You are on page 1of 86

1

ABOUT INDUSTRY
HISTORY OF THE STOCK BROKING INDUSTRY
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are meager and obscure.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid
development of commercial enterprise and brokerage business attracted many men into the
field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs.
87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business.
In 1887, they formally established in Bombay, the "Native Share and Stock Brokers'
Association" (which is alternatively known as "The Stock Exchange"). In 1895, the Stock
Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the
Stock Exchange at Bombay was consolidated.
Thus in the same way, gradually with the passage of time number of exchanges were increased
and at currently it reached to the figure of 24 stock exchanges.

TRANSACTION CYCLE:

Decision to
trade

Funds or
Securities

Placing Order

Transaction
Cycle

Settlement of
trades

Trade
Execution

Clearing of
Trades

A person holding assets (Securities/Funds), either to meet his liquidity needs or to reshuffle his
holdings in response to changes in his perception about risk and return of the assets, decides to
buy or sell the securities. He selects a broker and instructs him to place buy/sell order on an
exchange. The order is converted to a trade as soon as it finds a matching sell/buy order. At the
end of the trade cycle, the trades are netted to determine the obligations of the trading
members securities/funds as per settlement cycle. Buyer/seller delivers funds/ securities and
receives securities/funds and acquires ownership of the securities.
A securities transaction cycle is presented above. Just because of this Transaction cycle, the
whole business of Securities and Stock Broking has emerged. And as an extension of stock
broking, the business of Online Stock broking/ Online Trading/ E-Broking has emerged.

HISTORY OF ONLINE TRADING:


Online
thru

stock

trading

private

is

networks

very

owned

old
by

concept
Reuter's

for

big

"Instinet"

institutions
and

who

trade

system

called

"Posit" since 1969. But it becomes internet based for lay men only in late 90s.
Funny,

that

actually

idea

was

first

time

used

by

company

making

Beer

called "WIT beer" to help its shareholders trade its shares. Thats how "WIT
Capital" was born which is considered pioneer of this concept. It was made
mainstream and household name by an offshoot of Charles Schwab & Co called
eSchwab which is used by millions of people in USA. Lots of NRI's play
in US stock market even when they come to India for holidays, via website
of eSchwabe.
There

are

other

serious

players

like

E*trade,

DATEK

online

etc.

All

this

companies ask you to start account with US $5000 and you can buy and sell
stock using these funds. They also issue you a check book which you can use
to make payments from this account. Or use their ATM card to withdraw cash
from your stock trading account.
Today

practically

every

big

name

brokerage

firm

offers

online

stock

trading

as it reduces their costs. Earlier they had army of brokers on phone with
clients

executing

trade,

which

is

done

by

computers

accepting

orders

from

clients directly. This firm now offers human access to high net worth accounts, and to rest at
charge per trade.

E- BROKING - A SMALL BEGINNING:


You have some money to dabble with. Trading shares on BSE/NSE has always been your
dream. When will you ever find the time? And besides, the hassle of finding a broker is not
easy. Realizing there is untapped market of investors who want to be able to execute their own
trades when it suits them, brokers have taken their trading rooms to the Internet. Known as
online brokers, they allow you to buy and sell shares via Internet. There are 2 types of online
trading service:
1. Discount brokers and
2. Full service online broker.
Discount online brokers allow you to trade via Internet at reduced rates. Some provide quality
research, other dont. Full service online brokerage is linked to existing brokerages. These
brokers allow their clients to place online orders with the option of talking/ chatting to brokers
if advice is needed. Brokerage rates here are higher. 5Paisa.com, ICICIDirect.com,
IndiaBulls.com,

Sharekhan.com,

Geojit

securities.com,

HDFCsec.com,

Tatatdw.com,

Kotakstreet.com are some of the online broking sites in India. With Net trading in securities
and rapid consolidation between multiple stock exchanges, the international securities
marketplace is fast becoming a "global village" through the creation of a universal virtual
equity market.
Compared to the Western countries, online trading is still in its infancy in India. With trading
turnover at around Rs. 10 crores per day from online trading compared to a combined gross
turnover of around Rs. 9000-10,000 crores handled by the BSE and NSE together, online
trading has a long way to go.

INTERNET TRADING IN INDIA:


In the past, investors had no option but to contact their broker to get real time access to market
data. The Net brings data to the investor on line and net broking enables him to trade on a
click. Now information has become easily accessible to both retail as well as big investors.
The development of broking in India can be categorized in 3 phases:
1. Stock brokers offering on their sites features such as live portfolio manager, live quotes,
market research and news to attract more investors.
2. Brokers offering on line broking and relationship management by providing and
offering analysis and information to investors during broking and non-broking hours
based on their profile and needs, that is, customized services.
3. Brokers (now e-brokers) will offer value management or services such as initial public
offerings on line, asset allocation, portfolio management, financial planning, tax
planning, insurance services and enable the investors to take better and well-considered
decisions.
In the US, 82 per cent of the deals are done on line. The European on line broking market is
expected to be of $8 billions and is likely to raise five fold by 2002. In India, presently Internet
trading can take place through the order routing system, which will route client orders to
exchanges trading systems for execution of trades on stock exchanges (NSE and BSE). This
will also require interface with banks to facilitate instant cash debit or credit and the depository
system for debit or credit of securities.

OBJECTIVES OF INTERNET TRADING:

Increase transparency in the markets.

Enhance market quality through improved liquidity, by increasing quote continuity and
market depth.

Reduce settlement risks due to open trades, by elimination of mismatches.

Provide management information system (MIS).

Introduce flexibility in system, to handle growing volumes easily and to support


nationwide expansion of market activity.

Besides, through Internet trading three fundamental objectives of securities regulation


can be easily achieved, these are: Investor protection, creation of a fair and efficient
market and, reduction of the systematic risks.

PROCEDURE FOR INTERNET TRADING:

Step-1: Those investors interested in doing the trading over internet system, that is,
NEAT-ISX, should approach the brokers and register with the Stock Broker.

Step-2: After registration, the broker will provide to them a login name, password and a
personal identification number (PIN).

Step-3: Actual placement of an order. An order can then be placed by using the place
order window as under:
o First by entering the symbol and series of stock and other parameters such as
quantity and price of the scrip on the place order window.
o Second, fill in the symbol, series and the default quantity.

Step-4: It is the process of review. Thus, the investor has to review the order placed by
clicking the review option. He may also re-set to clear the values.

Step-5: After the review has been satisfactory; the order has to be sent by clicking on
the send option.

Step-6: The investor will receive an ``Order Confirmation'' message along with the
order number and the value of the order.

Step-7: In case the order is rejected by the Broker or the Stock Exchange for certain
reasons such as invalid price limit, an appropriate message will appear at the bottom of
the screen. At present, a time lag of about ten seconds is there in executing the trade.

Step-8: It is regarding charging payment, for which there are different modes. Some
brokers will take some advance payment from the investors and will fix their trading
limits. When the trade is executed, the broker will ask the investor for transfer of funds
by the investor to his account.

The above figure shows how the internet trading procedure.

FACTORS TO KEEP IN MIND WHILE SELECTING ONLINE


BROKERS:
Brokerage cost: It is important to weigh up the subscription and trading costs charged by an
online broker against benefits offered by the site. All online brokers display their charges on
their sites. Some make sure you find the charges easily, while with others you will have to
search a bit.

Safety: Please make sure site has 128-bit encryption to ensure safety of transaction online.
ICICIDirect.com, 5paisa.com are few sites with 128-bit encryption. You normally get a secured
Login id and password. It is always advisable to frequently change trading password. Ideally
online trading site should be fully integrated. The greater the backward integration, the better it
is for the customer. Ideally broking account, demat account and bank account should be linked
electronically.

Rate refresh: Rate refresh has to be real-time with no time lag. The speed and reliability
comes with huge investment in technology. It is always advisable to check rates of online
broking sites with BSE/ NSE terminal rates.

Speed of execution: System has to be fast and reliable that does just one job- executes your
trades. The last thing you need is a site that is heavily congested with the users who are
downloading heavy jpeg graphs or pulling the latest story why market is moving. The site
should be one click wonder where squaring off all your positions or canceling all your pending
orders takes one click and a confirmation of action.

Trading limit: For trading, all sites provide 4 times buy and sell limit against margin money
put in by customer. For delivery of shares, buying limit is equal to margin money put in by
customer. Couple of sites also provides margin funding for buying of shares.

Free trial period: Site should allow users free trial period to familiarize yourself with system
before you decide to become trading member of the site.

10

SUCCESS FACTORS FOR E-BROKING:


There are three key success factors for e-broking,

(I) Scalability and robustness of the trading system:


The fundamental difference between the Internet as a transaction medium and the conventional
closed user group network is that the Net is a universal platform providing concurrent access to
infinite users at any given point in time.
Consequently, it becomes imperative for any Net-based application to have a proven capability
for scalability and robustness which ensures the ability to handle and process requests from
multiple users at any given point in time.

(ii) Bandwidth optimization:


In the Indian context where availability of a sufficient bandwidth is limited, the application
software should demonstrate intelligence in optimizing the available bandwidth by deploying
advanced technologies such as streaming.

(iii) Integration with third party systems:


On the Net, with information feeds available from multiple points, it is prudent to deploy
applications that are built on open architecture methodology for interfacing with third party
systems in the new Net age.

11

CHALLENGES IN INTERNET TRADING:


For Internet trading to succeed, it is imperative to have both
1. A robust business model and
2. Comprehensive technology strategy.
Some of the challenges are discussed: Transaction fulfillment--In the Net-based economy, it is
both prudent and essential for a broker/intermediary to offer total solution to the clients at a
single point. Total solutions would essentially mean offering interfaces with banks,
depositories, information feeds, etc. for efficiency in trade completion and reducing duplication
of client information. The service providers will have to go beyond the stage of mere order
execution and emerge as "informediaries" rather than "intermediaries". This will not only
ensure lower trading costs in terms of offering cross services but will also help in maximizing
RoIs.
A true Internet trading system should deliver cost effective transaction fulfillment at a single
point.

12

FUTURE OF INTERNET TRADING:


International marketplaces are already witnessing re-alignments and changes with the
emergence of electronic communication networks (ECNs) such as INSTINET and ISLAND,
which are already contributing substantial business volumes to mainline exchanges such as
NASDAQ and the NYSE. Concurrently, exchanges worldwide are looking at striking strategic
alliances such as the Global Equity Market (GEM). With Net trading in securities and rapid
consolidation between multiple stock exchanges, the international securities marketplace is fast
becoming a "global village" through the creation of a universal virtual equity market.
Therefore the challenge for the technology providers is to develop and deploy advanced etrading tools and applications using electronic straight through processing technologies.

13

14

MAJOR PLAYERS OF THE INDUSTRY


S. S. Kantilal Ishwarlal Securities Pvt. Ltd. (sharekhan.com):
Sharekhan, Indias leading stock broker is the retail arm of SSKI, and offers you depository
services and trade execution facilities for equities, derivatives and commodities backed with
investment advice tempered by decades of broking experience. A research and analysis team is
constantly working to track performance and trends. Thats why Sharekhan has the trading
products, which are having one of the highest success rates in the industry. Sharekhan is having
240 share shops in 110 cities; the largest chain of retail share shops in India is of Sharekhan.
In future, Sharekhan is planning to enter in Mutual funds, Insurance sector and banking sector
to expand beyond the market currently covered by it. And it has started MF (Mutual Funds) on
priority basis but wants to grow in it.

ICICI WEB TRADE LTD. (ICICIdirect.com):


ICICIdirect.com was the first entrant into e-broking. ICICdirect.com provides the 3-in-1 to
the users which ties in their saving bank account and their Demat account to their brokerage
account electronically. This integration ensures that money is transferred to/from their bank
account and the shares are transferred from/to their Demat account automatically without
writing any cheques or transfer instructions while carrying out their trades in shares.
ICICIdirect.com has the option of trading in shares in cash, margin or spot segments. An
investor can also invest in 14 Mutual Funds (Prudential ICICI MF, Franklin Templeton India
MF, Alliance Capital MF, JM MF, Birla Sun Life MF, Sundaram MF, IL&FS MF, Principal
MF, HDFC MF, Standard Chartered MF, Reliance Capital MF, Kotak Mahindra MF, TATA MF
and DSP MERRILL LYNCH MF) through their trading account.
ICICIdirect.com doesnt provide the facility of trading in a traditional way.

15

5Paisa.com:
5paisa is the trade name of India Infoline Securities Private Limited (5paisa), member of
National Stock Exchange and The Stock Exchange, Mumbai. 5paisa is a wholly owned
subsidiary of India Infoline Ltd, Indias leading and most popular finance and investment
portal. 5paisa has emerged as one of leading players in e-broking space in India.
The companys brokerage is one of the lowest in the industry. It also provides the research on
commodities. Investors can benefit from its analysis and advice available at the click of the
mouse. For those who prefer to trade the traditional way, India Infoline investor points are
available across the country.
India Infoline was founded by a group of professionals in 1995. Its institutional investors
include Intel Capital, one of the leading technology companies in the world promoted by the
UK government, ICICI, TDA and Reeshanar. The company offers a slew of products such as
stock and derivatives broking, commodities broking and mutual funds.

KOTAK SECURITIES LIMITED (kotakstreet.com):


Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and Goldman
Sachs (holding 25% - one of the worlds leading investment banks and brokerage firms) is
Indias leading stock broking house with a market share of 5 - 6 %. Kotak Securities Ltd. has
been the largest in IPO distribution - It was ranked number One in 2003-04 as Book Running
Lead Managers in public equity offerings by PRIME Database. It has also won the Best Equity
House Award from Finance Asia - April 2004.
Kotak Securities Ltd is also a depository participant with National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL) providing dual benefit
services wherein the investors can use the brokerage services of the company for executing the
transactions and the depository services for settling them. The company has 42 branches
servicing around 1, 00,000 customers. Kotakstreet.com the online division of Kotak Securities
Limited offers Internet Broking services and also online IPO and Mutual Fund Investments.

16

Kotak Securities Limited manages assets over 1700 crores under Portfolio Management
Services (PMS) which is mainly to the high end of the market. Kotak Securities Limited has
newly launched Kotak Infinity as a distinct discretionary Portfolio Management Service
which looks into the middle end of the market.

India Bulls:
Indiabulls is India's leading retail financial services company with 77 locations spread across
64 cities. Its size and strong balance sheet allows providing varied products and services at
very attractive prices, our over 750 Client Relationship Managers are dedicated to serving your
unique needs.
Indiabulls is lead by a highly regarded management team that has invested crores of rupees
into a world class Infrastructure that provides real-time service & 24/7 access to all
information and products. The Indiabulls Professional Network offers real-time prices,
detailed data and news, intelligent analytics, and electronic trading capabilities, right at your
finger-tips. This powerful technology is complemented by our knowledgeable and customer
focused Relationship Managers.
Indiabulls offers a full range of financial services and products ranging from Equities,
Derivatives, Demat services and Insurance to enhance wealth and to achieve the financial
goals.

MOTILAL OSWAL SECURITIES LTD. (MOSt):


One of the top-3 stock-broking houses in India, with a dominant position in both institutional

and retail broking, MOSt is amongst the best-capitalized firms in the broking industry in terms
of net worth. MOSt was founded in 1987 as a small sub-broking unit, with just two people
running the show. Focus on customer-first-attitude, ethical and transparent business practices,
respect for professionalism, research-based value investing and implementation of cutting-edge
technology have enabled it to blossom into a thousand-member team.

17

The institutional business unit has relationships with several leading foreign institutional
investors (FIIs) in the US, UK, Hong Kong and Singapore. In a recent media report MOSt was
rated as one of the top-10 brokers in terms of business transacted for FIIs.
The retail business unit provides equity investment solutions to more than 50,000 investors
through 270 outlets spanning 150 cities and 22 states. MOSt provides Advice-Based Broking,
Portfolio Management Services (PMS), E-Broking Services, Depository Services,
Commodities Trading, and IPO and Mutual Fund Investment Advisory Services. Its Value
PMS Scheme gave a 160% post-tax return for the year ended March 2004.
In AsiaMoney Brokers Poll 2003 MOSt has been rated as the Best Domestic Research HouseMega Funds ,while in 2000 and 2002 it has been rated as the Best Domestic Equity Research
House and Second best amongst Indian Brokerage firms respectively.

HDFC SECURITIES LTD (HDFCsec):


HDFCsec is a brand brought to you by HDFC Securities Ltd, which has been promoted by the
HDFC Bank & HDFC with the objective of providing the diverse customer base of the HDFC
Group and other investors a capability to transact in the Stock Exchanges & other financial
market transactions. The services comprise online buying and selling of equity shares on the
National Stock Exchange (NSE). Buying and selling of select corporate debt and government
securities on the NSE would be introduced in a subsequent phase. In a few months, they will
also start offering the following online trading services on the BSE and NSE:
1. Buying and selling of shares on the BSE
2. Arbitrage between NSE & BSE
3. Trading in Derivatives on the NSE
4. Margin trading products.
They are also planning to include buying and selling of Mutual Funds, IPO subscriptions,
Right issues, purchase of Insurance policies and asset financing.

18

UTI SECURITIES LTD.: (UTISEL)


UTI Securities Ltd was incorporated on June 24, 1994 by Unit Trust of India as a 100%
subsidiary and on the repealing of the UTI Act, the capital is now held by the Administrator of
the Specified Undertaking of Unit Trust of India (ASUUTI). UTI Securities has been working
as an independent professional entity for providing financial intermediary and advisory
services to its corporate and retail clientele.
The Company has presence in major cities with 20 branches and 50 franchisees to service a
wide range of clients. The company has also invested in the joint-venture company with
Standard Chartered Bank viz. Standard Chartered UTI Securities (P) Ltd. that is engaged in
primary dealership and Government securities. The company is very soon going to start
Commodity Trading through its subsidiary, USEc Commodities Ltd, which provides facility of
commodity trading on NCDEX and MCX.

IDBI Capital Market Services Ltd.


IDBI Capital is a leading Indian securities firm offering a complete suite of products and
services to individual, institutional and corporate clients.
IDBI Capital Market Services Ltd. (IDBI Capital), a wholly owned subsidiary of Industrial
Development Bank of India (IDBI), is a leading Indian securities firm, offering a complete
suite of products and services to individual, institutional and corporate clients. The services
include fixed income trading, equities brokerage, debt and equity derivatives, research, private
placements, depository services, portfolio management and distribution of financial products.
Over the last five years, we have emerged as a leading player in each of these businesses.

March 1995 - Commenced Equity Broking on NSE CM segment

July 1995 - Built agent Distribution Network across the country

October 1996 - Commenced Debt Broking on NSE WDM segment

December 1996 - Started operations as a Depository Participant

1996 - Started to act as Arranger to Privately Placed Bond issues

April 1998 - Commenced operations as a Portfolio Manager

19

February 1999 - Acquired membership of BSE, Mumbai

November 1999 - Started operations as a Primary Dealer

June 2000 - Acquired Derivatives memberships of BSE and NSE

March 2002 - Achieved an outright secondary market turnover exceeding Rs100,000 cr


in G-Secs

October 2002- Commenced trading in Interest Rate Swaps

20

21

CHARGES PROVIDED BY THE DIFFERENT COMPANIES


FOR ONLINE ACCOUNTS:
(N.A. = Not Available)

A/c Opening Fee


Parameters

Trading
A/c

Brokerage

Demat

Delivery

Interface

Square

Banks Associated

Off

with
HDFC, UTI, OBC,

Sharekhan

750

NIL

0.50

0.10

ICICI Direct

750

NIL

0.75

0.18

ICICI Bank

Indiabulls

750

250

0.40

0.10

N.A.

IDBI & Citibank

Citibank, HDFC,

5 paisa

800

NIL

0.20

0.05

Kotak Street

500

N.A.

0.59

0.06

HDFC Securities

700

NIL

0.50

0.15

OBC, UTI & ICICI


Bank
Kotak Bank &
Citibank
HDFC & Other 4
Banks

If we check the above table, we can come to know that the rates of Sharekhan is quite
competitive than other brokerage houses.
One other best point of Sharekhan is if a person is having a online/offline trading account as
well as Demat account with Sharekhan, they wont be charged any kind of Demat transfer
charges, which are charged when the shares are sold from the Demat account.

22

COMPETITIVE ANALYSIS
Follower:

The followers are those who just blindly follow the other player which are leader
and challenges.

The players like 5 paisa, Motilal Oswal, HDFC Securities, Kotakstreet are the
followers.

LEADER:

ICICIdirect.com is a leader in the online account which is having 1, 24,000


accounts in the country.

While in offline account Sharekhan is leading with 64,000 offline accounts.

NICHER:

ICICIdirect.com and Kotakstreet.com are the two stock broking houses which are
focusing only on online investors.

CHALLENGER:

Sharekhan, Kotakstreet and Indiabulls come under this head.

Sharekhan challenges competitors by providing quality services and research based


advice.

Indiabulls is also challenging with low brokerage rates and class one services.

23

24

ABOUT THE COMPANY


Sharekhan, the retail arm of the SSKI (Shrepal Sewaklal Kantilal Ishwarlal) Group offers
world-class facilities for buying and selling shares on BSE and NSE, demat services,
derivatives (F&O) and most importantly investment advice tempered by 85 years of research
and broking experience. A research and analysis team is constantly working to track
performance and trends. Thats why Sharekhan has the trading products, which are having one
of the highest success rates in the industry. You can avail of all its services at any of their 240
outlets in 110 cities, or through internet using their real time online trading terminals.
A part from Sharekhan, the SSKI Group also comprises of Institutional Broking and Corporate
Finance. The Institutional Broking division caters to domestic and foreign institutional
investors, while the Corporate Finance Division focuses on niche areas such as infrastructure,
telecom and media. SSKI has been voted as the Top Domestic Brokerage House in the research
category, twice by Euromoney survey and four times by Asiamoney survey. SSKI has been
voted the best domestic brokerage in India by Asiamoney Polls 2004.
Also SSKI is being rated as No. 1 Financial Researcher by Business Today, in the Survey
conducted on Lead Managers of all the Mutual Funds.
Basically, the company is a market leader in providing brokering services and has a high
turnover in it which makes it No.1 in the market. The main difference is the services that they
provide to the investors. The customer is managed with a friendly corporate culture to give him
a more benefited investment idea and motivate him whenever he needs. The company is
providing as many tips to the clients (pre-market, online and post-market) for more and more
trading ideas and the manager helps each client to concentrate on a few scripts so that he can
manage the profit/loss.
In future, Sharekhan is planning to enter in Mutual funds, Insurance sector and banking sector
to expand beyond the market currently covered by it. And it has started MF (Mutual Funds) on
priority basis but wants to grow in it.
To sum up, Sharekhan brings a user- friendly trading facility, coupled with a wealth of content
that will help customers stalk the right shares.

25

SHAREKHAN IN ONLINE TRADING


Trading in stock markets through the Internet, which took a dip due to investor apathy because
of prolonged bearishness in recent years, is witnessing a revival of interest and is expected to
record growth in the coming years.
The retail investors in the capital market are the most neglected lot with no access to research
and Sharekhan, one of the oldest members of the BSE, seeks to fill this vacuum felt by retail
investors. The company had invested about Rs 13 crore in the last two years in creating the
requisite infrastructure by way of branches and for Internet trading. With presence in about 110
cities across the country now, it will seek to consolidate its presence in the current year and
focus on expanding its membership.
Sharekhan enjoyed about 20% market share in Web business (Internet trading) in stock
markets. Three years ago, Web trading showed lot of promise but with the market witnessing a
downturn, there was not much interest among retail customers. The company adds around
1,000 customers a month.
While his company has about 10,000 plus customers, ICICI Securities claimed to have 1.20
lakh customers and there were other players like HDFC too. But the number of active Web
traders would be in the 30,000-50,000 region. This number is growing at 5 to 10% a month and
this was a segment that could not be ignored. In Sharekhan, Web trading constituted about
1 per cent to 2 per cent of the revenue in 2001-02.
But in 2002-03, when the overall revenue trebled, the share of Web trading constituted
22% of the revenue. As Sharekhan's daily trading volume was over Rs 300 crore, the share of
Web trading at about Rs 40 crore a day was substantial and a larger part of the volume was
coming from day traders.

26

The pricing for Web trading are expected to come down and once the investment was made on
technology, the scalability would be high and there is minimum involvement of staff in dealing
with customers. The crediting of the sale/purchase orders would be fast with no physical
handling as the system does every work.
Sharekhan has already obtained license to offer Portfolio Management Services (PMS). It was
offering a range of products to suit retail investors and PMS when launched, would cater to the
requirements of the high net-worth individuals. The entry-level investment for PMS
membership may be around Rs 5 - Rs 10 lakhs, which was needed for having a well-diversified
portfolio.

27

SHAREKHAN DEPOSITORY SERVICES


Dematerialization and trading in the demat mode is the safer and faster alternative to the
physical existence of securities. Demat as a parallel solution offers freedom from delays, thefts,
forgeries, settlement risks and paper work. This system works through depository participants
(DPs) who offer demat services and the securities are held in the electronic form for the
investor directly by the Depository.
Sharekhan Depository Services offers dematerialization services to individual and corporate
investors. Sharekhan is a registered Depository Participant (DP) with National Securities
Depository Ltd. (NSDL). It has a team of professionals and the latest technological expertise
dedicated exclusively to our demat department, apart from a national network of franchisee,
making our services quick, convenient and efficient. At Sharekhan, the commitment is to
provide a complete demat solution which is simple, safe and secure.

28

RESEARCH BASED ADVICE


Every investors needs and goals are different. To meet these needs, Sharekhan provides a
comprehensive set of research reports, so that one can take the right investment decisions
regardless of their investing preferences! The Research and Development at Sharekhan is done
at its Head office Mumbai.
The R&D department Head Mr. Hemang Jani forwards all the details regarding all stocks and
scripts to all the branches through Internet. At the end of each trading day there is a
Teleconference, through which the R&D department Head MR. Hemang Jani talks with each
Branch heads and discusses about each days closing position and shows their predictions
about next days opening position. The quarries regarding stock positions and other relevant
matter of the branch heads of each branch is being solved through teleconference.
The various publications of Sharekhan viz. Derivatives Digest, Sharekhans Valueline, Eagle
eye, High Noon, Investors Eye, Commodities Buzz, Commodities Beat, Commodity Traders
corner, Sharekhan Xclusive, etc. are being prepared by the research team of Sharekhan made
up of highly experienced people from diverse field. These all publication provides:

In-depth analysis of the markets

Analysis Before, During (live market updates) and After market timings

Special sector tracking reports sent regularly

STOCK IDEAS
Stock Ideas is aimed at Sharekhan's trading clients. It presents our best stock picks in today's
market. We categorize these companies into six clusters to help you identify the stocks that fit
your time horizons and return objectives the best. Each cluster represents a certain profile
in terms of business fundamentals as well as the kind of returns you can expect of it over a
certain time horizon.

29

STOCK CLUSTERS
Sharekhan categorise all the scripts that are under coverage into 6 clusters. Each cluster
represents a certain profile in terms of business fundamentals as well as the kind of returns you
can expect over a certain time horizon. This help in identifying the stocks that fit your time
horizons and return objectives best. The six clusters are: Evergreen, Apple Green,
Emerging Star, Ugly Duckling, Vulture's Pick and Cannonball.

EVERGREEN
These stocks are steady compounders, churning out steady growth rates year on year. They are
typically significant players in their markets, with sound strategies that will help them achieve
and sustain market dominance in the long run. They have strong brands, management
credentials and a consistent track record of achieving super normal shareholder returns. We
expect stocks in this category to compound at between 18-20% per annum for the next five to
ten years. Also called ownership stocks, Evergreen stocks are the brightest jewels in any
portfolio.

APPLE GREEN
These are stocks that have the potential to be steady compounders and are attempting to move
upwards, to turn Evergreen. They rank a shade below the Evergreen companies, only
because their potential in the five to ten years' time is still not very clear, although they
might grow at rates faster than that of the Evergreen stocks in the next year or two. They
could grow at 25-30% per annum over the next two to three years.

EMERGING STAR
These are typically young companies, often in niche businesses, that have the potential to grow
and dominate their niches. Even better, they might turn out to be real giants, if their niches
explode into full-blown markets in their own rights. These stocks are potential ten-baggers
but you need to be patient.

30

UGLY DUCKLING
These are companies that are trading below their fair value or at values which are at a
significant discount to that of their peer group, due to a combination of circumstances. But
things are now starting to happen in these companies or in their markets that are likely to cause
a re-evaluation of their prospects. These stocks could double in two to three years' time.
VULTURE'S PICK
These are companies with valuable assets or brands that have been trashed to ridiculously low
prices. Buy a Vulture's Pick and wait for a predator who finds its assets undervalued to come
along. This could be a long wait but the returns could be startlingly high.

CANNONBALL
Season's favourites! Typically they are fast gainers in a rising market, which could give returns
of 20-40% within three months. These are based on a combination of sound market
information, technical charts and available fundamentals for investors which are having an
appetite for high risk and high reward.

31

COMMODITY TRADING
Sharekhan is providing the facility to trade with the commodities through MCX (MultiCommodity Exchange) and NCDEX (National Commodities & Derivatives Exchange).
The commodities market in India is an emerging market, which will become the largest market
in the world within the next 5 years, as the trends in the commodities market shows its
performance. The company also provides research reports on daily, weekly and monthly basis
for the investors in the commodities. It is just like the futures and is having a fixed lot of goods
with the margin for each commodity and the trading is based on the theory of futures and
therefore, it is also called Vayda Market. In short Sharekhan also provides brokering in
commodities and the brokerage charges are 0.10% on total trade value and if carry forwarded
an additional 0.02% charge on total trade.

ONLINE IPO
Online IPO (Initial Public Offering) is a new service started by Sharekhan for providing the
application form of any companys issues of shares just like the TCS issue can be subscribed
by filling an online form to reduce the paper work and the fund transfer facility is also
provided to the clients for transferring the funds online. It is given on its web-site for helping
the clients who are not able to collect the forms manually and the speed of filling and reducing
the risk of misplacing of forms, not reaching in time, etc.

32

PRODUCTS of SHAREKHAN
Sharekhans products are basically divided into online and offline products.

Sharekhan
Off-Line

On-Line

Classic

Speed Trade

OFF-LINE TRADING ACCOUNT:


The Off-Line account is trading account through which one can buy and sell through his/her
telephone or by personal visit at sharekhan shop. This a/c is for those who are not comfortable
with computer and want to trade.

ON-LINE TRADING ACCOUNT:


The Online trading facilities provided by Sharekhan is basically divided into two types of
accounts, viz. Classic Account and Speed trade Plus and Streamer.

1. Classic Account
The CLASSIC ACCOUNT is a Sharekhan online trading account, through which one can buy
and sell shares through our website www.sharekhan.com in an instant.
Along with enabling access for you to trade online, the CLASSIC ACCOUNT also gives you
our Dial-n-Trade service. With this service, all you have to do is dial 1-600-22-7050 to buy
and sell shares using your phone.

33

9 Features of the CLASSIC ACCOUNT that enable you to invest effortlessly


1.

Online trading account for investing in Equities and Derivatives via sharekhan.com

2.

Integration of: Online trading + Bank + Demat account

3.

Instant cash transfer facility against purchase & sale of shares

4.

Reasonable transaction charges

5.

Instant order and trade confirmation by e-mail

6.

Streaming quotes

7.

Personalized market watch

8.

Single screen interface for cash, derivatives and more

9.

Provision to enter price trigger and view the same online in market watch

2. SPEED TRADE PLUS


SPEEDTRADE PLUS is an internet-based software application that enables you to buy and
sell shares in an instant. Its ideal for active traders and jobbers who transact frequently during
day's trading session to capitalize on intra-day price movements.
Speed Trade Plus also provides the features of and functionality of trading in derivatives from
the same single-screen interface.
7 Features of Speed trade Plus that enable you to trade effortlessly
1. Instant order Execution & Confirmation
2. Single screen trading terminal
3. Real-time streaming quotes, tic-by-tic charts
4. Market summary (most traded scrip, highest value)
5. Hot keys similar to a brokers terminal
6. Alerts and reminders
7. Back-up facility to place trades on Direct Phone lines

34

CHARGES OF DIFFERENT TRADING ACCOUNTS:


Off-Line

Rs.300 Demat A/c charge +

Deposits will be in Cash or In term

10,000 Deposits

of Group As Shares
Demat free for 1 year (other

Classic

Rs.750 (one time)

Speed Trade Plus

Rs.1,000 (one time)

facilities included)
Online trading on your pc with
Demat free and other facilities

The various benefits the client gets from the online trading are:

Freedom from Paperwork: Integrated trading, bank and Demat account (auto pay-in
and pay-out of securities) with digital contracts removes all paperwork.

Instant Credit And Transfer: Instant transfer of funds from bank accounts of clients
choice to his/her Sharekhan trading account.

Trade Anywhere: Enjoy the ease of trading from any part of the world in a completely
secure environment.

Dial n Trade: Call Sharekhan on a toll free number to place orders through Sharekhans
tele-brokers.

Timely Advice: Make informed decisions with expert advice, investment calls and live
market commentary.

Real-Time Portfolio Tracking: Benefit from real-time information of your investment


and current portfolio value.

After-Hour Orders: The Client can place orders after the market hours, which get
executed as soon as markets open.

35

ABOUT DERIVATIVES
INTRODUCTION
Keeping in view the experience of even strong and developed economies the world over, it is
no denying the fact that financial market is extremely volatile by nature. Indian financial
market is not an exception to this phenomenon. The attendant risk arising out of the volatility
and complexity of the financial market is an important concern for financial analysts. As a
result, the logical need is for those financial instruments which allow fund managers to better
manage or reduce these risks.
With gradual liberalization of Indian financial system and the growing integration among
markets, the risks associated with operations of banks and All India Financial Institutions have
become increasingly complex, requiring strategic management. In keeping with spirit of the
guidelines on Asset-Liability Management (ALM) systems and on integrated risk management
systems, it is very much required to design risk management architecture, taking into
consideration the size, complexity of business, risk philosophy, market perception and the level
of capital. In addition, fine-tuning the risk management system to deal with credit and market
risk is also the need of the hour. For enabling the banks and the financial institutions, among
others, to manage their risk effectively, the concept of derivatives comes into picture.
The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by lockingin asset
prices. As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However, by locking-in asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors.

36

WHAT ARE DERIVATIVES??


A derivative is a financial instrument, which derives its value from some other financial price.
This other financial price is called the underlying. The underlying asset can be equity,
FOREX, commodity or any other asset.
A wheat farmer may wish to contract to sell his harvest at a future date to eliminate the risk of
a change in prices by that date. The price for such a contract would obviously depend upon the
current spot price of wheat. Such a transaction could take place on a wheat forward market.
Here, the wheat forward is the derivative and wheat on the spot market is the underlying.
The terms derivative contract, derivative product, or derivative are used interchangeably.
The most important derivatives are futures and options.

Example: A very simple example of derivatives is curd, which is derivative of milk. The price of curd
depends upon the price of milk, which in turn depends upon the demand, and supply of milk.
See it this way. American depository receipts/ global depository receipts of ICICI, Satyam and
Infosys traded on stock exchanges in the USA and England have their own values? No. They
draw their price from the underlying shares traded in India.
Consider how the value of mutual fund units changes on a day-to-day basis. Dont mutual fund
units draw their value from the value of the portfolio of securities under the schemes? Arent
these examples of derivatives? Yes, these are. And you know what, these examples prove that
derivatives are not so new to us. Nifty options and futures, Reliance futures and options,
Satyam futures and options etc are all examples of derivatives. Futures and options are the
most common and popular form of derivatives.

37

HISTORY
The derivatives markets has existed for centuries as a result of the need for both users and
producers of natural resources to hedge against price fluctuations in the underlying
commodities. India has been trading derivatives contracts in silver, gold, spices, coffee,
cotton and oil etc for decades in the gray market. Trading derivatives contracts in
organized market was legal before Morarji Desais government banned forward contracts.
Derivatives on stocks were traded in the form of Teji and Mandi in unorganized
markets. Recently futures contract in various commodities was allowed to trade on
exchanges. In June 2000, NSE and BSE started trading in futures on Sensex and Nifty.
Options trading on Sensex and Nifty commenced in June 2001. Very soon thereafter
trading began on options and futures in 31 prominent stocks in the month of July and
November respectively. The market lots keeps on changing from time to time. The
minimum quantity you can trade in is one market lot.

38

DERIVATIVES: AN INDIAN CONTEXT:


In Indian context, the intensity of derivatives usage by institutional investors (viz. Banks,
Financial Institution; Mutual Funds, Foreign Institutional Investors, Life and General Insurers)
depend on their ability and willingness to use derivatives for one or more of the following
purposes:

Risk containment: using derivatives for hedging and risk containment purposes

Risk Trading/Market Making: Running derivatives trading book for profits and
arbitrage; and/or

Covered Intermediation: On-balance-sheet derivatives intermediation for client


transaction, without retaining any net-risk on the balance sheet (except credit risks).

39

TYPES OF DERIVATIVES
Derivative as a term conjures up visions of complex numeric calculations, speculative dealings
and comes across as an instrument which is the prerogative of a few smart finance
professionals. In reality it is not so. In fact, a derivative transaction helps cover risk, which
would arise on the trading of securities on which the derivative is based and a small investor
can benefit immensely. A derivative security can be defined as a security whose value
depends on the values of other underlying variables. Very often, the variables
underlying the derivative securities are the prices of traded securities.
Derivatives and futures are basically of 3 types:

Forwards and Futures

Options

Swaps
DERIVATIVES
DERIVATIVES

Options
Options

Put
Put

Futures
Futures

Call
Call
Commodity
Commodity

Swaps
Swaps

Interest
Interest Rate
Rate
Security
Security

40

Forwards
Forwards

Currency
Currency

FORWARDS:
A forward contract is the simplest mode of a derivative transaction. It is an agreement to
buy or sell an asset (of a specified quantity) at a certain future time for a certain price. No
cash is exchanged when the contract is entered into.
Illustration: - Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it
outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will
rise 3 months from now. So in order to protect himself from the rise in prices Shyam enters
into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,000.
What Shyam is doing is that he is locking the current price of a TV for a forward contract. The
forward contract is settled at maturity. The dealer will deliver the asset to Shyam at the end of
three months and Shyam in turn will pay cash equivalent to the TV price on delivery.

FUTURES:
It is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price through exchange traded contracts.
A Future represents the right to buy or sell a standard quantity and quality of an asset or
security at a specified date and price. Futures are similar to Forward Contracts, but are
standardized and traded on an exchange, and are valued, or "Marked to Market daily. The
Marking to Market provides both parties with a daily accounting of their financial obligations
under the terms of the Future. Unlike Forward Contracts, the counterparty to a Futures contract
is the clearing corporation on the appropriate exchange. Futures often are settled in cash or
cash equivalents, rather than requiring physical delivery of the underlying asset. Parties to a
Futures contract may buy or write Options on Futures.

41

OPTIONS:
An option is a contract, which gives the buyer the right, but not the obligation to buy or
sell shares of the underlying security at a specific price on or before a specific date.
Option, as the word suggests, is a choice given to the investor to either honor the contract; or
if he chooses not to walk away from the contract. There are two kinds of options: Call Options
and Put Options.
A Call Option is an option to buy a stock at a specific price on or before a certain date. When
you buy a Call option, the price you pay for it, called the option premium, secures your right to
buy that certain stock at a specified price called the strike price. If you decide not to use the
option to buy the stock, and you are not obligated to, your only cost is the option premium.
Put Options are options to sell a stock at a specific price on or before a certain date. In this
way, Put options are like insurance policies. With a Put Option, you can "insure" a stock by
fixing a selling price. If something happens which causes the stock price to fall, and thus,
"damages" your asset, you can exercise your option and sell it at its "insured" price level. If the
price of your stock goes up, and there is no "damage," then you do not need to use the
insurance, and, once again, your only cost is the premium.
Technically, an option is a contract between two parties. The buyer receives a privilege for
which he pays a premium. The seller accepts an obligation for which he receives a fee.

42

CALL OPTIONS
Call options give the taker the right, but not the obligation, to buy the underlying shares at a
predetermined price, on or before a predetermined date.
Illustration: - Raj purchases 1 Satyam Computer (SATCOM) AUG 150 Call --Premium 8
This contract allows Raj to buy 100 shares of SATCOM at Rs 150 per share at any time
between the current date and the end of next August. For this privilege, Raj pays a fee of Rs
800 (Rs eight a share for 100 shares).
The buyer of a call has purchased the right to buy and for that he pays a premium.
Now let us see how one can profit from buying an option; Sam purchases a December call
option at Rs 40 for a premium of Rs 15. That is he has purchased the right to buy that share for
Rs 40 in December. If the stock rises above Rs 55 (40+15) he will break even and he will start
making a profit. Suppose the stock does not rise and instead falls he will choose not to exercise
the option and forego the premium of Rs 15 and thus limiting his loss to Rs 15.

Call Options-Long & Short Positions


When you expect prices to rise, then you take a long position by buying calls. You are
bullish.
When you expect prices to fall, then you take a short position by selling calls. You are
bearish.

43

PUT OPTIONS
A Put Option gives the holder of the right to sell a specific number of shares of an agreed
security at a fixed price for a period of time.
Illustration:- Raj is of the view that the a stock is overpriced and will fall in future, but he
does not want to take the risk in the event of price rising so purchases a put option at Rs 70 on
X. By purchasing the put option Raj has the right to sell the stock at Rs 70 but he has to pay a
fee of Rs 15 (premium).
So he will breakeven only after the stock falls below Rs 55 (70-15) and will start making profit
if the stock falls below Rs 55.

Put Options-Long & Short Positions


When you expect prices to fall, then you take a long position by buying Puts. You are
bearish.
When you expect prices to rise, then you take a short position by selling Puts. You are
bullish.

CALL OPTIONS

PUT OPTIONS

If you expect a fall in price(Bearish)

Short

Long

If you expect a rise in price (Bullish)

Long

Short

44

COMMODITIES MARKET IN INDIA


Organized futures market evolved in India by the setting up of "Bombay Cotton Trade
Association Ltd." in 1875. In 1893, following widespread discontent amongst leading cotton
mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a
separate association by the name "Bombay Cotton Exchange Ltd." was constituted. Futures
trading in oilseeds was organized in India for the first time with the setting up of Gujarati
Vyapari Mandali in 1900, which carried on futures trading in groundnut , castor seed and
cotton. Before the Second World War broke out in 1939 several futures markets in oilseeds
were functioning in Gujarat and Punjab.
There were booming activities in this market and at one time as many as 110 exchanges were
conducting forward trade in various commodities in the country. The securities market was a
poor cousin of this market as there were not many papers to be traded at that time.
The era of widespread shortages in many essential commodities resulting in inflationary
pressures and the tilt towards socialist policy, in which the role of market forces for resource
allocation got diminished, saw the decline of this market since the mid-1960s. This coupled
with the regulatory constraints in 1960s, resulted in virtual dismantling of the commodities
future markets. It is only in the last decade that commodity future exchanges have been
actively encouraged. However, the markets have been thin with poor liquidity and have not
grown to any significant level.
A three-pronged approach has been adopted to revive and revitalize the market. Firstly, on
policy front many legal and administrative hurdles in the functioning of the market have been
removed. Forward trading was permitted in cotton and jute goods in 1998, followed by some
oilseeds and their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc. in
1999. A statement in the first ever National Agriculture Policy, issued in July, 2000 by the
government that futures trading will be encouraged in increasing number of agricultural
commodities was indicative of welcome change in the government policy towards forward
trading.

45

Secondly, strengthening of infrastructure and institutional capabilities of the regulator and the
existing exchanges received priority. Thirdly, as the existing exchanges are slow to adopt
reforms due to legacy or lack of resources, new promoters with resources and professional
approach were being attracted with a clear mandate to set up demutualised, technology driven
exchanges with nationwide reach and adopting best international practices.
The year 2003 marked the real turning point in the policy framework for commodity market
when the government issued notifications for withdrawing all prohibitions and opening up
forward trading in all the commodities. Of the country's total GDP, commodities related
(and dependent) industries constitute about roughly 50-60 %, which itself cannot be
ignored.
Most of the existing Indian commodity exchanges are single commodity platforms; are
regional in nature, run mainly by entities which trade on them resulting in substantial conflict
of interests, opaque in their functioning and have not used technology to scale up their
operations and reach to bring down their costs. But with the strong emergence of: National
Multi-commodity Exchange Ltd., Ahmedabad (NMCE), Multi Commodity Exchange
Ltd., Mumbai (MCX), National Commodities and Derivatives Exchange, Mumbai
(NCDEX), and National Board of Trade, Indore (NBOT), all these shortcomings will be
addressed rapidly. These exchanges are expected to be role model to other exchanges and are
likely to compete for trade not only among themselves but also with the existing exchanges.
The current mindset of the people in India is that the Commodity exchanges are
speculative (due to non delivery) and are not meant for actual users. One major reason beingthe awareness is lacking amongst actual users. In India, Interest rate risks, exchange rate
risks are actively managed, but the same does not hold true for the commodity risks. Some
additional impediments are centered on the safety, transparency and taxation issues.

46

NCDEX (NATIONAL COMMODITIES AND DERIVATIVES


EXCHANGE)
NCDEX started working on 15th December, 2003. This exchange provides facilities to their
trading and clearing member at different 130 centers for contract.
In commodity market the main participants are speculators, hedgers and arbitrageurs.
Promoters of NCDEX are
National Stock Exchange(NSE)
ICICI bank
Life Insurance Corporation(LIC)
National Bank for Agricultural and Rural Development (NABARD)
IFFICO
Punjab National Bank (PNB)
CRISIL

47

WHY NCDEX?
NCDEX is nationalized screen based system which is providing transparent, private
and easy services.
NCDEX is one of the traditional media which gives online information
NCDEX is one of the Indian commodity exchange, constructed on the basis of the
current national institutes the exchange has been established with the coloration of
leading institutes like NABARD, LIC, NSI etc.
In India NCDEX has maximum settlement guarantee fund.
NCDEX has appointed two exports for checking quality at the time of delivery

48

FACILITIES PROVIDED BY NCDEX


NCDEX has developed facility for checking of commodity and also provides a wear
house facility
By collaborating with industrial partners, industrial companies, news agencies, banks
and developers of kiosk network NCDEX is able to provide current rates and contracts
rate.
To prepare guidelines related to special products of securitization NCDEX works with
bank.
To avail farmers from risk of fluctuation in prices NCDEX provides special services for
agricultural.
NCDEX is working with tax officer to make clear different types of sales and service
taxes.
NCDEX is providing attractive products like weather derivatives

49

MCX (MULTI COMMODITY EXCHANGE)


MULTI COMMODITY EXCHANGE of India limited is a new order exchange with a mandate
for setting up a nationwide, online multi-commodity marketplace, offering unlimited growth
opportunities to commodities market participants. As a true neutral market, MCX has taken
several initiatives for users
In a new generation commodities futures market in the process, become the countrys premier
exchange.
MCX, an independent and a de-mutualized exchange since inception, is all set up to introduce
a state of the art, online digital exchange for commodities futures trading in the country and
has accordingly initiated several steps to translate this vision into reality.
MARKET WATCH:

The market watch window is used to view the market details for a particular or group of
contracts and for a particular instrument type. This window displays the following details:
Symbol,Expiry,price quotation unit, buy qty, buy price, sell price, sell qty, last traded
price,D.P.R,volume (in 000s), value (in lac),% change,
average trade price, high, low, open, close & open interest.

50

ARE COMMODITIES SUITABLE FOR FUTURE TRADING??


The following are some of the key factors, which decide the suitability of the commodities for
future trading:

The commodity should be competitive, i.e., there should be large demand for and
supply of the commodity - no individual or group of persons acting in concert should
be in a position to influence the demand or supply, and consequently the price
substantially.

There should be fluctuations in price.

The market for the commodity should be free from substantial government control.

The commodity should have long shelf life and be capable of standardization and
gradation.

51

ITEMS TRADED ON MCX


Bullion: Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI
Oil & Oil Seeds : Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD
Palmolein, Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil, Cottonseed
Oilcake, Cottonseed

Spices: Pepper, Red Chili, Jeera, Turmeric


Metal: Steel Long, Steel Flat, Copper, Nickel, Tin
Fibre: Kapas, Long Staple Cotton, Medium Staple Cotton
Pulses: Chana, Urad, Yellow Peas, Tur
Cereals: Rice, Basmati Rice, Wheat, Maize, Sarbati Rice
Energy: Crude Oil
Others: Rubber, Guar Seed, Gur, Guargum Bandhani, Guargum, Cashew Kernel, Guar seed
Bandhani

52

WHY TO TRADE IN COMMODITY FUTURES??


Commodity Futures, which forms an essential component of Commodity Exchange, can be
broadly classified into precious metals, agriculture, energy and other metals. Current futures
volumes are miniscule compared to underlying spot market volumes and thus have a
tremendous potential in the near future.
Futures trading in commodities results in transparent and fair price discovery on account of
large-scale participations of entities associated with different value chains. It reflects views and
expectations of a wider section of people related to a particular commodity. It also provides
effective platform for price risk management for all segments of players ranging from
producers, traders and processors to exporters/importers and end-users of a commodity.
It also helps in improving the cropping pattern for the farmers, thus minimizing the losses to
the farmers. It acts as a smart investment choice by providing hedging, trading and arbitrage
opportunities to market players. Historically, pricing in commodities futures has been less
volatile compared with equity and bonds, thus providing an efficient portfolio diversification
option.
Raw materials form the most key element of most of the industries. The significance of raw
materials can further be strengthened by the fact that the "increase in raw material cost means
reduction in share prices". In other words "Share prices mimic the commodity price
movements". Today, Industry in India runs the raw material price risk; hence going forward the
industry can hedge this risk by trading in the commodities market.

53

HEDGING
Hedging is a sophisticated mechanism, which provides the necessary immunity to the above
interests in the marketing of commodities from the risk of adverse price fluctuations.
A Hedge is a countervailing contract transacted in a futures market through which those who
have bought in the ready market will sell in the futures market and those who have sold in the
ready market would buy in the futures market. In each of these two cases, a purchase in the
ready market is off-set by an opposite sale in the futures market and a sale in the ready market
is off-set by purchase in the futures market.
When the purchase or sale commitment in the ready market is fulfilled, the sale or purchase
hedge contract is closed out by an offsetting reverse purchase or sale contract in the futures
market.
The practice of hedging is based on the assumption that the ready and futures prices of the
commodity move more or less parallel to each other. The ready and futures prices of a
commodity ordinarily do move together in sympathy with each other because both ready and
futures prices are basically determined by the demand and supply factors of that particular
commodity. When the price of a commodity has declined in the ready market, its price in the
futures market would normally have also declined so that the loss incurred in the ready market
would be recovered by the profit made in the futures market.
Similarly, if the price rises in the ready market after the hedge sale had been entered into the
futures market, there would be a loss in the futures market, which would, however, be made up
with the profit made in the ready market. But, in certain circumstance, the ready and futures
prices may not move together or the spread between the two may increase or decrease sharply.
To the extent that they do not move together by the same extent, hedging itself may be a source
of minor gains or losses. But a dealer, manufacturer or exporter is not, per se, interested in such
speculative losses or gains. His only interest is to ensure that he gets the necessary insurance
against unforeseen fluctuation in prices. By and large, hedging in a futures market does afford
such a protection to the various functionaries.

54

REGULATORY BODY
The Forward Markets Commission (FMC) is the regulatory body for commodity
futures/forward trade in India. The commission was set up under the Forward Contracts
(Regulation) Act of 1952. It is responsible for regulating and promoting futures/forward trade
in commodities. The FMC is headquartered in Mumbai while its regional office is located in
Kolkata. Curbing the illegal activities of the diehard traders who continued to trade illegally is
the major role of the Forward Markets Commission.

WHY TO TRADE IN COMMODITIES?


India has very large agriculture production in number of Agri-commodities, which needs use of
futures and derivatives as price-risk management system.
Fundamentally price you pay for goods and services depend greatly on how well business
handle risk. By using effectively futures and derivatives, businesses can minimize risks, thus
lowering cost of doing business. Commodity players use it as a hedge mechanism as well as a
means of making money. For e.g. in the bullion markets, players hedge their risks by using
futures Euro-Dollar fluctuations and the international prices affecting it.
For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the
issues in price dissemination, standards, certification and warehousing are bound to occur.
Commodity Market will serve as a suitable alternative to tackle all these problems efficiently.

PROBLEMS FACED BY COMMODITIES MARKETS IN INDIA


Institutional issues have resulted in very few deliveries so far. Currently, there are a lot of
hassles such as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkata,
transportation costs, octroi duty, logistical problems prevent trading to take place. Exchanges
are used only to hedge price risk on spot transactions carried out in the local markets. Also
multiple restrictions exist on inter-state movement and warehousing of commodities.

55

RISKS ASSOCIATED WITH COMMODITIES MARKETS


No risk can be eliminated, but the same can be transferred to someone who can handle it better
or to someone who has the appetite for risk. Commodity enterprises primarily face the
following classes of risks, namely: the price risk, the quantity risk, the yield/output risk and the
political risk. Talking about the nationwide commodity exchanges, the risk of the counter party
(trading member, client, vendors etc) not fulfilling his obligations on due date or at any time
thereafter is the most common risk.
This risk is mitigated by collection of the following margins:

Initial Margins

Exposure margins

Market to market of positions on a daily basis

Position Limits and Intra day price limits

Surveillance

Commodity price risks include:

Increase in purchase cost vis--vis commitment on sales price

Change in value of inventory

Counter party risk translating into commodity price risk

56

EXPECTATIONS FROM COMMODITIES EXCHANGES


The following are some of the key expectations of the investor's w.r.t. any commodity
exchange:

To get in place the right regulatory structure to even out the differences that may exist
in various fields.

Proper Product Conceptualization and Design.

Fair and Transparent Price Discovery & Dissemination.

Robust Trading & Settlement systems.

Effective Management of Counter party Credit Risk.

Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of


Members, Enforcement of Exchange rules.

57

FUTURE OF COMMODITY TRADING


With the gradual withdrawal of the government from various sectors in the post-liberalization
era, the need has been felt that various operators in the commodities market be provided with a
mechanism to hedge and transfer their risks. India's obligation under WTO to open agriculture
sector to world trade would require futures trade in a wide variety of primary commodities and
their products to enable diverse market functionaries to cope with the price volatility prevailing
in the world markets. Government subsidy may go down as a result of WTO. The MSP
programme will not be sustainable in such a scenario. The farmer will have to look at ways of
being in a position to trade on commodity exchanges in future. Also, corporates will feel the
pressure to hedge their price risk once the frontiers open up for free trade.
Indian markets have recently thrown open a new avenue for retail investors and traders to
participate: commodity derivatives. For those who want to diversify their portfolios beyond
shares, bonds and real estate, commodities are the best option.
Following are some of the applications, which can utilize the power of the commodity markets
and create a win-win situation for all the involved parties: 1. Regulatory Approval / Permission to FII's for trading in the Commodity

Markets: FII's are currently not allowed nor disallowed under any law. As, they have added
depth to the equity markets; they will add depth to the commodities markets, since they
globally know the commodities.
2. Active Involvement of Mutual Fund Industry in India: Currently Mutual
Funds are prohibited from not using derivatives apart from hedging. Mutual Funds as investors
can invest in gold and get returns as they get from debt instruments, equity markets. AMFI &
SEBI need to collectively work towards the same. Launch of the "Commodity Funds", by the
Mutual Funds in India, can serve as a newer investment avenue for investors.

58

3. Online commodity trading: Online commodity trading offers a way for an open,
many-to-many system, where every user has equal access to price quotes and trading
functionality. It provides a level playing field for all, without favoritism or control by a chosen
few, where any user can view all quotes posted by other users in real time, act or trade on
quotes posted by others, post their own prices and quantities for others to trade
The Online commodity trading site usually lists a large number of unique products covering a
variety of commodities, structures, and settlement terms ranging from Oil, Natural Gas,
Electric Power, Precious Metals, Emissions and Weather. It provides for various media ranging
from Physical Delivery and Financial Cash Settlement. The greatest advantage of an online
system for trading is that just a click can be used to hit a bid or lift an offer. The Online
trading system operates almost continuously around the clock, 24 hours a day, seven days a
week. This allows any user to extend the trading day, and easily pass the trading objectives to
others in companies in different time zones.
There are further derivative options available ranging from Forwards, Swaps, Options,
Spreads, Differentials, Complex Derivatives.
Liquidity, or trade activity, is perhaps the best measure of success of an online trading
commodity trading system. With most online commodity trading systems, traders can be sure
of finding an interesting market development or trading opportunity almost every time they log
on.
All quotes posted by users on any online commodity trading systems are live and firm. They
can be acted on with full assurance of a completed transaction. The greatest advantage of an
online system for trading is that just a click can be used to hit a bid or lift an offer.

59

The Online trading system operates almost continuously around the clock, 24 hours a day,
seven days a week. This allows any user to extend the trading day, and easily pass the trading
objectives to others in companies in different times zones.
The online commodity trading system in India is only an emerging segment yet. This is
because the Internet boom in Indian is on the rise only now. The Internet charges are becoming
minimal and the Internet is soon becoming a way of life in India. It is in this scenario that
online trading is becoming more the way of trading in India.

60

SHAREKHAN COMMODITY ADVANTAGE

KEY BENEFITS OF COMMODITIES@ SHAREKHAN:


You are getting 20time exposer in MCX &10 time in NCDEX depends on commodity to open
an account
We have sms facility where u getting market information as well as buy/sell call
You are also getting yahoo chat,Where our dealer/RM are always help for market information
as well as buy/sell call

61

62

WHY THIS STUDY IS CONDUCTED??


In the Rajkot City, Most of the investors trade in equity while Derivatives & Commodities
segment remain inaccessible.
There are very few people in Rajkot who are trading in Derivatives & Commodities while
there are immense opportunities for the development of these segments.
Sharekhan as a stock broking company needs to focus on increasing the awareness about
derivatives & commodities. Because, if trading on these instruments will increase, Sharekhan
will also be benefited by earning revenue in term of Brokerage. This was the main reason
behind conducting this study.

63

RESEARCH OBJECTIVE
The main objective of the study is to check literacy ratio of Derivatives & Commodities and
their potential market among the people of Rajkot City.

Some other secondary objectives are as under:


1.

To know the awareness of Derivatives & Commodities.

2.

To know the scope for the Derivatives & Commodities.

3.

To know the investment habit of the people of Rajkot City.

4.

To know the purpose of investing in Derivative & Commodities.

5.

To know the influencing force behind the decision making while trading in derivatives
and Commodities.

6.

To find out the best pattern to educate about Derivatives & Commodities.

7.

To find out the medium which is the best suitable for trading on Derivatives &
Commodities.
.

64

SOURCES OF DATA
There are mainly two sources of data i.e.

(1) Primary
(2) Secondary
Primary Data:
The data, which is collected directly from the respondents to the base of knowledge and belief
of the research, are called primary data.
The normal procedure is to interview some people individually to get a sense of how people
feel about the derivatives & commodities segment.
So far as our research is concerned, primary data is the main source of information. We have
collected data through Questionnaire and information from respondent.

Secondary Data:
When data are collected and compelled from the published nature or any others primary data
is called secondary data.
So far as our research is concerned, we have not collected any information from any sources.
So, we have not used secondary data for our research

65

SAMPLING PROCESS
It is very true that its very difficult to do the research with the whole universe. As we know
that it is not feasible to go for population survey because of the numerous customers and their
scattered location. So for this purpose sample size has to be determined well in advance and
selection of sample also must be scientific so that it represents the whole universe.
So far as our research is concerned, we have taken sample size of 300 respondents. We have
selected Income Earners with savings to invest in Rajkot city.

All the respondents are stratified on the basis of their profession and savings. We have
selected the samples as per our convenience.

Sample universe
Sampling Technique
Sample size

Sampling Unit:

Baroda city
Stratified and Random
150 respondents
Professional

Random

Random

Government Employees

Random

Employees working in private firms

Random

Busi Business Man

66

SCOPE OF STUDY
The research that is being conducted by us will be useful in the following respect.

This will help the company, how to make people aware about derivatives &
commodities by imparting best education.

This will help the company to know the taste of masses and turn it towards derivatives
& commodities.

This will help the company to frame effective Marketing Strategy.

This will also help to select the right media for advertising to create brand awareness as
well as to give knowledge of the products.

Mind share of Sharekhan can be known.

This will also help to select right medium for trading in derivatives & commodities
segment.

This will help the company to reduce the obstacles which come in the way for the
development of derivatives & commodities segment.

67

LIMITATIONS OF THE STUDY


1.

Personal Bias:

People may have personal bias towards particular investment option so they may not give
correct information and due to which conclusion may be derived.

2.

Time Limit:

The time duration of the research is short thats why the information is not covered fully.

3.

Area:

The area was limited to Baroda city only, so we can not know the degree of the literacy outside
the city.

4.

Sample Size:

The last limitation is Sample size, taken by us is of 150 only; due to which we may not get the
proper results.

68

ANALYSIS & INTERPRETATION


1.

Gender Ratio
Male

Female

93

57

Out of the sample size of 300, the break up of the gender ratio has come up as above.

2.

Age
21 35
91

Age

36 50
12

51 65
47

Above 66
0

Most of the respondents were between the age of 21 to 35.

3.

Educational Qualification

Qualification

Post Graduate
57

Graduate
93

Under Graduate
0

Maximum numbers of respondents were Graduates.

4.

Occupation

Professionals
57

Business Man
23

Employees working in Pvt. Firm


34

69

Govt. Employees
36

5.

Investment Pattern of The people


Securities

Nos.

Percentage

Bank FD

115

77

Mutual Fund

69

46

Shares/ Equity

93

62

Postal Scheme

104

69

Insurance

115

77

Real Estate

81

54

G-secs

57

38

Bonds/Debentures

69

46

Jewellery

115

77

It can be seen from the graph that the respondents have given first preference for investment to
Bank FD. Insurance and Jewellary are at 77% while postal schemes, shares/equities have
almost equal share with second and third position. We can say that the respondents are not in
favor of taking risk. But by seeing the shares on second preferences we can say that people are
now turning towards capital market.

70

6.

Instruments in which people are trading


Instruments
Equity
Derivative
Commodities

Nos.
103
57
23

Percentage (%)
69
38
15

When asked to the respondents that out of the given three options in which they are trading.
Equity got the first preference by 69%. While derivatives i.e. F&O has got second rank and
commodities has been least preferred now a days.

71

7.

Instruments in which people want to be trade in.


Instruments
Equity
Derivative
Commodities

Nos.
46
47
57

Percentage (%)
31
31
38

On asked about their preferences for trading in future, the respondents have shown equal
interest in equity and commodity with 38% followed by derivatives. From this we can say that
commodity segment has got a brighter future.

72

8.

The constraints those are decreasing the use of Derivatives &


Commodities segment.
Obstacles

Risk Taking Ability


Fund Facilities
Lack of Knowledge
Non Availability of Option
with the Broker
Regulatory Constraints
Still in wait & see
Lack of Guidance

Nos.

Percentage (%)

35
34
23

23
23
15

12
12

08
08

While questioned about the constraints which hold them back from trading in derivatives and
commodities, respondents have given the maximum votes to their Risk awareness and lack
of funds with 23% each. While the lack of knowledge about derivatives and commodities is
also one of the big constraints followed by lack of guidance.

73

9.

Factors that are to be considered by people while jumping in to

Derivative

& Commodity segment.

Factors
Risk Reduction
To Increase Leverage
Investment
Arbitrage
Speculation

Nos.
28.4
21.9
24.6
11.4
13.7

Rank
1
3
2
5
4

While investigating the factors which have been given the maximum importance by investors
while trading in derivatives and commodities we have come up with Risk Reduction as the
first priority with 28.4%, while 24.6% people have considered it as an investment option near
to that almost 22% people are using derivatives and commodity as a tool to increase the
leverage. So, in future derivatives and commodities can be highlighted as an investment option
which given higher leverage.

74

10.

Factors which people takes into consideration while taking the decision to trade in

Derivatives & Commodities.

Factor

Percentage (%)

Rank

Independently

14.3

Broker/Agents advice
News Channel

11.6
9.3

5
8

Internet
Advice of Friends/Colleagues

11.3
12

6
2

Advice of CA/Tax consultants

9.7

Well-known Stock Broking Houses

12

11.8

News Papers

Business Magazines

On asked to the respondents that while deciding to trade in derivative commodities, whom do
they consider the reliable source of information. We come up with the conclusion that most of
investors take their decision independently. While they consider Business Magazines, Advice
of friends/colleagues and services of well known stock broking houses equally important. Also
brokers have a good knowledge on investment. So, stock broking houses like Sharekhan can
plan out their strategy to increase the trading on derivatives and commodities.
11.

Tools preferred by the people while learning Derivatives & Commodities.

75

Tools
Classroom Teaching
Literature
Self-Experience
Internet
Documentaries
Seminars

Nos.
57
57
103
47
35

Percentage (%)
38
38
69
31
23

When the respondents were asked about the learning technique on derivatives and
commodities, the most of them preferred preference self experience that is they wanted to learn
through trial n error: after all Experience is The Best Teacher.

76

12.

Time which people can devote to learn Derivatives & Commodities.

Time
1 day
2 days
3 days
2 hrs per day over 1 month
Cant say

Nos.
23
46
12
22
47

Percentage (%)
15
31
8
15
31

When asked about the time which the respondents would like to devote for learning about
derivatives and commodities, 31% were not sure about the time limit. It means it depends and
varies on person to person.

77

13.

Most preferred medium for trading in Derivatives & Commodities

Medium
Stock Broking Cos. (Branded)
Franchisees
Brokers
Online

Percentage (%)
33.1
15.3
25.8
25.8

Rank
1
3
2
2

While finding out the medium which people consider the most reliable while trading
derivatives and commodities, the respondents gave maximum vote to Branded Stock Broking
Houses like Sharekhan, ICICIdirect.com, and Kotakstreet.com. While the second choice was
local brokers. So from the above we can say that if proper attention is given on online trading
and brokers the chances of development of derivatives and commodities would be increasing.

78

14.

Most preferred Broking companies of the city

Broking Company
India Bulls
ICICIdirect
Kotak Street
Karvy
Sharekhan
5 Paisa
HDFC Securities
Motilal Oswal
Marwadi

Percentage (%)
10.20
29.30
14.10
08.90
25.00
05.10
03.80
01.20
02.40

Rank
4
1
3
5
2
6
7
9
8

This question was one of the most crucial for investigating the mind share of stock broking
houses. In this question we came up with the company which is one of the leading in stock
broking industry i.e. ICICIdirect.com the next close challenger was Sharekhan.com followed
by Kotakstreet.com.
15.

Individual perception and knowledge


True

False

79

Cans Say

54.8

32.7

12.5

In this question we asked eight sub questions on derivatives and commodities segment. Almost
55% questions were correctly answered by the respondents; while 32.7% were false. So, we
can say that the people have more or less knowledge about derivatives and commodities.

80

CONCLUSION

Most of the people in Rajkot City are investing in fixed return Instruments.

But there are investors who use Equity as an investment tool.

Those people who want to invest in Derivatives & Commodities are investing mainly for
reducing risk and they consider them as investment tool.

People generally want to take trading decisions independently or under the guidance of
Friends or Well Known Stock Broking Houses.

Literature and Self Experience can be taken as the best method to impart education about
derivatives & commodities.

More than 55% of the respondents are familiar with the Derivatives & Commodities.

81

RECOMMENDATION

Sharekhan needs to make its marketing team strong and also it should increase
marketing activities such as promotional campaigns.

Sharekhan should educate the investors about Derivatives & Commodities by


organizing classes, corporate presentations, taking part in consumer fairs, organizing
events.

Company should show the benefits of trading on Derivatives & Commodities

Sharekhan should turn existing customers (who are trading in Equity only) towards
Derivatives & Commodities.

Sharekhan can also use Newspapers and Local New Channels as a medium of
advertising.

Sharekhan may also use its helpline number for giving education on Derivatives &
Commodities.

Company may appoint special team for giving education & attracting people towards
trading on Derivatives & Commodities.

82

APPENDIX
1.

Gender:

Male

Female

2.

Age:

21-35

36-50

3.

Education:

_________________________

4.

Occupation:

Professional

Businessmen

Employees working

Govt. Employee

in Pvt. Firms

Others

5.

6.

Bank FD

Postal Scheme

G-Secs

Mutual Funds

Insurance

Bonds/Debentures

Shares/Equity

Real Estate

Jewellary

Which of these are you already in today?


Derivatives (F&O)

Commodity

Which of these you would like to be in for trading?


Equity

8.

Above 66

Of this investment options, with which are you familiar and already invest in?

Equity
7.

51-65

Derivatives (F&O)

Commodity

If Questions 6& 7 are not applicable, then what are the constraints that are
holding you back?
Risk taking ability

Regulatory constraints

Fund Facilities

Still in wait & see

Lack of knowledge

Lack of Guidance

Non-Availability of Options
with your broker

83

9.

If you are trading in derivatives & commodities or you want to be in, which
factors will you give importance? (Give Rank)
Risk Reduction

Speculation

Investment

Arbitrage

To increase the leverage


10.

How do you take decisions if you want to trade in Derivatives & commodities? (Give
Rank)
Independently

Advice of Friends/colleagues

Broker/Agents advice

Advice from CA/Tax consultant

News channels

Well-known Stock Broking Houses

Newspapers

Business Magazines

Internet

11.

12.

How do you want to learn about derivatives & commodities?


Classroom teaching

Internet

Literature

Documentaries

Self-Experience

Seminars

How much time will you be able to devote for learning derivatives &
Commodities?

13.

1 day

2 days

3 days

2 hrs per day over 1 month

Cant say

According to you, which medium is the most reliable for trading in derivatives
& Commodities? (Give Rank)
Stock broking cos. (Branded)

Brokers

Franchisees

Online

84

14.

Name any 3 stock-broking companies that deal in derivatives & commodities?


1. ________________

15.

2. ________________

Individual perception & knowledge: True ()

3. ________________
;

False (X)

a.)

Options are available for too many strikes

b.)

Buying Calls and Puts means Teji

c.)

If a fund gave a return of 16% in 2004, it will give at least 16% in 2005

d.)

Derivatives and commodities are risk-reducing/ Hedging instruments

e.)

One needs to pay margin for buying Calls & Puts

f.)

Commodities are traded on NSE & BSE.

g.)

The price of derivatives & future commodities are based on


current underlying

h.)

Options are available in Commodities

85

BIBLIOGRAPHY

Kothari C.R., Research Methodology, New Delhi, Vikas Publishing House pvt.Ltd.
1978

Pathak Bharti v.,Indian Financial System,Delhi,Person Education(Singapore) pvt.Ltd.

WEBSITES:
1. www.Google.com
2. www.bseindia.com
3. www.nseindia.com
4. www.sharekhan.com
5. www.ncdex.com.
6. www.mcx.com
NEWSPAPERS:
ECONOMIC TIMES
TIMES OF INDIA
FINANCIAL EXPRESS
SHAREKHANS VALUE LINE MAGAZINE

86