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Session IV


 Role of Brokers
 Stock market quotations  Procedure for buying and selling  On Line Trading  Clearing and Settlement

Stock Brokers
A stock broker is an intermediary who arranges to buy and sell securities on the behalf of clients (the buyer and the seller). According to SEBI (Stock Brokers and SubBrokers) Regulations, 1992, a stockbroker is member of a stock exchange andrequires to hold a certificate of registration from SEBI in order to buy, sell or deal in securities. SEBI grants a certificate to a stock broker subject to the conditions that the stock broker: (a) holds the membership of any stock exchange; (b) should abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member;

(c) should obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange in case of any change in the status and constitution; (d) should pay the amount of fees for registration in the prescribed manner; and (e) should take adequate steps for redress of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints.

Role of Broker
 Investor risk profile, financial profile, investor

identification details, address details, income, PAN number, employment, age, investments experience, trading preference.  Margins from the Clients  Payments/Delivery of Securities to the Clients  Brokerage
The maximum brokerage chargeable by TM in respect of trades effected in the securities admitted to dealing on the CM segment of the Exchange is fixed at 2.5% of the contract price, exclusive of statutory levies.

For example: If a client has sold 10000 shares of a scrip @ Rs. 50, what is the maximum brokerage that the client can be charged? In this case, the maximum brokerage = brokerage rate*value of the transaction =2.5 %*( 10000 shares*Rs. 50) = Rs. 12,500

 Segregation of Bank Accounts

Maintain separate bank accounts for client’s funds and own funds. It is compulsory for all TMs to keep the money of the clients in a separate account and their own money in a separate account.  Segregation of Demat (Beneficiary) Accounts The trading members should keep the dematerialised securities of constituents in a separate beneficiary account distinct from the beneficiary account maintained for holding their own dematerialised securities.  Contract notes A stock broker should issue contract note as per the format prescribed by the Exchange to client introduced through a sub-broker

Distribution of Financial Products

Investment Banking

Portfolio Management

Loan Syndication

Institutional Business Retail Broking

Commodity Trading

Online Trading

Insurance Broking

Stock Trading

Important terms in stock market and in stock trading

Bid Quantity - The total number of stocks available for buying is called Bid Quantity. Offer Quantity - The total number of stocks available for selling is called Offer Quantity. Buying and selling of stocks - Buy is also called as demand or bid and selling is also called as supply or offer. First selling and then buying (this only happens in day trading) is called as shorting of stocks or short sell.

Important terms in stock market and in stock trading

Stock Trading - Buying and Selling of stocks is called stock trading. Transaction - One complete cycle of buying and selling of stocks is called One Transaction. Squaring off - This term is used to complete one transaction. Means if you buy then have to sell (means square-off) and if you sell then you have to buy (means square-off).

Important terms in stock market and in stock trading

Limit Order - In limit order the buying or selling price has to be mentioned and when the stock price comes to that price then your order will get executed with the mentioned price by you Market Order - When you put buy or sell price at market rate then the price get executes at the current rate of market. The market order get immediately executed at the current available price

Important terms in stock market and in stock trading

Open - The first price at which the stock opens when market opens in the morning. High - The stock price reached at the highest level in a day. Low - The stock price reached the lowest level in a day.

Important terms in stock market and in stock trading

Close - The stock price at which it remains after the end of market timings or the final price of the stock when the market closes for a day. Volume - Volume is nothing but quantity. Bid - The Buying price is called as Bid price.

Offer - The selling price is called offer price.

Different types of stock trading
Day trading and Delivery trading are the two main types of stocks trading. ¤ Day trading Buying and selling of stocks on daily basis is called day trading this is also called as Intra day trading. Whatever you buy today you have to sell it today OR whatever you sell today you have to buy it today and very importantly during market hours that is 9.00 am to 3.30 pm (Indian time).

Different types of stock trading
¤ Delivery Trading
In Delivery Trading, as the name say, you have to take the delivery of stocks and after getting these stocks in your demat account you can sell them at anytime (or you can hold them till you want, there is no restriction). In delivery trading you need to have the amount required to buy stock For example, if you want to buy 100 stocks of Reliance at price 500 than you must have (100*500) Rs. 5000 in your account; once you purchased these stocks will get deposited in your demat account (say after basically, trading day and 2 additional days). Then you can sell these stocks when the price of these stocks goes up or else you can sell whenever you want.

Please Note - First you have to buy and sell. You can’t sell before buying in
delivery trading while it’s possible in day trading.

Investment in Short term, Mid term and Long term trading

Short Term Trading Stock trading done from one week to couple of months is called short term. Mid term Trading Stock trading done from one month to couple of months, say six to eight months is called mid term trading.

Investment in Short term, Mid term and Long term trading

Long term trading Stock trading done form couple of months to couple of years is called long term trading. Companies whose fundamentals are good and have good future plans then the stocks of these companies are used for long term trading. Generally traders having good capital go for long term trading.

Getting started
 To start trading the following are required –

 Trading account
 Member – Client Agreement  Risk Disclosure Document  Demat account  Bank account  Permanent Account Number (PAN)  Unique Client Code

What is Demat account and why it is required?
Demat (Dematerialization) is the process by which an investor can get stocks converted into electronic form maintained in an account with the Depository Participant (DP). Depository Participant (DP) could be organizations involved in the business of providing financial services like banks, brokers, financial institutions etc. DP’s are like agents of Depository.

 Depository is an organization responsible to

maintain investor's securities in the electronic form.  In India there are two such organizations called NSDL (National Securities Depository Ltd.) and  CDSL (Central Depository Services India Ltd.)

Where to trade
 The

secondary market is divided into two segments –
 Cash/ Equity segment  Derivative segment –  Equity Futures and Option (F & O) – Index / Single Stock  Currency Futures/ Option  Interest Rate Futures


How to trade
 Trade through a SEBI registered Stock Broker, by
 Placing margins as required with the broker  placing order over the phone  email etc.

 Internet Trading  Wireless / Mobile Trading.


Post Trade
 The stock broker is required to provide contract

notes confirming the trades done within 24 hrs of executing the trade

 The contract notes can either be in physical or

electronic form


Charges by the Stock Broker
 Brokerage charged by member broker (maximum

2.5%)  Service tax as stipulated  Securities Transaction Tax  Penalties arising on specific default on behalf of client (investor)


Types of Trading
 Online Trading  Offline Trading

Online Trading
 Online trading India is the internet based investment

activity that involves no direct involvement of the broker.  online trading platforms of the biggest stock houses like the National stock exchange and the Bombay stock exchange.  Online trading allows you to buy and sell shares on the exchange through Internet.  The online stock trading is becoming the most popular way to trade stocks because of computers. No longer do we have to call a broker and pay high commissions to buy or sell a stock.

 The history of e trading began in 1983, when a doctor in Michigan

placed the first online trade using E*TRADE technology.
 The concept was visualized by one Bill Porter, a physicist and

inventor with more than a dozen patents to his credit.
 In India Online trading started in February 2000 when a couple of

brokers started offering an online trading platform for their customers.
 E trading has become a way of investing in the developed world and

is soon catching on in developing countries too.
 Online trading means trading investing in equities, derivatives,

commodities etc through the Internet.

 Fully Customizable display

 Dynamic Charts with Indicators
 Real-Time market data  Live order status

 Track orders real time
 Real time position updates  Dynamic buying power

 Online trading consumes less time as compare to manual

trading.  Online trading has very helpful to finding the records easily but offline trading takes more time to finding the records.  In the help of online trading, there is no chance of any errors while doing the trading. In offline trading there are some errors exist like barriers of communication.

Name Of The Trader

An Investment Form through Which Trading Can Be Done

Trader Name

Commodities Index

Types of Order
 Market Order
 The market order is the simplest and quickest way

to get your order filled (or completed). A market order instructs your broker to buy or sell the stock immediately at the prevailing price, whatever that may be.  If you are following the market, you may or may not get the last price listed. In a volatile market, you will probably get a price close to that, but there is no guarantee of any specific price.  One final, but important note: Market orders will likely be the most inexpensive of the orders you place.

 Limit Orders
 Limit orders instruct your broker to buy or sell a

stock at a particular price. The purchase or sale will not happen unless you get your price. Limit orders give you control over your entry or exit point by fixing the price, which can be helpful.  However, you may want to do some math first. Check with your broker to see how the commission on limit orders compares with what you pay for market orders.  If there is a significant difference, you may be better off with a market order (assuming the price is at or near your target) and saving on commissions.

 Stop Loss Orders

A stop loss order gives your broker a price trigger that protects you from a big drop in a stock. You enter a stop loss order at a point below the current market price. If the stock falls to this price point, the stop loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop loss order does nothing.  Trailing Stops The trailing stop order is similar to the stop loss order, but you use it to protect a profit, as opposed to protect against a loss. If you have a profit in a stock, you can use the trailing stop order to follow it up. You enter the trailing stop order as a percentage of the market price. If the market price declines by that percentage, the trailing stop becomes a market order and your broker sells the stock. If the stock continues to rise, the trailing stop follows it up since it is a percentage of the market price. This protects your additional gains.

National stock exchange And Bombay stock exchange
 In spite of many private stock houses at present involved in

online trading in India, the NSE and BSE are among the largest exchanges.  They handle huge daily trading volumes, supporting large amounts of data traffic, and possessing a countrywide network.  The automated online systems used for trading NSE & BSE NIBIS (Internet Based Information System ) & BOLT BSE Online Trading system

Clearing and Settlement Processes
 The transactions in secondary market pass through three

distinct phases, viz., trading, clearing and settlement. While the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities obligations of the trading members and ensures that the trade is settled through exchange of obligations.  The clearing banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of funds and securities obligations of trading members. The clearing process involves determination of what counter-parties owe, and which counter-parties are due to receive on the settlement date, thereafter the obligations are discharged by settlement.  The clearing and settlement process for transaction in securities on NSE is presented in Chart 5-1.

Key terminologies used in Clearing and Settlement Process
Pay-in day is the day when the trading members/brokers are required to make payment of funds or delivery of securities to the clearing corporation of the Exchange for all transactions traded by or through them in the respective settlement period. (a) Securities Pay-in: The process of delivering securities to the clearing corporation to effect settlement of a sale transaction. (b) Funds Pay-in: The process of transfer of funds to the clearing corporation to pay for purchase transactions.

Pay-out day is the day when the clearing corporation of the stock exchange transfers funds and securities to the broker/trading member who have receivable obligation. (a) Securities Pay-out: The process of receiving securities from the clearing corporation to complete the securities settlement of a purchase transaction. (b) Funds Pay-out: The process of transfers of funds from the clearing corporation to complete the funds settlement of a sale transaction.

Steps in Transaction Cycle
(a) A person holding assets (securities/funds), either to meet his liquidity needs or to reshuffle his holdings in response to changes in his perception about risk and return of the assets, decides to buy or sell the securities. (b) He selects a broker and instructs him to place buy/sell order on an exchange. (c) The order is converted to a trade as soon as it finds a matching sell/buy order. (d) At the end of the trade cycle, the trades are netted to determine the obligations of the trading members to deliver securities/funds as per settlement schedule. (e) Buyer (seller) delivers funds (securities) and receives securities (funds) and acquires ownership of the securities. A securities

Settlement Agencies
The roles of several entities involved in the process of clearing and settling the trades executed on Exchanges are explained below: (i) Clearing Corporation (NSCCL): The NSCCL is responsible for post-trade activities of a stock exchange. Clearing and settlement of trades and risk management are its central functions. It clears all trades, determines obligations of members, arranges for pay-in of funds/securities, receives funds / securities, processes for shortages in funds/securities, arranges for pay-out of funds/securities to members, guarantees settlement, and collects and maintains margins / collateral base capital / other funds. (ii) Clearing Members: They are responsible for settling their obligations as determined by the NSCCL. They have to make available funds and/or securities in the designated accounts with clearing bank/depository participant, as the case may be, to meet their obligations on the settlement day. In the capital market segment, all trading members of the Exchange are required to become the Clearing Member of the Clearing Corporation.

(iii) Custodians: A custodian is an entity who is responsible for safeguarding the documentary evidence of the title to property like share certificates, etc. The title to the custodian’s property remains vested with the original holder, or in their nominee(s), or custodian trustee, as the case may be. In NSCCL, custodian is a clearing member but not a trading member. The custodian settles trades assigned by trading members. The custodian is required to confirm whether it is going to settle a particular trade or not. If it is confirmed, the NSCCL assigns that obligation to that custodian and the custodian is required to settle it on the settlement day. If the custodian rejects the trade, the obligation is assigned back to the trading / clearing member. (iv) Clearing Banks: Clearing banks are a key link between the clearing members and NSCCL for funds settlement. Every clearing member is required to open a dedicated settlement account with one of the clearing banks. Based on his obligation as determined through clearing, the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out. Multiple clearing banks provide advantages of competitive forces, facilitate introduction of new products viz. working capital funding, anywhere banking facilities, the option to members to settle funds through a bank, which provides the maximum services suitable to the member.

(v) Depositories: A depository is an entity where the securities of an investor are held in electronic form. The person who holds a demat account is a beneficiary owner. In case of a joint account, the account holders are beneficiary holders of that joint account. Depositories help in the settlement of the dematerialized securities. Each custodian/clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL. As per the schedule of allocation of securities determined by the NSCCL, the depositories transfer the securities on the pay-out day from the account of the NSCCL to those of members/custodians.

 Depositories: Depository holds securities in dematerialized

form for the investors in their beneficiary accounts. Each clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa as per the schedule of allocation of securities.
 Professional Clearing Member : NSCCL admits special

category of members known as professional clearing members (PCMs). PCMs may clear and settle trades executed for their clients (individuals, institutions etc.). In such cases, the functions and responsibilities of the PCM are similar to that of the custodians. PCMs also undertake clearing and settlement responsibilities of the trading members. The PCM

Secondary Market - Clearing and Settlement