocks. Position trading doesnt

require a great deal of time since the time needed to study the stock market can be as little as 30

minutes a day and it can be done after regular work hours. A quick examination of daily reports

is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock

market for the purpose of supplementing their income.

Swing Trading

Swing traders, when compared with position traders; hold their stocks for a shorter period of

time that generally lasts only for about one to five days. In looking for stock market changes, the

swing trader is more driven by the emotion rather than the fundamental value. This type of

trading requires more time in researching stocks and conceptualizing strategies because the

swing traders need to identify the trends in order to pick out the best trading opportunities. They

tend to rely on daily and intra-day charts to plot the movements of the stocks. This type of

trading usually generates a greater payback.

Day Traders

Day trading is considered to be the riskiest way to play the stock market. This may be true for

slightly uneducated traders but not for well experienced ones. Day trading involves the buying

and selling of stocks in very short periods of time. It generally takes less than a day but it can be

as short as a few minutes. Day traders need to stay rational and analytical to survive this type of

trading. They create plots of when to get in and out of a position by relying mostly on the

information that can influence the movement of the stock prices. Day trading has to be a full-

time profession since it requires paying a close attention to the different market conditions.


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TRADING PROCEDURE

Stock exchanges like NSE and BSE are the places where the trading of shares takes place.

Demat account is must be required to registered the security in stock market. The market

regulator, the Securities and Exchange Board of India (SEBI), has made it compulsory to open

the demat account if you want to buy and sell shares in Indian share market. So a demat account

is a must for trading and investing in share market.

How to open a Demat account?

You have to approach a Depository Participant (DP) to open a Demat account. Most banks are

DP participants so you can approach them or else you can contact us. To have latest list of

registered DP please visit websites www.nsdl.co.in and www.cdslindia.com

A broker and a DP are two different people.

A broker is a member of the stock exchange, who buys and sells shares on his behalf and also on

behalf of his customers.A broker can also be a DP.

Following are the documents required to open Demat account

When you approach any DP, you will be guided through the formalities for opening a demat

account.

The DP will ask to provide some documents as proof of your identity and address.

Below is a list of documents out of which you have to submit one or two.

PAN card, Voters ID, Passport, Ration card, Drivers license,

Photo credit card Employee ID card, IT returns, Electricity/ Landline phone bill etc.

.

How much it cost to open a Demat account?

The charges for demat account opening varies from broker to broker of from DP to DP.

Generally some broker charge one time account opening fees but currently due to high

competition they are offering free account..

Finally After successfully opening the demat account you are ready to do buying and selling of

shares in share market exchanges like BSE and NSE.


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Important points to remember while opening online demat account

1) Do multiple enquiries with various brokers or DPs and try getting low brokerage charges.

2) Also discuss about the margin they provide for day trading.

3) Discuss about fund transfer facility. The fund transfer should be reliable and easy. Fund

transfer from your bank account to trading account and fund payout from your trading account

back to your bank savings account.

Some online share trading account has integrated savings account which makes easy for you to

transfer funds from your saving account to trading account.

4) Very important is about service they provide, the research calls, intraday or daily trading tips.

5) Also enquire about their services charges and any other hidden fees if any.

6) Check how reliable and easy is to contact them in case of any emergency, like buying and

selling of shares on immediate basis or in case of any technical or other problems at your side

while trading yourself.

7) You can also request to broker for demonstration of the trading terminal software and check

how comfortable it is for you.


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Corporation broker

A business whose main responsibility is to be an intermediary that puts buyer and seller together

in order to facilitate a transaction. Brokerage companies are compensated via commission after

the transaction has been successfully completed.

For example, when a trade order for a stock is carried out, an individual often pays a transaction fee for

the brokerage company's efforts to execute the trade.

The real estate industry also operates in a brokerage-company format, as it is common for real estate

brokers to work together, each representing one party of the transaction, in order to make a sale. In this

case, the commission is split between both brokerage companies.

Corporate advisory

Corporate advisory refers to the activity of advising organizations, including corporations,

institutions and government bodies, on mergers and acquisitions and other transactions that

involve a change in ownership of a company or business. In investment banking circles, this

activity is commonly known by the general term M&A (Mergers and Acquisitions).

Transaction types include mergers, acquisitions, disposals, defenses, spin-offs, demergers, joint

ventures, privatizations, leveraged buyouts and many others. Transactions may be "public"

transactions, where the target is a listed public company, or "private" transactions, where the

target company is not listed.

There will normally be a minimum of two parties to an M&A transaction, namely the bidder and

the target. In a sale transaction, there will also be a vendor, i.e. the seller of the target business .

Proprietor broker

Proprietor broker is a person, who carried out his operation himself, it also share responsibility is

to be an intermediary that puts buyer and seller together in order to facilitate a transaction.

Brokerage companies are compensated via commission after the transaction has been

successfully completed.
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Government interference in stock exchange

Recently Indias economy has suffered as the result of ill-advised government meddling and

blatant corruption reminiscent of its inept.

Political interference in economic matters has resulted in consternation from both foreigninvestors and domestic entrepreneurs. Protectionist measures like the myopic exports irked

domestic suppliers and foreign consumers alike. A decision to retroactively tax foreign

purchases of Indian companies will only exacerbate foreign investor skepticism.

While reforms of this nature might grant politicians temporary popularity with constituencies,

they do nothing to reformIndias looming inflation problems.

Corruption remains pervasive in Indias sprawling bureaucracy, spanning all levels of

government. The recent election season demonstrated the propensity for candidates political

machines to give cash directly to voters and other overt attempts to curry favor (sorry). A week

which exposed government officials who had been complicit in granting undue benefits worth

billions to the coal industry.

These incidents have had a marked effect on both the Indian economy and stock market. The

Indian economy this year. While this may dwarf the growth rate of most developed countries,

6.1% is significantly lower than its growth of recent years. Further, anything lower than 6%

growth could have serious ramifications on Indian financial and social stability.

Indian markets have struggled for the past month, largely as a result of the aforementioned

developments. The BSE Sensex is down roughly 5% from its highs last month.

American investors with a long-term focus concerned about the Indian economy should pay

careful attention to stocks that are particularly sensitive to government interference like Tata

Communications (TCL, quote) and ICICI Bank(IBN, quote), as well as India-focused ETFs like

the Wisdom Tree India Earnings Fund (EPI, quote)
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Primary market

The primary market is that part of the capital markets that deals with the issuance of new

securities. Companies, governments or public sector institutions can obtain funding through the

sale of a new stockor bond issue. This is typically done through a syndicate of securities dealers.

The process of selling new issues to investors is called underwriting. In the case of a new stockissue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the

price of the security offering, though it can be found in the prospectus. Primary markets create

long term instruments through which corporate entities borrow from capital market.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market

where the securities are sold for the first time. Therefore it is also called the new issue

market (NIM).

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new security certificates to the investors.

Primary issues are used by companies for the purpose of setting up new business or for

expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the

economy.

The new issue market does not include certain other sources of new long term external

finance, such as loans from financial institutions. Borrowers in the new issue market may

be raising capital for converting private capital into public capital; this is known as

"going public."

Secondary market

The secondary market, also called aftermarket, is the financial market in which previously issued

financial instruments such as stock, bonds, options, and futures are bought and sold.[1] Another

frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bankto

investors such as Fannie Mae and Freddie Mac.
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The term "secondary market" is also used to refer to the market for any used goods or assets, or

an alternative use for an existing product or asset where the customer base is the second market

(for example, corn has been traditionally used primarily for food production and feedstock, but a

"second" or "third" market has developed for use in ethanol production).

With primary issuances of securities or financial instruments, or the primary market, investors

purchase these securities directly from issuers such as corporations issuing shares in an IPO or

private placement, or directly from the federal government in the case of treasuries. After the

initial issuance, investors can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from fragmented to

centralized, and from illiquid to very liquid. The major stock exchanges are the most visible

example of liquid secondary markets - in this case, for stocks of publicly traded companies.

Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock Exchange

provide a centralized, liquid secondary market for the investors who own stocks that trade on

those exchanges. Most bonds and structured products trade over the counter, or by phoning the

bond desk of ones broker-dealer. Loans sometimes trade online using a Loan Exchange
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Derivative trading

The term "Derivative" indicates that it has no independent value, i.e. its value is entirely

"derived" from the value of the underlying asset. The underlying asset can be securities,

commodities, bullion, currency, live stock or anything else. In other words, Derivative means a

forward, future, option or any other hybrid contract of pre determined fixed duration, linked for

the purpose of contract fulfillment to the value of a specified real or financial asset or to an index

of securities.

With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the

definition of Securities. The term Derivative has been defined in Securities Contracts

(Regulations) Act, as:-

A Derivative includes:

A security derived from a debt instrument, share, loan, whether secured or unsecured,

risk instrument or contract for differences or any other form of security;

A contract which derives its value from the prices, or index of prices, of underlying

securities.

What is a Futures Contract?

Futures Contract means a legally binding agreement to buy or sell the underlying security on a

future date. Future contracts are the organized/standardized contracts in terms of quantity, quality

(in case of commodities), delivery time and place for settlement on any date in future. The

contract expires on a pre-specified date which is called the expiry date of the contract. On expiry,

futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the

settlement of obligations arising out of the future/option contract in cash.

What is an Options contract?

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract

the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within

or at end of a specified period. The buyer / holder of the option purchases the right from the

seller/writer for a consideration which is called the premium. The seller/writer of an option is


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obligated to settle the option as per the terms of the contract when the buyer/holder exercises his

right. The underlying asset could include securities, an index of prices of securities etc.

Under Securities Contracts (Regulations) Act,1956 ,options on securities has been defined as

"option in securities" meaning a contract for the purchase or sale of a right to buy or sell, or a

right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a

call or a put and call in securities.

An Option to buy is called Call option and option to sell is called Put option. Further, if an option

that is exercisable on or before the expiry date is called American option and one that is

exercisable only on expiry date, is called European option. The price at which the option is to be

exercised is called Strike price or Exercise price.

Therefore, in the case of American options the buyer has the right to exercise the option at

anytime on or before the expiry date. This request for exercise is submitted to the Exchange,

which randomly assigns the exercise request to the sellers of the options, who are obligated to

settle the terms of the contract within a specified time frame.

As in the case of futures contracts, option contracts can be also be settled by delivery of the

underlying asset or cash. However, unlike futures cash settlement in option contract entails

paying/receiving the difference between the strike price/exercise price and the price of the

underlying asset either at the time of expiry of the contract or at the time of exercise / assignment

of the option contract.

What are Index Futures and Index Option Contracts?

Futures contract based on an index i.e. the underlying asset is the index, are known as Index

Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These

contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known as Index options

contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right

but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are

generally European Style options i.e. they can be exercised / assigned only on the expiry date.


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An index, in turn derives its value from the prices of securities that constitute the index and is

created to represent the sentiments of the market as a whole or of a particular sector of the

economy. Indices that represent the whole market are broad based indices and those that

represent a particular sector are sectoral indices.

In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex.

Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the

eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index

constituents are individually eligible for derivatives trading. However, no single ineligible stock

in the index shall have a weight age of more than 5% in the index. The index is required to fulfill

the eligibility criteria even after derivatives trading on the index have begun. If the index does

not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be

discontinued.

By its very nature, index cannot be delivered on maturity of the Index futures or Index option

contracts therefore, these contracts are essentially cash settled on Expiry.

Why longer dated index options?

Longer dated derivatives products are useful for those investors who want to have a long term

hedge or long term exposure in derivative market. The premiums for longer term derivatives

products are higher than for standard options in the same stock because the increased expiration

date gives the underlying asset more time to make a substantial move and for the investor to

make a healthy profit.

What is Volatility Index?

Volatility Index is a measure of expected stock market volatility, over a specified time period,

conveyed by the prices of stock / index options. It depicts the collective sentiment of the market

on the implied future volatility.


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What are the derivative contracts permitted by SEBI?

Derivative products have been introduced in a phased manner starting with Index Futures

Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and July

2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for

derivatives trading in December 2002. During December 2007 SEBI permitted mini derivative

(F&O) contract on Index (Sensex and Nifty). Further, in January 2008, longer tenure Index

options contracts and Volatility Index and in April 2008, Bond Index was introduced. In addition

to the above, during August 2008, SEBI permitted Exchange traded Currency Derivatives.

What is the lot size of contract in the equity derivatives market?

Lot size refers to number of underlying securities in one contract. The lot size is determined

keeping in mind the minimum contract size requirement at the time of introduction of derivative

contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size

is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e.

one contract in XYZ Ltd. covers 200 shares.

What do you mean by Initial Margin and Mark To Market in derivatives market?

Two type of margins have been specified -

Initial Margin - Based on 99% VAR and worst case loss over a specified horizon, which

depends on the time in which Mark to Market margin is collected.

Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted

against the available Liquid Net worth for option positions. In the case of Futures

Contracts MTM may be considered as Mark to Market Settlement.


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Definition of Derivative Trading

Derivatives are financial instruments, traded on or off an exchange, the price of which is based

on or directly dependent upon i.e., derived from the value of one or more underlying asset,

reference rate or index. The underlying asset can include securities, commodities, bullion,

currency, livestock, etc., the reference rate includes interest rates, exchange rates and index

consist of stock market index, consumer price index(CPI). This trading of rights or obligations

based on the underlying product, for hedging, speculating or arbitraging purposes is termed

Derivatives Trading, Financial Derivatives or Trading Derivatives. The main types of derivatives

are, such as:

1. Forwards

2.

Futures

3. Options

4. SWAPs

Derivative trading in India can take place either on a separate and independent Derivative

Exchange or on a separate segment of an existing Stock Exchange. Derivative

Exchange/Segment function as a Self-Regulatory Organization (SRO) and SEBI acts as the

oversight regulator.

Futures Trading & Pricing

A Futures Contract is a standardized agreement between a buyer and a seller; obligating the

seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date

at a specified place and the buyer, in turn, is obligated to pay to the seller a pre-negotiated price

in exchange of the delivery. The trading in these contracts is termed Futures Trading. In this type

of trading, the contracting parties negotiate on, not only the price at which the commodity is to

be delivered on a future date but also on what quality and quantity to be delivered and at whatplace.

Based upon their reason for choosing futures trading, people engaging in it can be typically

classified as-


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1. Hedgers

2. Speculators & Arbitragers

In case of Hedgers, Future contracts are used a risk minimizing tool. For example, in case of

commodity as the underlying asset, a wheat farmer and a wheat miller could enter into a futures

contract to exchange cash for wheat in the future. The farmer agreeing to sell the wheat is said to

assume the short position and the wheat miller agreeing to buy it is said to assume the long

position. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the

price and a sure buyer, and for the wheat miller, the availability of wheat. Farmers,

manufacturers, importers and exporters, etc, are Example of Hedgers who trade in futures for

protection from price risks.

Though it minimizes risk, hedging has a black side to it also, if the wheat prices surge in the near

future, the farmer will not be able to increase his prices and will lose the excess profit possible in

that case and if the wheat prices fall down the buyer will still have to pay the agreed upon price

in the contract, thus paying more than the market price.

Speculators, trade with hedgers and other speculators and consider futures trading as a means to

earn profits and not for minimizing risk purposes (like hedgers). They aim to profit from the very

price change that hedgers are protecting themselves against. Hedgers want to minimize their risk

no matter what theyre investing in, while speculators want to increase their risk and therefore

maximize their profits.

They speculate the value of the underlying asset and buy if they feel its value will increase,

selling later when it has indeed increased and sell when they feel its value will decrease. As the

name indicates, this is pure speculation on their part, based on what they perceive as market

conditions. If their speculation is right, it will result in profits, else loss. This is a risk they are

willing to take in order to earn quick profits.

Arbitragers are those who attempt to profit by exploiting price differences of identical or similar

financial instruments, on different markets or in different forms.

Unlike the stock market, where the capital gains or losses from movements in price arent

realized until the investor decides to sell the stock or cover his or her short position, futures


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positions are settled on a daily basis, which means that gains and losses from a days trading are

deducted or credited to a persons account each day. The profits and losses depend upon the

daily movements of the market for that contract and are calculated on a daily basis.

For example, consider the futures contract between a wheat farmer and bread maker of INR 40

per bushel, if in the next day, the price of the futures contract for wheat increases to INR 50 per

bushel, the farmer, as the holder of the short position, has lost INR 10 per bushel because the

selling price just increased from the future price at which he is obliged to sell his wheat. The

bread maker, as the long position, has profited by INR 10 per bushel because the price he is

obliged to pay is less than what the rest of the market is obliged to pay in the future for wheat.

On the day the change occurs, the farmers account is debited INR 50,000 (INR 10 per bushel X

5,000 bushels) and the bread makers account is credited by INR 50,000 (INR 10 per bushel X

5,000 bushels). As the market moves every day, these kinds of adjustments are made

accordingly.

Apart from functioning as a risk reduction tool, Futures contracts are used for Price Discovery.

Due to its highly competitive nature, the futures market has become an important economic tool

to determine prices based on todays and tomorrows estimated amount of supply and demand.

Futures Market is fast-paced and its prices depend upon a continuous flow of information from

around the world and thus require a high amount of transparency. Factors such as weather, war,

debt default, refugee displacement, land reclamation and deforestation can all have a major effect

on supply and demand and, as a result, the present and future price of a commodity. In such a

market into which information is continuously being fed, speculators and hedgers bounce off of

and benefit from each other. The closer it gets to the time of the contracts expiration, the

more solid the information entering the market will be regarding the commodity in question.

Thus, all can expect a more accurate reflection of supply and demand and the corresponding

price. This process is termed as competitive price discovery or simply price discovery.

Futures prices have a price change limit that determines the prices between which the contracts

can trade on a daily basis. The price change limit is added to and subtracted from the previous

days close and the results remain the upper and lower price boundary for the day and can be

revised if the exchange feels it is necessary.


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Say that the price change limit on silver per ounce is INR 2.50. Yesterday, the price per ounce

closed at INR 50. Todays upper price boundary for silver would be INR 52.25 and the lower

boundary would be INR 47.5. If at any moment during the day the price of futures contracts for

silver reaches either boundary, the exchange shuts down all trading of silver futures for the day.

The next day, the new boundaries are again calculated by adding and subtracting INR 2.50 to the

previous days close. Each day the silver ounce could increase or decrease by INR 2.50 until an

equilibrium price is found. One drawback is that as trading shuts down if prices reach their daily

limits, there may be occasions when it is NOT possible to liquidate an existing futures position at

will.

Derivatives are contracts that are based on or derived from some underlying asset, reference rate,

or index. The underlying asset can be securities, commodities, bullion, currency, livestock or

anything else. Generally, derivatives are contracts to buy or sell the underlying asset at a future

date, with the price, quantity and other specifications defined today.

Types of Derivatives

Derivatives can be classified into six types: Futures, Options, Swaps, Leaps, Baskets, Swaptions.

But Futures and Options are two major forms of derivative trading.

Futures: A future contract involves agreement between two parties to exchange any asset or

currency or commodity for cash at a certain future date, at pre-determined price. It takes place

only in organized future markets and according to well established standards.

Options: An option gives the buyer the right but not the obligation to buy or sell something in

the future. An option gives the holder the right but not the obligation to buy or sell something in

the future. There are two types of Options: put and call. A put option is one which gives holder

he right to sell at particlar number of shares (or any other commodity) at a given price, where asa whereas a call option gives you the right to buy the shares in the a finite predetermined period

of time and at a predetermined price. Typically, you would buy call options if you expect the

price of the underlying stock to rise, and you would buy put options if you expect the price of the

stock to decline.


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With Securities Laws (Second Amendment) Act 1999, Derivatives has been included in the

definition o

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