TYPES OF TRANSACTIONS

CONDUCTED AT STOCK EXCHANGE.

MCOM PART II SEM 4

PRESENTATION BY:
HEENA SHAIKH; ROLL NO: 31
SHRUTI MITTAL; ROLL NO: 40
PRANALI NAIK; ROLL NO: 43
YOHAN PRADHAN; ROLL NO: 46
YASH THAKKAR; ROLL NO: 51
MEGHNA VALIYAVEETIL; ROLL NO: 53

GUIDED BY: DR. ASHA JADHAV

SUBJECT: CAPITAL MARKET & FINANCIAL
SERVICES
 INTRODUCTION
 WHAT IS STOCK EXCHANGE AND IT’S MEANING?

• Stock exchange is an organized market where sale and purchase of listed

securities of all description i.e. shares, stocks, debentures, government
securities, etc. are done. It is a government approved market place where buyer
and seller of securities of all kind find each other to buy and sell securities on
the market price.
• “ An association, organization or body of individuals, whether incorporated or
not, established for the purpose of assisting, regulating and controlling business
in buying, selling and dealing in securities.”
• - The Securities Contracts (Regulation) Act, 1956
 TYPES OF SHARE MARKET.
 PRIMARY SHARE MARKET
• It is in the primary market that
companies register themselves to issue
their shares and raise money. This
process is also known as listing on the
stock exchange. The purpose of entering
into the primary market is to raise
money and if the company is selling
their shares for the very first time it is
referred to as the Initial Public Offering
(IPO). Through this process, the
company becomes a public entity.
 SECONDARY SHARE MARKET
• The shares of a company are traded in the
secondary market once the new securities
are sold in the primary market. This way
investors can exit by selling their shares.
These transactions that take place in the
secondary market are called trades. It
involves the activity of investors buying
from each other and selling amongst
themselves at an agreed upon price. A
broker is the intermediary that facilitates
these transactions.
 REGULATIONS OF THE INDIAN STOCK
MARKETS
 The regulation and supervision of the stocks markets in India rest with the Securities and Exchange
Board of India. SEBI was formed as an independent identity under the SEBI Act of 1992 and has
the power to conduct inspections of the stock exchanges. The inspections review the operations of
the market and the organizational structure along with aspects of administrative control.  

• The main role of SEBI includes:

1. Ensuring a fair and equitable market for investors to grow in

2. Compliance of the exchange organization, the system its practices in accordance with the rules
framed under the Securities Contracts (Regulation) Act (SC(R) Act), 1956

3. Ensure implementation of the guidelines and directions issued by the SEBI

4. Check if the exchange has complied with all the conditions and has renewed the grants, if
needed, under Section 4 of the SC(R) Act of 1956.
OPERATORS AT STOCK EXCHANGE
1. Broker
• As I mentioned earlier, no one can deal directly in stock
exchange and every intended seller or buyer, who wants to
sell or buy securities has to deal through members known as
brokers. Broker is duly certified by SEBI (Stock and
Exchange Board of India) under its 1992 rule. Membership
of the stock exchange is restricted to prescribed numbers of
members, to financially sound persons who have sufficient
experience in dealing in securities.
• A broker cannot buy or sell securities on his personal
capacity. He charges commission from the parties, sellers,
and buyers and deals on the behalf of his non-member
clients.
2. Sub-broker
• Sub-brokers are non-members of the stock exchange and deal only on behalf of the
members or registered brokers. Commission is received by sub-brokers on the business
procured by them out of total commission received by the brokers. Sub brokers are known
as “half commission men” and “remisiers” too.

3. Jobbers
• Jobbers are the independent dealers, who deal in securities at their own. A jobber cannot sell
or buy securities on the behalf of others, but he deals in securities for his own profit through
fluctuation of the prices. Difference between sale price and purchase price of securities is
the profit of a jobber.
 PROCEDURES FOR DEALING AT STOCK EXCHANGE
 No one can directly deal in stock exchange, therefore, any person who wants to sell or buy securities,
requires a broker through whom selling or buying of securities can be done.
 Afterfinalization of a member or a broker, intending buyer or seller of the securities, places an order
according to his choice, mentioning tentative quantity, and price. Thereupon, broker opens a new
account for each client and start trading in the best possible way.
 After getting an order, broker tries to finalize the deal between seller and buyer. After finalization of
deal, seller and buyer of securities send a selling and buying note respectively mentioning the detail of
traded securities.
 Finally, settlement of account may be done in the following three manners :
 When the settlement of account is done as per the fixed and agreed date, it is called as “liquidation in
full.”
 When only difference of agreed price and ruling price is settled on the fixed date, it is called as
“liquidation by payment of difference.”
 When a settlement is carried forward to the next settlement period, it is known as “carried over to next
settlement period”.
 TYPES OF TRANSACTIONS CONDUCTED AT STOCK
EXCHANGE
 SPOT CONTRACT :

• A spot contract is an agreement that enables you to buy and sell an asset at the current market
rate, known as the spot price. Spot contracts are most commonly associated
with commodities, currencies and bonds, but are also available on a range of markets, such as
property.
• Most spot contracts are settled physically, resulting in the delivery of the asset in question, which
usually takes place within one business day. However, forex trades can take approximately two
days. For example, if you bought a spot contract on Brent crude oil, you’d pay the most recent
market price and take ownership of the underlying oil but delivery would occur the next day.

 HOW DO SPOT CONTRACTS WORK?

• Spot contracts work by tracking the spot price of an asset, so that you can take a position on the
most recent buy and sell orders of market participants.
 SPOT CONTRACT

• Once you’ve chosen a price level you’re comfortable entering the market at,
you can enter your position. At which point, your spot contract is
automatically created, and you’d be part of a binding agreement to exchange
the asset immediately or settle in cash.
 An example of spot contract transaction:
• Gold is trading at $1400. You want to buy and take ownership of the
precious metal immediately, so enter a spot contract at the current market
price. You would pay $1400 for the position, and receive delivery the next
day - unless you decided to settle in cash.
 FORWARD CONTRACT
• A forward contract, often shortened to just forward, is a contract agreement to buy or sell
an asset at a specific price on a specified date in the future. Since the forward contract refers to the
underlying asset that will be delivered on the specified date, it is considered a type of derivative.
• Forward contracts can be used to lock in a specific price to avoid volatility in pricing. The party
who buys a forward contract is entering into a long position, and the party selling a forward
contract enters into a short position. If the price of the underlying asset increases, the long position
benefits. If the underlying asset price decreases, the short position benefits.
 An example of forward contract:
• Old MacDonald had a farm, and on that farm, he grew a lot of corn. This year, he expects to
produce 500 bushels of corn that he can sell at the price-per-bushel that’s available at harvest time
or he can lock in a price now.
 
 FORWARD CONTRACT
The Crunchy Breakfast Cereal Company needs plenty of corn to manufacture their cornflakes.
They send a representative around to Old MacDonald’s farm and offer him a fixed price to be
paid upon delivery of 500 bushels of corn at harvest.
 
With the forward contract, Old MacDonald will receive the delivery price if he can deliver
500 bushels of corn by a specific date. Based upon the expected delivery price, if he's able to
produce the 500 bushels of corn, he can plan this year’s farm revenues and next year’s
expenses.
 
Because Crunchy Breakfast Cereal Company has a forward contract, they can control variable
costs (such as the cost of corn) to make their breakfast cereal. Knowing the cost of corn in
advance enables them to keep prices steady for the consumer. They risk overpaying Old
MacDonald for his corn, but it's a risk they’re willing to take to hold costs steady and retain
market share for their cornflakes.
 FUTURE CONTRACT
• Futures are derivative financial contracts that obligate the parties to transact an asset at a
predetermined future rate and price. The buyer must purchase or the seller must sell the underlying
asset at the set price, regardless of the current market price at the expiration date.
• Underlying assets include physical commodities or other financial instruments. Futures contracts
details the quantity of the underlying asset and are standardized to facilitate trading on a futures
exchanges. Futures can be used for hedging or trade speculation.
• Let’s say you are a soybean farmer, there is good rainfall and hence the supply of soybean is high and
so the prices come down. You will be at loss as a farmer. Think of the soybean buyer now. Due to
unexpected drought, the price of soybean goes up. So as a buyer, he has to shell out more and hence
he faces loss. To avoid these losses, it is essential to enter into futures contract. This will protect you
irrespective of the market fluctuations.
• For example, the price of soybean hits Rs. 350 after 3 months, but if you have already made a futures
contract at Rs. 400, you will gain a profit of Rs. 50 even though the market price is Rs. 350. By this
way, you can predict the future demand, price and also reduce the losses. You can actually trade using
lesser margins in case of futures contract
 OPTIONS CONTRACT

• Options contracts are agreements between a buyer and seller which give the
buyer the right to buy or sell a particular asset at a later date (expiration
date) and an agreed-upon price (strike price). 
• They’re often used for securities, commodities, and real estate transactions.
In other words, buyers can purchase them much like other types of assets
within brokerage accounts. An options contract has terms that specify the
strike price, the underlying security, and expiration date. Typically, a
contract will cover 100 shares (though it can be adjusted for special
dividends, mergers, or stock splits). 
 OPTION CONTRACT EXAMPLE
• You expect Company XYZ's stock price to go up to $90 within the next
month. You find out that you can buy an option contract for this company at
$4.50 with a strike price of $75 per share. That means you’ll pay $450 for
your options contract ($4.50 x 100 shares).
• The stock price begins to rise as you expect and stabilizes at $100. Prior to
the expiry date on the options contract, you execute the call option and buy
all 100 shares of Company XYZ at $75 (the strike price) for $7,500.  
• Since it’s worth $100 a share, you can then sell your new stock on the
market for $10,000. Your profit would be $2,050, since you’d need to take
the original $450 options contract into account ($10,000 - $7,500 - $450 =
$2,050).
 SWAP CONTRACT
• Swap contracts are financial derivatives that allow two transacting agents to
“swap” revenue streams arising from some underlying assets held by each party. For
example, consider the case of an Indian business that borrowed money from a Indian-based
bank (in INR) but wants to do business in the USA. The company’s revenue and costs are in
different currencies. It needs to make interest payments in INR whereas it generates
revenues in USD. However, it is exposed to risk arising from the fluctuation of the
INR/USD exchange rate.
• The company can use a INR/USD currency swap to hedge against the risk. In order to
complete the transaction, the business needs to find someone who is willing to take the
other side of the swap. For example, it can look for a USA business that sells its products in
India. It should be clear from the structure of currency swaps that the two transacting parties
must have opposing views on the market movement of the INR/USD exchange rate.
COMPARISON BETWEEN FORWARD & FUTURE
CONTRACT
BASIS FOR COMPARISON FORWARD CONTRACT FUTURE CONTRACT
Meaning Forward Contract is an A contract in which the parties
agreement between parties to agree to exchange the asset for
buy and sell the underlying cash at a fixed price and at a
asset at a specified date and future specified date, is known
agreed rate in future. as future contract.
What is it? It is a tailor made contract. It is a standardized contract.
Traded on Over the counter, i.e. there is no Organized stock exchange.
secondary market.
Settlement On maturity date. On a daily basis.
Risk High Low
Default As they are private agreement, No such probability.
the chances of default are
relatively high.
Regulation Self regulated By stock exchange
 COMPARISON BETWEEN FUTURE AND
OPTION
BASIS FOR COMPARISON FUTURES
Meaning Futures contract is a binding
agreement, for buying and
selling of a financial instrument
at a predetermined price at a
future specified date.
Obligation of buyer Yes, to execute the contract.
Execution of contract On the agreed date.
Risk High
Advance payment No advance payment
Degree of profit/loss Unlimited
OPTIONS
Options are the contract in
which the investor gets the right
to buy or sell the financial
instrument at a set price, on or
before a certain date, however
the investor is not obligated to
do so.
No, there is no obligation.
Anytime before the expiry of the
agreed date.
Limited
Paid in the form of premiums.
Unlimited profit and limited
loss.
 CONCLUSION
A stock exchange is an exchange where traders and stock brokers buy and sell shares of
stock, bonds and other securities. It also offers facilities for issue and redemption of
securities and other financial instruments. Stock issued by listed companies and unit trusts,
bonds and pooled investment products can be traded on a stock exchange. A stock exchange
functions as a 'continuous auction' market where transactions are conducted between the
buyers and sellers.
A stock exchange plays an important role in the economy. It helps to raise capital for
business, mobilize savings for investment, facilitates the growth of companies, and enables
profit sharing. It assists in creating investment opportunities for small investors, and raising
capital for development projects taken up by the government. It acts as a barometer of the
economy.