Let’s start with…

We shall start today’s

session with A great
personality…
The greatest global
stock picker of the
century. Sir John
Templeton

Some good words

from him…
 INVESTING MANTRA

"Search for
companies
around the world
that offered low
Sir John Templeton
prices and an
excellent long-
term outlook."
Let’s move ahead with
SOME GOOD ADVICE!
 Please note
that
investment is
‘making
money to
work for us’.
Another thing to note…
WHAT …
Next …?
First…
Margin payments ensure that each
player in the market is serious and
committed to honour transactions
of buying or selling shares.
There was a query about the Maintenance Margin

 Maintenance Margin is a concept that is more used in US stock

markets and NOT in India.
 It is a percentage of the total market value of the securities in the
investor account.
 If the equity value in the margin account falls below the maintenance
margin level due to market fluctuations (losses), the investor will
receive a margin call from their broker.
 In that case, the investor is supposed to deposit additional funds into
the account to bring the equity back up to or above the maintenance
margin requirement.
In India, the margin requirement is
different for -
• CASH MARKET; AND
• DERIVATIVE MARKET.
Cash Market Margins

 Margins in the cash market segment comprise of

the following three types:

▪ Initial Margin
Value at Risk (VaR) margin
Extreme loss margin

▪ Mark to Market Margin

 We can calculate margin money using NSE
Calculator…

 NSE has a calculator through which we can estimate the

amount of margin money.

 The link is –

https://www.nseindia.com/market-data/margin-calculator
The Margin Requirement for Derivative
Market
 The portfolio approach is used to calculate the margin requirement
for F&O; that is to say, the margin for F&O segment is calculated on a
portfolio (a collection of futures and option positions) based approach.

 The margin calculation is carried out using a software called - SPAN®

(Standard Portfolio Analysis of Risk). It is a product developed by
Chicago Mercantile Exchange (CME) and is extensively used by
leading world stock exchanges.

 SPAN® uses scenario based approach to arrive at margins.

For a detailed discussion on
Margin, you may please refer to
the following document of NSE/BSE
NEXT…?
Please note that one can not invest
unless and until s/he is prepared to
trade in the stock market.

So, the question is – how one can prepare oneself for

trading in the stock market?
We need to have the following accounts for
trading

A Bank Account

A Demat Account

A Trading Account
WHAT DO WE NEED TO HAVE A BANK
ACCOUNT IN INDIA?
Bank Account…

 It may be a current account or a savings account.

 Documents required

▪ PAN Card

▪ Address proof

▪ I.D proof

▪ Photos

▪ Introducer
WHAT DO WE NEED TO HAVE A
DEMAT ACCOUNT IN INDIA?
Demat Account

 A demat account is similar to any other bank account, except that it is used
to hold securities and other financial instruments.

 Depository

▪ NSDL - National Securities Depositories Ltd (NSDL)

▪ CDSL - Central Depositories Services Ltd (CDSL).

 Demat Account

 You have to contact a Depository Participant (DP) with the following

Documents

▪ PAN Card

▪ Address proof

▪ I.D proof

▪ Photos

▪ Bank Account proof

WHAT DO WE NEED TO HAVE A
TRADING ACCOUNT IN INDIA?
Trading Account

 A trading account is used to place buy or sell

orders in the stock market.

 Trading account can be opened through any broker

– a bank may also be a broker.
Trading Account

 Documents required

▪ PAN Card

▪ Address proof

▪ I.D proof

▪ Photos

▪ Bank Account proof

▪ Demat Account Number (You need to authorize the provider of the trading account to
link your bank account and depository account)
Understanding Trading Mechanism Bank Bank
Exchange

m
Account Account

n
o
o

y
y
e

e
‘A’ ‘B’

Trading Trading

U
B

ll

S
e
Y
Account Account
‘A’ ‘B’

Execute

Demat Demat
Account shares Exchange shares Account
‘A’ ‘B’
For trading at a stock exchange, we need a
trading platform…

 Exchanges are providing exchange specific

trading platform
▪ NSE

NEAT - National Exchange for Automated Trading

▪ BSE

BOLT - BSE On-Line Trading

Can minors trade stocks in India??

A minor can invest in the stock markets through a

guardian.
▪ A Trading & Demat account can be opened at a brokerage firm
in the name of a minor by the Guardians.
▪ The minor needs to submit;
 PAN Card
 Date of Birth Proof
 Guardian’s PAN Card
 Guardian’s address Proof.
 Can minors trade stocks in India??

 When a minor attains majority, two options are

possible.
▪ Either the existing account can be closed and new account opened in the
name of the minor turned major and all securities in the minor account are
transferred to the new account.
▪ An existing account can still be used and minor turned major has to sign a
new agreement with the DP and complete all formalities required for
opening a new demat account
▪ Guardian details entered earlier have to be deleted.
Can NRIs trade stocks in India??

 Yes,
▪ NRIs can purchase shares of an Indian Company through stock
exchanges, under the portfolio investment scheme on
repatriation and /or non repatriation basis.
▪ As per Reserve Bank of India (RBI) guidelines,
 NRIwho wishes to invest in shares in India need to approach the
designated branch of any authorized dealer (bank) authorized by
the Reserve Bank to administer the PIS (Portfolio Investment
Scheme) to open a NRE (Non Resident External) /NRO (Non
Resident Ordinary) account under the scheme for routing
Investments.
We have Compulsory Rolling Settlement at
Indian Stock Market.

 All transactions in all groups of securities in the Equity segment and

Fixed Income securities listed on BSE are required to be settled on T+2
basis (w.e.f. April 1, 2003) and now it is T+1 (w.e.f. January 27, 2023)

 The settlement calendar, which indicates the dates of the various

settlement-related activities, is drawn by BSE in advance and is
circulated among the market participants.

 Under rolling settlements, the trades on a particular day are settled

after a number of business days depending upon the trading cycle.
 ANY QUESTIONS
BEFORE WE
PROCEED
Please raise FURTHER?
hand to ask
In the previous class, we
were discussing about bonds.
Any questions about bonds?
There is no bond on this earth which is

having zero-risk!

Every bond is RISKY

 TYPES OF RISKS IN BONDS...

 A Bond may have the following types of risk :

 Interest Rate Risk SYSTEMATIC

 Price Risk
RISK
 Reinvestment Risk

 Purchasing Power Risk

 Exchange Rate Risk
 Political and Regulatory Risk

UNSYSTEMATIC
 Call Risk RISK
 Liquidity Risk
 Default Risk
Let’s start with interest rate risk …
 INTEREST RATE RISK…?

 Interest Rate Risk is understood in terms of sensitivity of bond price and

thereby of return with respect to change in interest rate.

 When interest rate changes, the price of bond changes and reinvestment rate
also changes. Thus, interest rate risk means -
 Price Risk; and

 Reinvestment Risk

 When interest rate changes, its impact on price and reinvestment rate is
opposite and to some extent neutralize the effect of each other.
Remember…
that interest rate risk is always understood in the
sense of SENSITIVITY of bond prices with respect to
yield-to-maturity.
A measure of interest rate risk is based on the
concept of duration and therefore, let’s talk
about duration now...
 DURATION ...

 DURATION is understood in SOME sense of sensitivity

in bond prices with respect to changes in interest rate or
YTM.

 If this sensitivity is higher, duration is higher and so is

the interest rate risk!!!
EVERY BOND HAS A DURATION!!!

 Duration may be-

Macaulay’s Duration [D]

Modified Duration [Dm]

First, we shall talk about
Macaulay’s Duration
 MACAULAY’S DURATION

 MACULAY’S DURATION of a bond means:

 Itis Percentage change in Price with respect to percentage

change in yield.

A measure which is based on the first derivative of the price

function of a bond.
MACAULAY’S DURATION…continued

 MACULAY’S DURATION of a bond is calculated as thus:

n
Ct
(1 + y ) p
 (1 + y )t
t =1
Duration = −  =
P y P
MACAULAY’S DURATION …

 MACAULAY'S DURATION HAS CLOSED FORM

(1 + y ) dP 1 + y (1 + y ) + ( c − y )  n
D=− = −
P d (1 + y ) y c [(1 + y )n − 1] + y
 54

Calculating Bond Duration

YIELD-TO-
9%
MATURITY
I II III IV = II x III V = IV x I
YEAR x PV OF CASH
YEAR CASH FLOWS DISCOUNTING FACTOR PV OF CASH FLOWS
FLOWS

1 100 0.9174 91.7431 91.7431

2 100 0.8417 84.1680 168.3360

3 100 0.7722 77.2183 231.6550

4 100 0.7084 70.8425 283.3701

5 1,100 0.6499 714.9245 3574.6226

1,038.8965 4,349.7269

p
R
I
DURATION OF THE
4.1869 C
BOND
E
Time to appreciate relation…

… between duration and its determinants.

 Duration of a Zero – Coupon Bond…

 It’s maturity is equal to its duration.

 MACAULAY’S DURATION (Some Implications ...)

 There is negative relation between coupon and duration – higher

coupon  lower duration.
 There is negative relation between YTM and duration – higher YTM 
lower duration.
 Duration of a coupon-bearing bond with perpetuity is (1+y)/y
 If a bond is selling at a premium or at par, then maturity and
duration are positively related and if a bond is selling at a discount,
then maturity and duration are positively as well as negatively related.
 MODIFIED DURATION

 MODIFIED DURATION of a bond means:

 Percentage change in bond price due to change in yield

1 dP
 It is defined as Dm = − = D /(1 + y )
P dy

 It helps in prediction of future bond prices if yields are changing.

 We can predict percent change in
price using Modified Duration!!!

 By using the concept of Modified Duration, we can predict

proportionate change in Bond prices by using the following
formula:
P
 (-Modified Duration) y
P
 DURATION OF PORTFOLIO...

 Bonds Portfolio can also have DURATION!!!

 It is equal to weighted average of duration of bonds where

weights are proportionate to the value of a bond in the
portfolio, that is n
DP =   i Di
i =1
where
Ni Pi
i =
Total Price of Portfolio
What NEXT?
Your
comments
about the
shape of the
curve.
BONDS HAVE

CONVEXITY !!!!
 CONVEXITY

 Convexity measures how fast the slope of the bond’s price curve changes
when the interest rate is changed.

 It is a measure that is based on second derivative and since second

derivative of bond price with respect to interest rate is positive, it is called
CONVEXITY.

 Convexity can be rewarding for bond’s owner: the greater the convexity, the
higher the return if interest rates drop; the smaller the loss if interest rate
rises.
CONVEXITY is measured as...

1 d 2P
CONVEXITY = 2
P dy
1 n
t (t + 1)ct
=
P(1 + y ) 2

t =1 (1 + y ) t
CLOSED FORM FORMULA FOR
CONVEXITY...

  C
 n(n + 1)F −  
1 2C  1  2nC  Y
CONVEXITY =  3 1 − − +
P  Y  (1 + Y)n  Y 2 (1 + Y)n+1 (1 + Y)n+2 
 
 

Where C is the Coupon

Amount and not the
Coupon Rate.
 PROPERTIES OF CONVEXITY...

 Convexity of non-callable bond is always positive and its

dimension is (years2).

 Convexity is positively related to duration.

 Convexity is inversely related to yield-to-maturity.

 PROPERTIES OF CONVEXITY
(continued…)

 Convexity is inversely related to coupon.(This property is not applicable in

case of zero-coupon bond)

 Lower the maturity, given the coupon and YTM, lower the convexity of a bond
for par or premium bonds and for discounted bonds, it has mixed impact.

 A zero-coupon bond has a convexity which is equal to –

𝑛(𝑛 + 1)
𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
1+𝑌 2
 PROPERTIES OF CONVEXITY
(continued…)

 A coupon bearing bond trading a par has a convexity which is

equal to –

2 1 1 𝑛
𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 = 1− 𝑛
− 𝑛+1
𝑌 𝑌 1+𝑌 1+𝑌

 When maturity tends to infinity, convexity tends to a value -

2
Y2
 CONVEXITY OF PORTFOLIO...

 Bonds Portfolio also have CONVEXITY!!!

 It is equal to weighted average of convexity of bonds

where weights are proportionate to the value of a bond in
n
the portfolio, that is C P =   i Ci
i =1

where
N i Pi
i =
Total Price of Portfolio
Any question or any doubt?
What next?
That’s all for day!
ENJOY AND
HAVE FUN!

THANK
YOU
VERY
MUCH