Financial Markets, Institutions and Services

A study of Trading Practices in the Indian Equity

Market

Submitted to
Prof. Vinay Kumar Dutta
Faculty, Finance
FORE School of Management

Submitted by
Group VI
Aman Sharma (271126)
Vaibhav Arora (271172)
Chainika Kapoor (271071)
Prince Rajawat (271151)
Rahul K R (271098)

FMI-II

March 7, 2018
Table of Contents
1. Executive Summary
2. Objective
3. Source of Data
4. Methodology
5. Limitations
6. Introduction
7. Literature Review
8. Infrastructure of a Stock Exchange(NSE)
9. Trading and Settlement mechanism at NSE
10. Role of depositories in the stock exchanges
11. Products & Services offered by NSE
12. Risks In stock exchanges and how are the hedging it
13. Participants and Role of the participants
14. Trading Guidelines In INDIA
15. Frauds are committed on the stock exchanges
16. Risk Management practices of stock exchanges
17. Different types of Trading
18. Risks involved in different types of trading
19. Role of Technical analysis in Trading
20. Recommendation
EXECUTIVE SUMMARY
A study of Trading Practices in the Indian Equity Markets is conducted and compiled in the form
of this report. National Stock Exchange (NSE) was used as the prime source of information and
the practices followed by the stock exchange were taken into consideration for this study.

This report basically gives an overview of the following:

● Brief introduction of the equity market in India

● Analysis of the existing literature
● Infrastructure of a stock exchange (NSE)
● The trading, settlement, risk management process of the stock exchange (NSE)
● Guidelines for trading in India
● Various kinds of products offered and trading
● Importance of the technical analysis and types of risks involved in the trading process

Then at the concluding part analysing as what are some of the key features of the National Stock
Exchange, how the stock exchange can successfully tackle the fraudulent trading practices.
Challenges and ways by which these challenges can be overcome to make the process of trading
more secure and easy for the people to trade and minimize the risks that are involved.

Finally, drawing conclusion from the literature review on the existing scope of further study that
can be done to make the Stock exchange and trading more efficient.
OBJECTIVE
The objective of carrying out this study is to identify and learn about the Infrastructure of the
Stock Exchange (NSE), various types of risk management practices followed by NSE to
minimize the fraudulent trading practices. Products that are offered at NSE, various trading
practices that are followed and the importance of the technical analysis in the process of trading.

SOURCE OF DATA
We have use the secondary sources of data i.e research papers and the information available on
the NSE portal for the completion of this project.

METHODOLOGY
We have studied various scholarly articles, research papers, and contextual material for our
study.

LIMITATIONS
The analysis is done on the basis of secondary data that is collected. This data is assumed to be
accurate and reliable. The data is based on the trends seen in the market over the recent years. It
is assumed to be consistent. Further Quantitative and Qualitative researches are done based on
that. The researcher biases are ignored in the facts collected during the study.
INTRODUCTION
An equity market is a market in which shares are issued and traded, either through exchanges or
over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a
market economy because it gives companies access to capital and investors ownership in a
company with the potential to realize gains based on its future performance.

Equity markets are the meeting point for buyers and sellers of stocks. The securities traded in the
equity market can be either public stocks, which are those listed on the stock exchange, or
privately traded stocks. Often, private stocks are traded through dealers, which is the definition
of an over-the-counter market.

In the equity market, investors bid for stocks by offering a certain price, and sellers ask for a
specific price. When these two prices match, a sale occurs. Often, there are many investors
bidding on the same stock. When this occurs, the first investor to place the bid is the first to get
the stock. When a buyer will pay any price for the stock, he or she is buying at market similarly,
when a seller will take any price for the stock, he or she is selling at market value.

Companies sell stocks in order to get capital to grow their businesses. When a company offers
stocks on the market, it means the company is publicly traded, and each stock represents a piece
of ownership. This appeals to investors, and when a company does well, its investors are
rewarded as the value of their stocks rise. The risk comes when a company is not doing well, and
its stock value may fall. Stocks can be bought and sold easily and quickly, and the activity
surrounding a certain stock impacts its value. For example, when there is high demand to invest
in the company, the price of the stock tends to rise, and when many investors want to sell their
stocks, the value goes down.
LITERATURE REVIEW
Gautami and Kalyan (2018) in their article “A comparative study on the Risk and Return
Analysis of Selected Stocks in India” studied the fluctuations in share prices of selected
companies in India. The Stock exchange is a market for old securities which have been already
issued and listed on a stock exchange. These Securities are purchased and sold continuously
among investors without involvement of companies. The Stock exchange provides not only free
transferability of shares but also makes continuous evaluation of securities traded in the market.
The present study is deliberate to examine the Risk & Return Analysis of Selected Stocks in
India. Risk may be defined as the chance of variations in actual return. Return is defined as the
gain in the value of investment. The return on an investment portfolio helps an investor to
evaluate the financial performance of the investment.

Chandrasekhar and Eleswarapu (2017) in their article “Liquidity, Stock Return and
Ownership Structures - An empirical study of the Bombay Stock Exchange” tested a sample
of about 250 companies over a five year period - 1989 to 1993. The study found evidence in
favour of a liquidity premium in the Indian market and that diffused stock ownership has a
beneficial impact on the secondary market liquidity. Also, liquidity is adversely affected by
larger insider holdings of government and financial institutions.
The authors conclude by the findings that liquid firms face lower cost of capital and therefore
have a higher market value and Diffused ownership has a beneficial impact on liquidity but
comes with additional costs.

According to Yadav (2017) in his article “Stock Market Volatility - A Study of Indian Stock
Market”, Stock Market is one of the most versatile sectors in the financial system, and Stock
Market plays an important role in economic development. Volatility is a statistical measure of
the dispersion of returns for a given security or Market Index. Commonly, the higher the
volatility greater the risk associated with the security.
The stock market volatility is caused by number of factors such as change in inflation rate,
interest rate, financial leverage, corporate earnings; dividends yield policies, bonds prices and
many other macroeconomic, social and political variables such as international trends, economic
cycle, economic growth, budget, general business conditions, credit policy etc. Volatility is
driven by trading volume followed by arrival of new information regarding new floats, or any
kind of private information that incorporate into market stock prices.
Investor reactions, due to psychological or sociological beliefs, exert a great influence on the
market than good economic sense arguments.
Amongst other things that cause volatility is arbitrage. Arbitrage is the simultaneous or almost
simultaneous buying and selling of an asset to profit from price discrepancies. Arbitrage causes
markets to adjust prices quickly. Improved trading technology makes it easier to take advantage
of arbitrage opportunities, and the resulting price alignment arbitrage causes.
Another reason for market volatility is speculation. Speculation is the act of trading in an asset,
or conducting a financial transaction, that carries significant risk of losing most or all of the
initial outlay, in expectation of a substantial gain. This involves buying and selling of financial
instrument and make money from the anticipated price fluctuation. Speculation causes deviation
of price form their intrinsic value. Various measures have been adopted to control volatility such
as
Circuit Breakers- A system of coordinated trading habits and/or price limits on equity markets
and equity derivative markets designed to provide cooling off period and avert pani selling
during large, industry market declines. These circuit breakers when triggered bring about a
coordinated trading halt in all equity and equity derivative markets nationwide.
Pre Trading Session- has been introduced by SEBI in July 2010 to discover opening price. Its
main motive is to eliminate/ minimize opening volatility on prices of securities. The pre-open
session is of the duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-open session is
comprised of Order Collection period and Order Matching period. After completion of order
matching there shall be silent period to facilitate the transition from pre-open session to the
normal market. All Securities forming part of BSE Sensex and NSE Nifty are subject to pre
Trading Session.
Increase in Market Timing (Trading Hours)- To align Indian markets with those of the
international markets & to facilitate the assimilation of any economic information that flow in
from other global markets, discussions have been going on to increase market timings . The
extension of market hours may help in effectively assimilating information and thereby make
Indian markets efficient in terms of better price discovery, reduction in volatility and impact cost.
The information which accumulates after the close of trading session on Friday is reflected in
prices when markets reopen on Monday.

According to Sudheer V. (2015), in his article “Trading through technical analysis: An

empirical study from Indian Stock Market”, Trading (Buying /selling) of script is not an easy
task if the investor wants to make money from doing it. Millions of investors have lost the
money in the past by trying/guessing stock price movements. In today’s world, if the investors’
purely depends on fundamental analysis, broker’s advice, newspaper articles or business
channels for investing/ trading decisions, at which investor get painful experience in the stock
market. So, his research study on technical analysis will help the investors’ in analyzing the
script based on technical oscillators to earn fruitful investments. Technical Analysis is all about
learning the Art of Making Profits in all market conditions whether rising or falling. Knowledge
of the stock markets is key ingredient to the success and emphasis should be on managing
trading risk while technical analysis can help the investors’ to control. And it provides unbiased
solutions in a biased world. “There is only one side to the stock market and it is not the bull side
or bear side but the right side technical analysis can be used, when to buy and when to sell the
scrip

Ashraf and Baig (2015) in their article “Investment and trading practices in the Indian Stock
Market” studied that Beta and debt-equity ratio are the important variables for explaining the
investment and trading strategies for Indian stock market. The study uses data analysis
techniques and arrives at the findings that long term investment in the stocks with low beta and
low debt-equity ratio provide higher return, though short term trading the stocks with high beta
and high debt-equity ratio provide high return in the short time period. The model suggests that
an investor’s cost of equity capital is determined by beta. Looking at beta of the stock, if one is
interested for higher return, he has to choose the stock with high beta. Trading strategies are
usually based on both fundamental and technical analysis of the stocks under consideration.
Technical strategies take into consideration the mean-reversion, momentum of stocks, and also
the events. The technical strategies are usually verified by back-testing with scientific method.

According to Madhvi (2014), in her article “an evaluating study of Indian stock market
scenario with reference to its growth and inception trend attempted by Indian investors”
uses data analysis techniques and arrives at the findings that long term investments in the stock
with lower beta and lower debt-equity ratio provides higher returns. On the other hand short term
trading of the stock with high beta and high debt-equity ratio also provides high return in the
short term period. She then gives points on motivation for investing in stock market, alternative
investments and types of risks involved while investing in stock market. The main motive for
this research was to analyses the conditions of stock market with relation to its financial factors
impacting it. Under this study effects of globalization, risk and return conditions and risk
management techniques has been looked into. The main points in the study are:
1. To know the trend of Indian stock market.
2. To study the volatile trends for securities on Indian stock market after globalization
3. To analyses risk management measures adopted for securing safe return.
She concludes by stating that in stock market incomplete information leads to bad return whereas
perfection and alertness leads to good and stable return.

According to RAHIM (2013) in his article “Problems and prospects of online share trading
practices in India”, prior to internet being popular trading was done offline, through phone and
was difficult for a common man. After the arrival of internet, Internet trading is a method of
trading in securities whereby it is possible for the investors to buy and sell stocks through the
internet. It is also called on-line trading; the trading takes place under the “Order Routing
System” [ORS] through registered stock brokers on behalf of clients for execution of trades on
stock exchange. This resulted to immediate execution. The democracy of online trading is the
key factors why the retail investors prefer to transact over the internet their broker. The days are
gone where the customers were made to pay higher charges by small brokers, since they weren’t
aware of the market rates. Traditional brokers are now scrambling to scale up their online
operations. The use of online brokerage services automates the process of buying and selling and
hence allows a reduction of commission charges. Also the commodity being traded is intangible;
the ownership of stocks and shares can be recorded electronically so that there is no requirement
for physical delivery. Alternative Trading System, [ATS], also known as Electronic
Communications Network [ECNS]. ECNS are computerized systems that automatically match
orders between buyers and sellers and serve as an alternative to traditional market making and
floor trading. Some of the online share trading benefits were wider choice, better value, source
of information, faster to complete and inexpensive. Some problems faced were inadequate
availability of technology, poor communication network, more chances of fraud, lack of
transparency etc. The stock exchanges in India, under the overall supervision of the regulatory
authority, the Securities and Exchange Board of India (SEBI), provide a trading platform where
buyers and sellers can meet to transact in securities. Online trading empowers educated investors
to make their own decision with close watch on market sensitivity by browsing through various
sites.

According to Sabarinathan (2010), in his article “SEBI’s regulation of the Indian Securities
Market: A critical review of the major developments”, Economic consequences of some of
the major interventions by SEBI are -
● Primary Market - Three important institutional developments transformed the
primary markets fundamentally. First, the guidelines for book-building enables
issuers to price securities based on investor interest and market conditions prevailing
at the time of the offer to the public, subject to a floor price that is announced in the
prospectus and a 20 per cent band above the floor. Second, dematerialization and
electronic book-building makes it possible to reduce the issue time from the opening
of the issue to listing and trading from a mean of 122 days and a maximum of 991
days. Thirdly, all these improvements have led to a larger participation by
institutional investors in public offerings.
● Disclosure - the regulations has a copious flow of information which should result in
a substantial improvement in the discovery of prices, both at the time of an issuance
as well as once the securities are listed for trading
● Trading Mechanism - There is an automated trading and post trading system
adopted for the functioning of Stock Exchanges in India
● Settlement Systems - All Stock Exchanges adopt a weekly settlement system, i.e. a
T+2 rolling settlement. Also, Stock Exchanges runs a trade and settlement guarantee
fund to ensure investors that they would not face the risk of loss on account of a
default by the counterparty. Thus resulting in reduced transaction cost.
● Dematerialization of securities.
 ● There is institutional ownership of shares and an increasing share of institutions in
securities trade.
● The Indian Securities Market is still subject to several manipulative practices and
instances of insider trading.

According to Economides and Schwartz (1995) in their article “Equity Trading Practices
and Market Structures: Assessing Asset Managers’ Demand for Immediacy”, in recent
years, increasing numbers of institutional investors are breaking out of traditional molds to
explore various proprietary trading systems (PTS). With the exception of Instinet's continuous
market, the PTSs are crossing networks (e.g., Instinet's after hours cross and Investment
Technology Group Inc.'s POSIT system) and call markets that are capable of independent price
discovery (e.g. The Arizona Stock Exchange's AZX system). Nevertheless, immediacy continues
to be a major service provided by market centers such as the New York Stock Exchange (NYSE)
and Nasdaq. These market centers operate on the assumption that participants want instant access
to the market, and that they are willing to pay the price for trading with immediacy. However
very little empirical evidence exists on asset managers' demand for immediacy. To assess this
demand, 825 questionnaires were mailed to traders of managed equity funds, and 150 responses
were received. These respondents represent approximately $1.5 trillion in equity assets under
management. In broad sweep, the responses to the survey suggest that buy-side participants do
trade patiently in an attempt to control execution costs.

The key results include:

● Two-thirds of the respondents indicated that they are willing to trade patiently to
reduce execution costs.
● nearly half say they frequently do delay trades in an effort to obtain better prices.
● One-third would regularly or frequently accept a trading delay of one hour for a $50
stock if they could save 256 per share in trading costs.
● nearly a quarter would regularly or frequently accept a trading delay of three hours
for a $50 stock if they could save 259 per share in trading costs
● about one in five would regularly or frequently accept a trading delay of one hour for
a $50 stock if they could gain anonymity on a trade of 10,000 shares or more.
● nearly two-thirds regularly or frequently use limit orders.
● One-third report that 20% or more of their orders for a stock are larger than the
stock's average daily trading volume.
● More than two-thirds typically give more than one day to implement a large order for
a small cap stock
INFRASTRUCTURE OF A STOCK EXCHANGE (NSE)
NSE is one of the first de-mutualized stock exchanges in the country, where the ownership and
management of the Exchange is completely divorced from the right to trade on it. Though the
impetus for its establishment came from policy makers in the country, it has been set up as a
public limited company, owned by the leading institutional investors in the country.
From day one, NSE has adopted the form of a demutualized exchange - the ownership,
management and trading is in the hands of three different sets of people. NSE is owned by a set
of leading financial institutions, banks, insurance companies and other financial intermediaries
and is managed by professionals, who do not directly or indirectly trade on the Exchange. Its
Board comprises of senior executives from promoter institutions, eminent professionals in the
fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of
SEBI and one full time executive of the Exchange.
While the Board deals with broad policy issues, decisions relating to market operations are
delegated by the Board to various committees constituted by it. Such committees include
representatives from trading members, professionals, the public and the management. The day-
to-day management of the Exchange is delegated to the Managing Director who is supported by
a team of professional staff.

NSE was incorporated in 1992. It was recognized as a stock exchange by SEBI in April 1993 and
commenced operations in 1994 with the launch of the wholesale debt market, followed shortly
after by the launch of the cash market segment.
Between 1994 and 2016, NSE expanded the lines of business and product offerings as follows:

Year History

1995 Setup wholly-owned subsidiary, NSE Clearing, which became the first clearing
corporation to be established in India (according to the Oliver Wyman Report).
NSE Clearing commenced clearing and settlement operations in the following
year.

1998 Established NSE Indices, a subsidiary, as a joint venture with CRISIL Limited to
operate an indices business. NSE Indices became a wholly-owned subsidiary in
2013 following the acquisition of CRISIL's 49% stake.
1999 Established NSEIT, a wholly-owned subsidiary and a global technology firm that
provides end-to-end technology solutions, including application services,
infrastructure services, analytics as a service and IT enabled services. In 2015 and
2016, respectively, NSEIT launched its Testing Center of Excellence and
Integrated Security Response Center

2000 Incorporated DotEx, a wholly-owned subsidiary, and consolidated the data and
info-vending business under DotEx.

2006 Incorporated NSE InfoTech Ltd., a wholly-owned subsidiary for IT research and
development.

2016 Consolidated the education business under NSE Academy, a wholly-owned

subsidiary. Incorporated two new subsidiaries, NSE IFSC Limited and NSE IFSC
Clearing Corporation Limited, in furtherance of NSE's long-term business strategy
to establish an international exchange in GIFT City.

NSE also has strategic investments in complementary businesses, including mutual fund registry
services, back-end exchange support services for its platforms, depository services, e-corporate
governance and commodity, power and receivables exchanges.

The Board of Directors constitute of

Sr.No. Name & Company Designation

1 Mr. Vikram Limaye Managing Director &

CEO

2 Mr. Abhay Havaldar Shareholder Director

Former Advisory Director - General Atlantic LLC

3 Mr. Dinesh Kanabar Public Interest

Director
Former Dy. CEO of KPMG in India &
CEO of Dhruva Advisors LLP
4 Mr. Naved Masood Public Interest
Director
Former Secretary, Ministry of Corporate Affairs
Government of India

5 Mr. T. V. Mohandas Pai Public Interest

Director
Chairman of Manipal Global Education Services Private
Limited &
Former CFO - Infosys Technologies Limited

6 Mr. Prakash Parthasarathy Shareholder Director

Former Chief Investment Officer
PremjiInvest

7 Ms. Dharmishta Raval Public Interest

Director
Advocate & Former Executive Director
SEBI

8 Ms. Sunita Sharma Shareholder Director

Managing Director,
LIC Housing Finance Limited

The Mandatory Committees are as follows-

● Membership Selection Committee
● Disciplinary Action Committee
● Defaulters Committee
● Nomination & Remuneration Committee
● Standing Committee on Technology
● Sub-Committee for Monitoring Compliance of suggestions given in SEBI
inspection Report
● Investor Services Committee
● Public Interest Directors Committee
● Ethics Committee
 ● Independent oversight committee for member regulation (IOC-MR)
● Independent oversight committee for listing function (IOC-LF)
● Independent oversight committee for trading and surveillance function (IOC-T&S)
● Independent Oversight Committee for Product Design - Commodity Derivatives
● Advisory Committee
● Selection Committee

COMMITTEES UNDER THE COMPANIES ACT 2013 AND SEBI (LISTING

OBLIGATIONS AND DISCLOSURE REQUIREMENTS, 2015) are
● Nomination and Remuneration Committee
● Audit Committee
● Risk Assessment and Review Committee
● Stakeholders Relationship Committee
● Corporate Social Responsibility Committee
● Group Investment Committee
TRADING AND SETTLEMENT MECHANISM AT NSE
NSE Clearing carries out clearing and settlement functions as per the settlement cycles provided
in the settlement schedule.
The clearing function of the clearing corporation is designed to work out a) what members are
due to deliver and b) what members are due to receive on the settlement date. Settlement is a two
way process which involves transfer of funds and securities on the settlement date.
NSE Clearing has also devised mechanism to handle various exceptional situations like security
shortages, bad delivery, company objections, auction settlement etc.
Clearing is the process of determination of obligations, after which the obligations are discharged
by settlement.
NSE Clearing has two categories of clearing members: trading clearing members and
custodians. Trading members can trade on a proprietary basis or trade for their clients. All
proprietary trades become the member’s obligation for settlement. Where trading members’ trade
on behalf of their clients they could trade for normal clients or for clients who would be settling
through their custodians. Trades which are for settlement by Custodians are indicated with a
Custodian Participant (CP) code and the same is subject to confirmation by the respective
Custodian. The custodian is required to confirm settlement of these trades on T + 1 day by
the cut-off time 1.00 p.m. Non-confirmation by custodian devolves the trade obligation on
the member who had input the trade for the respective client.
A multilateral netting procedure is adopted to determine the net settlement obligations
(delivery/receipt positions) of the clearing members. Accordingly, a clearing member would
have either pay-in or pay-out obligations for funds and securities separately. In the case of
securities in the Trade for Trade – Surveillance segment and auction trades, obligations are
determined on a gross basis i.e. every trade results into a deliverable and receivable obligation of
funds and securities. Members pay-in and pay-out obligations for funds and securities are
determined by 2.30 p.m. on T + 1 day and are downloaded to them so that they can settle their
obligations on the settlement day (T+2).

Auto Delivery Out facility

For pay-in through NSDL / CDSL a facility has been provided to members wherein delivery-out
instructions will be generated automatically by the Clearing Corporation based on the net
delivery obligations of its Clearing Members. These instructions will be released on the T+1 day
to NSDL / CDSL and the securities in the Clearing Members’ pool accounts will be marked for
pay-in.

Cleared and non-cleared deals

NSE Clearing carries out the clearing and settlement of trades executed on the exchange except
Trade for trade - physical segment of capital market. Primary responsibility of settling these
deals rests directly with the members and the Exchange only monitors the settlement. The parties
are required to report settlement of these deals to the Exchange.

The important settlement types are as follows:

● Normal segment (N)
● Trade for trade Surveillance (W)
● Retail Debt Market (D)
● Limited Physical market (O)
● Non cleared TT deals (Z)
● Auction normal (A)
Trades in the settlement type N, W, D and A are settled in dematerialized mode. Trades under
settlement type O are settled in physical form. Trades under settlement type Z are settled directly
between the members and may be settled either in physical or dematerialized mode.
Details of the two modes of settlement are as under:

Dematerialized settlement
NSE Clearing follows a T+2 rolling settlement cycle. For all trades executed on the T day, NSE
Clearing determines the cumulative obligations of each member on the T+1 day and
electronically transfers the data to Clearing Members (CMs). All trades concluded during a
particular trading date are settled on a designated settlement day i.e. T+2 day. In case of short
deliveries on the T+2 day in the normal segment, NSE Clearing conducts a buy –in auction on
the T+2 day itself and the settlement for the same is completed on the T+3 day, whereas in case
of W segment there is a direct close out. For arriving at the settlement day all intervening
holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. The
settlement schedule for all the settlement types in the manner explained above is communicated
to the market participants vide circular issued during the previous month.
Rolling Settlement
In a rolling settlement, for all trades executed on trading day .i.e.T day the obligations are
determined on the T+1 day and settlement on T+2 basis i.e. on the 2nd working day. For arriving
at the settlement day all intervening holidays, which include bank holidays, NSE holidays,
Saturdays and Sundays are excluded. A tabular representation of the settlement cycle for rolling
settlement is given below:
 Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Valuation Debit T+2 working days

Post
Auction T+2 working days
Settlement

Auction settlement T+3 working days

Bad Delivery Reporting T+4 working days

Rectified bad delivery pay-in

T+6 working days
and pay-out

Re-bad delivery reporting and

T+8 working days
pickup

T+9 working days

Close out of re-bad delivery
 and funds pay-in & pay-out

Physical settlement
Limited physical Market : To provide an exit route for small investors holding physical shares in
securities the Exchange has provided a facility for such trading in physical shares not exceeding
500 shares in the 'Limited Physical Market' (small window).

Salient features of Limited Physical Market

● Delivery of shares in street name and market delivery (clients holding physical shares
purchased from the secondary market) is treated as bad delivery. The shares standing in
the name of individuals/HUF only would constitute good delivery. The selling/delivering
member must necessarily be the introducing member.
● Any delivery of shares which bears the last transfer date on or after the introduction of
the security for trading in the LP market is construed as bad delivery.
● Any delivery in excess of 500 shares is marked as short and such deliveries are
compulsorily closed-out.
● Shortages, if any, are compulsorily closed-out at 20% over the actual traded price. Non
rectification/replacement for bad delivery are closed out at at 10% over the actual trade
price. Non rectification/replacement for objection cases are closed out at at 20% above
the official closing price in regular Market on the auction day.
● The buyer must compulsorily send the securities for transfer and dematerialisation, latest
within 3 months from the date of pay-out.
● Company objections arising out of such trading and settlement in this market are reported
in the same manner as is currently being done for normal market segment. However
securities would be accepted as valid company objection, only if the securities are lodged
for transfer within 3 months from the date of pay-out.
Limited Physical Market
Settlement for trades is done on a trade-for-trade basis and delivery obligations arise out of each
trade. The settlement cycle for this segment is same as for the rolling settlement viz:

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Post Assigning of shortages for

T+2 working days
Settlement close out

Reporting and pick-up of bad

T+4 working days
delivery

Close out of shortages T+4 working days

Replacement of bad delivery T+6 working days

Reporting of re-bad and pick-

T+8 working days
up

Close out of re-bad delivery T+9 working days

Bad Deliveries (in case of physical settlement)
Bad deliveries (deliveries which are prima facie defective) are required to be reported to the
clearing house within two days from the receipt of documents. The delivering member is
required to rectify these within two days. Un-rectified bad deliveries are assigned to auction on
the next day

Company Objections (in case of physical settlement)

The CM on whom company objection is lodged has an opportunity to withdraw the objection if
the objection is not valid or the documents are incomplete (i.e. not as required under guideline
No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of lodgement against him.
If the CM is unable to rectify/replace defective documents on or before 21 days, NSE Clearing
conducts a buying-in auction for the non-rectified part of defective document on the next auction
day through the trading system of NSE. All objections, which are not bought-in, are deemed
closed out on the auction day at the closing price on the auction day plus 20%. This amount is
credited to the receiving member's account on the auction pay-out day.

Shortages Handling
On the settlement day NSE Clearing accepts pay-in of securities made by members through
depositories and identifies the shortages. The members are debited by an amount equivalent to
the securities not delivered and valued at a valuation price. This is known as valuation debit. For
all such short deliveries NSE Clearing conducts a buying-in auction on the T+2 day, after
completion of the pay-out, through the NSE trading system.
If the buy-in auction price is more than the valuation price, the CM is required to make good the
difference. All shortages not bought-in are deemed closed out.
ROLE OF DEPOSITORIES IN THE STOCK
EXCHANGES
Depositories are integral institutions in the Indian Capital Market and their functionality can be
compared to banking entities. Their role comes into play from the time an investor makes a
decision on investing.

Depositories in India:
At present there are two depositories in India, National Securities Depository Limited (NSDL)
and Central Depository Services (CDS). NSDL is the first Indian depository; it was inaugurated
in November 1996. NSDL was set up with an initial capital of US$28mn, promoted by Industrial
Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of
India Ltd. (NSE). Later, State Bank of India (SBI) also became a shareholder.

The other depository is Central Depository Services (CDS). It is still in the process of linking
with the stock exchanges. It has registered around 20 DPs and has signed up with 40 companies.
It had received a certificate of commencement of business from SEBI on February 8, 1999.

These depositories have appointed different Depository Participants (DP) for them. An investor
can open an account with any of the depositories’ DP. But transfers arising out of trades on the
stock exchanges can take place only amongst account-holders with NSDL’s DPs. This is because
only NSDL is 134 linked to the stock exchanges (nine of them including the main ones-National
Stock Exchange and Bombay Stock Exchange).
Key Features of the Depository System in India

1. Multi-Depository System:
The depository model adopted in India provides for a competitive multi-depository system.
There can be various entities providing depository services.

There are two depositories registered with SEBI, namely:

National Securities Depository Limited (NSDL), and Central Depository Service Limited
(CDSL)

2. Depository services through depository participants:

The depositories can provide their services to investors through their agents called depository
participants.

3. Dematerialization
The model adopted in India provides for dematerialization of securities. This is a significant step
in the direction of achieving a completely paper-free securities market.

4. Fungibility
The securities held in dematerialized form do not bear any notable feature like distinctive
number, folio number or certificate number. Once shares get dematerialized, they lose their
identity in terms of share certificate distinctive numbers and folio numbers.

5. Registered Owner/ Beneficial Owner:

In the depository system, the ownership of securities dematerialized is bifurcated between
Registered Owner and Beneficial Owner. According to the Depositories Act, ‘Registered Owner’
means a depository whose name is entered as such in the register of the issuer. A ‘Beneficial
Owner’ means a person whose name is recorded as such with the depository.

6. Free Transferability of shares

Transfer of shares held in dematerialized form takes place freely through electronic book-entry
system.

Depository Participant
NSDL carries out its activities through various functionaries called business partners who
include Depository Participants (DPs), Issuing corporates and their Registrars and Transfer
Agents, Clearing corporations/ Clearing Houses etc. NSDL is electronically linked to each of
these business partners via a satellite link through Very Small Aperture Terminals (VSATs). The
entire integrated system (including the VSAT linkups and the software at NSDL and each
business partner’s end) has been named as the “NEST” [National Electronic Settlement &
Transfer] system.

The investor interacts with the depository through a depository participant of NSDL. A DP can
be a bank, financial institution, a custodian or a broker. Just as one opens a bank account in order
to avail of the services of a bank, an investor opens a depository account with a depository
participant in order to avail of depository facilities.
The Depositories Act provides that every person subscribing to securities offered by an issuer
has the option to receive the security certificates or hold securities with a depository. However,
investors need to note that while securities can be held by way of certificates, dealing in the
market is permitted only if the securities are in the demat mode. When an investor holds
securities in the physical form, the certificates bear serial numbers, the distinctive numbers, etc.
However, when the securities are held in demat mode, they are akin to money lying in the bank
account. Therefore, there is no question of certificate numbers or distinctive numbers, though the
quantity will remain the same.

Agreement between the Depository and Issuers:

If either the issuer (a company which has issued securities) or the investor opts to hold his
securities in a demat form, the issuer enters into an agreement with the depository to enable the
investors to dematerialize their securities. No such agreement is necessary where the state or
Central Government is the issuer of government securities.

Both NSDL and CDSL, facilitate dematerialization of shares i.e. held the shares in electronic
form. So, in a way depository is held accountable for safe-keeping of your portfolio of securities.
On instruction of the account holder, depositories also facilitate transfer of securities from one
account to the other. So, transfer of ownership of securities is affected by depositories. With all
the details concerning your personal details, scripts as well the number of units of each script
held by the individual, several corporate actions or transactions such as the issue of bonus shares
or annual dividend are executed via depositories acting as an important intermediary in the entire
process. So, the depository other than acting as a safe-keeper of your securities provides services
pertaining to the transaction in securities.

Functions of Depository:
1) Dematerialization: One of the primary functions of depository is to eliminate or minimize the
movement of physical securities in the market. This is achieved through dematerialization of
securities.
2) Account Transfer: The depository gives effects to all transfers resulting from the settlement
of trades and other transactions between various beneficial owners by recording entries in the
accounts of such beneficial owners.
3) Transfer and Registration: A transfer is the legal change of ownership of a security in the
records of the issuer. For effecting a transfer, certain legal steps have to be taken like
endorsement, execution of a transfer instrument and payment of stamp duty.
4) Corporate Actions: A depository may handle corporate actions in two ways. In the first case,
it merely provides information to the issuer about the persons entitled to receive corporate
benefits. In the other case, depository itself takes the responsibility of distribution of corporate
benefits.
5) Pledge and Hypothecation: Depositories allow the securities placed with them to be used as
collateral to secure loans and other credits. In a manual environment, borrowers are required to
deliver pledged securities in physical form to the lender or its custodian. These securities are
verified for authenticity and often need to be transferred in the name of lender.

Which One is Better (NSDL or CDSL)?

Securities are safely stored by the depository system in the depository accounts of investors,
similar to holding money in a bank account. In this system, transfer of ownership of securities
happens by way of simple account transfer.
This electronic system has eliminated all the risks and inconvenience that was faced in the
physical certificate system. Moreover, the transaction cost of this system is comparatively lower
than the previous system.
As seen above there is not much difference between this two depositories. So, there is not much
of difference between the NSDL and CDSL demat account. Both NSDL and CDSL are
regularized by Indian Government and offers same facilities to customers.
Hence, you being an investor have no reason to think much about which repository your account
is registered to.

Under the depository system, securities are stored in the depository accounts of investors akin to
holding money in a bank account. In this system, transfer of ownership takes place by way of
simple account transfer. The system has eliminated all the risks and inconvenience related to the
physical certificate system. Moreover, the transaction cost in this system is relatively lower than
the previous system.
PRODUCTS & SERVICES OFFERED BY NSE

Services offered by NSE India

NSE chose to harness technology in creating a new market design. It believes that technology
provides the necessary impetus for the organization to retain its competitive edge and ensure
timeliness and satisfaction in customer service.

The various application systems that NSE uses for its trading as well clearing and settlement and
other operations form the backbone of the Exchange. The application systems used for the day-
to-day functioning of the Exchange can be divided into

(a) Trading Applications and

(b) Other Applications.

Trading Applications
NSE offers superior technology and trading efficiency for all market participants. NSE's
complete electronic trading floor increases speed of execution and provides unsurpassed capacity
that ensures orders being processed in sub milliseconds. Trading platform provides
● Versatility
● Speed
● Transparency &
● Reliability

Superior Technology
In a High Frequency Trading (HFT) environment where milliseconds matter and best
execution is paramount, NSE provides the most widely used & reliable trading venue in the
country.
NSE's trading platform is renowned for its high performance technology and proven
reliability with 99.999% uptime. Host end uses a layered approach and has various functional
subsystems which can scale independently based on the needs of business. In-memory database
is used within the various layers to ensure least possible time for transaction processing thereby
ensuring low latency.
By utilizing modern satellite technology, terrestrial leased line network and internet, users across
the globe are connected to the trading platform. Users can use NSE provided fully automated
screen known as NEAT (National Exchange for Automated Trading) /NEATPLUS for trading or
alternatively can use their own front ends, order management servers (OMS) or Independent
Software Vendors (ISV) provided front ends/ OMS to connect into the trading platform.
● NEAT-CM system takes care of trading of securities in the Capital Market segment that
includes equities, debentures/notes as well as retail Gilts. The application runs on three
Stratus systems with communication over TCP IP protocol. This is a direct interface with
the trading members of the CM segment of the Exchange for entering the orders into the
main system.
 ● NEAT-F&O system takes care of trading of securities in the Futures and Options (F&O)
segment that includes Futures on Index as well as individual stocks and Options on Index
as well as individual stocks. This is a direct interface with the trading members of the
F&O segment of the Exchange for entering the orders into the main system.
● NEAT-WDM system takes care of trading of securities in the Wholesale Debt Market
(WDM) segment that includes Gilts, Corporate Bonds, CPs, T-Bills, etc. This is a direct
interface with the trading members of the WDM segment of the Exchange for entering
the orders/trades into the main system.
● Neat-IPO system is an interface to help the initial public offering of companies which
are issuing the stocks to raise capital from the market. This is a direct interface with the
trading members of the CM segment who are registered for undertaking order entry on
behalf of their clients for IPOs. NSE uses the NEAT IPO system that allows bidding in
several issues concurrently.
● NEAT- MF system is an interface with the trading members of the CM segment for
order collection of designated Mutual Funds units.
● NEAT- CD system provides interface for trading in currency derivatives and Interest
Rate Futures.
● NEATPLUS is a multi-market front end application NEATPlus to its members. This
application provides a common trading platform to NSE members to trade in Capital
Market as well as Futures and Options Market segments at NSE. Members can take login
in CM and F&O segments in a single terminal with ability to monitor and trade in Equity
securities as well as Equity derivatives from single screen.
● The exchange also provides a facility to its members to use their own front end software
through the CTCL (computer to computer link) facility. The member can either
develop his own software or use products developed by CTCL vendors.
● NOW NSE is also offering internet based trading services to NSE members. This facility
is branded as NOW 'Neat on Web' NOW provides an internet portal for NSE members
and their authorized clients to transact orders and trades to the various market of NSE viz.
CM, F&O and Currency. The members can also access NOW through their existing
VSAT/ Leased line, in addition to internet links. The various features provided by NOW
are (a) comprehensive Administration features, flexible risk management system, high
speed dealer terminals and online trading facility for investors.

Other Applications
● Nationwide Clearing and Settlement System (NCSS) is the clearing and settlement
system of the NSCCL for the trades executed in the CM segment of the Exchange. The
system has 3 important interfaces - OLTL (Online Trade loading) that takes each and
every trade executed on real time basis and allocates the same to the clearing members,
Depository Interface that connects the depositories for settlement of securities and
Clearing Bank Interface that connects the 13 clearing banks for settlement of funds. It
also interfaces with the clearing members for all required reports. Through collateral
management system it keeps an account of all available collaterals on behalf of all
trading/ clearing members and integrates the same with the position monitoring of the
trading/clearing members. The system also generates base capital adequacy reports.
 ● Future and Options Clearing and Settlement System (FOCASS) is the clearing and
settlement system of the NSCCL for the trades executed in the F&O segment of the
Exchange. It interfaces with the clearing members for all required reports. Through
collateral management system it keeps an account of all available collaterals on behalf of
all trading/clearing members and integrates the same with the position monitoring of the
trading/clearing members. The system also generates base capital adequacy reports.
● Currency Derivatives Clearing and Settlement System (CDCSS) is the clearing and
settlement system for trades executed in the currency derivative segment. Through
collateral management system it keeps an account of all available collateral on behalf of
all trading /clearing members and integrates the same with the position monitoring of the
trading/clearing members. The System also generates base capital adequacy report.
● Surveillance system offers the users a facility to comprehensively monitor the trading
activity and analyze the trade data online and offline.
● Online Position Monitoring System (OPMS) is the online position monitoring system that
keeps track of all trades executed for a trading member vis-a-vis its capital adequacy.
● Parallel Risk Monitoring System (PRISM) is the parallel risk management system for
F&O trades using Standard Portfolio Analysis (SPAN). It is a system for comprehensive
monitoring and load balancing of an array of parallel processors that provides complete
fault tolerance. It provides real time information on initial margin value, mark to market
profit or loss, collateral amounts, contract-wise latest prices, contract-wise open interest
and limits. The system also tracks online real time client level portfolio base upfront
margining and monitoring.
● Parallel Risk Monitoring System - Currency Derivatives (PRISM-CD) is the risk
management system of the currency derivatives segment. It is similar in features to the
PRISM of F&O Segment.
● Listing system captures the data from the companies which are listed in the Exchange for
corporate governance and integrates the same to the trading system for necessary
broadcasts for data dissemination process.
● Membership system keeps track of all required details of the Trading Members of the
Exchange.

NSE's Nationwide Network

The exchange operates and manages a nationwide network. This network includes 9 POPs
(Points of Presence) setup across the country and catering to 3070+ leased lines. All the POP's
are connected to DC and DR over high Speed links (Mainly STM's). All the members are given a
2mb point to point connection to the nearest POP. All the members have a choice of selecting the
POP's based on their office location. Also there are plans to setup additional POPs based on
member requirements. The old X.25 VSAT and Leased Line network has been decommissioned
completely.
NSE's existing POPs are built on highly redundant infrastructure connecting to Core and DR
setup via high speed redundant backbone links from multiple service providers. Mini POP with
low connectivity requirement is fully owned and operated by NSE is proposed to be built in with
redundant Infrastructure at Rajkot. Member links would terminate at Mini POP and the traffic
would be routed via a dual backbone pipe to nearby Mini POP.
Colocation
In keeping with global trends, the Exchange has provided members a co-location facility for low
latency high frequency trading. The Co-location data center is an international standard, state of
the art, robust, highly redundant and secure infrastructure data center, built at the BKC premises.
This data center has a capacity of 100+ full racks and 28 half racks.

Products offered by NSE India

Capital Market
 Equities
● Indices
● Mutual Funds
● Exchange Traded Funds
● Initial Public Offerings
● Offer for Sale
● Institutional Placement Program
● Security Lending and Borrowing Scheme
● Sovereign Gold Bond Scheme

Equities
The Equity market also known as the stock market is where the listed securities are traded in the
secondary market. This is one of the most vital areas of a market economy, as investors have the
opportunity to own a slice of ownership in a company with the potential to realize gains based on
its future performance. The price of shares and other assets is an important part of the dynamics
of economic activity, and can influence or be an indicator of social mood. The securities market
has two interdependent and inseparable segments, the new issues (primary) market and the stock
(secondary) market. The primary market provides the channel for creation and sale of new
securities, while the secondary market deals in securities previously issued. The Stock market or
Equities market is where listed securities are traded in the secondary market. Currently more
than 1300 securities are available for trading on the Exchange.

Current Volume and Turnover

As on Mar 07, 2019 14:02 IST

Traded Volume (shares in lakh) Traded Value (Rs crores)

14281.22 23,451.78
Mutual Fund
One of the main advantages of mutual funds is that they give small investors access to
professionally managed, diversified portfolios of equities, bonds and other securities, which
would be quite difficult (if not impossible) to create with a small amount of capital.

Derivatives
● Equity Derivatives
● Commodity Derivatives
● Currency Derivatives
● Interest Rate Futures
Equities Derivatives: Equity derivative is a class of derivatives whose value is at least partly
derived from one or more underlying equity securities. Options and futures are by far the most
common equity derivatives. This section provides you with an insight into the daily activities of
the equity derivatives market segment on NSE. 2 major products under Equity derivatives are
Futures and Options, which are available on Indices and Stocks.

Instrument wise Volume and Turnover

As on Mar 07, 2019 14:06:57 IST

Product No. of Turnover (cr.)* Premium

contracts Turnover (cr.)

Index Futures 1,34,480 9,261.36 -

Stock Futures 5,50,917 31,915.45 -

Index Options 1,68,40,156 10,27,316.44 1,811.25

Stock Options 5,27,151 32,208.32 631.63

F&O Total 1,80,52,704 11,00,701.58 2,442.87

Currency Derivatives
A currency future, also known as FX future, is a futures contract to exchange one currency for
another at a specified date in the future at a price (exchange rate) that is fixed on the purchase
date. On NSE the price of a future contract is in terms of INR per unit of other currency e.g. US
Dollars. Currency future contracts allow investors to hedge against foreign exchange risk.
Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR),
Great Britain Pound (GBP) and Japanese Yen (JPY). Cross Currency Futures & Options
contracts on EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency
Derivatives segment.

Interest Rate Futures

An Interest Rate Futures contract is "an agreement to buy or sell a debt instrument at a specified
future date at a price that is fixed today." The underlying security for Interest Rate Futures is
either Government Bond or T-Bill. Exchange traded Interest Rate Futures on NSE are
standardized contracts based on 6 year, 10 year and 13 year Government of India Security (NBF
II) and 91-day Government of India Treasury Bill (91DTB). All futures contracts available for
trading on NSE are cash settled.

Commodity Derivatives markets:

Are a good source of critical information and indicator of market sentiments. Since, commodities
are frequently used as input in the production of goods or services, uncertainty and volatility in
commodity prices and raw materials makes the business environment erratic, unpredictable and
subject to unforeseeable risks.

Volatility in raw material costs affects businesses and can be significant given that commodity
prices are driven by supply and demand from domestics as well as global markets. Ability to
manage or mitigate risks by using suitable hedging in commodity derivative products, can
positively affect business performance. Futures & Options, are by far the most common
Commodity Derivatives products offered on an Exchange, that are well structured and regulated
through robust mechanisms and controls.

NSE launched the Commodities derivatives segment on October 12, 2018. Currently Futures on
Commodity derivatives are available on Bullion and Energy

Debt
● Debt Segment
● Corporate Bonds
● NSE EBP
● Non-Competitive Bidding in Government Securities
● Tri-Party Repo

Debt Segment: The erstwhile Wholesale Debt Market (WDM) segment of the Exchange
commenced operations on June 30, 1994. This provided the first formal screen-based trading
facility for the debt market in the country. It has now been merged under the New Debt Market
as the Negotiated Trade Reporting Platform.
Corporate Bonds: Corporate bonds are debt securities issued by private and public
corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as
building a new plant, purchasing equipment, or growing the business. When one buys a
corporate bond, one lends money to the "issuer," the company that issued the bond. In exchange,
the company promises to return the money, also known as "principal," on a specified maturity
date. Until that date, the company usually pays you a stated rate of interest, generally
semiannually. While a corporate bond gives an IOU from the company, it does not have an
ownership interest in the issuing company, unlike when one purchases the company's equity
stock.

NSE's Electronic Debt Bidding platform (NSE-EBP): for issuance of debt securities on
private placement basis, made available w.e.f. July 1, 2016, is aimed to bring efficiency and
transparency in the price discovery mechanism and to reduce the time and cost of these
issuances.

In order to streamline procedures for issuance of debt securities on private placement basis, SEBI
vide its circular no CIR/IMD/DF1/48/2016 dated April 21, 2016 has laid down a framework for
issuance of debt securities on private placement basis through an electronic book mechanism.
The same have been replaced vide circular no SEBI/HO/DDHS/CIR/P/2018/05 dated January 5,
2018.. The usage of this platform is mandatory for the issuers with an issue size of INR 200
crores and above, inclusive of green shoe option (if any). However the platform can also be used
for issues less than INR 200 crores.

The participants desirous of availing the NSE-EBP facility need to register with NSE by
executing the documentation for registration. The access credentials will be shared with the
authorized personnel of the participants post registration.

Non-Competitive Bidding in Government Securities:

Government Securities (G-Sec) are issued in the primary market through auctions conducted by
Reserve Bank of India (RBI). An investor, depending upon eligibility, may bid in an auction
under Competitive Bidding or Non-Competitive Bidding.

Institutional investors such as banks, financial institutions, primary dealers, mutual funds, and
insurance companies are generally eligible to make competitive bids.

To encourage retail investors in Government Securities (G-Secs), the facility of non-competitive

bidding (NCB) has been introduced. Under the scheme, eligible retail investors apply for a
certain amount of securities in an auction without mentioning price/yield. Such bidders are
allotted securities at the weighted average price/yield of the auction.

RBI conducts auction usually every week to issue Treasury Bills (T-Bills) and GoI dated
securities. The details of upcoming auction are made available by NSE.

Scheme for Non-Competitive Bidding

Upcoming and Past Auctions

Investing in Government Securities

Eligible retail investors necessarily have to participate in non-competitive bidding (NCB) at RBI
through an aggregator or facilitator. NSE acts as facilitator in NCB to aggregate the bids received
from the retail investors and submits a single bid at RBI.

Retail investors have multiple channels through which they can place their bids. Retail investors
can place their bids through trading members of NSE or using the NSE goBID mobile app/web
platform.

Tri-party repo:
It is a type of repo contract where a third entity (apart from the borrower and lender), called a
Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services
like collateral selection, payment and settlement, custody and management during the life of the
transaction.

The RBI has notified the introduction of tri party repo in India in its April 11, 2017, Draft
Directions. The aim to introduce Tri-party repo was that would contribute to better liquidity in
the corporate bond repo market, thereby providing markets an alternate repo instrument to
Government securities repo. Tri-Party repos are transacted through a Tri-Party agent in terms of
Tri-Party Repo (Reserve Bank) Directions dated August 10, 2017.

Risks In stock exchanges and how are the hedging it

There are two major kinds of Risks in Stock Market - Systematic and Unsystematic Risk. A
systematic Risk is the one inherent to the whole market or market segments and it may affect the
market on the whole. Whereas an unsystematic risk is the one that affects a very small number
of assets. Also called nonsystematic risk, specific risk, diversifiable risk and residual risk,
this type of risk refers to the uncertainty inherent in a company or industry investment.
Examples include a change in management, a product recall, a regulatory change that
could drive down company sales and a new competitor in the marketplace with the
potential to take away market share from a company in which you’re invested. This can
further be segregated as -

TYPE OF RISK HOW TO HEDGE

Market Risk - Risk of everyday price Diversification of investment portfolio or
fluctuation Set up a Forward Contract

Business Risk - Failure of management or Diversification of investment portfolio

poor results reducing the stock prices
Liquidity Risk - Unable to buy or sell Investment in stable large cap companies
investments quickly

Taxation Risk - Change of tax amount Purchase Stock through Tax Deferred
associated with the stock Account

Margining Risk - Future Cash flows are Use Margin Trading only for short term
smaller than expected
Interest Rate Risk - Change of Interest Invest using Interest Rate Swaps
Rate over time

Inflationary Risk - Purchasing power risk Investment in Treasury Inflation protected

related to securities Securities

Participants and Role of the participants

Part of the Objective of Securities and Exchange Board of India is to maintain standards for fair
and orderly markets. In order to help achieve this goal, the Securities and Exchange Board of
India regulates a number of stock market participants. If we consider the stock market to be a
giant organization, there are a number of stakeholders in it.

These include the following:

Major Stock Market Participants:
Stock Exchange:

A stock exchange is an organized marketplace that brings all the investors or traders together. It
facilitates the sale and purchase of stocks by different buyers and sellers. Most of the trading in
Indian stock market takes place on BSE and NSE. These stock exchanges enforce strict rules and
regulations that listed companies and trading participants must follow.
The Bombay Stock Exchange (BSE) has been in existence since 1875, whereas the National
Stock Exchange (NSE), on the other hand, was founded in 1992 and started trading in 1994.
However, both BSE and NSE exchanges follow the same trading mechanism, trading hours,
settlement process, etc.

The Role and working of Stock exchanges

1. The Stock exchange acts as a continuous market for securities
Investors can invest in any securities, but in case of any risk, they can exit from that security and
freshly re enter into whichever security they feel as secure. In this way the stock markets
provides opportunities in ready and continuous form for securities, where investors and traders
and conduct buy and sell transactions in the stock market.

2. Stock exchanges are responsible for Securities Evaluation

The stock price is based on demand and supply in market. If a company performs well, its stocks
price automatically increases as more investors are likely to invest and demand rises which
affects stock price to rise. If a company performs badly, its stocks price automatically decreases
as more investors are likely to sell and supply rises which affects stock price to fall. Thus stock
price indicates the performance and stability of the company. Through these investors decide
according to their risk appetite whether to enter or exit or hold. The stock exchange acts as a
regulator for the securities price evaluation for all the listed stocks.

3. Stock exchanges Mobilizes savings

Most of the public cannot invest the bulk amount in securities, so they invest in indirect ways
such as mutual funds and investment trusts, and these are mobilized by stock exchanges.

4. Stock Exchanges enables healthy speculation

Stock exchange encourages businessmen and provides healthy speculation opportunities to
speculate and gain profits from fluctuations in stock prices. The stock price is based on demand
and supply. Due to the rules and regulations of the artificial market, scarcity is prevented.
5. Stock exchanges Mobilizes funds

Stock exchange encourages both the companies and investors to sell or buy stocks and enables
the availability of funds. These actions strengthen the money market and ensure short-term funds
to available. Banks also provide funds in the form of loans for dealings in the stock market.
6. Stock exchanges Protect investors
Stock exchange ensures the protection of the funds of investors by allowing only genuine
companies to be listed in the stock exchange. The stock exchanges also control the companies by
its norms and conditions.

7. Stock exchanges provide opportunity for Capital formation

Stock exchange plays a key role in the capital formation for the listed companies. When a
company is extending or diversifying its needs to raise more fund, exchanges make this very
easy by issuing more shares, bonds, etc through which they can issue more shares through rights
shares or bonus shares, and thus the capital gets generated which promotes economic growth.

8. Stock exchanges ensures Liquidity

Banks and some other institutions like Life Insurance Corporation (LIC) invest their funds in the
stocks and earn a profit within a short period and are sold immediately if there is any necessity of
funds. Thus there is an opportunity to liquidate immediately at any time if required in the stock
market.
9. Stock exchanges act as an economic barometer
The country’s economic growth is measured with the trends in the stock market. An upward
trend in the stock market denotes growth potential and downward trend denotes the fall in the
economy. Hence the stock exchange is called as an economic barometer as it indicates conditions
prevailing in the country. Generally, a politically and economically strong government follows
an upward trend in the stock market, and unstable government with huge borrowings follows a
downward trend in the stock market.

10. Stock exchanges have a Control on companies

Every company listed on an exchange must produce their annual reports and an audited balance
sheet to the stock exchange. It is open for all to go through, and investors invest according to
these reports, and they get to know how the company has been performing. Thus stock
exchanges have a control on companies. Thus it stock exchanges ensure that only genuine
company’s shares are transacted in the market. Fraud companies once identified will be
blacklisted and will not be allowed to raise their capital through exchanges.

11. Stock exchanges attracts foreign capital

Foreign institutional investors (FII) are likely to invest in developing economy as the rate of
returns will be high in developing economies due to growth opportunities. Thus stock exchanges
help in attracting more foreign funds which improves exchange rate of the currency, and thus
more trade is undertaken by the government.

12. Stock exchanges manage Monetary and fiscal policies

The monetary policy must be in favor of the businessmen and producers, if it is not functioning
then, suitable actions can be taken by the government through stock market transactions.
13. Stock exchanges ensure Safety of Capital and Fair Dealing
The transactions made in the stock exchange are made available to the public under well-defined
rules and regulations abided by laws. This ensures safety and fair dealings for the average
investors.

14. Stock exchanges ensure proper Channelization of Capital

Stock exchanges ensure that the flow of savings is directed into the most productive and
profitable channels.

15. Stock exchanges regulate company management

The firms wanting to get their securities listed must follow certain rules and fulfill certain
conditions. Stock exchanges safeguard the interest of the investors and regulate the company
management.

16. Stock exchanges are the barometer of Business Progress

The stock exchange functions as a barometer of the business in our country. The boom and
depression are reflected by the market indices and varies as per the securities. The changes are
attributed after seeing the market quotations.

Capital market regulators:

Regulation is crucial for the capital market to function smoothly and competently. In India, the
three capital market regulatory authorities are: The Ministry of Finance (MoF), the Securities and
Exchange Board of India and the Reserve Bank of India (RBI).

Listed Companies:
Also known as issuers, these are the companies whose shares are traded on the stock exchange.
They, are thus very much concerned about the activities of the stock market. Moreover, their
decisions affect other stakeholders directly. All the listed companies go through Initial Public
Offering (IPO) and register themselves with the stock exchange after abiding by all the
prescribed regulations.

Stock Brokers:
Stock brokers are major stakeholders in the capital market .They are licensed by the Securities
and Exchange Board of India and are entitled to trade at the stock exchange. They act as the
middlemen or agents between the sellers and the buyers of stocks in the stock market. For
providing these broking services, they receive buying or selling commission from their clients.
Most brokers are capable of dealing in all types of securities in the market. They help clients to
buy or sell shares in the market and take a percentage of the trade value as commission. There
are a lot of popular broking agencies in India that make trading easier for investors.

Capital Market Shareholders:

Any person who buys a stock becomes a shareholder of the company. However, all shareholders
are not the same. We have common stockholders, preferred stockholders, and institutional
investors.
Different types of shares come with different benefits and privileges. For example, common
stockholders receive dividends and elect the board of directors by voting. On the other hand,
preferred stockholders cannot vote. However, in case of bankruptcy, preferred stockholders are
paid much before common stockholders.
This also includes those who are merely trading in the market to make profits. This refers to
those who buy and sell stocks without any intention of owning them for a long time.

Clearing House: Clearing Houses are wholly owned subsidiaries of Securities and Exchange
Board of India. They are formed to ensure the orderly settlement of trades executed on various
stock exchanges. Clearing Houses settle the funds and transfer shares based on everyday
transactions between sellers and buyers.

Transfer Agents: Transfer Agents record changes of ownership of shares. They provide the
listed companies with a list of its security holders. Transfer agents are also responsible for
cancelling or issuing of certificates and distribute dividends.

Settlement Banks: The settlement banks perform the function of accepting the deposit of funds
for payment of stocks bought by an investor or confirm payment of funds when due. These banks
debit or credit the investor’s account during settlement and also report balances and other
information as may be required.

Depository: A depository refers to an organization or an institution that assists in the trading of

securities. This institution also holds securities in electronic form or in dematerialized form. One
of the major functions of the depositories is to transfer the ownership of shares from one
investor’s account to another when a trade takes place. There are two depositories in India: the
National Securities Depository Limited (NSDL) and the Central Depository Service (India) Ltd
(CSDL).Both of these depositories are registered with SEBI.

Thus, every stock market participant has a specific role to play in the proper and smooth
functioning of the stock market. All of these participants are some or the other way
interlinked to each other and must abide by the guidelines set by Securities and Exchange
Board of India.
 Trading Guidelines In INDIA
Protecting the interest of Investors dealing in securities is one of the main objectives of the
Exchange. In pursuit of these objectives, Department of Investors Services (DIS) was set up in
1986. The grievances of Investors against listed companies and Trading Members of the
Exchange are redressed by the Exchange. The Exchange also assists in arbitration process
between Trading Members inter-se as well as between Trading Members and Non – Trading
members. The capital market can grow only when the Investors find it safe for them to invest in
the capital market and they are assured that rules governing the market are fair and just to all the
players in the market.
Safeguards for Investors:
These are some of the safeguards that needs to be adhered to by the Investors’ before
trading in the securities market.
1. While Selecting the Broker/ Sub-Broker
2. While entering into an Agreement:
3. While Transacting
a. Specify to the Broker / Sub- broker, the Exchange through which your trade is to be
executed and maintain separate account per Exchange.
b.Obtain a valid Contract Note issued by Trading Member of the Exchange within 24
hours of the execution of the Trade.
c. Ensure that the Contract Note contains

SEBI registration number of the Trading Member.

Details of trade such as, Order no, trade no., trade time, quantity, price, brokerage, settlement
number, details of other levies.

Rights of Investors
1.To receive all benefits/ material information declared for the Investors by the Company.
2. Prompt Services from the Company such as transfers, Sub-divisions and consolidation of
holdings in the Company.
3. Equity holders have a right to subscribe to further issue of Capital by the Company.
4. Receipt of the Contract note from the Trading Member in the specified format showing
transaction price and brokerage separately.

Process of solving Investors’ grievances:

BSE has established a full-fledged Department of Investors’ Services (DIS) to redress Investor’s
grievances.
The services offered by the ISC are as under:
● Investor’s grievances against Listed Companies:
● Lodge your complaint against a company listed on BSE at Mumbai regional centre and
Complaints / Arbitration against Trading Members of the Exchange at nearest Regional
Arbitration Centre

Grievance Redressal:
There will be occasions when you have a grievance against the company in which you are a
stake-holder.
The following table would provide you the guidance in this regard.

Types of Complaints Can be taken up with

a. Re-validation of transfer deeds Registrar of Companies (RoC)

b. Regarding bad delivery of shares Bad Delivery Cell of the Stock

Exchange
c. Regarding shares or debentures in unlisted Ministry of Corporate Affairs
companies

d. Deposits in collective investment schemes SEBI

like plantations etc.

e. Units of Mutual Funds SEBI / AMFI

f. Fixed Deposits in Bank / NBFC Reserve Bank of India

g. Fixed Deposits in Non – Listed Companies Ministry of Corporate Affairs

h. Fixed Deposits in manufacturing companies. Ministry of Corporate Affairs /

SEBI

i. Non-receipt of money: Stock Exchange / SEBI

Refund in Public / Rights issue
Interest / Redemption on debt securities,
Fractional entitlement.

j. Non-receipt of Equity Shares / Debt Stock Exchange / SEBI

Securities (Demat & Physical):
In Public / Rights issue (including allotment
letter), Remat / Transfer / Transmission,
Conversion / endorsement / consolidation /
splitting / duplicate certificate

k. Non receipt of corporate benefits / Stock Exchange / SEBI

entitlements:
Dividend / Bonus / Rights form Buyback /
letter of offer Delisting letter of offer
Annual Report
l. Non-receipt of interest for delay in: Stock Exchange / SEBI
Refunds / Dividend / Interest on debt
security / Redemption of debt security
Securities

m. Others: (including non adherence to Stock Exchange / SEBI

corporate governance norms)

Delay in Despatch of Securities: A share certificate under the seal of the company is prima-
facie documentary evidence to title of the shareholder to the shares specified therein.

Grievance: In certain cases the investors complain with regard to delay in receipt of shares
/debentures certificates allotted to them.

Rights and Remedies:

1 Companies Act : In case of delay in dispatch of securities, the investor may
refer to Section 113 of the Companies Act and write to the
MCA. The investor can also seek remedy u/s. 621

2 SEBI: Investors can write to SEBI and obtain redressal with regard
to delay in dispatch of securities.

Delay in Payment of Interest on Debentures: Investors who would like to have fixed return by
way of interest, normally invest in debentures on the assumption that the debentures are secured
and risk free investments. Investors are advised to verify whether the company is healthy or sick
and check the credit rating of the company before making such investments.

Grievance: There have been instances where investors have complained of non-receipt or delay
in the receipt of debentures certificates or interest thereon, non-appointment of Debenture
Trustee or non-creation of the stipulated security.

Rights and Remedies:

1 Companies Act : In case of delay in payment of interest on debentures, the
investor may refer to Section 118 & 119 of the Companies
Act and write to the CLB. The investor can also seek remedy
u/s.433 & 434 by approaching the court.

2 SEBI: Investors can write to SEBI and obtain redressal with regard
to delay in payment of interest on debentures.

Non–Payment of Dividends: Dividends are declared by the company with the approval of the
shareholders in its general meeting. Accordingly, a resolution declaring dividend payable by the
company is passed. This becomes a debt due by the company to the shareholders.

Grievance: In certain cases the shareholders complain on non-receipt of the dividend declared
by the company.

Rights and Remedies:

1 Companies Act : In case of non-payment of dividends, the investor may refer
to Section 205A & 207 of the Companies Act and write to
the MCA. The investor can also seek remedy u/s.621.

2 SEBI: Investors can write to SEBI and obtain redressal with regard
to non-payment of Dividends.

3 The investor can file complaints before the District forum,

State Commission or National Commission depending upon
Consumer Protection the jurisdiction of the claim involved.
Act (COPRA):

Insider Trading
Insider is any person who accesses the unpublished price sensitive information of the company
before it is available to the general public. Insiders may include corporate officers, directors,
owners of the firm, who may be having substantial interest in the equity of the company. They
could also be neither corporate officers nor large shareholders, however, they may have access to
non-public information due to their relationship with the entity.

Investor’s grievances against Trading Member

The nature of complaints received by the Exchange against its Trading Members can be broadly
classified into the following categories:
1 Non-receipt /delay in payment : Non-receipt/delay in securities :
2
1) Delay in payment 2) Non- 1) Delay in delivery 2) Non-receipt of
receipt of payment 3) Delay in delivery 3) Delay in refund of margin
refund of margin payment 4) Non deposit 4) Non settlement of accounts.
settlement of accounts.

3 Non-receipt of documents: 4 Unauthorized trades/misappropriation :

1) Contract notes 2) Bills 3) 1) Unauthorized trades in client account

Account Statements 4) Agreement 2) Mis-appropriation of client’s funds /
Copies. securities.

Service related : 6 Closing out / squaring up:

5
1) Excess brokerage 2) Non- 1) Closing off - squaring up position
execution of order 3) Wrong without consent 2) Dispute in Auction
execution of order 4) Connectivity value /close out value
- system related problem 5) Non-
receipt of corporate benefits 6)
Other service defaults

7 Non implementation of Arbitration 8 Others

Award
 Frauds are committed on the stock exchanges

Dabba Trading

We often read about dabba trading, not being permitted by the regulators. Many do not know the
mechanics, and also the risk associated with it, till now.

Dabba means box and a dabba operator, in stock market terminology is the one who indulges in
dabba trading. His office is like any other broker’s office having terminals linked to the stock
exchange showing market rates of stocks. However, the difference is that the investor’s trades do
not get executed on the stock exchange system but in the dabba operator’s books only. A dabba
operator acts as a principal to all the trades and not as an agent of the client. He is a counter party
to the trades, whereas, he should be the Clearing Corporation who guarantees trades on the
BOLT/NEAT system. This kind of operation, where trade is kept within the books of the
operator is called “dabba” in the popular market terms.

Dabba Trading” also known as “Bucketing” is the process used by brokers to route their client’s
trades outside the Stock/Commodity exchange. In such trading, the broker either does not
execute any trade or matches and execute trades on its own terminal. “Dabba” has its origin in
the developed markets where a system called bucketing prevails. Bucketing is an illegal practice
where a stockbroker executes a customer’s trade without taking it to a stock exchange with the
hope of making some gains at a future date. essentially, bucketing involves the confirmation of
an order from a client without actually executing the order on the client’s behalf. The
anticipation is that the broker will be able to realize enough profit to offset the difference to the
client at a future date, either due to executing the order at a later date or through profits generated
on other transactions. The broking house that engages in this activity are called bucket shops.
Dabba trading operates essentially like the American bucket shops of the 1920s that existed
before the Securities and Exchange Commission (SEC) was set up.

A Dabba operator flouts rules and regulations relating to Client Protection, which includes
registrations, margins, transaction, execution and settlements. Not only he evades the Income tax
regulations, which prohibit dealings in cash, but also service tax rules requirements.

It may be learnt that the Securities Contract Regulation Act permits securities transactions only
through stock exchanges unless the settlement of the trade is done on a spot basis i.e. the receipt
and delivery of shares happen within 24 hours of the trade. But a dabba operator allows the client
to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily
prescribed by the stock exchange. The cash trade is not settled on rolling basis and the derivative
trade may not have a month-end settlement cycle.
In dabba trading, most of the times, neither written contracts are made, nor the bills are issued
.The settlement cycles are authorized by the dabba operator, himself. There is no daily mark to
market settlement if the trade is in client’s favour, whereas losses are extracted regularly from
the clients.

This presents before us the picture of an outlaw practicing amidst us, the organized price
discovery mechanism of stock exchanges to run an illegal business, while maintaining the façade
of a stock market broker. It is a criminal offence, not much different from smuggling or black
marketing. As a result, frequent raids are conducted on dabba trading operators in which their
computers and records are seized. Those working in his office are also taken in the custody just
like drunkards found in the illegal toddy shop. The Gujarat police has conducted several raids in
the past and alerted citizens. Media has also played its role in reducing the menace of dabba
trading.

Some dabba traders hedge their positions in the market by partly executing the trade in the
market, maybe in their own proprietary accounts or some benami names. Dabba traders
disappear when the market goes against them, resulting in huge losses for their clients. The
brokers who permit such activity in their branches or even sub-broker’s offices are the affected
parties. Stock exchanges take complaints against dabba trading very seriously and enforce strict
penalties. Even suspension is levied, if stock exchange inspections confirm the complaint.

Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the
business. Hence constant vigilance is required. Most important, people should not patronize such
traders.

Circular Trading
Circular trading is a fraudulent scheme where sell orders are entered by a broker who knows that
offsetting buy orders for the exact same number of shares at the same time and, at the same price,
have either been or will be entered.

Such a trading scheme does not represent a real change in the beneficial ownership of the
security. Circular trading artificially inflates volumes as a way to show that a security has
liquidity, maintain share price at a desired level, and to act as proof that there is market interest
in the stock. The practice is banned and illegal in numerous countries.

How Circular Trading Manipulates the Market

If circular trades persist, they can create a false sense of activity around a stock that may
influence its price. A circular trade could serve to buttress the share price by giving the
impression that new owners are buying the stock at the desired level.
If the shares do rise in price as result, the value is fraudulently inflated. Once the scheme is
discovered, that artificial escalation of the stock price will collapse in on itself, taking with it the
funds invested by others.

Some initial public offerings (IPOs) and penny stocks may be especially susceptible to circular
trade schemes, particularly if certain shareholders want to create the appearance of intense
trading activity and buzz surrounding a stock.

Day traders might fall victim to such a scheme if they are looking for new investment
opportunities, see volume activity on a stock, and buy into it expecting the shares to escalate in
value.

Circular trading is based on the premise that trading volume has a direct impact on share price.
Trading volume increases are widely regarded as a signal that something important is happening
within a company, such as a new product or a change in management that may be soon
announced. Due to this, investors buy shares in order to take advantage of the expected increase
in share value. This increases the value of the shares, causing them to become overvalued.
Circular trading is fraudulent because the signal that investors receive to buy shares has no basis
in reality and is made with the sole purpose of creating interest where none is warranted.
Therefore, this fraudulent practice is widely considered unethical and is banned in many
countries. This issue is most prevalent in India, where companies such as Videocon Industries
Ltd had their shares devalued fraudulently by the brokers Mansukh Securities and Finance Ltd.
and Intec Shares and Stock Brokers Ltd.
Beyond the broad-reaching market consequences, the consequences for private individuals who
invest in the stock markets are also significant. Individuals may spend more money on shares
than they are worth. Regardless of whether they make a profit on the shares in the long term,
their initial overpayment in purchasing the shares remains a detriment. When instances of
circular trading are discovered, changes in consumer confidence often spread through the
entirety of the stock market, and public trust in the stock markets as a whole is eroded.
Responses
Methods for preventing circular trading have been in development since the outbreak of high-
profile cases in India, starting in 2010. In India, SEBI has begun using several methods aimed at
preventing this fraudulent practice. This is done through increasing regulation on the stock
market in a way that restricts trading high volumes of stocks in short amounts of time. One such
method includes a price band, which is a range of prices which is set for a day, and specific
stocks can only be sold within the price range on that day. As of 2018, SEBI has imposed a 10%
price band for all stocks on the market. However, they can restrict genuine price movements that
may occur in companies when important events occur, such as a change in management.
There are also inter-week price bands which restrict price movements over a week, with a larger
variation of 25% being allowed in order to prevent large swings in price from having a direct
impact for over more than one trading period. Margins have also been introduced, requiring that
for each transaction that a broker orders, they must also deposit a small amount to the stock
exchange. This is essentially a transaction charge that disincentivises brokers from placing orders
unnecessarily. Without a transaction charge, groups could trade shares amongst themselves many
times at no cost with no change in real ownership while still creating the appearance of trade
volume. Although circular trading is still possible, it has a charge which cannot be avoided.
In addition to these institutional measures which seek to make circular trading more difficult,
there is also a field of academic research that is seeking ways to detect circular trading in a faster
and more accurate manner than is currently possible. Further research in this area may lead to
methods that will allow for the increasingly swift and accurate identification of circular traders in
various types of markets. This is particularly important, considering that circular traders are only
ever brought to justice after significant market damage has already occurred.

Insider Trading

Insider trading is the buying or selling of a security by someone who has access to material
nonpublic information about the security. It is illegal when the material information is still
nonpublic.

Illegal insider trading includes tipping others when you have any sort of nonpublic information.
Legal insider trading happens when directors of the company purchase or sell shares, but they
disclose their transactions legally. The Securities and Exchange Commission has rules to protect
investments from the effects of insider trading.

The rules governing insider trading are complex and vary significantly from country to country.
The extent of enforcement also varies from one country to another. The definition of insider in
one jurisdiction can be broad, and may cover not only insiders themselves but also any persons
related to them, such as brokers, associates and even family members. A person who becomes
aware of non-public information and trades on that basis may be guilty of a crime.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not
rely on material information not in the public domain. Many jurisdictions require that such
trading be reported so that the transactions can be monitored.
Security Analysis
Security analysts gather and compile information, talk to corporate officers and other insiders,
and issue recommendations to traders. Thus their activities may easily cross legal lines if they are
not especially careful. The CFA Institute in its code of ethics states that analysts should make
every effort to make all reports available to all the broker's clients on a timely basis. Analysts
should never report material nonpublic information, except in an effort to make that information
available to the general public. Nevertheless, analysts' reports may contain a variety of
information that is "pieced together" without violating insider trading laws, under the Mosaic
theory. This information may include non-material nonpublic information as well as material
public information, which may increase in value when properly compiled and documented.
 Risk Management practices of stock exchanges

For Active Traders

Risk management helps cut down losses. It can also help protect a trader's account from losing
all of his or her money. The risk occurs when the trader suffers a loss. If it can be managed it, the
trader can open him or herself up to making money in the market.

Some simple strategies that can be used to protect trading profits-

Planning Your Trades

First, make sure your broker is right for frequent trading. Some brokers cater to customers who
trade infrequently. They charge high commissions and don't offer the right analytical tools for
active traders.

Consider the One-Percent Rule

A lot of day traders follow what's called the one-percent rule. Basically, this rule suggests that
you should never put more than 1% of your capital or your trading account into a single trade.

Stop-Loss and Take-Profit Points

A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. This
often happens when a trade does not pan out the way a trader hoped. The points are designed to
prevent the "it will come back" mentality and limit losses before they escalate.

On the other hand, a take-profit point is the price at which a trader will sell a stock and take a
profit on the trade. This is when the additional upside is limited given the risks.

Circuit Breaker
The Exchange has implemented index-based market-wide circuit breakers with effect from July
02, 2001. The guidelines are as below-
The index-based market-wide circuit breaker system applies at 3 stages of the index movement,
either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a
coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide
circuit breakers are triggered by movement of either the BSE Sensex or the Nifty 50, whichever
is breached earlier.
The market shall re-open, after index based market-wide circuit filter breach, with a pre-open
call auction session. The extent of duration of the market halt and pre-open session is as given
below:
Trigge Market halt Pre-open call auction
r limit Trigger time duration session post market halt

10% Before 1:00 pm. 45 Minutes 15 Minutes

 At or after 1:00 pm
upto 2.30 pm 15 Minutes 15 Minutes

At or after 2.30 pm No halt Not applicable

1 hour 45
Before 1 pm minutes 15 Minutes

At or after 1:00 pm
before 2:00 pm 45 Minutes 15 Minutes

Remainder
15% On or after 2:00 pm of the day Not applicable

Any time during Remainder

20% market hours of the day Not applicable
Exchange shall compute the Index circuit breaker limits for 10%, 15% and 20% levels on a daily
basis based on the previous day's closing level of the index rounded off to the nearest tick size.

Risk Management at NSE

A sound risk management system is integral to an efficient clearing and settlement system. NSE
introduced for the first time in India, risk containment measures that were common
internationally but were absent from the Indian securities markets.
Risk containment measures include capital adequacy requirements of members, monitoring of
member performance and track record, stringent margin requirements, position limits based on
capital, online monitoring of member positions and automatic disablement from trading when
limits are breached, etc.
Risk Management for Derivative products is managed with Standard Portfolio Analysis of Risk
(SPAN)®is a highly sophisticated, value-at-risk methodology that calculates performance
bond/margin requirements by analyzing the "what-if's" of virtually any market scenario.
SPAN ® is a registered trademark of the Chicago Mercantile Exchange, used herein under
License. The Chicago Mercantile Exchange assumes no liability in connection with the use of
SPAN by any person or entity.

Various methods used for Risk Management are as follows-

● Margins
● Margins for institutional deals
● Voluntary Close out Facility
● Cross Margining
● Margin Shortfall
● Liquid assets
● Pay-ins
 Different types of trading

There are five main types of trading available to technical traders: scalping, day trading,
momentum trading, swing trading and position trading. Mastering one style of trading is
very important, but the trader also needs to be proficient in others. If in doubt, stay out of the
market. Standing aside is considered a defensive position, and there’s nothing wrong with
waiting for an opportunity.

Scalping: Scalping (or micro-trading) is all about taking very small profits, repeatedly.
Typically, trades last from seconds to minutes. Scalping is a trading strategy that attempts to
make many profits on small price changes. Traders who implement this strategy will place
anywhere from 10 to a few hundred trades in a single day in the belief that small moves in stock
prices are easier to catch than large ones.

Day trading: Day trading is all about buying and selling on the same day, without holding
positions overnight. Compared to scalping, this style calls for holding positions for minutes to
hours versus seconds to minutes. A day trader closes out all trades before the market closes.
Most day traders use leverage to magnify the returns generated from small price movements.

Day trading is often glamorised as an easy way to get rich quickly. However, this is rarely the
case. Day traders typically suffer severe financial losses in their first months of trading and many
never graduate to profit-making status. Day traders are handicapped by the bid-ask spread,
trading commissions and other expenses. These costs require day traders to earn significant
trading profits just to break even.

Both scalping and day trading require strong discipline; the time and ability to learn how
to trade a tested and profitable strategy rapidly; and enough capital to withstand sudden
and, possibly, larger-than-expected losses.Both scalping and day trading are what is known as
intraday trading. If you buy and sell shares in a single day, then you are considered to have
traded intraday. An intraday trader opens (buys) and closes (sells) their trades (also called
positions) within the trading day, leaving no trades open overnight.

Momentum trading: In momentum trading, the trader identifies a stock that is “breaking out”
and jumps on to capture as much of the momentum on the way up or down as possible. They
focus on stocks that are moving significantly in one direction on high volume. The typical time
frame for momentum trading is several hours to several days, depending on how quickly the
stock moves and when it changes direction.

Swing trading: Swing trading is the art of capturing the short-term trend. It is a style of trading
that attempts to capture gains in a stock within one to seven days. Swing traders use technical
analysis to look for stocks with short-term price momentum. These traders are not interested in
the fundamentals or the intrinsic value of stocks, but rather in their price trends and patterns.

Position trading: Position traders stay in trades for weeks to months. The position trader
endeavours to anticipate whether the current trend will continue for a much longer term than a
momentum or swing trade. Position trading gives traders who cannot trade frequently a lot of
freedom: profit potential is not diminished and position traders can make considerable gains.
Long-term traders are not concerned with short-term fluctuations, because they believe that their
long-term investment horizons will smooth these out. Position trading is the polar opposite of
day trading, because the goal is to profit from the move in the primary trend, rather than the
short-term fluctuations that occur from day to day.

None of these types of trading are limited to buying. With certain types of instruments, the trader
can also short (or short-sell) the stock. This means that profits can be made in both rising and
falling markets.

Risks Involved in different types of Trading

Risks involved in intraday trading

1. High price fluctuations: These fluctuations are very uncertain, especially when the
market is volatile. Due to this uncertainty, the chances of losing money becomes higher.
2. Lack of strategy: When you don’t have a strategy in place or do not fully adhere to the
one you made, or if you move only on the basis of speculation, then the chances of you
losing money become higher.
3. Wrong exit: Often, a wrongly timed exit can result in losses, and this remains a potential
risk while practicing intraday trading.
4. Emotional trading: When trading-related decisions are driven by emotions, the chances
of committing a blunder and falling prey to losses get higher.
5. Technological slippages: There could be some slippages that you encounter while using
technology, and though such risks occur rarely, they still might cause losses.

Risks involved in short-term trading

1. Brokerage Costs: Whether you make money or not by trading (buying & selling) too
frequently, your broker will surely make money on all your stock trades. It is their
business to encourage their clients to trade as frequently as possible. So, the more you
trade the more are your brokerage expenses. You may lose more than your initial
investment. But your broker will still make money.
2. Depository Expenses: Like brokerage expenses, you have to pay Depository fee for
every stock trade. So, short-term trading has higher transaction cost than long-term
investing.
3. Capital Gains Taxes : If you buy and sell frequently, you have to pay Short Term
Capital Gains taxes on your profits. The applicable STCG tax rate is flat 15%. However,
if you buy and sell shares after one year (12 months) then capital gains taxes are not
applicable (provided Securities Transaction Tax – STT is paid).
 4. Increase of Tax liability: If you trade frequently, you may be classified as a ‘Trader’ and
the income from such trades would be treated as ‘Business Income’ by the Income Tax
Dept. Kindly note that business income is taxed at 30%.
5. Financial Losses: Most of the traders enter into short-term trading to make quick bucks.
But if things do not go as planned, they do not cut short the losses but end up riding on
losses forever. The losses can be very high. The key to successful trading is to know
‘when to get out of the trade’.
6. Perception about stock markets: Some of my friends who have lost money big time
during 2008 stock market crash (mainly due to short-term trading) never invested in
stock markets again. No long-term investments too. The saddest thing is, they do not
want to invest even in Equity oriented mutual funds. But, equities or equity oriented MFs
are the best tools to create long-term wealth. It is not advisable to completely avoid
investing in Equity oriented products. These products give you the best chance to beat
inflation over the longer run.
7. Short term trading offers you less time to make decisions. Short-term trading gives
you less time to react and hence you may end up taking bad and wrong investment
decisions. Also, it is very difficult to keep ‘emotions’ out of your investment decisions
when you have to make quick decisions.
8. Not all of us have the infrastructure, tools and time to track the stock prices (markets)
continuously. To identify the price gaps (if any), you got to be with the markets. In
reality, this may not be possible. So, most of the investors end up doing short-term
trading influenced by brokers, analysts, colleagues & friends. Investing based on tips,
rumors, speculation and blindly following the herd can be very risky.
9. If you incur loss from speculative business, you can set off this loss against profit from
another speculative business income only. Also, un-absorbed speculation business loss
can be carried forward only for a period of 4 years. Normally, unabsorbed loss under
house property, capital loss and business loss can be carried forward for 8 years. (If
shares are purchased and sold on the same date, it is treated as a speculative business)
10. Timing the markets is impossible: The future is always impossible to predict. It is our
natural tendency to predict that stock prices will continue raising if they are in uptrend. If
the market drops, the same brain tendency is to predict continued dropping.

Role of Technical Analysis in trading

Technical analysis is done for short term and hence the purpose of technical analysis is to carry
out price forecasts within a year. By processing historical market data of any instrument, you can
try to anticipate how it should be traded. There are several premises in favor of the reliability of
technical analysis that are based on the experience and prolonged observation. Technical
Analysis is based on few key assumptions. One needs to be aware of these assumptions to ensure
the best results.
1) Markets discount everything – This assumption tells us that, all known and unknown
information in the public domain is reflected in the latest stock price.
2) The ‘how’ is more important than ‘why’ – This is an extension to the first assumption. Going
with the same example as discussed above – the technical analyst would not be interested in
questioning why the insider bought the stock as long he knows how the price reacted to the
insider’s action.

3) Price moves in trend – All major moves in the market is an outcome of a trend. The concept
of trend is the foundation of technical analysis. For example the recent upward movement in the
NIFTY Index to 7700 from 6400 did not happen overnight. This move happened in a phased
manner, in over 11 months. Another way to look at it is, once the trend is established, the price
moves in the direction of the trend.

4) History tends to repeat itself – In the technical analysis context, the price trend tends to repeat
itself. This happens because the market participants consistently react to price movements in a
remarkably similar way, each and every time the price moves in a certain direction. For example
in up trending markets, market participants get greedy and want to buy irrespective of the high
price. Likewise in a down trend, market participants want to sell irrespective of the low and
unattractive prices. This human reaction ensures that the price history repeats itself.

Chart types:

1. Line chart
2. Bar Chart
3. Japanese Candlestick

The focus of this module will be on the Japanese Candlesticks however before we get to
candlesticks, we will understand why we don’t use the line and bar chart.

The Line and Bar chart

The line chart is the most basic chart type and it uses only one data point to form the chart. When
it comes to technical analysis, a line chart is formed by plotting the closing prices of a stock or an
index. A dot is placed for each closing price and the various dots are then connected by a line.

If we are looking 60 day data then the line chart is formed by connecting the dots of the closing
prices for 60 days.
The line charts can be plotted for various time frames namely monthly, weekly, hourly etc. So ,if
you wish to draw a weekly line chart, you can use weekly closing prices of securities and
likewise for the other time frames as well.

The advantage of the line chart is its simplicity. However the disadvantage of the line chart is
also its simplicity. Besides giving the analysts a view on the trend, the line chart does not provide
any additional detail. Plus the line chart takes into consideration only the closing prices ignoring
the open, high and low. For this reason traders prefer not to use the line charts.

The bar chart on the other hand is a bit more versatile. A bar chart displays all the four price
variables namely open, high, low, and close. A bar has three components.

1. The central line – The top of the bar indicates the highest price the security has
reached. The bottom end of the bar indicates the lowest price for the same period.
2. The left mark/tick – indicates the open
3. The right mark/tick – indicates the close
For example assume the OHLC data for a stock as follows: Open – 65 High – 70 Low – 60
Close – 68 .For the above data, the bar chart would look like this

As you can see, in a single bar, we can plot four different price points. If you wish to view 5 days
chart, as you would imagine we will have 5 vertical bars. So on and so forth.

The position of the left and right mark on the bar chart varies based on how the market has
moved for the given day.

The length of the central line indicates the range for the day. A range can be defined as the
difference between the high and low. Longer the line, bigger the range, shorter the line, smaller
is the range.

While the bar chart displays all the four data points it still lacks a visual appeal. This is probably
the biggest disadvantage of a bar chart. It becomes really hard to spot potential patterns brewing
when one is looking at a bar chart. The complexity increases when a trader has to analyze
multiple charts during the day.
Hence for this reason the traders do not use bar charts. However it is worth mentioning that there
are traders who prefer to use bar charts. But if you are starting fresh, I would strongly
recommend the use of Japanese Candlesticks. Candlesticks are the default option for the majority
in the trading community.

Candlestick
The candlesticks originated from Japan. The earliest use of candlesticks dates back to the 18th
century by a Japanese rice merchant named Homma Munehisa.

While in a bar chart the open and the close prices are shown by a tick on the left and the right
sides of the bar respectively, however in a candlestick the open and close prices are displayed by
a rectangular body.

In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented
by blue/green/white and red/black candles respectively. Needless to say, the colors can be
customized to any color of your choice; the technical analysis software allows you to do this. In
this module we have opted for the blue and red combination to represent bullish and bearish
candles respectively.

Bullish candle. The candlestick, like a bar chart is made of 3 components.

1. The Central real body – The real body, rectangular in shape connects the opening
and closing price
2. Upper shadow – Connects the high point to the close
3. Lower Shadow – Connects the low point to the open

Likewise, the bearish candle also has 3 components:

1. The Central real body – The real body, rectangular in shape which connects the opening
and closing price. However the opening is at the top end and the closing is at the bottom
end of the rectangle
2. Upper shadow – Connects the high point to the open
3. Lower Shadow – Connects the Low point to the close

Candlestick patterns:
The Marubozu:Marubozu as a candlestick with no upper and lower shadow (therefore
appearing bald)

The Spinning Top:The spinning top is a very interesting candlestick. Unlike the Marubuzo, it
does not give the trader a trading signal with specific entry or an exit point. However the
spinning top gives out useful information with regard to the current situation in the market. The
trader can use this information to position himself in the market.Two things are quite
prominent…

● The candles have a small real body

● The upper and lower shadow are almost equal

The Dojis:The Doji’s are very similar to the spinning tops, except that it does not have a real
body at all. This means the open and close prices are equal. Doji’s provide crucial information
about the market sentiments and is an important candlestick pattern.

Paper Umbrella:The paper umbrella is a single candlestick pattern which helps traders in
setting up directional trades. The interpretation of the paper umbrella changes based on where it
appears on the chart.If the paper umbrella appears at the bottom end of a downward rally, it is
called the ‘Hammer’.If the paper umbrella appears at the top end of an uptrend rally, it is called
the ‘Hanging man’.To qualify a candle as a paper umbrella, the length of the lower shadow
should be at least twice the length of the real body. This is called the ‘shadow to real body
ratio’.
Support and Resistance

The support and resistance (S&R) are specific price points on a chart which are expected to
attract maximum amount of either buying or selling. The support price is a price at which one
can expect more buyers than sellers. Likewise the resistance price is a price at which one can
expect more sellers than buyers.On a standalone basis traders can use S&R to identify trade entry
points as well.The resistance level is always above the current market price.The support level is
always below the current market price.

Volume

Volumes indicate how many shares are bought and sold over a given period of time. The more
active the share, higher would be its volume.
Sl No Price Volume What is the expectation?
01 Increases Increases Bullish
02 Increases Decreases Caution – weak hands buying
03 Decreases Increases Bearish
04 Decreases Decreases Caution – weak hands selling

Moving Average
A standard average calculation is a quick approximation of a series of numbers.In a average
calculation where the latest data is included, and the oldest is excluded is called a Moving
Average.The simple moving average (SMA) gives equal weightage to all data points in the
series.An exponential moving average (EMA) scales the data according to its newness. Recent
data gets the maximum weightage and the oldest gets the least weightage.For all practical
purposes, use an EMA as opposed to SMA. This is because the EMA gives more weightage to
the most recent data points.The outlook is bullish when the current market price is greater than
the EMA. The outlook turns bearish when the current market price turns lesser than the EMA.In
a non trending market, moving averages may result in whipsaws thereby causing frequent losses.
To overcome this a EMA crossover system is adopted.In a typical crossover system, the price
chart is over laid with two EMAs. The shorter EMA is faster to react, while the longer EMA is
slower to react.The outlook turns bullish when the faster EMA crosses and is above the slower
EMA. Hence one should look at buying the stock. The trade lasts upto a point where the faster
EMA starts going below the slower EMA.The longer the time frame one chooses for a crossover
system, the lesser the trading signals.

Drawbacks of technical analysis

1. The failure to know the underlying fundamentals.

2. The lack of scientific objectivity.
3. The uniqueness of the pattern occurrences
Suggestions
It is suggested to the regulators of the capital market that they should take all possible measures
to regulate the securities market by effectively imposing the rules and regulations strictly and
equally to all the market agencies so that it can effectively carrying out all their functions.

The repository participants should charge nominally for the opening the demat account from the
investors so that it will enhance the investor base and promotes the growth of the capital market.

SEBI should take steps to minimize frauds of Capital market intermediaries by stringent
regulatory and supervisory norms in addition to the effective auditing of their accounts so that it
will boost the confidence of investors and promotes the growth of the capital market.

References
● Dr. S. Gautami, Dr. Nalla Bala Kalyan(2018) A Comparative Study on Risk & Return
Analysis of Selected Stocks in India
https://www.investopedia.com/articles/stocks/09/indian-stock-market.asp
● Liquidity, Stock Returns And Ownership Structure An Empirical Study Of The Bombay
Stock Exchange(2017): K.Chandrasekhar
● NICHOLAS ECONOMIDES AND ROBERT A. SCHWARTZ, Equity Trading Practices
and Market Structure: Assessing Asset Managers' Demand for Immediacy
● Shahid Ashraf ,Mirza Allim Baig(2015) Investment and Trading Strategies in Indian
Stock Market
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And Inception Trend Attempted By Indian Investors(2014): Madhvi
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Sameer Yadav
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c
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23, 2018) https://www.financeorigin.com
● “CHAPTER-V Role of Depositories: NSDL and CDSL” (2018)
http://shodhganga.inflibnet.ac.in
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2M. Kannappan(2018)
● Role of Depositories in Indian Capital Market – A Comparative Study between NSDL
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