INTRODUCTION

As Indian securities markets continue to evolve, market participants,

investors and regulators are looking at different ways in which the risk
management may be efficiently met through the introduction of Derivative
markets.
Through the use of derivative products, it is possible to partially or fully
transfer price risks by locking in asset prices. As instruments of risk management,
these generally do not influence the fluctuations in the underlying asset prices.
Derivatives are risk management instruments, which derive their value form
an underlying asset. The underlying asset can be bullion, index, share, bonds,
currency, interest etc. banks, securities firms, companies and investors to hedge
risks, to gain access to cheaper money and to make profit, uses derivatives.
Derivatives are likely to grow even at a faster rate in future.
However, the advent of modern day derivative contracts is attributed to the
need for farmers to protect themselves from any decline in the price of their crops
due to delayed monsoon, or overproduction. The first futures contracts can be
traced to the Yodoya rice market in Osaka, Japan around 1650. These were
evidently standardized contracts, which made them much like todays futures.
The Chicago Board of trade (CBOT), the largest derivative exchange in the
world, was established in 1848 where forward contracts on various commodities
were standardized around 1865. From then on, futures contracts have remained
more or less in the same form, as we know them today.

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DERIVATIVES:
Derivatives are defined as financial instruments whose value derived from
the prices of one or more other assets such as equity securities, fixed-income
securities, foreign currencies, or commodities. Derivative is also a kind of contract
between two counter parties to exchange payments linked to the prices of
underlying assets.

DEFINITION:
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A)
defines derivative to include1. A security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other from of
security.
2. A contract which derives its value from the prices, or index or prices, of
underlying securities
The above definition conveys that
Derivatives are financial products and derive its value from the underlying assets.
Derivatives are derived from a matter financial contract called the underlying.

DIFFERENCE BETWEEN DERIVATIVES AND SHARES:

The subtle, but crucial, difference is that while shares are assets, derivatives
are usually contracts (the major exception to this are warrants and convertible
bonds, which are similar to shares in that they are assets).

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INVESTING IN DERIVATIVES:
If one is interested in getting directly involved with futures or options, then
the idea to incest is inappropriate they are traded. This implies that one monitors
the price more closely, and uses more sophisticated trading techniques (for
example, the use if stop orders). There are a number of brokers that specialize in
private client futures/options trading; list of these can usually be requested from
futures exchanges.
USAGE OF DERIVATIVES:
Any person who has funds invested, (e.g. an insurance policy or a pension
fund), are mostly exposed to derivatives in some or other way. Due to its great
flexibility, derivatives are used by many different types of investors. From this
stand point, derivatives will allow the modern investor the full range of investment
strategy: speculation, hedging, arbitrage and all of the possible combinations
thereof.
MEASURES OF DERIVATIVES:
The value of a derivatives contract equals the difference between the value
of the underlying asset and the cost of financing a purchase of the asset, Further
the value also depends on the price of the underlying asset and the level of interest
rates.
PARTICIPANTS OF DERIVATIVES:
The following are the three broad categories of participants in the derivative
market.

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Hedgers:
Hedgers are parties who ate exposed to risk because they have a prior position in
the commodity or the financial instrument specified in the futures contract. They
use futures or options marked to reduce or eliminate this risk. Since one can take
neither a long position nor a short position in the futures contract, there are two
basic hedge positions:
1. The short (sell) hedge: A party who has a long cash position, current or
potential, may sell (short) the futures.
2. The long (buy) hedge: A party who is not currently in cash but who expects
to be in cash in the future may buy a futures contract to eliminate uncertainty
about the price.

Speculators:
Speculators are those who do not have any position on which they enter in futures
and options market. They only have a particular view on the market, stock,
commodity etc. In short speculators put their money a risk in the hope of profiting
from an anticipated price change. They consider various factors such as demand
supply, market positions, open interests, economic fundamentals and other data to
take their positions.
They play very important role in the proper functioning of futures market. The
futures market offers the following attraction to the speculator:

Leverage
Ease of transactions
Lower transaction costs

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Arbitraguers:
An arbitrageur is basically risk averse. To earn risk free profits by exploiting
market imperfections. Arbitrageurs make profit from price differential existing in
to markets by simultaneously operating in the two different markets. There are
two main kinds of arbitrage transactions. They are
A futures-futures arbitrage: It occurs when a dealer exploit the price
differential between two future markets.
A cash-futures arbitrage: It occurs when a dealer exploits price
misalignment between the cash market and the futures market.
FUNCTIONS OF DERICATIVE MARKET:
The following are the various functions that are performed by the
derivatives markets. They are:
Price in an organized derivatives market reflects the perception of market
participations about the futures and let the prices of underlying to the
perceived future level.
Derivatives market helps to transfer risks from those who have them but
may not like them to those who have an appetite for them.
Derivative trading acts as a catalyst for new entrepreneurial activity.
Derivatives markets help increase savings and investment in the long run.

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TYPES OF DERIVATIVES:
The following are the most common types of derivatives. They are
FORWARDS:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at todays pre-agreed price.
FUTURES:
A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are standardized exchangetraded contracts. These are one of the most popular and widely used derivative
instruments.
OPTIONS:
Options are of tow types calls and puts.
Calls give the buyer the right but not the obligation to buy a given quantity
of the underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity
of the underlying asset at a given price on ore before a given date.
WARRANTS:
Options generally have lives of up to one year, the majority of options
traded on options exchanges having a maximum maturity of nine months. Longerdated options are called warrants and are generally treaded over-the-counter.
LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities.
These are options having a maturity of up to three years.

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BASKETS:
Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average of a basket of assets. Equity index
options are a form of basket options.
SWAPS:
Swaps are private agreements between two parties to exchange cash flows
in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are:
INTEREST RATE SWAPS:
These entail swapping only the interest related cash flows between the
parties in the swap currency.
CURRENCY SWAPS:
These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the
opposite direction.
SWAPTIONS:
Swaptions are options to buy or sell a swap that will become operative at
the expiry of the options. Thus a swaption is an option on a forward swap. Rather
than have calls and puts, the swaptions market has receiver swaptions and payer
swaptions. A receiver swaption is an option to receive fixed and pay floating. A
payer swaption is an option to pay fixed and receive floating.

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CHRONOLOGY OF DERIVATIVE MARKET IN INDIA:

DATE
14 DEC 1996
18 NOV 1996

PARTICULARS
NSE asked SEBI for permission to trade Index Futures.
Formed L.C.Gupta Committee to design framework for

7 JULY 1999

Index Futures.
RBI gave permission

24 MAY 2000

Agreements and Interest Rate Swaps.

SIMEX chose NIFTY for trading futures and options

25 MAY 2000

on India Index.
SEBI gave permission to NSE to do Index Futures

9 JUN 2000

trading.
Trading of BSE Futures.

22 JUN 2000
JULY 2001
NOV 2001

Trading of NSE Futures and Index Options market.

Stock Options introduced.
Stock Futures.

3 OCT 2003

Commodity Futures.

REGULATORY FRAMEWORK:

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of

OTC

Forward

Rate

The trading of derivatives is governed by the provisions contained in the

SC (R) A, the SEBI Act and the regulations framed there under the rules and
byelaws of stock exchanges.
REGULATIONS FOR DERIVATIVES TRADING:
SEBI set up a 24 member committed under Chairmanship of Dr. L. C.
Gupta develop the appropriate regulatory frame work for derivative trading in
India. The committee submitted its report in March 1998. On May 11, 1998 SEBI
accepted the recommendations of the committee and approved the phased
introduction of Derivatives trading in India beginning with Stock Index Futures.
SEBI also approved he Suggestive bye-laws recommended by the committee for
regulation and control of trading and settlement of Derivatives contracts.
The provision in the SC (R) A governs the trading in the securities. The
amendment of the SC(R) A to include DERIVATIVES within the ambit of
Securities in the SC (R) A Made trading in Derivatives possible within the frame
work of the Act.

1. Eligibility criteria as prescribed in the L.C. Gupta committee report may

apply to SEBI for grant of recognition under Section 4 of the SC(R)A 1956
to start Derivatives Trading. The derivatives exchange/segment should have
a separate governing council and representation of trading/ clearing
members shall be limited to maximum of 40% of the total members of the
governing council. The exchange shall regulate the sales practices of its
members and will obtain approval of SEBI before start of Trading in any
derivative contract.
2. The exchange shall have minimum 50 members.

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3. The members of an existing segment of the exchange will not automatically

become the members of the derivative segment. The members of the
derivative segment need to fulfill the eligibility conditions as lay down by
the L. C. Gupta Committee.
4. The clearing and settlement of derivates trades shall be through a SEBI
approved Clearing Corporation / Clearing house. Clearing Corporation /
Clearing House complying with the eligibility conditions as lay down By
the committee have to apply to SEBI for grant of approval.
5. Derivatives broker / dealers and Clearing members are required to seek
registration from SEBI.
6. The minimum contract value shall not be less than Rs.2Lakh. Exchanges
should also submit details of the futures contract they purpose to introduce.
7. The trading members are required to have qualified approved user and sales
person who have passed a certification programme approved by SEBI
THE ECONOMIC ROLE OF DERIVATIVES
Derivative markets provide three essential economic functions:
Risk management
Price discovery
Transactional efficiency
Risk management:
The principal benefit of the Derivative market is that it provides the
opportunity for risk management through Hedging.

Risks involved in derivatives:

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Risk can be defined as The possibility or probability of loss. Derivatives

are used to separate risks from traditional instruments and transfer these risks. The
fundamental risks involved in derivatives business includes following:
Credit risk:
This is the risk of a counterpart to perform its obligations as per the
contract. Also known as default or counterpart risk, it differs with different
instruments.
Market risk:
Market risk is a risk of financial loss as a result of adverse movements of
prices of the underlying asset.
Liquidity risk:
The inability of a firm to arrange a transaction at prevailing market prices is
termed as liquidity risk.
Related to liquidity of separate products.
Related to the funding of activities of the firm including derivatives.
Legal risk:
Derivatives cut a cross judicial boundaries therefore the legal aspects
Associated with the deal should be looked into carefully.
Risk management/Hedging strategies can be broadly grouped into three
categories:
1. Inventory hedging to protect the value of existing portfolio of assets.

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2. Anticipatory hedging to sell/buy derivatives especially forwards and

futures instead of the anticipated inflows (assets)/ outflows (liabilities). A
classic example is that of exporters and importers who sells/buys currency
futures/options.
3. Return enhancement hedge using derivatives to create synthetic securities,
which minic cash assets.
Price discovery:
The second major function of derivative market is price discovery. This is a
process of providing equilibrium prices that reflect current and prospective
demands on current and prospective supplies, and making these prices visible to
all.
Transactional efficiency:
Derivative markets allow institution to transact more efficiently than
otherwise. They reduce the direct cost of transacting in cash/financial markets are
also provided, through clearing houses, an efficient mechanism to deal with
counter party risk.
INTRODUCTION TO FUTURES:
A Futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Future markets were designed
to solve the problems that exist in forward markets. But unlike forward contracts,
the futures contracts ate standardized and exchange traded. To facilitate liquidity in
the futures contracts, the exchange specifies certain standard features of the
contract. It is a standardized contract with standard underlying instrument, a
standard quantity and quality of the underlying instrument that can be delivered,

35

(or which can be used for reference purposes in settlement) and a standard timing
of such settlement.
The standardized items in a futures contract are:
o Quantity of the underlying
o Quality of the underlying
o Date and Month of Delivery
o The units of Price quotations and Minimum price changes
o Location of settlement

TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided into
following types.
STOCK FUTURES
The stock futures are the futures that have the underlying asset as the
individual securities. The settlement of the stock futures is of cash settlement
and the settlement price of the future is the closing price of the underlying
security.
INDEX FUTURES
Index futures are the futures, which have the underlying asset as an Index.
The Index futures are also cash settled. The settlement price of the Index
futures shall be the closing value of the underlying index on the expiry date of
the contract.
COMMODITY FUTURES

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In this case, the underlying asset is a commodity. It can be an agricultural

commodity like wheat corn, or even a precious asset like gold, silver etc.
FINANCIAL FUTURES
In this case, the underlying assets are financial instruments like money
market paper, Treasury Bills, notes, bonds etc.
CURRENCY FUTURES
Currency futures are those in which the underlying assets are major
convertible currencies like the U.S. dollar, the Pound Sterling, the Euro and the
Yen etc.
PARTIES IN THE FUTURES CONTRACT:
There are two parties in a future contract, the Buyer and the Seller.
The buyer of the futures contract is one who is LONG on the futures
contract and
The seller of the futures contract is one who is SHORT on the futures
contract.
The pay off for the buyer and the seller of the futures contract are as follows.

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PAYOFF FOR A BUYER OF FUTURES:

PROFIT

E2
E1

LOSS

F
L

CASE 1:
The buyer bought the future contract at (F); if the futures price goes to E1
then the buyer gets the profit of (FP).

CASE 2:
The buyer gets loss when the future price goes less then (F), if the futures
price goes to E2 then the Buyer gets the loss of (FL).

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PAYOFF FOR A SELLER OF FUTURES:

PROFIT

E2
F

LOSS

E1

F-FUTURES PRICE
E1, E2-SETTLEMENT PRICE
CASE 1:
The Seller sold the future contract at (f); if the futures price goes to E1 then
the Seller gets the profit of (FP).

CASE 2:

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The Seller gets loss when the future price goes grater than (F), if the futures
price goes to E2 then the Seller gets the loss of (FL).

MARGINS:
Margins are the deposits, which reduce counter party risk, arise in a futures
contract. These margins are collected in order to eliminate the counter party risk.
There are three types of margin.
INITIAL MARGINS:
Whenever a futures contract is signed, both buyer and seller are required to
post initial margin. Both buyer and seller are required to make security deposits
that are intended to guarantee that they will infact be able to fulfill their obligation.
These deposits ate Initial margins and they are often referred as performance as
performance margins. The amount of margin is roughly 5% to 15% of total
purchase price of futures contract.

MARKING OF MARKET MARGIN:

The process of adjusting the equity in an investors account in order to
reflect the change in the settlement price of futures contract is known as MTM
Margin.

MAINTENANCE MARGIS:
The investor must keep the futures account equity equal to or grater than
certain percentage pf the amount deposited as Initial Margin. If the equity goes
less than that percentage of Initial margin, then the investor receives a call for an
additional deposit of cash known as Maintenance Margin to bring the equity up to
the Initial margin.

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PRICING THE FUTURES:

The fair value of the futures contract is derived from a model known as the
Cost of Carry model. This model gives the fair value of the futures contract.
Cost of Carry Model:
F=S (1+r-q) t
Where
F Futures Price
S Spot price of the Underlying
R Cost of Financing
q Expected Dividend Yield
t Holding Period.

FUTURES TERMINOLOGY:
SPOT PRICE:
The price at which an asset trades in the spot market.
FUTURES PRICE:
The price at which the futures contract trades in the futures market.

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CONTRACTCYCLES:
It is the period over which a contract trades. The index futures contracts
on the NSE have near month (one-month), middle month (two-months) and far
month (three-months) expiry cycles, which expire on the last Thursday of the
month. Thus a January expiration contract expires on the last Thursday of January
and a February expiration contract ceases trading on the last Thursday of February.
On the Friday following the last Thursday, a new contract having a three-month
expiry is introduced for trading.
EXAMPLE 1:
DEC 31ST

JAN 27TH

FEB 24TH

MAR 31ST

FAR MONTH
MIDDLE MONTH
NEAR MONTH

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EXAMPLE 2:
JAN 28TH

FEB 24TH

MAR 31ST

APR 28TH

FAR MONTH
MIDDLE MONTH
NEAR MONTH

EXPIRY DATE:
It is the date specified in the futures contract. This is the last day on
which the correct will be traded, at the end of which it will cease to exist.
CONTRACT SIZE:
The amount of asset that has to be delivered less than one contract,
For instance, the contract size on NSE s futures market is 200 Niftiest.
BASIS:
In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery reflects that
futures prices normally exceed spot prices.
COST OF CARRY:
The relationship between futures process and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the
storage cost plus the interest that is paid to finance the asset less the income earned
on the asset.

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OPEN INTEREST:
Open Interest means the Total outstanding long or short positions in the
market at any specific time. As total long positions for market would be equal to
short positions, for calculation of open interest, only one side of the contract is
counted.
CHOICE OF FUTURES:
Choice of futures consists of 3 decisions. They are
Which futures commodity
Which expiration month
Whenever to be long or short
TECHNICAL ANALYSIS:
Technical analysis is a process of identifying trend reversals at
an earlier stage to formulate the buying and selling strategy with the help of
several indicators.
The technical analysis mainly focuses the attention on the past
history of prices. Generally technical analysts choose to study two basic market
data-price and volume. They mainly predict short-term price movement rather than
long-term movement.
History of Technical Analysis:
The technical analysis is based on the doctrine given by
Charles H. Dow in 1984, in the Wall Street Journal. He wrote a series of articles in

35

the Wall Street Journal. A. J. Nelson, a close friend of Charles Dow formulised the
Dow theory for economic forecasting.

Technical Tools:
Generally used technical tools are, Dow theory, volume of
trade, short selling, bars and line charts, moving averages and oscillators.
Dow Theory:
Dow developed his theory to explain the movement of indices of Dow Jones
Averages on the basis of certain hypotheses. The first hypothesis is that, no single
individual or buyer can influence the major trend of the market. His second
hypothesis is that the market discounts everything. His third hypothesis is that the
theory is not infallible.
The theory According to Dow Theory the trend is divided into primary,
intermediate and short-term trend. The primary trend may be the broad upward or
downward movement that may last for a year or two. The intermediate trends are
corrective movements, which may last for three weeks to three months. The shortterm trend refers to the day-to-day price movement.
Volume of trade:
Dow gave special emphasis on volume. Volume expands along with the bull
market and narrows down in the market. If the volume falls with rise in price or
vice-versa, it is a matter of concern for the investor and the trend may not persist
for a longer time.
Short selling:

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Short selling is a technical indicator known as short interest. Short sales refer to
the selling of shares that are not owned. The bears are the short sellers who sell
now in the hope of purchasing at a lower price in the future to make profits.

Moving Average:
The market indices do not rise or fall in straight line. The upward and downward
movements are interrupted by counter moves. The underlying trend can be studied
by smoothening of the data. To smooth the data moving average technique is used.
If it is five day moving average, on the sixth day the body of the data moves to
include the sixth day observation eliminating the first days observation. Likewise
continues. For this calculation, closing price of the stock is used.
Oscillators:
Oscillator shows the share price movement across a reference point from one
extreme to another. The momentum indicates:
Overbought and oversold conditions of the scrip or the market.
Signaling the possible trend reversal.
Rise or decline in the momentum.
Bar Charts:
In bar charts, two dots are entered to represent the highest and lowest price at
which the stock is traded. A line is drawn to connect both the points a horizontal
nub is drawn to mark the closing prices.

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CHART PATTERNS:
These are used as a supplement to other information and confirmation of signals
provided by trend lines. Some of the chart patterns are discussed here.
1. V Formation:
The name itself indicates that in the V formation there is a long sharp decline
and a fast reversal. The V pattern occurs mostly in popular stocks where the
market interest changes quickly from hope to fear and vice-versa. In the case of
inverted ^ the rise occurs first and declines. These changes are shown in the
following diagram.

Price

Days

2. Double Top and Bottom:

This type of formation signals the end of one trend and the beginning of another.
The double top pattern resembles the letter M. The double top may indicate the
onset of the Bear Market.

35

In a double bottom, the price of the falls to a certain level and increase with
diminishing activity. Then it falls again to the same or to lower price and turns up
to a higher level. The double bottom resembles the letter W. Technical analysis
views this pattern as a sign for Bull Market. These patterns are shown in the
following charts.

Price

Price

Days

Days

3.Head and Shoulders:

In the head and shoulder pattern there are three rallies resembling the left shoulder,
a head and a right shoulder. A neckline is drawn connecting lows of the tops.
When the stock price cuts the neckline from above, it signals the Bear market.
4.Inverted head and shoulders:
Here the reverse of the previous pattern holds true. It indicates end of bear market
and the beginning of the bull market. These patterns have to be confirmed with the
volume and trend of the market.
These patterns are shown in the following charts.
Neckline
Price

Price

Neckline

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Days

Days

INDUSTRY PROFILE
STOCK BROKING OPERATIONS AN OVER VIEW

As capital market operations is a complex activity which require an in

depth knowledge of stock market and about the company performance, security
analysis of the stock. A full time practicing firm/person is needed to advise for our
investment; in fact a broker can also invest his own money to make profit out of
stock market operations.
A stockbroker invests in the stock market for individuals or corporations so
whenever individuals or corporations want to buy or sell stocks they must go
through a brokerage house. Stockbrokers often advise and counsel their clients on
appropriate investments. Brokers explain the workings of the stock exchange to
their clients and gather information from them about their needs and financial
ability, and then determine the best investments for them. The broker then sends
the order out to the floor of the securities exchange by computer or by phone.
When the transaction has been made, the broker supplies the client with the price.
The buyer pays for the stock and the broker transfers the title of the stock to the
client and performs clearing and settlement procedures. The settlement process is
discussed in subsequent pages.

The beginning stockbrokers first priority is

learning the market. One broker said, First you have to decide whether you have
an interest in the stock market. This will determine how well you will do. If you
are just interested in making money you wont get very far. Stockbrokers spend

35

their time in a fast-paced office, usually working from nine to five, unless they are
just starting out or have to meet with clients. The new broker spends many hours
on the phone building up a client base.

Sometimes brokers teach financial

education classes to expose themselves to potential investors who may then

become their clients.
Brokerage clerks handle much of the day-to-day operations of brokerages,
performing a number of different jobs with a wide range of responsibilities; all
involve computing and recording data pertaining to securities transactions.
Brokerage clerks also may contact customers, take orders, and inform
clients of changes to their accounts.

Some of these jobs are more clerical.

Brokerage clerks, who work in the operations departments of securities firms, on

trading floors, and in branch offices, also are called margin clerks, dividend clerks,
transfer clerks, and brokers assistants.
Brokerage clerks in the operations areas of securities firms perform many
duties to facilitate the sale and purchase of stocks, bonds, commodities, and other
kinds of investments.

These clerks produce the necessary records of all

transactions that occur in their area of the business. Job titles for many of them
depend upon the type of work that they perform. Purchase-and-sale clerks, for
example, match orders to buy with orders to sell. They balance and verify trades
of stock by comparing the records of the selling firm with those of the buying
firm. Dividend clerks ensure timely payments of stock or cash dividends to clients
of a particular brokerage firm. Transfer clerks execute customer requests for
changes to security registration and examine stock certificates to make sure that
they adhere to banking regulations.

Receive-and-deliver clerks facilitate the

receipt and delivery of securities among firms and institutions. Margin clerks
record and monitor activity in customers accounts to ensure that clients make
payments and stay within legal boundaries concerning their purchases of stock.

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Technology is changing the nature of many of these jobs. A significant and

growing number of brokerage clerks use custom-designed software programs to
process transactions more quickly. Only a few customized accounts are still
handled manually. Furthermore, the rapid expansion of online trading reduces the
amount of paperwork because brokerage clerks are able to make trades
electronically.

Stockbroker and the investor:

The stockbroker should provide adequate information regarding the
stocks. He should be capable of giving short term and long-term investment
suggestions to the investor and able to confirm the purchase and sale of securities
quickly. He should have adequate experience in the market to take correct
decision. He should have contact with other stock exchanges to execute the orders
profitably and also offer incidental service like arranging for financing the clients
transaction.

Types of stockbrokers
The stock brokers the key players in secondary market. There are
various categories of brokers as stated below.
Floor Brokers: They are representatives of the brokers, who enter the
trading floor and execute orders for their clients of for members.
Commission Broker: A commission broker is a broker who buys and
sells securities on behalf of his clients for a commission. He does not
purchase or sell his own name. A broker act for the large number of his
clients, and therefore, he deals in a large variety of securities.

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 Jobbers: A jobber is an independent broker who deals in securities as a

owner, keeps them for a very short period and sells them for profit known
as the jobbers turn.
Thus a jobber does not work for commission but works for profits.
A jobber transacts in the market for quick returns. In the London Stock
Exchange even member has to act as a broker or as a jobber. In India,
there is no such rigid classification.
Badla Financiers/Badliwallas: Badliwallas are the intermediaries who
finance the forward deals in specified securities in return for interest. This
interest is called Badla rate.
Arbitragers: They are brokers who buy securities in one market and sell
them in another market to take the advantages of the price differences
prevailing in different markets for same scripts.
Wolves: They are clever speculators. They perceive the changing trends
in the market and trade fast and make a fast duck.

Buying and selling of shares:

To buy and sell the script the investor has to locate register broker or a
sub broker who render prompt and efficient services to him. The order to buy
of sell specified number of scrip of the company of investors choice ate laced
with the broker, the order may be of any of the below mentions type after
receiving the order the broker tries to execute the order in his computer
terminal. Once matching order is found, the order is executed. The broker
delivers the contract note.

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To the investor, it gives the details regarding the name of the

company, number of scripts bought, price, brokerage, and the date of delivery
of share. In the physical trading form, once the broker gets the script certificate
through the clearing houses the stock broker delivers the share certificate along
with transfer deed to the investor. The investor has to fill the transfer deed and
stamp it. The stamp duty is one of the percentage consideration, the investor
should lodge the share certificate and transfer deed to the register or transfer
agent of the company if it is bought in the demit form the broker has to give a
matching instruction to his depository participant to transfer shares bought to
the investor account.

The investor should be account holder in any of

depository participant. In the case of sell of shares on receiving payment from

the purchasing broker, the broker effects the payment to the investor

Orders:
Buy and sell orders placed with members of the stock exchange by the
investor. The broker is responsible for getting the best price for his customer at
the time the order is placed.

Online Trading:
The Net is used as a medium of trading in Internet trading. Orders are
communicated to the stock exchange through website. Internet trading started in
India on 1st April 2000 with 79 members seeking permission for online trading.
The SEBI committees on Internet based securities trading services trading services
has allowed the net to be used as an Order Routing System (ORS) through
registered stock brokers on behalf of their clients for execution of transaction.

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The user should have the user id and password to enter into the electronic
ring. He should also have a demat account and bank account. The system permits
only a registered client to log in using user ID and password. Order can be placed
using place order window of the website.

The client has to enter stock code and other parameters such as quantity and
price of the scrip on the place order window.
The client can review the order placed by clicking the review option. He
can also reset to clear the values
Satisfactory orders are sent by clicking the send option.
The client receives an order confirmation message with order number and
value of the order.
If the order is rejected by the broker or stock exchange of r certain reasons
such as invalid price limit, a related message appears at the bottom of the
screen. The time taken to execute the order is 10 seconds.
When the trade is executed, the broker asks for the transfer of funds by the
investor to his account.

Stocks are credited/debited according to the

buy/sell order in the demat accounts.

Regulatory Framework
The securities and Exchange Board of India was constituted in 1998 under
a resolution of government of India. It was later made statutory body by the SEBI
act 1992. According to this act, the SEBI shall constitute of a chairman and five
other members appointed by the central government with the coming into effect of
the Securities and Exchange Board of India act, 1992. Some of the power and

35

functions exercised by the central government, in respect of the regulation of stock

exchange were transferred to the SEBI.

Objects and functions of SEBI:

I. To protect the interest of investors in securities.
II. Regulation the business in stock exchange and any other securities market.
III. Registering and regulation the working of intermediaries associated with
securities market as well as working of mutual fund.
IV. Promoting and regulating self-regulating organizations.
V. Prohibiting insides trading in securities.
VI. Regulation substantial acquisition of share and take over of companies.
VII. Performing such functions and exercising such powers under the provisions
of capital issues (control) act, 1947 and the securities to it by the central
government.

Securities and Exchange Board of India (Stock Brokers And Sub-Brokers)

Regulations, 1992,
In respect of stockbroker and sub-broker, SEBI has made 12 amendments from
November 28, 1995 to September 27,2002.
SEBI has been setup to ensure that the stock exchanges discharge their selfregulatory role properly. Even since SEBI began to monitor brokers, stock broker.

35

Stock broking is emerging as a professional advisory service, in tune with the

requirements of a mature, sophisticated, screen-based, ring less, automated stock
exchanges in the country.

New Membership -CM and F&O segment

Eligibility
The following persons are eligible to seek membership of the Exchange as
Trading Members (Brokers):
a. Individuals
b. Partnership Firms registered under the Indian Partnership Act, 1932.
c. Corporations,

Companies

or

institutions

or

subsidiaries

of

such

Corporations, Companies or institutions set up for providing financial

services.
d. Such other persons or entities as may be permitted from time to time by
RBI/SEBI under the securities Contracts (Regulations) Rules, 1957.

General Eligibility Conditions:

Criteria

Individuals

Firms

Corporate

AGE

Minimum age:

Minimum age:

Minimum age:

21 years

21

years 21

Maximum age: (applicable

partners)
60 years
STATUS

Indian Citizen

Registered
partnership

35

years

for (applicable

for

directors)
Corporate
firm registered

under

under
partnership

Indian The

Companies

Act, Act, 1956 (Indian)

1932

Conclusion

The futures market is a global marketplace, initially created as a place for

farmers and merchants to buy and sell commodities for either spot or
future delivery. This was done to lessen the risk of both waste and scarcity.
Rather than trade in physical commodities, futures markets buy and
sellfutures contracts, which state the price per unit, type, value, quality and
quantity of the commodity in question, as well as the month the contract
expires.
The players in the futures market are hedgers and speculators. A hedger
tries to minimize risk by buying or selling now in an effort to avoid rising or
declining prices. Conversely, the speculator will try to profit from the risks
by buying or selling now in anticipation of rising or declining prices.
The CFTC and the NFA are the regulatory bodies governing and
monitoring futures markets in the U.S. It is important to know your rights.
Futures accounts are credited or debited daily depending on profits or
losses incurred. The futures market is also characterized as being
highlyleveraged due to its margins; although leverage works as a doubleedged sword. It's important to understand the arithmetic of leverage when
calculating profit and loss, as well as the minimum price movements and
daily price limits at which contracts can trade.
"Going long," "going short," and "spreads" are the most common
strategies used when trading on the futures market.
Once you make the decision to trade in commodities, there are several
ways to participate in the futures market. All of them involve risk - some
more than others. You can trade your own account, have a managed
account or join a commodity pool.

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http://www.investopedia.com/university/futures/futures7.asp
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http://highered.mheducation.com/sites/0072443316/student_
view0/chapter19/work_the_web_exercises.html
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