STUDY OF FINANCIAL MARKET AND SHARE TRADING FROM INVESTORS 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 supposed to 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 companys brand awareness and the customer perceptions about the various services which the organization provides. Edelweiss broking ltd is the online share trading services.Through edelweiss broking ltd you can trade in share markets, commodities,currency,equitymarket, mutual fund and other products and prepare charts and research to create an investment portfolio for your personal services. The objective of the project is to study the financial market and share trading from investors point of view for investment and also to analyze the investors who are investing in Edelweiss broking ltd and what do they think about the charges and services that they provide.

INTRODUCTION
India Financial Market promotes the savings of the economy, providing an effective 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 forces of demand and supply within the Indian Financial Market. The other markets of the economy 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 CNXNifty NSE, stock quotes, company information, issues on market capitalization, corporate earning statements, Indian Business Directory Fixed Income Corporate Bond Prices, Corporate Debt details, Debt trading activities, 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 Equity Indexes Currency Indexes FX & Gold Chart Plotter, J. P. Morgan Currency Indexes National and Global Market Relations Mutual Funds

Insurance Loans Forex and Bullion A clear insight with informations on the Indian Financial Market will thus be the most useful tip for the investors and the marketers of both India and the foreign countries. To get more details on India Financial Market please look through the following links.

SHARES
In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's. In British English, the usage of the word share alone to refer solely to stocks is so common that it almost replaces the word stock itself. In simple Words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company 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, not necessarily what the company is "worth." For example, companies that are growing 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 status and earnings. Market forces and general investor opinions can also affect share price. 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 have historically averaged about 10% annual returns However, stocks offer no guarantee of any returns and can lose value, even in the long run Investments in stocks can generate returns through dividends, even if the price

How does one trade in shares? Every transaction in the stock exchange is carried out through licensed members called 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 small investors. These brokers have a network of sub-brokers who provide them with orders. The general investors should identify a sub-broker for regular trading in shares and place his order for purchase and sale through the sub-broker. The sub/broker will transmit 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 from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.

D-MAT ACCOUNT D-mat refers to a dematerialized account. Though the company is under obligation to offer the securities in both physical and d-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 name of the depository and also of the depository participant with whom he/she have depository account in application. It is, however desirable that a person hold securities in d-mat form as physical securities 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 he want to buy or sell stocks. So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open a d-mat account. 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 persons d-mat account. 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 the shares, they are adjusted in his account. Just like a bank passbook or statement, the DP 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 wants physical 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 CDSL websites and see who the registered DPs are. A broker is separate from a DP. A broker 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 can choose by own.

STOCK EXCHANGE
A stock exchange, share market or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment 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 for recordkeeping, but trade is less and less linked to such a physical place, as modern markets 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 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 is 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, nor must 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 exchanges In 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers. Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps 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 century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighboring counties and "Bourses" soon opened in Ghent and Amsterdam. The house of the Beurze family on Vlamingstraat Bruges was the site of the worlds first 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 government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London. The role of stock exchanges Stock exchanges have multiple roles in the economy, this may include the following: Raising capital for businesses The 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 rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and

industry, resulting in a stronger economic growth and higher productivity levels and firms. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Redistribution of wealth Stocks exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses. Corporate governance By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (Pets.com (2000), Enron Corporation (2001), One. Tel (2001), [[Sunbeam Products| Sunbeam]] (2001), Web van (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are among the most widely scrutinized by the media). Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be 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 the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces. 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 the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

REGION

STOCK EXCHANGE

Africa Americas Americas Americas Americas/europe Asia Pacific South asia

JSE Securities exchange NASDAQ Sau Paulo stock exchange Toronto stock exchange NYSE Euronext Australian securities exchange Bombay stock exchange of india

MARKET VALUE (TRILLIONS OF US DOLLARS) $0.94 $4.39 $1.40 $2.29 $20.70 $1.45 $1.61

TOTAL SHARE TURNOVER (TRILLIONS OF US DOLLARS) $0.35 $12.40 $0.48 $1.36 $28.70 $1.70 $0.26

Asia Pacific Asia pacific South Asia Asia Pacific Asia Pacific Asia Pacific Europe

Europe Europe

Europe Europe Europe Europe

Honk kong stock exchange Korea Exchange National Stock Exchange Of India Shanghai stock exchange Shezhen stock exchange Tokyo stock exchange Frankfurt Stock Exchange (Deutsche Brse) London stock exchange Madrid stock exchange(Bolsas y Mercados Espanalos Milas stock exchange Moscow interbank currency exchange Nordic stock exchange group Swiss exchange

$2.97 $1.26 $1.46 $3.02 $0.74 $4.63 $2.12

$1.70 $1.66 $0.56 $3.56 $1.86 $5.45 $3.64

$4.21 $1.83

$9.14 $2.49

$1.13 $0.97 $1.30 $1.33

$1.98 $0.49 $1.60 $1.58

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 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-a-vis base capitalization and indicates how prices in general have moved over a period of time. How Orders are executed Select a broker of ones choice and enter into a broker-client agreement and fill in the client registration form. Place the order with his/her 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 Of 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 SEBIregistered 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 Book-Closure/Record Date Book closure and record date help a company determine exactly the shareholders of 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 a given date, is known as the record date. An investor might purchase a share-cum-dividend, cum rights or cum bonus and may therefore expect to receive these benefits as the new shareholder. In order to receive this, the share has to be transferred in the investor's name, or he would stand deprived of the benefits. The buyer of such a share will be a loser. It is important 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 paid for the shares is ex-benefit and not cum benefit. Book closure v/s record date In 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 members who are eligible for the corporate benefits. In case of book closure, shares cannot be 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 Period Whenever a company announces a book closure or record date, the Exchange sets up a no-delivery (ND) period for that security. During this period only trading is permitted in the security. However, these trades are settled only after the nodelivery period is over. This is done to ensure that investor's entitlement for the corporate benefit is clearly determined.

Ex-dividend date The date on or after which a security begins trading without the dividend (cash or stock) included in the contract price. Ex-date The first day of the no-delivery period is the ex-date. If there is any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits. Bonus Issue While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonus he will hold three.

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. Clearing and Settlement

Settlement cycle The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins on 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. 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." 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, un-rectified company objections Is there a 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. 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 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. 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 the transfer. 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 name of an investor is called company objections. Rejection occurs due to a signature difference, or fake shares, or forgery, or if there is a court injunction preventing the transfer of the shares.

What should one do with company objections? The broker must immediately be notified. Company objection cases should be reported within 12 months from the date of issue of the memo for the original quantity 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 for replacing the shares within 21 days of the Exchange being informed. Company objection 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 stamped and complete in all respects is sent to the company for transfer in the name buyer.Once the transfer is registered in the share transfer register maintained by the company, the process of transfer is complete.

BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as "BSE" was established in 1875 as " The Native share and stock brokers association", as a voluntary non profit making association. 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 the interests of the investors and ensures redressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmers. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides the policies and regulates the affairs of the exchange. The Executive director as the chief executive officer is responsible for the day today administration of the exchange. The average daily turnover of the exchange during the year 2000-01(April-March) was Rs 3984.19crs and average 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 average daily trades during the period to 5.17lacs. The average daily turnover of the exchange during the year 2002-03 has declined and number of average daily trades during the period is also decreased. The Ban on all deferral products like BLESS AND ALBM in the 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 the exchanges w .e .f Dec 31, 2001, etc., have adversely impacted the liquidity and consequently 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 and downs 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 and leading 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 this methodology, the level of the index reflects the total market value of all 30 component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stock by the number of shares outstanding. Statisticians call an index of a set of combined variables( such as price and number of shares) a composite Index. An Indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. It is much easier to graph a chart based on Indexed values than one based on actual values world over majority of the well-known Indices are constructed using " Market capitalization weighted method ".In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. The Divisor keeps the Index comparable over a period of time and if the reference 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 EXCHANGE

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

It has been set up to strengthen the move towards professionalization of the capital market as well as provide nationwide securities trading facilities to investors.NSE is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing aboard of the exchange 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 Index which replaces the existing NSE-100 Index , is expected to serve as an appropriate Index for 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 an aggregate 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 traded for 85% of trading days at an impact cost of less than 1.5%.The base period for the index is the close of prices on Nov 3, 1995 which makes one year of completion of operation of NSEs 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 board Industry groups and will provide proper representation of the midcap segment of the Indian capital Market. All stocks in the Index should have
31

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 Index has been set at 1000.Average daily turn over of the present scenario 258212 (Laces) and number 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 started functioning from Sept 1992. OTCEI has been setup to meet a long felt need for a second tier market where companies will small paid up capital with less than onerous conditions could 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 the Securities contracts (regulation) Act. OTC exchange is now nationwide and operates for more 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 central computer Bombay and then broadcast generates scrip prices on in text.

LIST OF STOCK EXCHANGE NAME OF THE STOCK EXCHANGES

Bombay stock exchange, Ahemadabad share and stock brokers association Calcutta 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

YEAR
1875 1957 1957 1957 1957

EQUITY TRADING
Funds brought into a business by its shareholders is called equity. It is a measure of a stake 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 being compensated 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 other information publicly available is known as fundamental analysis. This information is used to derive a fair price of the share of the company. The faithful fundamentalists believe that the market incorporates all facts relating to the financial performance of the company. 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 cash flow 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 a company. 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 it could be a ratio between one figure of the balance sheet with a figure from Profit and Loss account or it could be comparison of one year's figure with a figure from the previous year. For example Return on Equity = Net profit (A Profit and a Loss figure) divided by Net Worth (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 current obligations. 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 financing the 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 firms manage 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 every additional rupee invested. Profitability Ratios: These ratios indicate the level of profitability of the business with relation to the inputs or capital employed. Some better-known profit ratios include operating profit margin (OPM). Operating profit margin is a measure of the company's efficiency, 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 to each outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by the total number of shares outstanding during that period. It is one of the measures of the profitability of common shareholder's investments. It is given by profit after tax (PAT) divided by number of common shares outstanding. Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and earning per share. Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital + reserves & surplus) divided by number of shares outstanding. Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a security and Book Value of the security.

What is technical analysis? Technical analysis is the study of historic price movements of securities and trading volumes. 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 to predictions that a stock price may move up or down. The belief is that by knowing the past, future prices can predict. CLEARING AND SETTLEMENT 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 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 respective obligations as per the rules, bye-laws and regulations of the Clearing Corporation. NSE settlement cycle at a glance Date Particulars Activity 1-7 Wednesday-Tuesday Trading Period 8 Wednesday Custodians report trades which they will not settle.Such trades will be added to the member obligation. Pay-in of securities, delivery of documents by the delivery members at the Clearing House. Pay-in funds by members through the Clearing Bank.Shortage identification at Clearing House. Pay-out day for Securities and Funds. Auction for shortages. Auction pay-in day for Securities and Funds. Bad delivery reporting by the receiving member to the Clearing House and intimation to the delivering member.

13

Monday

14

Tuesday

15

Wednesday

17

Friday

18

Saturday

20

Monday

22 23 24

Wednesday Thursday Friday

Auction pay-out. Pickup of bad deliveries for rectification. Bad delivery rectification/replacemen t by the delivering member. Auction for bad delivery not rectified/replaced. Bad delivery auction pay-in. Bad delivery auction pay-out.

BSE settlement cycle at a glance Day Activity Monday to Friday Trading on BOLT and daily downloading of statement showing details of transactions and margin statement, at the end of each trading day. Saturday Carry Forward Session (for A Group Securities) and downloading of money statement. Monday Marking the mode of delivery physical or demat Wednesday Pay-in of physical securities. Thursday Delivery of securities in the Clearing House as per prescribed time slots upto 1:00 p.m.only. Debiting of members bank accounts having payable position at 5:00 p.m. Reconciliation of securities delivered and amounts claimed. 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 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, i.e., Friday, it will be settled on the fourth working 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 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. 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 this is five working days after the trading day. The waiting period is uniform for all trades.

MECHANICS OF DERIVATIVE MARKETS

Some derivatives are traded on organized exchanges while others are traded only in OTC markets. Exchange-traded derivatives have standardized features and are not tailored to the needs of individual buyers and sellers. For example, in S&P 500 stock index futures which are traded on the Chicago Mercantile Exchange, the value of the futures contracts is tied to the Standard & Poors Composite Stock Price Index. The futures have standard maturity and the Exchange prescribes rules for settlement of any outstanding contracts in cash~of Ihe expiration dates IrT contrast, ulu derivatives are customized_Tp meet the specific needs .of the counterparty. Financial Swap is a good example of OTC derivative. OTC market, remains predominantly a telephone market. Notwithstanding the advantages 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 to appropriate disclosures. The guidelines permit derivative trading for hedging and portfolio 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/or obligations to require the underlying assets to honor the obligations contracted in the derivatives market. Since derivatives can be used by the mutual funds as a risk management tool, up to 100% of schemes net assets, in the debt component, can be used for derivative trading.

FUTURES
Consider yourself as a farmer growing com. Say, the month running is April, and your crop is likely to harvest in the month of July. There is an uncertainty about the price you will receive for the corn. In the years of low supply or scarcity of corn, you might obtain a 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 a great deal of risk. On the other hand, consider a merchant who has an ongoing requirement for corn. In the years 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 futures market 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 otherwise will be faced due to uncertain price fluctuations of the future price of corn. MECHANISM OF FUTURES MARKETS Futures contracts are traded in auctions markets, where the prices are order driven. In these 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 and sellers. 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 incidentally keep 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 the prices of underlying cash market. The activities of speculators and arbitragers also bring price alignment. In calendar spreading traders sell the current delivery-month contract and buy a later delivery-month contract, or vice-versa. This reduces price variance between the futures contracts. Arbitrage also helps keep the cash and futures prices aligned. For example, futures contracts seem to be overpriced in relation to the underlying commodity, arbitrageurs will sell the futures contract and simultaneously buy the 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 on daily 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 what is available in the market. It, therefore, becomes important to specify the grade of the commodity that is to be delivered. For example, on CBOT, one of the specifications for corn 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 future contract is specified at the time of agreement. The futures prices quoted are convenient and 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 are quoted in dollars with two decimals.

The Contract Size This specifies the amount of the asset that has to be delivered under one contract. If the size of the contract is too large, many investors cannot use the exchange for hedging or for speculative purposes. This is because speculators may not wish to take large positions due 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 avoid controversy. The location or place of delivery becomes a major issue when the transportation costs are significant. However, if any alternative delivery locations are specified, the price received by the seller is sometimes adjusted according to the place chosen by him. Sometimes alternatives are specified for the grade of the asset that will be delivered 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 one contract 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 the delivery can be made. The date on which the contracts cease to trade is specified by the exchange. tick Size The contract also specifies the minimum price fluctuation or tick size. For example, in soybean contract, one tick is cent per bushel as the minimum size of contract for soybean is 5000 bushels, which gives a tick size of $12.50 per contract. Limits on Daily Price Movements The daily price movement limits are specified by the exchange. If the price moves up by a limit, it is referred to as limit up and if it moves down by a limit, it is referred to as limit down. The prime purpose of the daily price limits is to prevent large price fluctuations that 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 limits become artificial when the price of the underlying commodity is advancing or declining rapidly. Option An option is a contract in which the seller of the contract grants the buyer, the right to purchase from the seller a designated instrument or an asset at a specific price which is agreed upon at the time of entering into the contract. It is important here to note that the option buyer has the right but not an obligation to buy or sell. But, if the buyer decides to exercise 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 the writer of the option.

FACTORS INFLUENCING OPTION PRICES

The 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-free interest rate d = Cash dividend Current Stock Price When a call option is to be exercised in the future, its net flow will be the amount by which the stock price exceeds the strike price. Hence, the value of the call option increases 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 strike price exceeds the stock price. Therefore, the value of a put option decreases with an increase 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, value of the call option decreases when strike price increases. This happens because the value of a call option depends on the difference between stock price and strike price as stated earlier. Similarly, the difference between the strike price and the stock price determines the value of a put option. Therefore, payoff from a put increases with an increase in the strike 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 the option is American or European. In case of American option, whether call or put, the holder has a right to exercise the option any time during the life of the option. The longer the Time-to-expiration, the greater the opportunity to exercise. Hence if the Time-toexpiration is longer, then the option price will be higher. However, this does not hold good for European options since the option holder can exercise the option only on maturity. Therefore, no definitive relationship can be established between the time-toexpiration 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 gains from price increase but has fixed downside risk in case of price decline. Again a put option owner benefits from the price decline but has limited risk in case of the upward movement 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 price increases 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 in the growth rate of the stock price enhances its value however much the present value effect tends to decrease it. Therefore, the first effect tends to push the price while the second 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 rate increases. It is quite important to mention here that the above effects have been considered with other variables remaining unchanged. Generally, whenever interest rates rise (fall), stock prices tend to fall (rise). The net effect of an interest rate change along with stock price change may differ from the results described above. Dividends The value of stock increases in anticipation of dividend declaration and the same declines after the record date. Hence the price of a European call option whose expiry date is beyond the record date tends to decline whereas that of a put option tends to increase. In case 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 impact of dividend on stock price. IPO An IPO is an abbreviation for Initial Public Offer. When a company goes public for the first 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 its first contact with the public at large. Book Building Book Building is a process used for marketing a public offer of equity shares of a company and is a common practice in most developed countries. Book Building is socalled because the collection of bids from investors is entered in a "book". These bids are based 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 Merchant Banker as a book runner. Initially, the company issues a draft prospectus which does not mention 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 the details of the issue are advertised. The book runner builds an order book, that is, collates the bids from various investors, which shows the demand for the shares of the company at various prices. For instance, a bidder may quote that he wants 50,000 shares at Rs.500 while 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 any of the bid options. Usually, the bid must be for a minimum of 500 equity shares and in multiples 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 offered are known. The price discovery is a function of demand at various prices, and involves negotiations between those involved in the issue. The book runner and the company conclude 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 highest bidding option of the bidder. The bidder has the option to make different bids like quoting 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 days of confirmation of allocation. Where a bidder has been allocated lesser number of shares than he or she had bid for, the excess amount paid on bidding, if any will be refunded to such bidder. Is the process followed in India different from abroad? Unlike international markets, India has a large number of retail investors who actively participate in IPOs. Internationally, the most active investors are the Mutual Funds and Other 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 the company. According to the first option, 25 per cent of the issue has to be sold at a fixed price and 75 per cent is through Book Building. The other option is to split the 25 per cent on offer to the public (small investors) into a fixed price portion of 10 per cent and a reservation in the book built portion amounting to 15 per cent of the issue size. The rest of the book built portion is open to any investor. What is the advantage of the Book Building process versus the normal IPO marketing process? The Book Building process allows for price and demand discovery. Also, the costs of the public 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 in India? Unlike in Book Building, IPOs are usually marketed at a fixed price. Here the demand cannot 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.