PROJECT SYNOPSIS REPORT

ON

Guide on Stock Market for ordinary investors

and for online traders.

SUMITTED IN PARTIAL FULFILLMENT OF

THE RQUIREMENT OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION

G.B. TECHNICAL UNIVERSITY,

LUCKNOW

SUBMITTED BY: SUBMITTED TO:

Abhishek Tyagi Anju Arora
ROLL NO.0908570003
Finance
 CERTIFICATE

I have the pleasure in certifying that Mr. NITIN KOHLI is a bonafide

student of semester of the Master’s Degree in Business
Administration of Institute of Management Studies, Dehradun under
Class ID No. MB06038

He has completed his/her Summer Training Project work entitled

”Guide on Stock Market for lay investors and for online traders”
under my guidance.

I certify that this is his original effort and has not been copied from
any other source. This project has also not been submitted in any other
university for the purpose of award of any degree.

This project fulfills the requirement of the curriculum prescribed by

Uttarakhand Technical University, Dehradun for the said course.

Signature: …………………………………
Name of the Guide:……………………….
Date:……………………………………….

TABLE OF CONTENTS
Acknowledgement

Exective Summary

Chapter 1: Introduction

1.1 Globe logo Group

1.2 Achievements
1.3 Objectives
1.4 Globe logo Stock Broking Ltd.
1.5 Overview of the Indian Financial System
1.6 Overview of the Indian Financial Markets
1.7 Self Regulatory Organizations(SROs)
1.8 Functioning of Primary Market
1.9 Functioning of Secondary Market
1.10 E-Broking & Online Trading
1.11 Securities and Exchange Board of India
1.12 Introduction to depository
1.13 Automated Lending and Borrowing Mechanism

Chapter 2: Objective of the Study

Chapter 3: Research Methodology

Chapter 4: Findings

4.1 Investment Instruments

4.2 Mutual Funds
4.3 The Stock Exchange, Mumbai(BSE)
4.4 National Stock Exchange(NSE)
4.5 National Securities Clearing Corporation Ltd.
(NSCCL)
4.6 Categerisation of instruments

Chapter 5: Analysis
 5.1 Economic Analysis
5.2 Industry Analysis
5.3 Company Analysis
5.4 Tools & Techniques

Conclusion

Bibliography

ACKNOWLEDGEMENTS
I hearby express my profound gratitude to all those respected people who
supported me in the completion of this project.
It is indeed a matter of great pleasure and privilege to be able to present
this project on “Guide on stock market for ordinary investors and for online
traders” at Globe logo Securities Ltd. Dehradun.
The completion of the project is a milestone in a student’s life & its
execution is inevitable in the hands of our guides. I am highly indebted to
the project guide Dr. Pradeep Suri for his invaluable guidance and appreciate
him for giving form and substance to this project.
I am immensely indebted to Mr. Rupendra Shukla for his continuous
guidance and motivation to complete the said project. I am also thankful to
Globe logo Securities Ltd. (Dehradun) for giving me this valuable
oppourtunity for doing this project.
I would like to express my deep regrets and gratitude to our Centre Head
Mr.Nitin Roxwell. It is due to their enduring efforts, patience and
enthusiasm, which has given a sense of direction and purposefulness to this
project and ultimately made it a success.
I would also like to thank our non- teaching staff and our friends who
have helped me all the time in one way or other. Finally we sincearly
thank to all those who have rendered their valuable service either directly
or indirectly & helped us for making the project successful.
Executive summary

The project is about writing a guide on the stock markets for ordinary
investors and for online traders. It required extensive reading. I had to start
from the very basics of capital markets, what are they and what role do they
perform. Its classification into primary and secondary markets and the features
and functions of both followed this. Valuation of securities and financial analysis
was then incorporated to let the investors know how to assess their investments.
Procedures of the stock exchanges with respect to trading and clearing as well
other aspects like depository, regulations concerning stock exchanges, taxation
issues, derivatives trading, e- broking and every other relevant aspect has been
covered in the guide.

Thus it is a comprehensive guide on understanding the capital markets and how to

invest in them. My entire focus in writing the guide was to make it simple, brief
and concise. A lot of material was read and referred to before the final draft of the
material was made. Websites like www.nseindia.com, bseindia.com,
investopedia.com, globe logo.in and mutualfunds India.com were of great help in
this.

This project has covered many criteria and it also helped the retail investor and
online traders, as they are moving in direction to self-learning. More and more
customers are trying the option of online trading because they feel it as a very
comfortable and one get more knowledge about the security of their investment.
 History of Mutual Funds:
Massachusetts Investors Trust was founded on March 21, 1924, and, after one
year, had 200 shareholders and $392,000 in assets. The entire industry, which
included a few closed-end funds, represented less than $10 million in 1924.

The stock market crash of 1929 slowed the growth of mutual funds. In response to
the stock market crash, Congress passed the Securities Act of 1933 and the
Securities Exchange Act of 1934. These laws require that a fund be registered
with the Securities and Exchange Commission (SEC) and provide prospective
investors with a prospectus that contains required disclosures about the fund, the
securities themselves, and fund manager. The SEC helped draft the Investment
Company Act of 1940, which sets forth the guidelines with which all SEC-
registered funds today must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By
the end of the 1960s, there were approximately 270 funds with $48 billion in
assets. The first retail index fund, the First Index Investment Trust, was formed in
1976 and headed by John Bogle, who conceptualized many of the key tenets of
the industry in his 1951 senior thesis at Princeton University. It is now called the
Vanguard 500 Index Fund and is one of the largest mutual funds ever with in
excess of $100 billion in assets.

One of the largest contributors of mutual fund growth was individual retirement
account (IRA) provisions added to the Internal Revenue Code in 1975, allowing
individuals (including those already in corporate pension plans) to contribute
$2,000 a year. Mutual funds are now popular in employer-sponsored defined
contribution retirement plans (401(k)s), IRAs and Roth IRAs.
As of April 2006, there are 8,606 mutual funds that belong to the Investment
Company Institute (ICI), the national association of investment companies in the
United States, with combined assets of $9.207 trillion.

Usage:
Mutual funds can invest in many different kinds of securities. The most common
are cash, stock, and bonds, but there are hundreds of sub-categories. Stock funds,
for instance, can invest primarily in the shares of a particular industry, such as
technology or utilities. These are known as sector funds. Bond funds can vary
according to risk (e.g., high-yield or junk bonds, investment-grade corporate
bonds), type of issuers (e.g., government agencies, corporations, or
municipalities), or maturity of the bonds (short- or long-term). Both stock and
bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and
foreign securities (global funds), or primarily foreign securities (international
funds).Most mutual funds’ investment portfolios are continually adjusted under
the supervision of a professional manager, who forecasts the future performance
of investments appropriate for the fund and chooses those which he or she
believes will most closely match the fund’s stated investment objective. A mutual
fund is administered through a parent management company, which may hire or
fire fund managers.Mutual funds are liable to a special set of regulatory,
accounting, and tax rules. Unlike most other types of business entities, they are
not taxed on their income as long as they distribute substantially all of it to their
shareholders. Also, the type of income they earn is often unchanged as it passes
through to the shareholders. Mutual fund distributions of tax-free municipal bond
income are also tax-free to the shareholder. Taxable distributions can be either
ordinary income or capital gains, depending on how the fund earned those
distributions.
Net asset value:

The net asset value, or NAV, is the current market value of a fund's holdings,
usually expressed as a per-share amount. For most funds, the NAV is determined
daily, after the close of trading on some specified financial exchange, but some
funds update their NAV multiple times during the trading day. Open-end funds
sell and redeem their shares at the NAV, and so process orders only after the
NAV is determined. Closed-end funds (the shares of which are traded by
investors) may trade at a higher or lower price than their NAV; this is known as a
premium or discount, respectively. If a fund is divided into multiple classes of
shares, each class will typically have its own NAV, reflecting differences in fees
and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal
exchange. These may be shares in very small or bankrupt companies; they may be
derivatives; or they may be private investments in unregistered financial
instruments (such as stock in a non-public company). In the absence of a public
market for these securities, it is the responsibility of the fund manager to form an
estimate of their value when computing the NAV. How much of a fund's assets
may be invested in such securities is stated in the fund's prospectus.
CHAPTER I: INTRODUCTION

1.1 GLOBE LOGO GROUP

Globe logo, a Ranbaxy promoter group company, is one of India’s largest and
fastest growing integrated financial services institutions. The company offers a
large and diverse bouquet of services ranging from equities, commodities,
insurance broking, to wealth advisory, portfolio management services, personal
finance services, Investment banking and institutional broking services. The
services are broadly clubbed across three key business verticals- Retail, Wealth
management and the Institutional spectrum. Globe logo Enterprises Limited is the
holding company for all its businesses, structured and being operated through
various subsidiaries.

Globe logo’s retail network spreads across the length and breadth of the country
with its presence through more than 900 locations across more than 300 cities and
towns. Having spread itself fairly well across the country and with the promise of
not resting on its laurels, it has also aggressively started eyeing global
geographies. Globe logo a company promoted, controlled and managed by the
promoters of Ranbaxy was founded with the vision of providing integrated
financial care driven by relationship of trust. To realize its vision, the company
provides both, fund-based and non-fund based financial services to its clients.
These services include Broking (Stocks and Commodities), Depository
Participant Services, and Advisory on Mutual Fund Investments. The clients of
the company greatly benefit by its strong research capability, which encompasses
fundamentals as well as technicals.

Globe logo provides integrated financial solutions to its corporate, retail and
wealth management clients through Globe logo Securities Limited, Globe logo
Finvest Limited, Globe logo Commodities Limited and Globe logo Insurance
Broking Limited. Today, we provide various financial services which include
Investment Banking, Corporate Finance, Portfolio Management Services, Equity
& Commodity Broking, Insurance and Mutual Funds. Plus, there’s a lot more to
come your way.

 Globe logo in recent past has been constantly innovating in terms of the
product and services, which it offers, and in this respect it has started a
premium NRI, FIs, HNIs, and Corporate Servicing group. This group
specifically caters to the growing investment needs of these premium
client categories by taking all their portfolio investment decisions
depending upon their risk / return parameter.

 Globe logo has a very credible team in its Research & Analysis division,
which not only caters to the needs of our Institutional clients but also gives
valuable input to Investment Dealers / Investors.

 Globe logo is also giving in house depository services to its clients and it
is amongst the leading Depository service providers in the country
managing more than Rs. 6000 crores worth of shares under its electronic
custody.

 Globe logo – Business Partner Concept has resulted in opening our

branches all over the country, thereby pioneering the concept of
partnership to reach multiple locations. We do this in partnership with
existing market participants, who can utilize our corporate backing
coupled with our technical and back office support to enhance the business
opportunities available to them from their area.
1.2 ACHIEVEMENTS

 India's No. 1 Registrar & Securities Transfer Agents

 Among the to top 3 Depository Participants

 Largest Network of Branches & Business Associates

 ISO 9002 certified operations by DNV

 Largest Distributor of Financial Products

 Adjudged as one of the top 50 IT uses in India by MIS Asia

 Full Fledged IT driven operations.

1.3 OBJECTIVES

To achieve and retain leadership, GLOBE LOGO shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide
superior quality financial services. In the process, GLOBE LOGO will strive to
exceed Customer's expectations. 

As per the Quality Policy, GLOBE LOGO will: 

 Build in-house processes that will ensure transparent and harmonious

relationships with its clients and investors to provide high quality of
services.

 Establish a partner relationship with its investor service agents and

vendors that will help in keeping up its commitments to the customers.

 Provide high quality of work life for all its employees and equip them with
adequate knowledge & skills so as to respond to customer's needs.

 Continue to uphold the values of honesty & integrity and strive to

establish unparalleled standards in business ethics.

 Use state-of-the art information technology in developing new and

innovative financial products and services to meet the changing needs of
investors and clients.

 Strive to be a reliable source of value-added financial products and

services and constantly guide the individuals and institutions in making
a judicious choice of same.
 Strive to keep all stake-holders(shareholders, clients, investors,
employees, suppliers and regulatory authorities) proud and satisfied. 
THE GLOBE LOGO TEAM
 Qualification
17%
37%

21%

25%

Graduates MBA/PGDBM
Post-Graduates Professional

THE GLOBE LOGO TEAM

 Av e r a g e Ag e o n Bo a r d

>40 yrs
5%
>35 <40 yrs
10%
<25 yrs
25%

>30 <35 yrs

20%

>25 <30 yrs

40%

<25 yrs >25 <30 yrs >30 <35 yrs >35 <40 yrs >40 yrs

THE GLOBE LOGO TEAM

 Industry Experie nce
more than 10
Years
Upto 3 years

3 - 10 ye ars
Upto 3 years 3 - 10 years mo re than 10 Years

1.4 GLOBE LOGO STOCKBROKING LIMITED:

Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE).
GLOBE LOGO Stock Broking Limited, flows freely towards attaining diverse
goals of the customer through varied services. Creating a plethora of opportunities
for the customer by opening up investment vistas backed by research-based
advisory services. Here, growth knows no limits and success recognizes no
boundaries. Helping the customer create waves in his portfolio and empowering
the investor completely is the ultimate goal.

STOCK BROKING SERVICES

It is an undisputed fact that the stock market is unpredictable and yet enjoys a
high success rate as a wealth management and wealth accumulation option. The
difference between unpredictability and a safety anchor in the market is provided
by in-depth knowledge of market functioning and changing trends, planning with
foresight and choosing one & rescue’s options with care. This is what we provide
in our Stock Broking services.

We offer trading on a vast platform; National Stock Exchange and Bombay Stock
Exchange. More importantly, we make trading safe to the maximum possible
extent, by accounting for several risk factors and planning accordingly. We are
assisted in this task by our in-depth research, constant feedback and sound
advisory facilities. Our highly skilled research team, comprising of technical
analysts as well as fundamental specialists, secure result-oriented information on
market trends, market analysis and market predictions. This crucial information is
given as a constant feedback to our customers.

Our foray into commodities broking has been path breaking and we are in the
process of converting existing traders in commodities into the more organized
mainstream of trading in commodity futures, both as a trading and risk hedging
mechanism.

In the future, our focus will be on the emerging businesses and to meet this
objective, we have enhanced our manpower and revitalized our knowledge base
with enhances focus on Futures and Options as well as the commodities business.
Interest on margin money:

With the growth of the internet as a medium for buying and selling of shares the
brokerage rates of the brokers in the US have also come down dramatically. When
Internet trading started the brokerage was $19.95 per trade and now it is possible
for $9.95 per trade, which means a fall of 50.12%. Meanwhile the cost of research
has been spiraling, as the brokerage houses have to keep track of everything that
is happening in the financial world. So how do the brokerage houses give
facilities at such low costs? The answer lies in putting up the margin money for
their clients and earning interest income. This works in two ways; first they earn
interest incomes and secondly since they are putting up the margin money the
clients have more money with which they can buy shares and are hence increasing
the brokerage margin.

1.5 Overview of Indian Financial System

The capital markets perform an important function in the allocation of resources.
The allocation of resources is dependent on the health of the various sectors of the
economy. In a market driven economy, resources are channelized to those sectors,
which are doing well. The capital markets through organized exchanges ensure
liquidity for funds invested in the corporate sector. Liquidity of the stock market
is therefore an important factor affecting growth. Many profitable projects which
have longer gestation periods require long term finance, however investors may
not wish to keep their investments locked for the entire period of the project. A
liquid stock market ensures a quick exit route without incurring heavy costs. Thus
development of a vibrant and efficient market is necessary for creating a
conducive climate for investment and economic growth.
The Indian financial system has several facets. A classification from the point of
view of regulators is:

Regulatory Authorities
RBI SEBI
Commercial Banks Primary Market
Foreign Exchange Markets Secondary Market
Financial Institutions Derivatives Market
Primary Dealers

Commercial Banks include the Public Sector banks, Private Banks and Foreign
Banks. The Commercial Banks are regulated by the RBI under the Banking
Regulation Act and Negotiable Instruments Act.
Financial Institutions may be of all India level like IDBI, IFCI, ICICI, NABARD
or sectoral financial institutions like EXIM, TFCIL etc. IFCI was the first term
lending institution to be set up. IDBI is the apex development financial institution
set up to provide funds for the rapid industrialization in India.

The participants in the Foreign Exchange markets include banks, financial

institutions and are regulated by the RBI.

Primary Dealers are the registered participants of the wholesale debt market. They
bid at auctions for Government Debt, treasury bills, which are then retailed to
banks and financial institutions who invest in these papers to maintain their
Statutory Liquidity Ratio (SLR).
Reserve Bank of India (RBI)
The Reserve Bank of India is the central banking institution in India. It is the sole
authority for issuing bank notes and the supervisory body for banking operations
in India. Even though the Indian currency (rupee) is now floated in the market, the
RBI supervises and administers exchange control and banking regulations, and
administers the government's monetary policy. It is also responsible for granting
licenses for new bank branches.

Securities and Exchange Board of India (SEBI)

SEBI was set up as an autonomous regulatory authority by the Government of
India in 1988 “to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters connected
therewith or incidental thereto." It is empowered by two acts namely the SEBI
Act, 1992 and the Securities Contract (Regulation) Act, 1956 to perform the
function of protecting investors rights and regulating the capital markets.

1.6 Overview of the Indian Financial Markets

The Indian Financial Markets comprises of Capital Market, the Money Market
and the Debt Market. The Capital Market consists of –
A. Primary Market
B. Secondary Market

A. Primary Market
The Primary Market is the place where the new offerings by Companies are made
either as an Initial Public Offering (IPO) or Rights Issue. IPOs are offerings made
by the Company for the first time while rights are offerings made to the existing
shareholders.
B. Secondary Market
Secondary Markets consists of the Stock Exchanges where the buy-orders and sell
orders are matched in an organized manner.
The functions of the stock exchange are as follows:
1) It ensures a measure of safety and fair dealing.
2) It translates short-term and medium term investments into long-term funds for
companies.
3) It directs the flow of capital to the area of maximum returns and ensures ample
investment options for the investors depending on their risk preference.
4) It induces the companies to raise their standards of performance.

C. Derivatives Market
Derivatives Market is the market for financial instruments whose value is derived
from an underlying stock, commodity or currency. There are innumerable
derivative instruments; common amongst them are futures, options, warrants and
swaps. Derivatives trading made its debut in Indian market with the introduction
of Sensex and Nifty futures in June 2000.

Derivatives market has the following roles:

1) Derivatives allow hedging of market risk.
2) It allows for a separate market to be developed for lending of funds and
securities to the market.
3) It helps in making the underlying cash market more liquid.
4) It helps in innovations and the creation of new financial products.

D. Role of Capital Markets

a)The Capital Market is the indicator of the inherent health of the economy.
b)The Capital Market is the largest sources of funds with long or indefinite
maturity for companies and thereby enhances capital formation in the economy.
c)The Capital Market offers a number of investment avenues to investors.
d)It helps in channelising the savings pool in the economy towards investments,
which are more efficient and give a better rate of return thereby helping in
optimum allocation of capital in the country.

1.7 Self Regulatory Organizations (SROs)

Securities and Exchange Board of India (SEBI) is authorized to promote and
regulate Self-Regulatory Organizations (SROs) in the Capital markets in India.
SROs are practical and effective tools for regulating various kinds of participants
in the securities market. They have byelaws and codes of conduct to bind their
members.
Currently, the SROs related to the securities market whose regulatory framework
is well established and which have actually been functioning are the stock
exchanges. Other non-registered SRO is Association of Merchant Bankers of
India (AMBI).

1.8 Functioning of Primary Market

Introduction
Primary market is a place where a corporate may raise capital by way of a -
a) Public Issue: Sale of securities to members of the Public.
b) Rights issue: Method of raising further capital from the existing shareholders/
debenture holders by offering additional shares to them on a pre-emptive basis.
c) Private placement: As its name suggests it involves selling securities
privately to a group of investors.

All issues by a new company has to be made at par and for existing companies the
issue price should be justified as per Malegam Committee recommendations by :
1.The earnings per share (EPS) for the last three years and comparison of pre-
issue price to earnings (P/E) ratio to the P/E ratio of the Industry.
2.Latest Net Asset Value,
3.Minimum return on increased net worth to maintain pre-issue EPS. A company
may also raise finance from the international markets by issuing GDR’s and
ADR’s.

Principal steps of a Public Issue

A) Vetting of prospectus by SEBI

A draft prospectus is prepared giving out details of the Company, promoters
background, Management, terms of the issue, project details, modes of financing,
past financial performance, projected profitability and others. Additionally a
Venture Capital Firm has to file the details of the terms subject to which funds are
to be raised in the proposed issue in a document called the ‘placement
memorandum:

a)Appointment of underwriters: The underwriters are appointed who commit to

shoulder the liability and subscribe to the shortfall in case the issue is under-
subscribed. For this commitment they are entitled to a maximum commission of
2.5 % on the amount underwritten.

b)Appointment of Bankers: Bankers along with their branch network act as the
collecting agencies and process the funds procured during the public issue. The
Banks provide temporary loans for the period between the issue date and the date
the issue proceeds becomes available after allotment, which is referred to as a
‘bridge loan’.

c)Appointment of Registrars: Registrars process the application forms, tabulate

the amounts collected during the Issue and initiate the allotment procedures.

d)Appointment of the brokers to the issue: Recognized members of the Stock

exchanges are appointed as brokers to the issue for marketing the issue. They are
eligible for a maximum brokerage of 1.5%.
e)Filing of prospectus with the Registrar of Companies: The draft prospectus
along with the copies of the agreements entered into with the Lead Manager,
Underwriters, Bankers, registrars and Brokers to the issue is filed with the
Registrar of Companies of the state where the registered office of the company is
located.
f)Printing and dispatch of Application forms: The prospectus and application
forms are printed and dispatched to all the merchant bankers, underwriters,
brokers to the issue.

g) Filing of the initial listing application: A letter is sent to the Stock exchanges
where the issue is proposed to be listed giving the details and stating the intent of
getting the shares listed on the Exchange.

h)Statutory announcement: An abridged version of the prospectus and the Issue

start and close dates are published in major English dailies and vernacular
newspapers.

i)Processing of applications: After the close of the Public Issue all the
application forms are scrutinized, tabulated and then shares are allotted against
these applications.
j)Establishing the liability of the underwriter: In case the Issue is not fully
subscribed to, then the liability for the subscription falls on the underwriters who
have to subscribe to the shortfall, incase they have not procured the amount
committed by them as per the Underwriting agreement.
k)Allotment of shares: After the issue is subscribed to the minimum level, the
allotment procedure as prescribed by SEBI is initiated.

L)Listing of the Issue: The shares after having been allotted have to be listed
compulsorily in the regional stock exchange and optionally at the other stock
exchanges.
B) Cost of a Public issue
The cost of a public issue works out between 8% to 12% depending on the issue
size but the maximum has been specified by SEBI as under:

For Equity & Convertible debentures For Non Convertible debentures

 When the issue size is upto 5 crores =  When the issue size is upto 5 crores =
Mandatory costs + 5% Mandatory costs +2%
 When the issue size is greater than 5  When the Issue size is greater than 5
crores : Mandatory costs + 2% crores : Mandatory costs + 1%

**Mandatory costs includes underwriting commission, brokerage, fees of the lead

managers of the issue, expenses on statutory announcements, listing fees and
stamp duty.

C) Eligibility for an IPO

An Indian Company is allowed to make an IPO if:
1.The company has a track record of dividend paying capability for 3 out of the
immediately preceding 5 years.
2.A public financial institution or scheduled commercial banks has appraised the
project to be financed through the proposed offer and the appraising agency
participates in the financing of the project to the extent of at least 10% of the
Project cost. Typically a new company has to compulsorily issue shares at par,
while for companies with a track record the shares can be issued at a premium.
Before thadvent of SEBI the prices of shares were valued as per the Controller of
Capital Issues (CCI).

Rights Issue
The rights issue involves selling of securities to the existing shareholders in
proportion to their current holding. When a company issues additional equity
capital it has to be offered in the first instance to the existing shareholders on a
pro-rata basis as per Section 81 of the Companies Act, 1956. The shareholders
may by a special resolution forfeit this right, partially or fully by a special
resolution to enable the company to issue additional capital to the public or
alternatively by passing a simple resolution and taking the permission of the
Central Government.

Private Placement
A private placement results from the sale of securities by the company to one or
few investors. The distinctive features of private placement is that:
 There is no need for a formal prospectus as well as underwriting
arrangement
 The terms of the issue are negotiated between the company and the
investors
The issuers are normally the listed public limited companies or closely held public
or private limited companies which cannot access the primary market. The
securities are placed normally with the Institutional investors, Mutual funds or
other Financial Institutions.

SEBI Guidelines for IPO’s

1. Allotment has to be made within 30 days of the closure of the
Public Issue and 42 days in case of a Rights issue.
2. Net Offer to the General Public has to be at least 25% of the Total
Issue Size for listing on a Stock exchange. For listing an IPO on
the NSE firstly, Paid up capital should be Rs.20 Crores, secondly
the issuer or the promoting company should have a track record of
profitability and thirdly the project should be appraised by a
financial Institution, banks or Category I merchant bank. For
knowledge based companies like IT the paid up capital should be
Rs.5 Crores, but the market capitalization should be at least Rs.50
Crores. It is mandatory for a company to get its shares listed at the
regional stock exchange where the registered office of the issuer is
located.
3. A Venture Capital Fund shall not be entitled to get its securities
listed on any stock exchange till the expiry of 3 years from the date
of issuance of securities.
4. In an Issue of more than Rs. 100 crores the issuer is allowed to
place the whole issue by book-building
5. Minimum of 50% of the Net offer to the Public has to be reserved
for Investors applying for less than 1000 shares.
6. All the listing formalities for a public Issue has to be completed
within 70 days from the date of closure of the subscription list.
7. There should be at-least 5 investors for every 1 lakh of equity
offered.
8. Quoting of permanent Account number or GIR No. in application
for allotment of securities is compulsory where monetary value of
Investment is Rs.50,000/- or above.
9. Firm Allotment to permanent and regular employees of the issuer
is subject to a ceiling of 10% of the issue amount.
10. Indian development financial institutions and Mutual Fund can be
allotted securities upto 75% of the Issue Amount.
11. Allotment to categories of FII’s and NRI’s/OCB’s is upto a
maximum of 24% which can be further extended to 30% by an
application to the RBI - supported by a resolution passed in the
General Meeting.
12. 10% individual ceiling for each category a) Permanent employees
b) Shareholding of the promoting companies
13. Securities issued to the promoter, his group companies by way of
firm allotment and reservation have a lock-in period of 3 years.
However shares allotted to FII’s and certain Indian and multilateral
development financial institutions and Indian Mutual Funds are not
subject to Lock-in periods.
14. The minimum period for which a public issue has to be kept open
is 3 working days and the maximum for which it can be kept open
is 10 working days. The minimum period for a rights issue is 15
working days and the maximum is 60 working days.
15. A public issue is effected if the issue is able to procure 90% of the
Total issue size within 60 days from the date of earliest closure of
the Public Issue. In case of over-subscription the company may
have the right to retain the excess application money and allot
shares more than the proposed issue which is referred to as the
‘green-shoe’ option.
16. A rights issue has to procure 90% subscription in 60 days of the
opening of the issue.
17. 20% of the total issued capital , if the company is an unlisted one
with a three year track record of consistent profitability Else in all
cases the following slab rate apply :
Size of Capital issued (Including Premium) Contribution %
 Less than Rs.100crores 50%
> 100 crores upto 300 crores 40%
> 300 crores up to 600 crores 30%
> 600 crores 15%
18. Promoter’s contribution is subject to a lock-in period of 3 years.
19. Refund orders have to be dispatched within 30 days of the closure
of the Public Issue.
20. Refunds of excess application money i.e. for un-allotted shares
have to be made within 30 days of the closure of the Public Issue.

Listing on Stock Exchanges

The Stock Exchange, Mumbai has notified new listing guidelines from 1st
December, 2000 for companies listed on other Stock Exchange and seeking listing
at BSE, the threshold limit will be Rs. 3 crores of minimum issued equity capital
and the following criteria will be applicable:
1. Company should have profit making track record for at least three
years.
2. Minimum networth of Rs. 20 crores (networth includes Equity capital
and free reserves excluding revaluation reserves).
3. Minimum market capitalization of the listed capital should be Rs.20
crores, based on average price of last six months.
4. Number of days traded during last six complete months should be
minimum 50% of the total trading days during the same six months on
any stock exchange.
5. Minimum Average volume traded per day during the last three
complete months should be 1000 shares and minimum 5 trades per
day.
 6. Minimum 25% of the company's issued capital should be with public
(inclusive of bodies corporate) and minimum 15 shareholders per Rs.1
lakh of capital in the public category.
7. The company should be agreeable to sign an agreement with CDSL &
NSDL for demat trading etc.

The Stock Exchange, Mumbai has decided that for new companies whose draft
offer documents are received w.e.f. 1st December, 2000 the threshold limit for
listing on The Stock Exchange will be issued equity capital of Rs.10 crores and
post issue net worth (equity capital + free reserves excluding revaluation reserve)
of Rs.20 crores.
The Exchange has also decided that for new companies in high technology (i.e.
information technology, internet, e-commerce, telecommunication, media
including advertisement, entertainment etc.) whose draft offer documents are
received w.e.f. 1st December, 2000, the following criteria will be applicable:
1. The total income/sales from the main activity, which should be in the
field of information technology, internet, e-commerce,
telecommunication, media including advertisement, entertainment etc.
should not be less than 75% of the total income during the two
immediately preceding years as certified by the Auditors of the
company.
2. The minimum post-issue paid-up equity capital should be Rs.5 Crores.
3. The minimum market capitalization should be Rs.50 Crores. (The
capitalization will be calculated by multiplying the post issue
subscribed number of equity shares with the Issue price).
4. Post issue networth (equity capital + free reserves excluding
revaluation reserve) of Rs.20 Crores.

GDR And Its Features

“Global Depositary Receipts means any instrument in the form of a
depositary receipt or certificate (by whatever name it is called) created by
 the Overseas Depositary Bank outside India and issued to non-resident
investors against the issue of ordinary shares or Foreign Currency
Convertible Bonds of issuing company.” A GDR issued in the USA is an
American Depositary Receipt (ADR). Among the Indian companies
Reliance Industries Limited was the first company to raise funds through a
GDR issue.

A) Salient Features of a GDR

1) The holder of a GDR does not have voting rights
2) The proceeds are collected in foreign currency thus enabling
the issuer to utilize the same for meeting the foreign exchange
component of project cost, repayment of foreign currency
loans, meeting overseas commitments and for similar other
purposes.
3) It has less exchange risk as compared to foreign currency
borrowings or foreign currency bonds.
4) The GDR’s are usually listed at the Luxembourg Stock
Exchange as also traded at two other places besides the place
of listing e.g. on the OTC market in London and on the private
placement market in USA.
5) An investor who wants to cancel his GDR may do so by
advising the depositary to request the custodian to release his
underlying shares and relinquishing his GDRs in lieu of shares
held by the Custodian. The GDR can be canceled only after a
cooling-period of 45 days. The depositary will instruct the
custodian about cancellation of the GDR and to release the
corresponding shares, collect the sales proceeds and remit the
same abroad.
 6) Marketing of the GDR issue is done by the under-writers by
organizing road shows which are presentations made to
potential investors. During the road shows, an indication of the
investor response is obtained by equity called the “Book
Runner”. The issuer fixes the range of the issue price and
finally decides on the issue price after assessing the investor
response at road shows.

1.9 Functioning of Secondary Market

Secondary Market is a market in which securities that have been issued at some
previous point of time are traded through the intermediaries in an organised
exchange. These intermediaries may be Stockbrokers or Sub-brokers.

Stock Exchange
Stock Exchange is a place where the buyers and sellers meet to trade in shares in
an organized manner. There are at present 24 recognized stock exchanges in the
country and are governed by the Securities Contracts (Regulation) Act, 1956.

Stock Brokers
According to Section 2 (e) of the SEBI (Stock Brokers and Sub-Brokers) Rules,
1992, a stockbroker means a member of a recognized stock exchange. No
stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate granted by SEBI.
A stockbroker applies for registration to SEBI through a stock exchange or stock
exchanges of which he or she is admitted as a member. A stockbroker may take
the form of sole proprietorship, partnership or corporation.

Sub-Brokers
Sub-broker is a person who intermediates between investors and trading
members. Stockbrokers of Indian stock exchanges are permitted to transact with
sub-brokers.

Capital Adequacy Norms For Brokers

Each stockbroker is subject to capital adequacy requirements consisting of two
components:
1. Base minimum capital, and
2. Additional or optional capital related to volume of business.
The amount of base minimum capital varies from exchange to exchange. A SEBI
regulation requires stockbrokers of The Stock Exchange, Mumbai to maintain an
absolute minimum of Rs.500,000. The form in which the base minimum capital
has to be maintained is also stipulated by SEBI. Exchange may stipulate higher
levels of base minimum capital at their discretion.
1.10 E-Broking and Online Trading

Introduction
Online trading gives an investor the flexibility of putting in a trade from the
comforts of his own home as also the transparency of being in front of the screen
or trading pit himself. As far as online brokerage activities is concerned diverse
studies the world over have concluded that, above average rates of growth are to
be found in the online securities trading sector, particularly as online trading has
already revolutionized the way ordinary citizens view the stock market. It’s turned
a world that was previously as accessible as the Stalinist Kremlin into a 24-hour
fast food restaurant - a fact not lost upon online trading business, investors &
bystanders.
While it still can’t claim the major chunk of the trading, online stock trading
constitute around 37% of all retail trades in the US. Along with the low price, it is
the ability to make their own trading decisions and execute their own trades,
which is what is drawing online investors to the Internet. In US, instead of
conducting a trade through a full service broker which can cost as much as $500
investors can turn to online brokers, who offers trades for $7.95 to $30 a piece,
depending on the level of service and research requested.
Trading volumes & assets are burgeoning as investors recognize the advantages
of going online. In US, assets held online at brokerages have hit $1.3 trillion. All
the indicators point that investors are becoming more comfortable conducting
their financial transactions online as the new platform evolves into the
mainstream.
The compelling economics of executing a trade & customer desire to conduct
trades online has drawn close to 150 online brokers, including the big muscles in
the business who are now battling it out for investor business. Expectedly, the
competition has become distinctly Darwinian with huge ad expenditures.
Online trading in India
In January 2000, the Securities and Exchange Board of India (SEBI) allowed e-
broking, or the buying and selling of shares on the Internet. This has opened up a
plethora of opportunities for investors to put in trades themselves at rates that are
current and a trading experience that is completely transparent.

In order to transact on the Internet, an investor first needs to open a trading

account with any of the e-broking sites. This is fairly simple as you only need to
furnish information about yourself such as your name, postal address, e-mail
address and your status as an investor. You are then given your username and
password and you are ready to put in your first trade.

Requirements for e-trading

All that an investor requires to trade online is a computer, an Internet connection,
a bank account and a demat account.

How to choose an online broker?

Many of the criteria that an investor uses for choosing an online broker is the
same as that for a traditional broker. After all, when you shift to an online broker,
the essential operation of buying and selling still remains the same, it is only that
you are doing it in a more efficient manner. Of course, there will be certain
additional criteria that you would have to consider like the security of your
transaction over the net.
Some of the key issues to be considered when choosing an online broker are
enumerated below:
1)Safety: Is the broker financially stable? It is always better to choose a broker
who has a string balance sheet. Does the broker have good brand equity? It is
always better to check out the broker’s reputation from friends and acquaintances
who may be using his services.

2)Security: Online investing is easy, low cost and efficient. But it can be
dangerous too. Unless effective security systems are in place, secure trading may
be difficult.

3)Service quality: What is the broker’s working hours? Can you access your
account information at any point of the day? How soon does the customer service
representative respond when you email him/her with a query? Is the staff
courteous and helpful? How soon does the broker confirm your buy/sell order?
How soon do you receive cash once a sell order is executed? Is your broker
getting you the best price?

4)Research/Investment advice: Does the broker provide research and investment

advice? The fact is that most of the online brokers provide research and
investment advice on their websites. The question that you need to consider is of
course regarding the quality of the advice. But here again, the issue is that the
investment recommendations put out by most of the online brokers can be
accessed whether you trade through them or not. This practice may of course
change once the volume picks up and the brokers may then decide to permit
access only to investors who trade through them. But for the present, it is not
necessary to give too much weightage to this criterion.

5)Cost: Commissions could eat into your returns more than you think. So, it
always makes sense to trade through the broker offering the lowest commissions,
provided of course that other things remain the same. The importance of “cost” as
a criterion also depends on the kind of investor you are. If you are one of those
who plan to be a day trader, it of course makes sense to keep your trading cost
minimum. If on the other hand, you are one of those long term buy and hold
investors who rarely buy and sell, broking commissions will of course have a
lower weightage in your decision.

6)Distribution/Reach: The importance of a brick and mortar approach to an

online business has more or less become evident, with even Amazon deciding to
set up its own brick and mortar infrastructure. In spite of the fact that online
broking does not involve the sale of a tangible product, a brick and mortar
structure is still essential as online brokers have to win the trust of the investors.
This can be done more easily if the investor is able to attribute a face to the
broking firm he is trading through.

Trading on the Internet

Investors access the exchange through the E-broker. The broker makes available a
web-site through which the investor can log-in and trade. The site will have the
usual security features seen in other e-commerce applications. The online broking
firms offer a variety of products and depending on the margin money, your
exposure limit will be decided. Some firms offer trading where you do not need
cash margins but allow you trade on the basis of the value of your shares
deposited in the demat account.
After logging on, investor is taken to the trading screen, where he can give buy
and sell orders. He can give a market order, a fill and kill order or a limit order. In
most cases, the order is valid only for the particular day and if it doesn’t get
executed on the same day, the order stands cancelled. The investor can also
modify his order but this will have to be done before the earlier order is executed.
Once the order is executed, his bank and demat accounts are credited/debited with
the cash and shares respectively.
Basic Trading Terminology

A. Pre-Opening Session
In this session, one is allowed to enter only limit orders. This is because the
system does not do any matching to generate trades. This session is meant for
entry of orders based on which the opening price of scrips will be calculated by
the system.
User may enter orders one by one at the screen or may wish to batch up the orders
for quick entry into the system, using a previously created file.
The time period for this session is approximately from 9:30 a.m. to 9:45 a.m.
B. Opening Session
One cannot enter quotes, orders or deals during this session, which lasts for about
5 minutes. This is because the system computes the opening price for every scrip
according to the algorithm defined in the BRS.
All possible trades at opening price are executed and unmatched orders are
returned at end of session.
At the end of this session, the opening price of the scrips is displayed on the
screen in the Touchline Window.

The time period for this task is approximately 9:45 a.m. to 10:00 a.m.

C. Continuous Trading Session

During this session user will be allowed to enter quotes, orders, and deals
(Negotiated non- computer deals and Crossed deals) into the system and carry on
his trading activities. User will receive confirmations of the trades executed by
him and have the facility to view his net position and break-even position in scrip.
He will also receive the latest market information and news.
The continuous trading session lasts approximately from 10:00 a.m. to 3:30 p.m.

D. Closing Session
As in the opening session, user will not be allowed to enter quotes, orders or
deals. This session lasts for a maximum of 10 minutes.

In this session, the Closing prices of scrips will be computed based on the trades
that took place during the day, including trades at opening price, according to the
algorithm defined in the BRS. At the end of this session, user will receive the
closing price for each scrip on his workstation in the Touchline window.

The closing session is approximately from 3:30 p.m. to 3:45 p.m.

E.Post-Closing Session
This session is after the closing session and is meant for matching of orders at
closing price only. User can enter orders, which will be matched at closing price.
User can also enter negotiated and crossed deals. All unmatched orders entered
during this session will be killed.
It is only in this session that a member broker can see ALL the trades of all his
traders on his workstation.

This session lasts approximately from 3:45 p.m. to 4:05 p.m.

F. Breakup Opening
Data processing goes on at backend. During this session traders can not logon.

This session lasts approximately from 4:05 p.m. to 4:15 p.m.

G.Broker Query
During this session the broker can logon as trader 1 and download all the trades
done via all his trading work stations.

This session lasts approximately from 4:15 p.m. to 4:45 p.m.

H. Daily Breakup
Type 1 member can redistribute his trades among 6 different clients for carry
forward or delivery. Broker has to logon as trader 1.

This session lasts approximately from 4:45 p.m. to 6:30 p.m.

Order Types And Conditions

There are five types of orders you can enter into the BOLT system. They are :

A. Price Conditions
a)Limit - Orders which specify the rate at which the trader wishes to execute his
trade are called Limit Orders.
b)Stop-Loss - Stop Loss orders are released into the market when the last traded
price for that security in the market reaches or surpasses the trigger price. The
trigger price is the price at which an order gets triggered from the Stop Loss
Book. Before triggering, the order does not participate in matching and cannot get
traded.

c)Market - Market orders are orders which are to be executed at the prevailing
market price. For such orders, the system determines the price.
B. Quantity conditions
a)Min Fill/Rest Kill – is a facility provided for quick order execution. Let us say,
you are watching the 'Touchline' and suddenly you find something suitable. To
make a quick deal, select the scrip and enter the quantity. Click on the Sell
Min/None or Buy Min/None button as the requirement may be. The order will be
matched at touchline price to a quantity greater than or equal to minimum
quantity and less than or equal to total quantity. The unexecuted quantity of the
order will be killed and a suitable message will be flashed in the reply box.
Hence, they are called 'Min Fill or Rest Kill' orders.

b)All/None – is a facility to enable trader to fill in the entire order quantity at one
shot or then no fills at all below the quantity.
c)Revealed Quantity – This refers to the quantity that the trader wishes to reveal
to the market. The revealed quantity should be at least 10% of the total order
quantity.

C. Time conditions
a)EOTODY- Is a default time condition meaning that the order will be in force
for the day it is entered. At the end of the day, the order will be automatically
cancelled by the system.
b)EOSESS– Is a time condition which specifies that the order will be retained in
the system only till the end of the ongoing session.
c)EOSTLM- Is an order that is retained in the system till the end of the
settlement. If the order remains unexecuted till the end of the settlement, the order
will get cancelled.
1.11 Securities & Exchange Board of India Act, 1992
The Securities and Exchange Board of India Act, 1992, has been enacted to
provide for the establishment of a Board to protect the interest of investors in
securities and to promote the development of, and to regulate, the securities
market and for matters connected therewith and incidental thereto.
SEBI’s regulatory jurisdiction extends over corporates in the issuance of capital
and transfer of securities, in addition to all the intermediaries and persons
associated with the securities market.
SEBI has been given the necessary autonomy and authority to ensure an orderly
securities market by regulating all the intermediaries such as stock exchanges,
brokers, sub-brokers, underwriters, merchant bankers, bankers to the issue, share
transfer agents and registrars. SEBI has issued regulations and guidelines for
monitoring and inspecting the operations of all the intermediaries to enforce
compliance.

A. Functions of the Securities & Exchange Board of India

The measures which SEBI is expected to perform to promote, develop and
regulate an orderly securities market are:
a) Regulating the business in stock exchanges and any other securities
markets;
b) Registering and regulating the working of stock brokers, sub-brokers,
share transfer agents, bankers to an issue, trustees of trust deeds, registrars
to an issue, merchant bankers, underwriters, portfolio managers,
investment advisors and such other intermediaries who may be associated
with securities markets in any manner.
c) Registering and regulating the working of the depositories, participants,
custodians of securities, foreign institutional investors, credit rating
agencies and such other intermediaries as the Board may, by notification,
specify in this behalf.
d) Registering and regulating the working of venture capital funds and
collective investment schemes including mutual funds;
e) Promoting and regulating self-regulatory organizations
f) Prohibiting fraudulent and unfair trade practices relating to securities
markets
g) Promoting investors’ education and training of intermediaries of securities
markets
 h) Prohibiting insider trading in securities
i) Regulating substantial acquisition of shares and takeover of companies
j) Calling for information from, undertaking inspection, conducting inquiries
and audits of the stock exchanges, mutual funds and other persons
associated with the securities market and intermediaries and self
regulatory organizations in the securities market
k) Performing such functions and exercising such powers according to
SC(R)A as may be delegated to it by the Central Government.
l) Conducting research for the above purposes. Calling from or furnishing to
any such agencies as may be specified by the Board, such information as
may be considered necessary by it for the efficient discharge of its
functions.

B. Registration of intermediaries with SEBI

The following persons in the below mentioned capacity can buy, sell or deal in
securities only after obtaining a certificate of registration from SEBI under section
12.
1) Stock-broker
2) Sub-broker
3) Share transfer Agent
4) Banker to Issue
5) Trustee of trust Deed
6) Registrar to Issue
7) Merchant Banker
8) Underwriter
9) Portfolio manager
10) Investment manager
11) Investment advisor
12) Depository
13) Depository Participant
14) Foreign Institutional Investor
 15) Credit Agency
16) Collective Investment schemes
17) Venture capital funds
18) Mutual Funds
19) Any other intermediary associated with the securities market

C. Penalties under the SEBI Act

The SEBI Act, 1992, provides for two types of penalties for violation of the
provisions of the Act. They are:
1.Suspension or cancellation of certificate of registration to be imposed by SEBI.
2.Monetary penalty to be imposed by an adjudicating officer appointed by SEBI,
as per rules framed by Central Government.

1.12 Introduction to Depository

The Government of India enacted the Depositories Act in August 1996, paving
the way for setting up of depositories in India. The National Securities Depository
Ltd. was inaugurated as the first depository in India, paving way for a paperless
settlement of securities. Soon after, the second depository, Central Depository
Services Ltd. was inaugurated.
Under the depository system, physical certificates are eliminated and replaced by
electronic entries in the books of the depository. The depository functions with
the help of Depository Participants (DP). This is similar to opening an account
with any branch of a bank in order to utilise the services of the bank The
depository holds these shares in its name, however the beneficial ownership of
these shares remain with the persons who are clients with the Depository
Participants.
Need for a Depository
Before the advent of the depository system, settlements were characterised by
inefficiencies of handling of share certificates. They exposed investors to higher
costs and unwanted risks. Some of the problems and risks associated with paper
based trading and settlement were:
 Unwarranted delay in transfer of shares.
 Possibility of forgery on various documents leading to bad deliveries,
legal disputes etc
 Theft of share certificates leading to defective title in shares purchased
and subsequent litigation

Benefits of a Depository
The benefits to an investor of participating in a depository are:
 No bad deliveries
 Immediate transfer of shares
 No stamp duty on transfer of shares
 Reduction in handling large volumes of paper
 Elimination of risks associated with physical certificates such as loss,
theft, mutilation, forgery etc;
 Reduction in transaction cost.

Facilities offered by a Depository

The Depository offers certain facilities to investors. These are listed
below:
 Dematerialization i.e., converting physical certificates to electronic
form
 Dematerialization which is the opposite of dematerialization
 Transfer of securities
 Settlement of trades executed in stock exchanges
 Pledging/hypothecation of dematerialized securities
  Electronic credit in public offerings of companies
Processes

A. Dematerialization (Demat)
Dematerialization is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited in
the investor’s DP account.
In order to dematerialize his certificates; an investor has to open an account with a
DP and then request for dematerialization of his certificates by filling up a
dematerialization request form (DRF) and submitting the same along with the
certificates. An investor can dematerialize those certificates which are registered
in his name and are available for demat with the Depository. The
dematerialization process usually takes about 20 days.

B. Trading and Settlement

Buying and selling in demat stocks is similar to buying/selling physical shares.
Once the buying/selling is done on the exchange, the investor has to follow
certain transactions.

The transactions relating to purchase of shares are:

 Investor purchases shares in the exchange and arranges

to make payment to broker
 Broker arranges to make payment to the Clearing
Corporation
 Broker receives credit in his clearing account with his
DP on the pay-out day.
 Broker gives instructions to his DP to debit his clearing
account and credit his client’s account
  Investor gives instruction to his DP for receiving credit
in his investor account
 If the instructions match, investor’s account with his
DP is credited.
An investor can give standing instructions for receiving securities in his account.

The transactions relating to sale of shares are:

 Investor sells shares in the stock exchange through a
broker
 Investor gives instruction to his DP for debit of his
account and credit of his broker’s clearing member pool
account.
 On the pay-in day investor’s broker gives instructions
to his DP for delivery to clearing corporation of the
stock exchange
 The broker receives payment from the clearing
corporation
 Investor receives payment from the broker for the sale
of the securities.

C. Corporate Benefits
In the event any company declares benefits such as dividends, rights, bonus or
stock split, the Depository will forward the details of the all the clients having
electronic holdings in that security as of the record date to the registrar of the
company. The registrar will calculate the corporate benefits due to all the
shareholders. The distribution of all cash benefits will be done by the registrar,
whereas the Depository will do the distribution of securities entitlements. In
recent times, NSDL has begun distributing dividends to accounts of shareholders
directly.

1.13 Automated Lending and Borrowing Mechanism (ALBM)

A. Introduction
The Automated Lending and Borrowing Mechanism (ALBM) is a scheme
envisaged specifically for Participants [Trading Members / Clearing Members] to
borrow/lend securities at market determined rates. The scheme is structured to
facilitate borrowing of securities to meet immediate settlement requirements at
reasonable cost and low risk.
Under the securities lending scheme, the Approved Intermediary is required to
ensure the return of the equivalent securities back to the lender. Normally this
requires the intermediary to keep adequate collateral to cover price risks. Under
this scheme market risk is sought to be minimized. The borrower first executes a
purchase transaction in the manner specified by the Approved Intermediary, to
indicate an intention to borrow securities. Similarly, the lender first executes in
the manner specified by the Approved Intermediary, a sale transaction to indicate
an intention to lend securities. The Approved Intermediary subsequently gives
effect to the lending/borrowing.

B. Procedure
A Participant who wishes to borrow a security or lend funds for a particular
security executes a borrow transaction in the Neat Trading system (ALBM
session). Similarly, the Participant who wishes to lend the security and borrow
funds executes a lend transaction. These transactions entered into in the ALBM
session are primarily meant for the purpose of determining the intention to
borrow/lend securities and the lending fees. These are not a part of the cleared
deals on the NSE and shall not constitute a part of the settlement obligations of
the Participant as a Clearing Member.

The net obligation of the Participant for the security for the transactions executed
in the ALBM session will determine the intention of the Participant to lend or
borrow the security. A net purchase position for a security implies a firm and
irrevocable intent to borrow the security whereas a net sale position for a security
implies a firm and irrevocable intent to lend the security. Based on this NSCCL
will give effect to lending/borrowing transactions at the securities lending price.
The securities lending price shall be announced to the Participants prior to the
commencement of the ALBM session.

The securities lending price will typically be the closing price of the security on
the previous day. For example, if the ALBM session takes place on Wednesday,
the closing price as of Tuesday, if available, shall be the lending price for the
security. If the closing price as of Tuesday is not available, the last available
closing price prior to Tuesday shall be used as the lending price.
The difference in the value at which transactions is executed in the ALBM session
and the transactions valued at the lending price shall determine the notional
lending fee.
The Approved Intermediary ensures the return of equivalent securities to the
lender by creating respective obligations for the lender and the borrower. For the
purpose of returning the securities borrowed to the lender concerned, the
Participant shall authorize the National Securities Clearing Corporation Limited
to create for that particular security for the relevant settlement (i) an obligation to
return the securities borrowed and the right to receive back the corresponding
funds in respect of the securities borrower and (ii) a right to receive back the
securities lent and an obligation to return the corresponding funds in respect of the
securities lender. Consequentially, the net obligation of the Participant as a
Clearing Member will be adjusted for the obligation and the right of the
Participant concerned, created as above, for completing the return of the lent
securities. The return of the lent securities and the corresponding return of funds
will be deemed to have been completed once the securities and funds pay out for
the relevant settlement takes place to the extent of such adjustment.

To the extent that pay-in of securities and/or funds in respect of the unadjusted
portion does not take place, consequential action, same as the process prescribed
under the Bye Laws and Regulations of NSCCL for Non-delivery and Non-
payment shall be taken and upon completion of the same, the obligation to return
securities and/or the right to receive funds shall be deemed to have taken place.
To the extent that pay-out of securities and/or funds in respect of the unadjusted
portion does not take place, consequential action, same as the process prescribed
under the Bye Laws and Regulations of NSCCL for Non-delivery and Non-
payment shall be taken and upon completion of the same, the obligation to return
securities and /or the right to receive funds shall be deemed to have taken place.

The payment of total lending fee payable/receivable will be effected along with
funds pay-in/pay-out of the relevant settlement. The pay out of lending fees shall
take place to the extent of fees actually collected by the Approved Intermediary.

C. Securities Eligible for the ALBM

All securities which are in the list of compulsory demat securities issued by SEBI
which also is an index stock (S&P CNX Nifty or CNX Nifty Junior Indices) are
eligible for inclusion in ALBM session. However, if these Securities fall in the
No-delivery period for the normal market, they are not eligible for the ALBM
session."
In the event of any corporate action announcement in any of the eligible
securities, the approved Intermediary may permit lending/borrowing in such a
security only if one of the following conditions is satisfied:
If both the securities lending and the return of equivalent securities takes place on
‘cum’ basis
If both the securities lending and the return of equivalent securities takes place on
‘ex’ basis.

D. Objectives of The Securities Lending And Borrowing

From the Participants point of view, the following can be broadly listed as the
objectives:
 Cover short sales.
 Optimize yield on portfolio.
 Facilitate timely settlement.

Chapter II: OBJECTIVE OF THE STUDY

2.1 OBJECTIVES OF THE STUDY

I. To give an idea to the new beginners about the various governing
authorities and their role in stock market like RBI, SEBI, CRISIL etc.
II. To enable the investors to know about the various investments in stocks &
in mutual fund.
III. To explain the investors about the functioning of markets (NSE, BSE)
IV. To knowledge them about the trading system of the stock broking firms.
CHAPTER III: RESEARCH METHODOLOGY

RESEARCH PROBLEM:
An upsurge in the Indian stock market has resulted into the emergence of
common man into the capital market. However entrance without complete
knowledge may prove to be risky for them. With increase in investor inflow and
the involvement of technology people are now, focusing towards the option of
online trading. I have undertaken this project so as to provide a guide that is brief,
concise and easily understandable by the lay investor and online trading.

METHODS OF DATA COLLECTION: Secondary Data-

I. Information available in Globe logo consultant for study through printed
and electronic media including information available on the Internet.
 II. In house guidelines printed manuals and related materials etc. were also
examined during the project.
III. Financial newspapers like magazines and relevant journals had also been
considered during the course of study.

LIMITATIONS:

The two-month was a great experience for me as I have been able to learn a lot
about working of broking house and this new concept of online share trading. But
still there are some limitations, like
 Time limitation
 Non response by the customers
 Anti advertising create a problem
As our work is to have consumer awareness so the time period of two month was
not sufficient and in the mean time bad publicity of the company by the media
made our job very hard.
At last the limited knowledge of a customer was also a big problem for us, so it is
necessary to create awareness among them to have a better result.
Chapter IV: FINDINGS:

There are many instruments for the investment purpose where the investor can
invest, some of the major investment instruments are as follows:

4.1 Investment Instruments

A. Fixed Income
Fixed Income instruments include bank deposits, Government securities, Bonds,
Debentures, Commercial Papers (CPs), and Certificates of Deposit (CDs).
Criteria for Investment in Fixed Income Products:
1) Yield to maturity
2) Credit rating of the Security
3) Risk Preference
For fixed income securities, credit risk and interest yield are major decisive
factors. Credit rating of the security published periodically helps the investor in
credit risk assessment. Types of fixed income instrument are explained below :
a) Government Securities
Government securities include T-Bills (364,182, 91 & 14 Days); Bonds issued by
the Central & State Government, State Financial Institutions, Municipal Bodies,
Post Trusts, Electricity Bodies etc. T-Bills are discounted instruments and these
may be traded with a repurchase clause which are called repos. Repos are allowed
in 364,182 & 91 day T-bills and the minimum repo term is 1 day. These securities
are purchased by the Banks, Financial Institutions and Provident Fund Trusts for
their SLR (Statutory Liquidity Ratio) requirements and are normally referred to as
gilt-edged securities.

b) Bonds
Bonds may be of many types - they may be regular income, infrastructure, tax
saving or deep discount bonds. These are investment products with a fixed
coupon rate and a definite period after which these are redeemed. The bonds may
be regular income with the coupons being paid at fixed intervals or cumulative in
which the interest is paid on redemption. Infrastructure bonds are bonds issued by
companies/institutions for utilisation in infrastructure projects. Investment in
these bonds usually are eligible for favourable tax treatment under section 88 of
Income Tax Act. Deep Discount Bonds are bonds, which are issued at a discount
to the face value, and an investor is paid the face value on redemption.
c) Debentures
Debentures may be of three types - fully convertible debentures (FCDs), Partly
convertible debentures (PCDs) and non-convertible debentures (NCDs).
FCDs are debentures whose face value is converted into a fixed number of Equity
shares at a fixed price. The price of each equity share received by way of
converting the face value of the convertible security i.e. debenture is called the
conversion price. The number of equity shares exchangeable per unit of the
convertible security i.e. debentures is called the conversion ratio.
PCDs are debentures where a portion of the face value is converted into equity
shares and the non-convertible part, called the ‘khoka’ is redeemed on maturity.

d) Public Deposits
Corporates can raise funds from the public in the form of Fixed Deposits. These
deposits are unsecured and are mainly used for the working capital requirements.
These unsecured public deposits are governed by the Companies (Acceptance of
Deposits) Amendment Rules 1978. Under this rule:
i) Public Deposits cannot exceed 25% of the share capital and free reserves
ii) The maximum maturity period is 3 years while the minimum is 6 months.

e) Certificate of Deposits
Certificates of Deposits are short term funding instruments issued by Banks and
Financial Institutions at a discount to the face value. Banks can issue CDs for a
duration of less than 1 year while FIs can only issue it for more than 1 year. The
issuing bank or financial institution cannot repurchase these instruments. These
are normally used by corporate for meeting their short-term requirements.

f) Commercial Papers (CPs)

CPs represents short term unsecured promissory notes issued by firms with a high
credit rating. The maturity of these varies from 15 days to a year sold at a
discount to the face value and redeemed at the face value. CPs can be issued by
companies which have a minimum networth of Rs.4 Crores and needs a
mandatory credit rating of minimum P2 (CRISIL), D2 (Duff & Phelps), PR2
(Credit Analysis & Research), A2 (ICRA). The rating should not be more than 2
months old. It can be issued for a minimum amount of Rs.25 lakhs and more in
multiples of Rs.5 Lakh.

B. Equity Shares
Equity share denotes a unit of owner’s capital of a corporate. It may further be
classified as either a) Ordinary or b) Preference. Ordinary shares do not carry any
fixed rate of return but carry voting rights. The equity shareholders are paid
dividend depending on the profitability of the firm, which is proposed by the
Board and passed in the Annual General Meeting of the company. Preference
Shareholders are entitled to a fixed percentage of dividend per year and they have
preference in the payment of dividend over the ordinary shares. The preference
shares can also be of Convertible or the non- Convertible types. Sometimes shares
issued at the time of the initial offering (IPOs) or Rights Issue may be
accompanied by a warrant which entitles the holder to subscribe to a fixed
number of shares after a mentioned period of time at a fixed price. These warrants
are sometimes listed and traded on the exchange as a security.

4.2 Mutual funds:

A mutual fund is a form of collective investment that pools money from

many investors and invests their money in stocks, bonds, short-term money
market instruments, and/or other securities. In a mutual fund, the fund
manager trades the fund's underlying securities, realizing capital gains or
losses, and collects the dividend or interest income. The investment
proceeds are then passed along to the individual investors. The value of a
share of the mutual fund, known as the net asset value per share (NAV), is
calculated daily based on the total value of the fund divided by the number
of shares currently issued and outstanding.

Legally known as an "open-end company" under the Investment Company

Act of 1940 (the primary regulatory statute governing investment companies), a
mutual fund is one of three basic types of investment companies available
in the United States. Outside of the United States (with the exception of
Canada, which follows the U.S. model), mutual fund is a generic term for
various types of collective investment vehicle. In the United Kingdom and
western Europe (including offshore jurisdictions), other forms of collective
investment vehicle are prevalent, Including unit trusts, open-ended investment
companies (OEICs), SICAVs and unitized insurance funds.

In Australia the term "mutual fund" is generally not used; the name "managed
fund" is used instead. However, "managed fund" is somewhat generic as the
definition of a managed fund in Australia is any vehicle in which investors'
money is managed by a third party (NB: usually an investment professional or
organization). Most managed funds are open-ended (i.e., there is no established
maximum number of shares that can be issued); however, this need not be the
case. Additionally the Australian government introduced a compulsory
superannuation/pension scheme which, although strictly speaking a managed
fund, is rarely identified by this term and is instead called a "superannuation fund"
because of its special tax concessions and restrictions on when money invested in
it can be accessed.

Types of mutual funds:

BY STRUCTURE
Open-ended fund

An open-ended fund is equitably divided into shares (or units) which vary in
price in direct proportion to the variation in value of the funds net asset value.
Each time money is invested new shares or units are created to match the
prevailing share price; each time shares are redeemed the assets sold match the
prevailing share price. In this way there is no supply or demand created for shares
and they remain a direct reflection of the underlying assets

Closed-ended fund

A closed-ended fund issues a limited number of shares (or units) in an initial

public offering (or IPO). The shares are then traded on an exchange or directly
through the fund manager to create a secondary market subject to market forces.
If demands for the shares are high they may trade at a premium to net asset value.
If demand is low they may trade at a discount to net asset value. Further share (or
unit) offerings may be made by the scheme if demand is high although this may
affect the share price.

BY NATURE OF INVESTMENT
Equity funds
An equity fund, which mainly consists of stock investments, is the most common
type of mutual fund. Equity funds hold 49 percent of total funds invested in
mutual funds in the United States. Oftentimes equity funds focus investments on
particular strategies and certain types of companies.
Bond funds

Bond funds account for 18% of mutual fund assets. Types of bond funds include
term funds, which have a fixed set of time (short, medium, long-term) before they
mature. Municipal bond funds generally have lower returns, but have tax
advantages and lower risk. High-yield bond funds invest in corporate bonds,
including high-yield or junk bonds. With the potential for high yield, these bonds
also come with greater risk.

Gilt Funds

Gilt funds are those that invest in several different types of medium and long-term
government securities in addition to top quality corporate debts. Gilts originated
in Britain. Gilt funds differ from bond funds because Bond funds invest in
corporate bonds, government securities and money market instruments. Gilt funds
stick to high quality-low risk debt, mainly government securities.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States. Money
market funds entail the least risk, as well as lower rates of return. Unlike
certificate of deposits (CDs), assets in money market funds are liquid and
redeemable at any time.

Sector Funds
Sector funds invest in individual industries such as banks or technology. Of the
912 new funds created in 2000,most were sector funds mainly representing the
Internet sector. When a sector is very narrow, it is called Fad Funds. Sometimes
they start off with a spectacular flash earning 100%or more.

Hybrid Funds

These are sometimes referred to as “balanced funds”.  They’re mutual funds that
invest in a mix of stocks and bonds (typically 60% stock, 40% bond).  They give
investors a single option for achieving diversification Hybrid funds are great for
investors who are looking for a single investment vehicle to create a diversified
portfolio.  If you don’t want to mess around with owning a number of different
mutual funds, a hybrid fund will take care of all of this.

BY INVESTMENT OBJECTIVE

Growth Funds

A mutual fund whose aim is to achieve capital appreciation by investing in

growth stocks. They focus on companies that are experiencing significant
earnings or revenue growth, rather than companies that pay out dividends. The
hope is that these rapidly growing companies will continue to increase in value,
thereby allowing the fund to reap the benefits of large capital gains. In general,
growth funds are more volatile than other types of funds, rising more than other
funds in bull markets and falling more in bear markets.

Income Funds

Mutual fund designed to produce current income for shareholders. Some

examples of income funds are government, mortgage-backed security, municipal,
international, and junk bond funds. Several kinds of equity-oriented funds also
can have income as their primary investment objective, such as utilities income
funds and equity income funds. All distributions from income funds are taxable in
the year received by the shareholder unless the fund is held in a tax-deferred
account such as an IRA or Keogh or the distributions come from tax-exempt
bonds, such as with a municipal bond fund.

Value Funds

Value funds are those mutual funds that tend to focus on safety rather than
growth, and often choose investments providing dividends as well as capital
appreciation. They invest in companies that the market has overlooked, and stocks
that have fallen out of favour with mainstream investors, either due to changing
investor preferences, a poor quarterly earnings report, or hard times in a particular
industry.

Balanced Funds

Fund that buys common stock, preferred stock, and bonds in an effort to obtain
the highest return consistent with a low-risk strategy.
4.3 The Stock Exchange, Mumbai (BSE)
The Stock Exchange, Mumbai which was established in 1875 as "The Native
Share and Stockbrokers Association" (a voluntary non-profit making association),
has evolved over the years into its present status as one of the premier stock
exchanges in the country. It may be noted that the Stock Exchange is the oldest
one in Asia, even older than the Tokyo Stock Exchange, which was founded in
1878. Sensex of BSE comprises of 30 companies.

The Stock Exchange, Mumbai (BSE) is generally referred to as the Gateway to

the capital market in India. As Indian economy is opening up, the Exchange has
brought its operations at par with international standards. However, the objectives
and the role of the Stock Exchange, Mumbai has remained the same as enunciated
by the charter. These objectives are:
1. To safeguard the interest of investing public having dealings on the
Exchange and the members.
2. To establish and promote honourable and just practices in securities
transactions.
3. To promote, develop and maintain a well regulated market for dealing
in securities.
4. To promote industrial developments in the country through efficient
resource mobilisation by way of investment in corporate securities.

A Governing Board comprising of 9 elected directors (one third of them retire

every year by rotation), an Executive Director, three Government nominees, a
Reserve Bank of India nominee and five public representatives, is the apex body
which regulates the Exchange and decides its policies.
A President, Vice-President and an Honorary Treasurer are annually elected from
among the elected directors by the Governing Board following the election of
directors.
The Executive Director as the Chief Executive Officer is responsible for the day-
to-day administration of the Exchange.
Settlement on The Stock Exchange, Mumbai
The trades done by the members during the weekly trading period from Monday
to Friday are settled by payment of money and delivery of securities in the
following week. All deliveries of securities are required to be routed through the
Clearing House, except for certain off-market transactions which, although are
required to be reported to the Exchange, may be settled directly between the
members concerned.
A. Settlement procedure
The Information Systems Department of the Exchange nets off all deliverable
trades (purchases and sales in each scrip) done by a member during a settlement
and generates delivery/receive orders and money statements which are
downloaded by the members in their back offices. However, in the Odd Lot
segment, the generation of delivery/receive orders is on a trade-for-trade basis and
no netting off is permitted.
The delivery orders provide information like scrip, quantity and the name of the
receiving member to whom the securities are to be delivered through the Clearing
House.
The Money Statement provides details of payments/receipts for the settlement.
The bank accounts of members maintained with Bank of India, HDFC Bank Ltd.,
Global Trust Bank Ltd. Standard Chartered Bank Ltd. and Centurion Bank Ltd.,
the five clearing banks, are directly debited/credited through computerized
posting on the pay-in/pay-out day for their settlement/receivable dues.
 Day Activity
Monday to Friday Trading Period
Saturday Carry Forward Session (for ‘A’ Group Securities) and
downloading of money statement.
Wednesday Pay-in of physical securities in the Clearing House
without any time slot upto 4:00 p.m. and between 4:00
p.m. and 6:00 p.m. as per time slot.
Thursday Pay-in of demat securities at 3:00 p.m.
Reconciliation of securities delivered and amounts
claimed.
Friday Pay-out of physical and demat securities
Saturday Funds pay-out

The securities, as per delivery orders issued by the Exchange, are to be delivered
in the Clearing House on the day designated for securities pay-in, i.e., on
Wednesday without any time slot upto 4:00 p.m. and as per time slot between
4:00 p.m. and 6:00 p.m. and on Thursday as per prescribed time slots upto 2:00
p.m. The members can, however, submit deliveries between 2:30 p.m. and 4:00
p.m. on Thursday on payment of late delivery charges. The members have to
deliver the securities in special closed pouches issued by the Exchange along with
the relevant details (distinctive numbers, scrip code, quantity, and receiving
member) on a floppy. The data submitted by the members on floppies is matched
against the master file data on the Clearing House computer systems. If there are
no discrepancies, then a scroll number is generated and a scroll slip is issued. The
members then submit the securities at the receiving counter.

B. Securities Settlement
The members can effect demat pay-in either through CDSIL or NSDL. In case of
NSDL, the members give instructions to their Depository Participant (DP)
specifying settlement no., settlement type, effective pay-in date, quantity, etc. The
securities are transferred to the Pool Account. The members are required to give
delivery-out instructions so that the securities are considered for pay-in. The
possibility of auto D.O. processing is currently under consideration and is likely
to be implemented shortly.
As regards CDSL, the members give pay-in instructions to their DP. The
securities are transferred to Clearing Member (CM) Principal Account. The
members are required to given confirmation to their DP, so that securities are
processed towards pay-in obligations. Alternatively, members may also effect
pay-in from clients' beneficiary account for which member is required to do
break-up on the front end software to generate obligation and settlement ID.

C. Securities Shortage (Auction)

The members download delivery/receive orders based on their netted positions for
transactions entered into by them during the settlement of ‘A’, ‘B1’, ‘B2’ and ‘Z’
groups of securities and the seller member has to deliver the shares in the Clearing
House of the Exchange as per the delivery orders downloaded. If the seller
member is unable to deliver the shares by the last day of Pay-in, then he submits a
document called "shortage memo" which, inter alia, indicates the undelivered
quantity. The member’s bank account is then debited at the standard rate fixed by
the Exchange for the quantity of shares short delivered. The shortage memo
contains details such as name & code of scrip short-delivered/not delivered,
quantity short-delivered/not delivered, the clearing number of receiving member
and the standard rate of scrip not delivered. These details are also required to be
submitted by the members on a floppy.

The Clearing House tallies the shortage memos delivering memberwise and
generates the final shortage report. The seller members are then informed about
the shares not delivered or short delivered by them. The intimation is given to the
seller members to rectify any possible discrepancy/error to prevent any wrong
auction against them.
Subsequently, an Auction Tender Notice is issued by the Exchange to the
members informing them about the names of the scrips, quantity slated for
auction and the date and time of the auction session on the BOLT. The auction for
the undelivered quantities is conducted on Monday and auction offers received in
batch mode are electronically matched with the auction quantities so as to award
the ‘best price’. Members who participate in the auction session can download the
delivery orders on the same day, if their offers are accepted. The members are
required to deliver the shares in the Clearing House on the auction Pay-In day,
i.e., Tuesday. Pay-Out of auction shares and funds is done on the next day, i.e.,
Wednesday.
The various auction sessions relating to shortages, objections not rectified and bad
deliveries are now conducted during normal trading hours on BOLT. Thus, it is
possible to schedule upto three auction sessions on a single day.

D. Close –out
There are cases when no offer for a particular scrip is received in an auction or
when members who offer the scrips in auction, fail to deliver the same. In the
former case, the original seller member’s account is debited and the buyer
member’s account is credited at the close-out rate. In the latter case, the offeror
member’s account is debited and the buyer member’s account is credited at the
close-out rate. The close-out rate is higher of the following rates :

a) The highest rate of the scrip from the first

day (trading day in case of Rolling demat
segment) to the day prior to the day on
which the auction is conducted for the
respective settlement.

b) 20% above the closing rate as on the day

prior to the day of auction of the respective
settlement.
4.4 National Stock Exchange
The National Stock Exchange (NSE) has been set up as a public limited company,
owned by the leading institutions of the country. Industrial and Development
Bank of India (IDBI) is a major shareholder of NSE.
The ownership and management of the Exchange is completely separated from
the right to a trading members, to trade on the NSE. The Exchange is managed by
a Board of Directors. Decisions relating to market operations are delegated by the
Board to an Executive Committee, which includes representatives from Trading
Members, public and the management.
The NSE has an automated order driven trading system. Member workstations are
spread-out throughout the country and NSE’s network is one of the largest
interactive VSAT based networks.

Major Indian Indices

A. BSE Sensitive Index (Sensex)
The BSE Sensex comprises of 30 stocks representing a sample of large, well
diversified and financially sound companies. The Sensex represents 14 significant
sectors of the Indian economy. The Sensex scrips on an average account for 52%
of trading volumes on a daily basis. The selection criteria for inclusion in the
Sensex are:

1. The security should figure in the top 100 companies listed by

market capitalization and should account for a minimum 0.5%
of weightage of the index.
2. The scrip should have been traded on every day for the last one
year.
3. The scrip should be among the top 150 scrips listed by average
number of trades and average volume per trade.
B. S&P CNX Nifty
This index is calculated and maintained by India Index Services & Products Ltd.
(IISL). This company has been promoted by National Stock Exchange and
CRISIL with technical oversight by Standard & Poor Corporation. The
constituent stocks in the Nifty index has been selected based on 2 criteria:

1. Market capitalization of the company should be at least Rs. 5

billion
2. Impact cost for Rs. 5 million portfolio should be less than 1.5%
and should have traded on at least 85% of trading days.

Concept of Impact cost

Impact cost is defined as the cost of executing a transaction in a security in
proportion to the weightage of its market capitalization as against the index
market capitalization at any point of time.
Calculation - This is the percentage mark up suffered while buying/selling the
desired quantity of a security compared to its ideal price, i.e.,
(best buy + best sell)/2

Order Book
Buy(Qty.) Buy(Price) Sell(Qty.) Sell(Price)
1000 98 1000 99
2000 97 1500 100
1000 96 1000 101

To Buy 1500 Shares

IDEAL PRICE = (99 + 98)/2 = 98.5

ACTUAL BUY PRICE = (1000 X 99 + 500 X 100)/1500 = 99.33
(FOR 1500 SHARES) IMPACT COST = (99.33 - 98.5)/98.5 X 100 = 0.84%
C. S&P CNX 500 Equity Index
The S&P CNX 500 includes most companies which are leaders in or are
representative of their industries, and reflect the market as closely as possible.
S&P CNX 500 Equity Index currently contains 79 industry groups, including one
group for diversified companies and one group for miscellaneous. However, the
number of industries in the Index and the number of companies within each
industry have been kept flexible, in order to ensure that the Index retains its
objective of being an efficient market indicator.

The criteria for inclusion of a stock in the index are:

1. S&P CNX 500 Equity Index includes only those companies

which have a minimum listing record of six months and a
portion of their outstanding share capital held with the public.
In addition these companies must have demonstrated trading
liquidity, in terms of quantum of shares traded and the
frequency with which they are traded.

2. S&P CNX 500 Equity Index includes companies that have

minimum record of three years with a positive net worth. The
objective here is to screen the companies for sustainability of
operations so that the turnover on the index is minimized.
Trading System of the Stock Exchanges

Trading System of the National Stock Exchange

The NEAT system is the trading system provided by the National Stock
Exchange to its trading members. The term ‘NEAT’ is an acronym for ‘National
Exchange for Automated Trading’. The NEAT CM system supports an order
driven market, wherein orders match automatically. Order matching is essentially
on the basis of security, its price, time and quantity.

Basic Trading Terminology

A. Market Phases
The system is normally made available for trading on all days except Saturdays,
Sundays and other holidays. A trading day typically consists of number of
discrete market phases:
a) Pre-Open Phase
The Pre-Open period is applicable only to normal market. Order matching takes
place at the end of the session, based on which an opening price is computed and
assigned to all trades of pre-open. Simple Regular Lot and Stop Loss orders can
be entered in this phase.

b) Opening
In this period, all orders that have been entered during the pre-open phase are
matched. During this phase, the trading member cannot login to the system.
c) Open Phase
The open period indicates the commencement of trading activity. During this
phase, orders are matched on a continuous basis. Several activities such as Order
Entry, Order Modification and Order Cancellation are allowed during this phase.
d) Market Close
When the market closes, trading in all instruments for that market comes to an
end. A message to this effect is sent to all trading members. No further orders are
accepted, but the user is permitted to perform activities like inquiries.

e) Surcon
Surveillance and Control (SURCON) is that period after market close during
which, the users have inquiry access only. After the end of SURCON period, the
system processes the data and prepares the system for the next trading day. When
the system starts processing data the interactive connection with the trading
system is lost and a message to that effect is displayed at the trader workstation.

4.5 National Securities Clearing Corporation Ltd. (NSCCL)

National Securities Clearing Corporation Ltd. (NSCCL) a wholly-owned
subsidiary of National Stock Exchange Of India Ltd. (NSE), carries out the
clearing and settlement activity for the National Stock Exchange. It was
incorporated as a limited company on 31st August, 1995 under the Companies
Act, 1956. NSCCL has been promoted to address these issues as also to meet
several other objectives such as:
 To bring and sustain confidence in clearing and settlement of
securities
 To promote and maintain short and consistent settlement cycles
  To provide counter party risk guarantee
 To operate a tight risk containment system

In order to guarantee settlement, NSCCL has set up a Settlement Guarantee Fund

contributed by the clearing members of the Corporation. It is the first of its kind in
India and represents an important step in upgrading clearing and settlement of the
securities for investors and bringing Indian financial markets in line with
international markets. The settlement performance of NSCCL has remained
efficient and consistently time bound. Unlike the experience with the market prior
to the setting up of the NSE, there have been no instances of delays or clubbing of
settlement or defaults. As a counter-party to settlement obligations, NSCCL
guarantees financial settlement. As a result, though there have been a few defaults
by member firms, the Clearing Corporation has stepped in to complete settlement
and avoided market disruption. It is of importance to note that short deliveries
have averaged less than 1.70% of every settlement and bad deliveries unrectified
have been less than 0.3% on an average in contrast to 10% across the market.
Short deliveries and unrectified bad deliveries are automatically auctioned by
NSCCL so that settlement is completed within a well defined time frame. All this
has been made possible on account of the comprehensive approach to risk
management taken earlier by NSE and now NSCCL which encompasses the
quality of clearing members, tight monitoring mechanism, strict margining,
efficient settlement systems cushioned by a large settlement guarantee fund. The
market is currently in a transitional phase. From a purely physical securities
environment with its concomitant problems of time required for settlement,
administrative issues of custody, bad deliveries, fakes etc, the market is moving
towards a depository environment. The Clearing Corporation, as the key link with
the depository, has made a smooth transition to provide delivery versus payments
settlement in a risk contained environment.
A. Clearing Members
NSCCL clears and settles deals on behalf of its clearing members. Presently, there
are two categories of clearing members viz., trading members of NSE and
custodians. All trading members of the Exchange are entitled to become clearing
members. Custodians may register as clearing members and will be responsible
for settling funds and securities of custodial participants. Following the
introduction of derivatives trading, the NSCCL has permitted Professional
Clearing members. These members are usually banks and corporates which
provide settlement function for a fee.

B. Custodial Participants
Custodial participants are typically banks, financial institutions, mutual funds and
large corporates. Custodial participants use trading members to trade on NSE and
services of custodians to settle their trades. Each custodial participant may be
associated with one or more custodians and vice versa.

C. Clearing House
NSCCL operates its own clearing house. The actual physical handling of
securities i.e., the delivery and receipt of securities for the settlements is carried
out at the clearing house. While trading has extended beyond Mumbai to over 292
towns and cities, clearing and settlement was limited to Mumbai till recently.
Regional clearing centers at New Delhi, Calcutta, Madras have now commenced
operations to facilitate security settlement. However, since the introduction of the
depository, the Clearing House function has lost much of its relevance.
D. Settlement Cycle for Regular Market
Day Particulars Activity
1-7 Wednesday-Tuesday Trading Period
8 Wednesday Custodians report trades which they will not settle. Such
trades will be added to the member obligation.
14 Tuesday Pay-In of securities in dematerialized form by the
delivering members through the depository
Pay-In of funds by members through the Clearing Bank.
Shortage identification at Clearing House
15 Wednesday Pay-Out day for securities and funds.
Auction for shortages
17 Friday Auction pay-in day for securities and funds
18 Saturday Auction pay-out

NSCCL operates an account period or a periodic settlement cycle. Trading period

on
the NSE starts on Wednesday and ends on Tuesday of the next week. At the end
of each trading day the Clearing Corporation determines the cumulative
obligations of each member and electronically transfers the data to clearing
members.

The clearing process i.e. the process of identifying, confirmed obligations of all
concerned entities is automated. Settlement is carried out on a physical basis and
electronic form as well requiring the delivery and receipt of documents and
sending instructions to the depository. NSCCL operates a clearing house for
managing the settlement of securities in physical form and interacts with the
depository for settlement of securities received in electronic form. All trades
concluded during a particular trading period are settled during the next week. A
multilateral netting procedure is adopted to determine the net settlement
obligations (delivery/receipt positions) of clearing members. The Clearing
Corporation then allocates or assigns delivery of securities to receipts to arrive at
the delivery and receipt obligation of members.

E. Security Shortage (Auction procedure)

Each clearing member communicates to the clearing house on the pay-in day the
securities, it is delivering and those it is unable to deliver. The clearing house
identifies short deliveries on Tuesday and the Clearing Corporation conducts a
buying-in auction on the pay-out day through the NSE trading system. The
clearing member is also debited by an amount equivalent to the securities not
delivered and valued at a valuation price (the closing price as announced by NSE
on the Friday previous to the day of the valuation). If the buy-in auction price is
more than the valuation price, the clearing member is required to make good the
difference. All shortages not bought-in are deemed closed out at the highest price
between the first day of the trading period till the day of squaring off or closing
price on the auction day plus 20%, whichever is higher. This amount is credited to
the receiving member's account on the auction pay-out day.

F. Rolling Settlement
Each trading day is considered as a trading period and trade taking place in this
trading period are settled on the 5th working day. Typically trades taking place on
Monday is settled on the next Monday, Tuesday's trades settled on the next
Tuesday and so on. Custodial confirmation takes place on/or before T+2 working
day. All unconfirmed trades revert back to the TM clearing members and the
settlement obligation and delivery information provided on T+2 day. Both
securities and funds are settled on T+5 working day

Day Activity
T Trading Period
 T+2 working days Custodial Confirmation
T+5 working days Pay in of funds/securities and Pay Out of funds/securities
T+6 working days Auction of shortages
On the auction day Custodial confirmation for auction offer

G. Securities Clearing Accounts

In order to settle trades carried out in the depository segment, a clearing member
needs to open a clearing account with a depository participant of the depository.
Each clearing account consists of three sub-accounts ;
Pool Account : This is used by the clearing member to interface with his clients.
The clients deliver securities to this account of the clearing member. The clearing
member pools all client deliveries in this account before making a delivery to the
clearing corporation.
Delivery Account : This is used by the clearing member to deliver securities to
clearing corporation. The clearing member moves a net deliverable quantity of
shares from the pool account to the delivery account from where it comes to the
clearing corporation.
Receipt Account : The clearing corporation gives pay-out to the clearing member
in the receipt account from where it is transferred to the pool account of the
clearing member.

H. Securities Settlement
Before pay-in, selling investors instruct depository participants to transfer security
balances from their accounts to clearing members' pool accounts. On or before the
time and day specified for pay-in by NSCCL, the clearing member instructs his
depository participant to move the required balance from his pool account to his
delivery account. On the pay-in day, the relevant depository moves balances from
the CM delivery accounts to a NSCCL settlement account within the depository
system. On receipt of pay-out instructions from NSCCL, the Depository credits
the receipt accounts of the receiving clearing members. These balances are then
moved back to the clearing members' pool accounts by the clearing member.
From the pool account, the clearing member distributes the receipts to the buying
clients by issuing instructions to his participant.

4.6 CATEGERISATION OF INSTRUMENTS:

Introduction to Derivatives

What are Derivatives?

A derivative is a product whose value is derived from the value of underlying
asset, index, or reference rate. The underlying asset can be equity, forex,
commodity, or any other asset. For example, wheat farmers may wish to sell their
harvest at a future date to eliminate the risk of a change in prices by that date.
Such a transaction would take place through a forward or futures market. This
market is the “derivative market”, and the prices of this market would be driven
by the spot market price of wheat which is the “underlying”. The terms of
“contracts” or “products” are often applied to denote the specific traded
instruments.

In recent years, derivatives have become increasingly important in the field of

finance. Futures and options are now actively traded on many exchanges. Forward
contracts, swaps, and many other derivative instruments are regularly traded both
in the exchanges and in the over-the-counter markets.
‘Derivative’ includes-
(i) a security derived from a debt instrument, share, loan whether
secured or unsecured, risk instrument or contract for differences or
any other form of security;
(ii) a contract which derives its value from the prices, or index of
prices, of underlying securities;

Some of the provisions of the Securities Contracts (Regulation) Act relating to

securities trading are as follows:
a) All contracts of securities (other than the spot delivery contracts)
which are not entered into through, with or between members of the
recognized stock exchanges shall be illegal and punishable with fine or
imprisonment.
b) A contract that violates the byelaws specified in that behalf shall be
void.
c) Members of recognized stock exchanges are permitted to act as both
brokers and dealers. No member is allowed to enter into a transaction
as a principal with any other person unless the other person is a
member of the recognized stock exchange.
d) The Central Government can require listing of securities of any public
company if it is deemed necessary in the interest of the trade or in the
interest of the public.

‘Spot delivery contract’ has been defined in Section 2(i), which means a
contract which provides for
(a) actual delivery of securities and the payment of a price therefor either
on the same day as the date of the contract or on the next day, the
actual period taken for the despatch of the securities or the remittance
of money therefor through the post being excluded from the
computation of the period aforesaid if the parties to the contract do not
reside in the same town or locality;
 (b) transfer of the securities by the depository from the account of a
beneficial owner to the account of another beneficial owner when such
securities are dealt with by a depository.

The development of Exchange - Traded derivatives

Derivatives have probably been around for as long as people have been trading
with one another. Forward contracting dates back at least to the 12th century, and
may well have been around before then. Merchants entered into contracts with
one another for future delivery of specified amount of commodities at specified
price. A primary motivation for prearranging a buyer or seller for a stock of
commodities in early forward contracts was to lessen the possibility that large
price swings would inhibit marketing the commodity after a harvest.
Although early forward contracts in the US addressed merchants’ concerns about
ensuring that there were buyers and sellers for commodities, “credit risk”
remained a serious problem. To deal with this problem, a group of Chicago
businessmen formed the Chicago Board of Trade (CBOT) in 1848. The primary
intention of the CBOT was to provide a centralized location known in advance for
buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one
step further and listed the first “exchange traded” derivatives contracts in the US,
these contracts were called “futures contracts”. In 1919 Chicago Butter and Egg
Board, a spin off of CBOT, was reorganized to allow futures trading. Its name
was changed to Chicago Mercantile Exchange (CME). The CBOT and CME
remain the two largest organised futures exchanges-indeed, the two largest
“financial” exchanges of any kind – in the world today.
The first stock index futures contract was traded in Kansas City Board of Trade.
Currently the most popular futures contract in the world is based on S&P 500
index, traded on Chicago Mercantile Exchange. During the mid eighties the
financial futures became the most active derivatives instruments generating
volumes many times more than the commodity futures. Index futures, futures on
T-Bills and Euro-Dollar futures are the top three most popular futures contracts
traded today. Other popular international exchanges that trade derivatives are
LIFFE in England, DTB in Germany, SIMEX in Singapore, TIFFE in Japan,
MATIF in France, etc.

Forward Contracts
A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price. One of the parties to the contract assumes a long position and
agrees to buy the underlying asset on a certain specified future date for a certain
specified price. The other party assumes a short position and agrees to sell the
asset on the same date for the same price. Other contract details like delivery date;
price and quantity are negotiated bilaterally by the parties to the contract. The
Forwards contracts are normally traded outside the purview of the exchange.
Forward contracts are very useful in hedging and speculation.

The classic hedging application would be that of a wheat farmer forward-selling

his harvest at a known price in order to eliminate price risk. Conversely, a bread
factory may want to buy bread forward in order to assist production planning
without the risk of price fluctuations. Thus forwards provide a useful tool for both
the farmer and the bread factory to hedge their risks

If a speculator has information or analysis, which forecasts an upturn in a price,

then he can go long on the forward market instead of the cash market. The
speculator would go long on the forward, wait for the price to rise, and then take a
reversing transaction to book the profits. The use of forward markets here
supplies leverage to the speculator.

Limitations of forward markets

Forward markets world-wide are afflicted by several problems:
 1. Lack of centralization of trading,
2. Liquidity, and
3. Counter party risk.

In the first two of these, the basic problem is that of too much flexibility and
generality. The forward market is like a real estate market in that any two
consenting adults can form contracts against each other. This often makes them
design terms of the deal, which are very convenient in that specific situation, but
makes the contracts non-tradable. Also the “OTC market” here is unlike the
centralization of price discovery that is obtained on an exchange.

Counter party risk in forward markets is a simple idea: when one of the two sides
of the transaction chooses to declare bankruptcy, the other suffers. Therefore
larger the time period of the contract, larger the counter party risk.

Even when forward markets trade standardized contracts, and hence avoid the
problem of liquidity, still the counter party risk remains a very large problem.
Introduction to Futures
Futures markets were designed to solve the problems that exist in forward
markets. A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the futures at a certain price. Unlike forward contracts the
futures contracts are standardized and exchange traded contracts. To facilitate
liquidity in the futures contracts, the exchange specifies certain standard features
of the contract. Therefore, a futures contract is a legally binding agreement
between two parties to the contract. It is standardized contract, with standard
underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement. A futures contract may be
offset prior to maturity by entering into an equal and opposite transaction. More
than 99% of futures transactions are offset this way.
The exchange-traded futures are a significant improvement over the forward
contracts as they eliminate counterparty risk and offer more liquidity.

Index Futures
The index futures are the most popular futures contracts as they can be used in a
variety of ways by various participants in the market. They offer different users
different opportunities. Futures on stock indices came into vogue only in the early
1980s. These contracts are cash settled. In India 2 index futures contracts are
traded, namely on the BSE Sensex and the S&P CNX Nifty.
Introduction to Options
Options are one of the most popular derivatives. Options derive their value from
the underlying capital market or forex or other form of assets. These are highly
leveraged instruments. They can be used for hedging, speculating and arbitrage
purposes.
Types of options Options are of two types. Call and Put option. A call option
gives a buyer / holder a right but not an obligation to buy the underlying on or
before a specified time at a specified price (usually called strike / exercise price)
and quantity. Whereas a put option gives a holder of that option a right but not an
obligation to sell the underlying on or before a specified time at a specified price
and quantity. The buyer / holder of an option pays an upfront premium to the
writer / seller of an option. In other words he pays the price of the option.

A writer / seller of an option undertakes an obligation to buy / sell the underling

on or before a specified time at specified price and quantity for a premium. This
premium is collected upfront. Thus, the writer of an option has to price his option
such a way that it takes all the possible scenarios into consideration and should be
close to the fair price of the option.
Exercise Style of Options Options are classified into two kinds depending on the
exercise styles. They are 1) American option and 2) European option. In the
American option the holder / buyer of an option is allowed to exercise the option
any time during the life of the option. However, in the European option exercise
is allowed only at the maturity date of the option.
Strike price of Options World over options are generally traded on different
variety of strike prices. These strike prices are determined by the exchange. For
example if a call option is traded at a strike price equal to that of the underlying
spot price, then the option is called “At-The–Money” option, if the strike price is
lesser than the underlying spot price, it is called “In-The-Money” option and if
the strike price is higher than the underlying spot price, it is called as Out-of-
Money option. In case of put option if the strike price is higher than the
underlying spot price it is called In-The-Money and when the strike price lower
than the underlying spot price, it is called Out-of-Money option. At the money
option is same for both a call and put on the same underlying and the same strike
price.

Option Premium Option premium consists of two parts 1) Intrinsic value and 2)
Time value. The intrinsic value of a call option is the difference between the spot
price and the strike price, whereas the intrinsic value of a put option is the
difference between the strike price and the spot price. In-the-money options have
intrinsic value. However, at-the-money and out-of-money options have no
intrinsic value. Time value of an option is the price a holder of an option has to
pay to the seller of an option because of the risk the seller of an option takes. This
is over and above the intrinsic value that an option holder pays. Typically, the
premium charged by the seller of an option is equal to the sum of both intrinsic
value and the time value.

Chapter V: ANALYSIS
How a customer should choose where to invest and how to invest. Analysis plays
an important role for the investors that where to invest, investor must do proper
analysis of the securities before investing. The intrinsic value of equity share
depends on a multitude of factors. The earnings of the company, the growth rate
and the risk exposure of the company have a direct bearing on the price of the
share. The Fundamental school of thought appraised the intrinsic value of shares
through:

 Economic Analysis
 Industry Analysis
 Company Analysis

5 .1 ECONOMIC ANALYSIS:

It palys an important role and has an impact on investment in many ways. If the
economy gorws rapidly, the industry can also be expected to show rapid growth
and vice versa. When the level of economic activity is low,stock prices are low,
and when the level of economic activity is high, stock prices are high. The
commonly analysed economic factors are as follows:

1. Gross domestic product(GDP)

GDP indicates the rate of growth of the economy. GDP represents the
aggregate value of the goods and services produced in the economy. GDP
consists of personal consumption expenditure, gorss private domestic
investment and government expenditure on goods and services and net
export of goods and services.
2. Savings and investment
It is obvious that growth requires investment which in turn requires
substantial amount of domestic savings. Stock market is the channel
through which savings of the investments are made available to the
corporate bodies. Savings are distributed over various assets like equity
shares, deposits, mutual fund units, real estate and bullion.

3. Interest rates
The interest rate affects the cost of financing to the firms. A decrease in
the interest rate implies lower cost of finance for firms and more
profitability. More money is available at a lower interest rate for the
brokers who are doing business with borrowed money. Availability of
cheap funds, encourages speculation and rise in the price of shares.

4. The tax structure

Every year in March, the business community eagerly awaits the
Government’s announcement regarding the tax policy. Concessions and
incentives given to a certain industry encourages investment in that
particular industry. Tax reliefs given to savings encourage savings.

5. The balance of payment

The balance of payment is the record of country’s money receipts from
and payments abroad. The difference between receipts and payments may
be surplus or deficit. Balance of payment is a mesure of the strength of
rupee on external account. The industries involved in the export and
import are considerably affected by the changes in foreign exchange rate.
 6. Infrastructure facilities
Infrastructure facilities are essential for the growth of industrial and
agricultural sector. A wide network of communication system is a must
for the growth of the economy. Regular supply of power without any
power cut would boost the production. Banking and financial sectors also
should be sound enough to provide adequate support to the industry and
agriculture. Good infrastructure facilities affect the stock market
favourably.

5 .2 INDUSTRY ANALYSIS:

An industry is a group of firms that have a similar technological structure of

production and produce similar products. For the convenience of the investors,
the broad classification of the industry is given in the financial dailies and
magazines. Industry analysis plays a very important role, the investor must
properly analysed all the factors before making the investment. The commonly
analysed industrial factors are as follows:

1. Growth of the industry

The historical performance of the industry in terms of growth and
profitability should be analysed. Industry wise growth is published
periodically by the centre for Monitoring Indian Economy. Even though
history may not repeat in the exact manner, looking in to the past growth
of the industry, the analyst can predict the future. The information
technology industry has witnessed a tremendous growth in the past so also
the scrip prices of the IT industry.
2. Nature of the product
The products produced by the industries are demanded by the consumers
and other industries. If industrial goods like pig iron, iron sheet and coils
are produced, the demand for them depends on construction industry. Like
wise, textile machine tools industry produces tools for the textile industry
and the entire demand depends upon the health of the textile industry.The
investor has to analyse the condition of related goods producing industry
and the end user industry to find out the demand for industrial goods.

3. Natur of the competition

Nature of competition is an essential factor that determines the demand
for the particular product, its profitability and the price of the concerned
company scrips.The supply may arise from indigenous producers and
multinationals.The multinationals are also entering in to the field with
sophisticated product process and better quality product.The competition
would lead to decline in the price of the product. The investor before
investing in to the scrip of a company, should analyse the market share of
the particular company’s product and should compare it with the top five
companies.

4. Government Policy
The government policies affect the very nerve of the industry and the
effects differ from industry to industry. Tax subsidies and tax holidays
are provided for export oriented products. Government regulates the size
of the production and the pricing of certain products.

5. Research and development

For any industry to survive the competition in the national and
international markets, product and production process have to be
technically competitive, This depends on the R&D in the particular
 company or industry . Economies of scale and new market can be
obtained only through R&D.

5 .3 COMPANY ANALYSIS:

In the company analysis the investor assimilates the several bits of information
related to the company and evaluates the present and the future value of the stock.
The risk and return associated with the purchase of the stock is analysed to take
better investment decisions. The valuation process depends upon the investors
ability to elicit information from the relationship and inter-relationship among the
company related variables. The present and the future values are affected by a
number of factors.

1. The Competitive edge of the company

The competitiveness of the company can be studied with the help of:
 The market share
 The growth of annual sales
 The stability of annual sales

The market share: The market share of the annual sales helps to
determine a
companie’s relative competitive position within the industry. If the
market
share is high, the company would be able to meet the competition
successfully.

Growth of sales: The company may be a leading company , but if the

Growth in sales is comparitiveli lower than company, it indicated the
possibility of the company losing the leadership. The rapid growth rate
in sales would keep the shareholders in a better position than one with the
stagnant growth rate. The company of large size with inadequate growth
 in sales will not be preferred by the investors.

Stability of sales: If the firm has stable revenue, other things being
remaining constant, will have more stable earnings. Wide variation in
sales
leads to variations in capacity utilization, financial planning and dividend.
Hence the invester should compare stability of sales with its market share
and
the competitors market share before investing in to any company’s scrip.

2. Earnings of the company

Sales alone do not increase the earnings but the costs and expenses of the
company also influence the earnings of the company. Further, earnings do
not always increase with the increase in sales. The company’s sals might
have increased but its earning per share decline due to rise in costs. The
rate change in earnings differ from the rate of change in sales. Hence the
invester should not depend only on the sales, but should analyse the
earnings of the company.

3. Management
Good and capable management generates profit to the investors. The
management of the firm should efficiently plan, organize, actuate and
control the activities of the company. The basic objective of the
management is to attain the stated objectives of the company for the good
of the equity holders, the public and the employees. If the objectives of
the company are achieved, investors will have a profit. A management
that ignores profit does more harm to the investors than over emphasizes
it.
 4. Financial analysis
The best source of financial information about a company is its own
financial statements.. Financial statement analysis is the study of a
company’s financial statement from various viewpoints. The statement
give the historical and current information about the company’s
operations. Historical financial statement helps to predict the future. The
current information helps to analyse the present status of the company.

5 .4 TOOLS AND TECHNIQUES:

Financial Ratios-

A) Leverage Ratios
a) Debt Equity Ratio
b) Debt Assets Ratio
c) Interest Coverage Ratio

B) Turnover Ratios
a) Inventory Turnover Ratio
b) Average Collection Period
c) Receivables Turnover Ratio
d) Fixed Assets Turnover Ratio

C) Profitability Ratios
a) Gross Profit Ratio
b) Net Profit Ratio
c) Net Income to Total Assets Ratio
d) Return on Investment
e) Return on Equity
 D) Valuation Ratios
a) Price Earnings Ratio
b) Yield

Types of Financial Ratios

A. Leverage Ratios
Financial leverage refers to the use of debt finance. Debt finance is thought to be a
cheaper source of finance and at the same time a riskier source. Leverage ratios
help in assessing the risk arising from the use of debt finance.

a) Debt Equity Ratio

Debt Equity Ratio = Debt / Equity

Debt - Long term as well as short term.

Equity Share Capital plus Reserves and Surplus (Networth)
It is generally felt that lower the ratio, the greater the degree of protection enjoyed
by the creditors. Generally, incase of capital intensive industries a higher debt-
equity ratio is observed.

b) Debt Assets Ratio

Debt Assets Ratio = Debt / Assets

Debt – Long term as well as short term

Assets – total of all assets

c) Interest Coverage Ratio

Interest coverage ratio = Earnings before interest & tax / Interest charges
This ratio measures the margin of safety a firm enjoys with respect to its interest
burden. The higher the ratio, the greater the margin of safety.

B. Turnover Ratios

a) Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of goods sold / Average Inventory
Average Inventory = Opening Inventory +Closing Inventory/2 .This ratio
reflects the efficiency of inventory management. The higher the ratio, the more
efficient the inventory management.

b) Average Collection Period

Average Collection Period = Receivables / Average Sales per day

c) Receivables Turnover Ratio

Receivables Turnover Ratio = Net Sales / Receivables

d) Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Net Sales / Fixed Assets

This ratio is used to measure the efficiency with which fixed assets are employed.
A high ratio indicates an efficient use of fixed assets. Generally this ratio is high
when the fixed assets are old and substantially depreciated.
C) Profitability Ratios

a) Gross Profit Ratio

Gross Profit Ratio = Gross Profit/Net Sales
Gross Profit = Net sales less cost of goods sold.
This ratio shows the margin left after meeting manufacturing costs and measures
the production efficiency.

b) Net Profit Ratio

Net Profit Margin ratio = Net Profit / Net Sales
This ratio shows the profits left for shareholders as a percentage of net sales. It
measures the overall efficiency of production, administration, selling, financing,
pricing and tax management.

c) Net Income to Total Assets Ratio

Net Income to Total Assets ratio = Net income (profit) / Total Assets
This measures how efficiently capital is employed.

d) Return on Investment
Return on Investment = Earnings before Interest and taxes / Total Assets
This measures the performance of the firm without the effect of interest and tax
burden.
e) Return on Equity
Return on Equity = Equity earnings / Net Worth
Equity earnings – Profit after tax less preference dividends.
Net Worth – Share capital plus reserves and surplus.

This ratio measures the profitability of equity funds invested in the firm. This
reflects the productivity of the ownership capital employed in the firm.

D) Valuation Ratios
Valuation ratios indicate how the equity stock of the company is assessed in the
capital market. Market value of equity reflects the influence of risk and return.
a) Price Earnings Ratio
Price Earnings Ratio = Market Price per share / Earnings per share
Market price per share may the price prevailing on a certain day or the average
price over a period of time.
Earning per share is profit after tax divided by the number of outstanding equity
shares.
The P/E ratio reflects the growth prospects, corporate image, risks involved and
degree of liquidity of a firm.

b) Yield
Dividend/Initial Price + Price Change/Initial Price
(Dividend Yield) (Capital gains/losses yield)
Companies with low growth prospects offer a high dividend yield and a low
capital gains yield. Companies with high growth prospects offer low dividend
yield and high capital gains yield.

CONCLUSION:
With more and more people becoming tech savvy and due to advancement of
technology and internet, the online share trading market has start to develop at a
fast space. It has got a lot of potential for the growth as very few players offer
service of online share trading. Due to the transparency of funds and the power
with the people to manage their funds themselves, people are getting attracted
towards online share trading. Emergence of new players in this sector is quite
easy as few players are currently in the market and there is vast untapped area
(about 87% people deal offline).
Emergence of new players will lead to healthy competition. So a company
providing better service and features at comparatively lower price would be
demanded. As a result companies have to constantly think and improve their
services, features, marketing strategies etc. in accordance with the changing
market scenario.
It is rightly said that ‘customer is the king’ and in the current scenario, as
compared to other online player, Globe logo is able to attract customers by
providing good services and features like linkage of bank accounts, tips etc. which
are really helpful to the customer. In comparison to off-line services Globe logo
attracts the customers in regard to brokerage, quick transfer of funds, providing
margin up to 20 times (depending on volume), freedom from paperwork etc.
There is a huge potential for Globe logo to grow as very few people trade online
and those who trade are not much satisfied by their current service providers.
Globe logo by giving much better services and facilities to its clients like,
providing trade on BSE online, carrying out marketing activities at a larger scale,
providing much better customer care facilities to its client and quick registration
of new accounts etc. can surely become the market leader in not in much time.
Globe logo has to pull its stock to make a mark in this field because many
companies are taking quick steps in this field, so they have to be more careful.
As compared to other players, Globe logo have to still devise many better
competitive strategies and carry them out effectively to increase its market share.
BIBLIOGRAPHY

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