Professional Documents
Culture Documents
ABOUT INDUSTRY
HISTORY OF THE STOCK BROKING INDUSTRY
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are meager and obscure.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid
development of commercial enterprise and brokerage business attracted many men into the
field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs.
87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business.
In 1887, they formally established in Bombay, the "Native Share and Stock Brokers'
Association" (which is alternatively known as "The Stock Exchange"). In 1895, the Stock
Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the
Stock Exchange at Bombay was consolidated.
Thus in the same way, gradually with the passage of time number of exchanges were increased
and at currently it reached to the figure of 24 stock exchanges.
TRANSACTION CYCLE:
Decision to
trade
Funds or
Securities
Placing Order
Transaction
Cycle
Settlement of
trades
Trade
Execution
Clearing of
Trades
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. He selects a broker and instructs him to place buy/sell order on an
exchange. The order is converted to a trade as soon as it finds a matching sell/buy order. At the
end of the trade cycle, the trades are netted to determine the obligations of the trading
members securities/funds as per settlement cycle. Buyer/seller delivers funds/ securities and
receives securities/funds and acquires ownership of the securities.
A securities transaction cycle is presented above. Just because of this Transaction cycle, the
whole business of Securities and Stock Broking has emerged. And as an extension of stock
broking, the business of Online Stock broking/ Online Trading/ E-Broking has emerged.
stock
trading
private
is
networks
very
owned
old
by
concept
Reuter's
for
big
"Instinet"
institutions
and
who
trade
system
called
"Posit" since 1969. But it becomes internet based for lay men only in late 90s.
Funny,
that
actually
idea
was
first
time
used
by
company
making
Beer
called "WIT beer" to help its shareholders trade its shares. Thats how "WIT
Capital" was born which is considered pioneer of this concept. It was made
mainstream and household name by an offshoot of Charles Schwab & Co called
eSchwab which is used by millions of people in USA. Lots of NRI's play
in US stock market even when they come to India for holidays, via website
of eSchwabe.
There
are
other
serious
players
like
E*trade,
DATEK
online
etc.
All
this
companies ask you to start account with US $5000 and you can buy and sell
stock using these funds. They also issue you a check book which you can use
to make payments from this account. Or use their ATM card to withdraw cash
from your stock trading account.
Today
practically
every
big
name
brokerage
firm
offers
online
stock
trading
as it reduces their costs. Earlier they had army of brokers on phone with
clients
executing
trade,
which
is
done
by
computers
accepting
orders
from
clients directly. This firm now offers human access to high net worth accounts, and to rest at
charge per trade.
Sharekhan.com,
Geojit
securities.com,
HDFCsec.com,
Tatatdw.com,
Kotakstreet.com are some of the online broking sites in India. With Net trading in securities
and rapid consolidation between multiple stock exchanges, the international securities
marketplace is fast becoming a "global village" through the creation of a universal virtual
equity market.
Compared to the Western countries, online trading is still in its infancy in India. With trading
turnover at around Rs. 10 crores per day from online trading compared to a combined gross
turnover of around Rs. 9000-10,000 crores handled by the BSE and NSE together, online
trading has a long way to go.
Enhance market quality through improved liquidity, by increasing quote continuity and
market depth.
Step-1: Those investors interested in doing the trading over internet system, that is,
NEAT-ISX, should approach the brokers and register with the Stock Broker.
Step-2: After registration, the broker will provide to them a login name, password and a
personal identification number (PIN).
Step-3: Actual placement of an order. An order can then be placed by using the place
order window as under:
o First by entering the symbol and series of stock and other parameters such as
quantity and price of the scrip on the place order window.
o Second, fill in the symbol, series and the default quantity.
Step-4: It is the process of review. Thus, the investor has to review the order placed by
clicking the review option. He may also re-set to clear the values.
Step-5: After the review has been satisfactory; the order has to be sent by clicking on
the send option.
Step-6: The investor will receive an ``Order Confirmation'' message along with the
order number and the value of the order.
Step-7: In case the order is rejected by the Broker or the Stock Exchange for certain
reasons such as invalid price limit, an appropriate message will appear at the bottom of
the screen. At present, a time lag of about ten seconds is there in executing the trade.
Step-8: It is regarding charging payment, for which there are different modes. Some
brokers will take some advance payment from the investors and will fix their trading
limits. When the trade is executed, the broker will ask the investor for transfer of funds
by the investor to his account.
Safety: Please make sure site has 128-bit encryption to ensure safety of transaction online.
ICICIDirect.com, 5paisa.com are few sites with 128-bit encryption. You normally get a secured
Login id and password. It is always advisable to frequently change trading password. Ideally
online trading site should be fully integrated. The greater the backward integration, the better it
is for the customer. Ideally broking account, demat account and bank account should be linked
electronically.
Rate refresh: Rate refresh has to be real-time with no time lag. The speed and reliability
comes with huge investment in technology. It is always advisable to check rates of online
broking sites with BSE/ NSE terminal rates.
Speed of execution: System has to be fast and reliable that does just one job- executes your
trades. The last thing you need is a site that is heavily congested with the users who are
downloading heavy jpeg graphs or pulling the latest story why market is moving. The site
should be one click wonder where squaring off all your positions or canceling all your pending
orders takes one click and a confirmation of action.
Trading limit: For trading, all sites provide 4 times buy and sell limit against margin money
put in by customer. For delivery of shares, buying limit is equal to margin money put in by
customer. Couple of sites also provides margin funding for buying of shares.
Free trial period: Site should allow users free trial period to familiarize yourself with system
before you decide to become trading member of the site.
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5Paisa.com:
5paisa is the trade name of India Infoline Securities Private Limited (5paisa), member of
National Stock Exchange and The Stock Exchange, Mumbai. 5paisa is a wholly owned
subsidiary of India Infoline Ltd, Indias leading and most popular finance and investment
portal. 5paisa has emerged as one of leading players in e-broking space in India.
The companys brokerage is one of the lowest in the industry. It also provides the research on
commodities. Investors can benefit from its analysis and advice available at the click of the
mouse. For those who prefer to trade the traditional way, India Infoline investor points are
available across the country.
India Infoline was founded by a group of professionals in 1995. Its institutional investors
include Intel Capital, one of the leading technology companies in the world promoted by the
UK government, ICICI, TDA and Reeshanar. The company offers a slew of products such as
stock and derivatives broking, commodities broking and mutual funds.
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Kotak Securities Limited manages assets over 1700 crores under Portfolio Management
Services (PMS) which is mainly to the high end of the market. Kotak Securities Limited has
newly launched Kotak Infinity as a distinct discretionary Portfolio Management Service
which looks into the middle end of the market.
India Bulls:
Indiabulls is India's leading retail financial services company with 77 locations spread across
64 cities. Its size and strong balance sheet allows providing varied products and services at
very attractive prices, our over 750 Client Relationship Managers are dedicated to serving your
unique needs.
Indiabulls is lead by a highly regarded management team that has invested crores of rupees
into a world class Infrastructure that provides real-time service & 24/7 access to all
information and products. The Indiabulls Professional Network offers real-time prices,
detailed data and news, intelligent analytics, and electronic trading capabilities, right at your
finger-tips. This powerful technology is complemented by our knowledgeable and customer
focused Relationship Managers.
Indiabulls offers a full range of financial services and products ranging from Equities,
Derivatives, Demat services and Insurance to enhance wealth and to achieve the financial
goals.
and retail broking, MOSt is amongst the best-capitalized firms in the broking industry in terms
of net worth. MOSt was founded in 1987 as a small sub-broking unit, with just two people
running the show. Focus on customer-first-attitude, ethical and transparent business practices,
respect for professionalism, research-based value investing and implementation of cutting-edge
technology have enabled it to blossom into a thousand-member team.
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The institutional business unit has relationships with several leading foreign institutional
investors (FIIs) in the US, UK, Hong Kong and Singapore. In a recent media report MOSt was
rated as one of the top-10 brokers in terms of business transacted for FIIs.
The retail business unit provides equity investment solutions to more than 50,000 investors
through 270 outlets spanning 150 cities and 22 states. MOSt provides Advice-Based Broking,
Portfolio Management Services (PMS), E-Broking Services, Depository Services,
Commodities Trading, and IPO and Mutual Fund Investment Advisory Services. Its Value
PMS Scheme gave a 160% post-tax return for the year ended March 2004.
In AsiaMoney Brokers Poll 2003 MOSt has been rated as the Best Domestic Research HouseMega Funds ,while in 2000 and 2002 it has been rated as the Best Domestic Equity Research
House and Second best amongst Indian Brokerage firms respectively.
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Trading
A/c
Brokerage
Demat
Delivery
Interface
Square
Banks Associated
Off
with
HDFC, UTI, OBC,
Sharekhan
750
NIL
0.50
0.10
ICICI Direct
750
NIL
0.75
0.18
ICICI Bank
Indiabulls
750
250
0.40
0.10
N.A.
Citibank, HDFC,
5 paisa
800
NIL
0.20
0.05
Kotak Street
500
N.A.
0.59
0.06
HDFC Securities
700
NIL
0.50
0.15
If we check the above table, we can come to know that the rates of Sharekhan is quite
competitive than other brokerage houses.
One other best point of Sharekhan is if a person is having a online/offline trading account as
well as Demat account with Sharekhan, they wont be charged any kind of Demat transfer
charges, which are charged when the shares are sold from the Demat account.
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COMPETITIVE ANALYSIS
Follower:
The followers are those who just blindly follow the other player which are leader
and challenges.
The players like 5 paisa, Motilal Oswal, HDFC Securities, Kotakstreet are the
followers.
LEADER:
NICHER:
ICICIdirect.com and Kotakstreet.com are the two stock broking houses which are
focusing only on online investors.
CHALLENGER:
Indiabulls is also challenging with low brokerage rates and class one services.
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The pricing for Web trading are expected to come down and once the investment was made on
technology, the scalability would be high and there is minimum involvement of staff in dealing
with customers. The crediting of the sale/purchase orders would be fast with no physical
handling as the system does every work.
Sharekhan has already obtained license to offer Portfolio Management Services (PMS). It was
offering a range of products to suit retail investors and PMS when launched, would cater to the
requirements of the high net-worth individuals. The entry-level investment for PMS
membership may be around Rs 5 - Rs 10 lakhs, which was needed for having a well-diversified
portfolio.
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Analysis Before, During (live market updates) and After market timings
STOCK IDEAS
Stock Ideas is aimed at Sharekhan's trading clients. It presents our best stock picks in today's
market. We categorize these companies into six clusters to help you identify the stocks that fit
your time horizons and return objectives the best. Each cluster represents a certain profile
in terms of business fundamentals as well as the kind of returns you can expect of it over a
certain time horizon.
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STOCK CLUSTERS
Sharekhan categorise all the scripts that are under coverage into 6 clusters. Each cluster
represents a certain profile in terms of business fundamentals as well as the kind of returns you
can expect over a certain time horizon. This help in identifying the stocks that fit your time
horizons and return objectives best. The six clusters are: Evergreen, Apple Green,
Emerging Star, Ugly Duckling, Vulture's Pick and Cannonball.
EVERGREEN
These stocks are steady compounders, churning out steady growth rates year on year. They are
typically significant players in their markets, with sound strategies that will help them achieve
and sustain market dominance in the long run. They have strong brands, management
credentials and a consistent track record of achieving super normal shareholder returns. We
expect stocks in this category to compound at between 18-20% per annum for the next five to
ten years. Also called ownership stocks, Evergreen stocks are the brightest jewels in any
portfolio.
APPLE GREEN
These are stocks that have the potential to be steady compounders and are attempting to move
upwards, to turn Evergreen. They rank a shade below the Evergreen companies, only
because their potential in the five to ten years' time is still not very clear, although they
might grow at rates faster than that of the Evergreen stocks in the next year or two. They
could grow at 25-30% per annum over the next two to three years.
EMERGING STAR
These are typically young companies, often in niche businesses, that have the potential to grow
and dominate their niches. Even better, they might turn out to be real giants, if their niches
explode into full-blown markets in their own rights. These stocks are potential ten-baggers
but you need to be patient.
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UGLY DUCKLING
These are companies that are trading below their fair value or at values which are at a
significant discount to that of their peer group, due to a combination of circumstances. But
things are now starting to happen in these companies or in their markets that are likely to cause
a re-evaluation of their prospects. These stocks could double in two to three years' time.
VULTURE'S PICK
These are companies with valuable assets or brands that have been trashed to ridiculously low
prices. Buy a Vulture's Pick and wait for a predator who finds its assets undervalued to come
along. This could be a long wait but the returns could be startlingly high.
CANNONBALL
Season's favourites! Typically they are fast gainers in a rising market, which could give returns
of 20-40% within three months. These are based on a combination of sound market
information, technical charts and available fundamentals for investors which are having an
appetite for high risk and high reward.
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COMMODITY TRADING
Sharekhan is providing the facility to trade with the commodities through MCX (MultiCommodity Exchange) and NCDEX (National Commodities & Derivatives Exchange).
The commodities market in India is an emerging market, which will become the largest market
in the world within the next 5 years, as the trends in the commodities market shows its
performance. The company also provides research reports on daily, weekly and monthly basis
for the investors in the commodities. It is just like the futures and is having a fixed lot of goods
with the margin for each commodity and the trading is based on the theory of futures and
therefore, it is also called Vayda Market. In short Sharekhan also provides brokering in
commodities and the brokerage charges are 0.10% on total trade value and if carry forwarded
an additional 0.02% charge on total trade.
ONLINE IPO
Online IPO (Initial Public Offering) is a new service started by Sharekhan for providing the
application form of any companys issues of shares just like the TCS issue can be subscribed
by filling an online form to reduce the paper work and the fund transfer facility is also
provided to the clients for transferring the funds online. It is given on its web-site for helping
the clients who are not able to collect the forms manually and the speed of filling and reducing
the risk of misplacing of forms, not reaching in time, etc.
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PRODUCTS of SHAREKHAN
Sharekhans products are basically divided into online and offline products.
Sharekhan
Off-Line
On-Line
Classic
Speed Trade
1. Classic Account
The CLASSIC ACCOUNT is a Sharekhan online trading account, through which one can buy
and sell shares through our website www.sharekhan.com in an instant.
Along with enabling access for you to trade online, the CLASSIC ACCOUNT also gives you
our Dial-n-Trade service. With this service, all you have to do is dial 1-600-22-7050 to buy
and sell shares using your phone.
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Online trading account for investing in Equities and Derivatives via sharekhan.com
2.
3.
4.
5.
6.
Streaming quotes
7.
8.
9.
Provision to enter price trigger and view the same online in market watch
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10,000 Deposits
of Group As Shares
Demat free for 1 year (other
Classic
facilities included)
Online trading on your pc with
Demat free and other facilities
The various benefits the client gets from the online trading are:
Freedom from Paperwork: Integrated trading, bank and Demat account (auto pay-in
and pay-out of securities) with digital contracts removes all paperwork.
Instant Credit And Transfer: Instant transfer of funds from bank accounts of clients
choice to his/her Sharekhan trading account.
Trade Anywhere: Enjoy the ease of trading from any part of the world in a completely
secure environment.
Dial n Trade: Call Sharekhan on a toll free number to place orders through Sharekhans
tele-brokers.
Timely Advice: Make informed decisions with expert advice, investment calls and live
market commentary.
After-Hour Orders: The Client can place orders after the market hours, which get
executed as soon as markets open.
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ABOUT DERIVATIVES
INTRODUCTION
Keeping in view the experience of even strong and developed economies the world over, it is
no denying the fact that financial market is extremely volatile by nature. Indian financial
market is not an exception to this phenomenon. The attendant risk arising out of the volatility
and complexity of the financial market is an important concern for financial analysts. As a
result, the logical need is for those financial instruments which allow fund managers to better
manage or reduce these risks.
With gradual liberalization of Indian financial system and the growing integration among
markets, the risks associated with operations of banks and All India Financial Institutions have
become increasingly complex, requiring strategic management. In keeping with spirit of the
guidelines on Asset-Liability Management (ALM) systems and on integrated risk management
systems, it is very much required to design risk management architecture, taking into
consideration the size, complexity of business, risk philosophy, market perception and the level
of capital. In addition, fine-tuning the risk management system to deal with credit and market
risk is also the need of the hour. For enabling the banks and the financial institutions, among
others, to manage their risk effectively, the concept of derivatives comes into picture.
The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by lockingin asset
prices. As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However, by locking-in asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors.
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Example: A very simple example of derivatives is curd, which is derivative of milk. The price of curd
depends upon the price of milk, which in turn depends upon the demand, and supply of milk.
See it this way. American depository receipts/ global depository receipts of ICICI, Satyam and
Infosys traded on stock exchanges in the USA and England have their own values? No. They
draw their price from the underlying shares traded in India.
Consider how the value of mutual fund units changes on a day-to-day basis. Dont mutual fund
units draw their value from the value of the portfolio of securities under the schemes? Arent
these examples of derivatives? Yes, these are. And you know what, these examples prove that
derivatives are not so new to us. Nifty options and futures, Reliance futures and options,
Satyam futures and options etc are all examples of derivatives. Futures and options are the
most common and popular form of derivatives.
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HISTORY
The derivatives markets has existed for centuries as a result of the need for both users and
producers of natural resources to hedge against price fluctuations in the underlying
commodities. India has been trading derivatives contracts in silver, gold, spices, coffee,
cotton and oil etc for decades in the gray market. Trading derivatives contracts in
organized market was legal before Morarji Desais government banned forward contracts.
Derivatives on stocks were traded in the form of Teji and Mandi in unorganized
markets. Recently futures contract in various commodities was allowed to trade on
exchanges. In June 2000, NSE and BSE started trading in futures on Sensex and Nifty.
Options trading on Sensex and Nifty commenced in June 2001. Very soon thereafter
trading began on options and futures in 31 prominent stocks in the month of July and
November respectively. The market lots keeps on changing from time to time. The
minimum quantity you can trade in is one market lot.
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Risk containment: using derivatives for hedging and risk containment purposes
Risk Trading/Market Making: Running derivatives trading book for profits and
arbitrage; and/or
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TYPES OF DERIVATIVES
Derivative as a term conjures up visions of complex numeric calculations, speculative dealings
and comes across as an instrument which is the prerogative of a few smart finance
professionals. In reality it is not so. In fact, a derivative transaction helps cover risk, which
would arise on the trading of securities on which the derivative is based and a small investor
can benefit immensely. A derivative security can be defined as a security whose value
depends on the values of other underlying variables. Very often, the variables
underlying the derivative securities are the prices of traded securities.
Derivatives and futures are basically of 3 types:
Options
Swaps
DERIVATIVES
DERIVATIVES
Options
Options
Put
Put
Futures
Futures
Call
Call
Commodity
Commodity
Swaps
Swaps
Interest
Interest Rate
Rate
Security
Security
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Forwards
Forwards
Currency
Currency
FORWARDS:
A forward contract is the simplest mode of a derivative transaction. It is an agreement to
buy or sell an asset (of a specified quantity) at a certain future time for a certain price. No
cash is exchanged when the contract is entered into.
Illustration: - Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it
outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will
rise 3 months from now. So in order to protect himself from the rise in prices Shyam enters
into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,000.
What Shyam is doing is that he is locking the current price of a TV for a forward contract. The
forward contract is settled at maturity. The dealer will deliver the asset to Shyam at the end of
three months and Shyam in turn will pay cash equivalent to the TV price on delivery.
FUTURES:
It is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price through exchange traded contracts.
A Future represents the right to buy or sell a standard quantity and quality of an asset or
security at a specified date and price. Futures are similar to Forward Contracts, but are
standardized and traded on an exchange, and are valued, or "Marked to Market daily. The
Marking to Market provides both parties with a daily accounting of their financial obligations
under the terms of the Future. Unlike Forward Contracts, the counterparty to a Futures contract
is the clearing corporation on the appropriate exchange. Futures often are settled in cash or
cash equivalents, rather than requiring physical delivery of the underlying asset. Parties to a
Futures contract may buy or write Options on Futures.
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OPTIONS:
An option is a contract, which gives the buyer the right, but not the obligation to buy or
sell shares of the underlying security at a specific price on or before a specific date.
Option, as the word suggests, is a choice given to the investor to either honor the contract; or
if he chooses not to walk away from the contract. There are two kinds of options: Call Options
and Put Options.
A Call Option is an option to buy a stock at a specific price on or before a certain date. When
you buy a Call option, the price you pay for it, called the option premium, secures your right to
buy that certain stock at a specified price called the strike price. If you decide not to use the
option to buy the stock, and you are not obligated to, your only cost is the option premium.
Put Options are options to sell a stock at a specific price on or before a certain date. In this
way, Put options are like insurance policies. With a Put Option, you can "insure" a stock by
fixing a selling price. If something happens which causes the stock price to fall, and thus,
"damages" your asset, you can exercise your option and sell it at its "insured" price level. If the
price of your stock goes up, and there is no "damage," then you do not need to use the
insurance, and, once again, your only cost is the premium.
Technically, an option is a contract between two parties. The buyer receives a privilege for
which he pays a premium. The seller accepts an obligation for which he receives a fee.
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CALL OPTIONS
Call options give the taker the right, but not the obligation, to buy the underlying shares at a
predetermined price, on or before a predetermined date.
Illustration: - Raj purchases 1 Satyam Computer (SATCOM) AUG 150 Call --Premium 8
This contract allows Raj to buy 100 shares of SATCOM at Rs 150 per share at any time
between the current date and the end of next August. For this privilege, Raj pays a fee of Rs
800 (Rs eight a share for 100 shares).
The buyer of a call has purchased the right to buy and for that he pays a premium.
Now let us see how one can profit from buying an option; Sam purchases a December call
option at Rs 40 for a premium of Rs 15. That is he has purchased the right to buy that share for
Rs 40 in December. If the stock rises above Rs 55 (40+15) he will break even and he will start
making a profit. Suppose the stock does not rise and instead falls he will choose not to exercise
the option and forego the premium of Rs 15 and thus limiting his loss to Rs 15.
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PUT OPTIONS
A Put Option gives the holder of the right to sell a specific number of shares of an agreed
security at a fixed price for a period of time.
Illustration:- Raj is of the view that the a stock is overpriced and will fall in future, but he
does not want to take the risk in the event of price rising so purchases a put option at Rs 70 on
X. By purchasing the put option Raj has the right to sell the stock at Rs 70 but he has to pay a
fee of Rs 15 (premium).
So he will breakeven only after the stock falls below Rs 55 (70-15) and will start making profit
if the stock falls below Rs 55.
CALL OPTIONS
PUT OPTIONS
Short
Long
Long
Short
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Secondly, strengthening of infrastructure and institutional capabilities of the regulator and the
existing exchanges received priority. Thirdly, as the existing exchanges are slow to adopt
reforms due to legacy or lack of resources, new promoters with resources and professional
approach were being attracted with a clear mandate to set up demutualised, technology driven
exchanges with nationwide reach and adopting best international practices.
The year 2003 marked the real turning point in the policy framework for commodity market
when the government issued notifications for withdrawing all prohibitions and opening up
forward trading in all the commodities. Of the country's total GDP, commodities related
(and dependent) industries constitute about roughly 50-60 %, which itself cannot be
ignored.
Most of the existing Indian commodity exchanges are single commodity platforms; are
regional in nature, run mainly by entities which trade on them resulting in substantial conflict
of interests, opaque in their functioning and have not used technology to scale up their
operations and reach to bring down their costs. But with the strong emergence of: National
Multi-commodity Exchange Ltd., Ahmedabad (NMCE), Multi Commodity Exchange
Ltd., Mumbai (MCX), National Commodities and Derivatives Exchange, Mumbai
(NCDEX), and National Board of Trade, Indore (NBOT), all these shortcomings will be
addressed rapidly. These exchanges are expected to be role model to other exchanges and are
likely to compete for trade not only among themselves but also with the existing exchanges.
The current mindset of the people in India is that the Commodity exchanges are
speculative (due to non delivery) and are not meant for actual users. One major reason beingthe awareness is lacking amongst actual users. In India, Interest rate risks, exchange rate
risks are actively managed, but the same does not hold true for the commodity risks. Some
additional impediments are centered on the safety, transparency and taxation issues.
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WHY NCDEX?
NCDEX is nationalized screen based system which is providing transparent, private
and easy services.
NCDEX is one of the traditional media which gives online information
NCDEX is one of the Indian commodity exchange, constructed on the basis of the
current national institutes the exchange has been established with the coloration of
leading institutes like NABARD, LIC, NSI etc.
In India NCDEX has maximum settlement guarantee fund.
NCDEX has appointed two exports for checking quality at the time of delivery
48
49
The market watch window is used to view the market details for a particular or group of
contracts and for a particular instrument type. This window displays the following details:
Symbol,Expiry,price quotation unit, buy qty, buy price, sell price, sell qty, last traded
price,D.P.R,volume (in 000s), value (in lac),% change,
average trade price, high, low, open, close & open interest.
50
The commodity should be competitive, i.e., there should be large demand for and
supply of the commodity - no individual or group of persons acting in concert should
be in a position to influence the demand or supply, and consequently the price
substantially.
The market for the commodity should be free from substantial government control.
The commodity should have long shelf life and be capable of standardization and
gradation.
51
52
53
HEDGING
Hedging is a sophisticated mechanism, which provides the necessary immunity to the above
interests in the marketing of commodities from the risk of adverse price fluctuations.
A Hedge is a countervailing contract transacted in a futures market through which those who
have bought in the ready market will sell in the futures market and those who have sold in the
ready market would buy in the futures market. In each of these two cases, a purchase in the
ready market is off-set by an opposite sale in the futures market and a sale in the ready market
is off-set by purchase in the futures market.
When the purchase or sale commitment in the ready market is fulfilled, the sale or purchase
hedge contract is closed out by an offsetting reverse purchase or sale contract in the futures
market.
The practice of hedging is based on the assumption that the ready and futures prices of the
commodity move more or less parallel to each other. The ready and futures prices of a
commodity ordinarily do move together in sympathy with each other because both ready and
futures prices are basically determined by the demand and supply factors of that particular
commodity. When the price of a commodity has declined in the ready market, its price in the
futures market would normally have also declined so that the loss incurred in the ready market
would be recovered by the profit made in the futures market.
Similarly, if the price rises in the ready market after the hedge sale had been entered into the
futures market, there would be a loss in the futures market, which would, however, be made up
with the profit made in the ready market. But, in certain circumstance, the ready and futures
prices may not move together or the spread between the two may increase or decrease sharply.
To the extent that they do not move together by the same extent, hedging itself may be a source
of minor gains or losses. But a dealer, manufacturer or exporter is not, per se, interested in such
speculative losses or gains. His only interest is to ensure that he gets the necessary insurance
against unforeseen fluctuation in prices. By and large, hedging in a futures market does afford
such a protection to the various functionaries.
54
REGULATORY BODY
The Forward Markets Commission (FMC) is the regulatory body for commodity
futures/forward trade in India. The commission was set up under the Forward Contracts
(Regulation) Act of 1952. It is responsible for regulating and promoting futures/forward trade
in commodities. The FMC is headquartered in Mumbai while its regional office is located in
Kolkata. Curbing the illegal activities of the diehard traders who continued to trade illegally is
the major role of the Forward Markets Commission.
55
Initial Margins
Exposure margins
Surveillance
56
To get in place the right regulatory structure to even out the differences that may exist
in various fields.
57
Markets: FII's are currently not allowed nor disallowed under any law. As, they have added
depth to the equity markets; they will add depth to the commodities markets, since they
globally know the commodities.
2. Active Involvement of Mutual Fund Industry in India: Currently Mutual
Funds are prohibited from not using derivatives apart from hedging. Mutual Funds as investors
can invest in gold and get returns as they get from debt instruments, equity markets. AMFI &
SEBI need to collectively work towards the same. Launch of the "Commodity Funds", by the
Mutual Funds in India, can serve as a newer investment avenue for investors.
58
3. Online commodity trading: Online commodity trading offers a way for an open,
many-to-many system, where every user has equal access to price quotes and trading
functionality. It provides a level playing field for all, without favoritism or control by a chosen
few, where any user can view all quotes posted by other users in real time, act or trade on
quotes posted by others, post their own prices and quantities for others to trade
The Online commodity trading site usually lists a large number of unique products covering a
variety of commodities, structures, and settlement terms ranging from Oil, Natural Gas,
Electric Power, Precious Metals, Emissions and Weather. It provides for various media ranging
from Physical Delivery and Financial Cash Settlement. The greatest advantage of an online
system for trading is that just a click can be used to hit a bid or lift an offer. The Online
trading system operates almost continuously around the clock, 24 hours a day, seven days a
week. This allows any user to extend the trading day, and easily pass the trading objectives to
others in companies in different time zones.
There are further derivative options available ranging from Forwards, Swaps, Options,
Spreads, Differentials, Complex Derivatives.
Liquidity, or trade activity, is perhaps the best measure of success of an online trading
commodity trading system. With most online commodity trading systems, traders can be sure
of finding an interesting market development or trading opportunity almost every time they log
on.
All quotes posted by users on any online commodity trading systems are live and firm. They
can be acted on with full assurance of a completed transaction. The greatest advantage of an
online system for trading is that just a click can be used to hit a bid or lift an offer.
59
The Online trading system operates almost continuously around the clock, 24 hours a day,
seven days a week. This allows any user to extend the trading day, and easily pass the trading
objectives to others in companies in different times zones.
The online commodity trading system in India is only an emerging segment yet. This is
because the Internet boom in Indian is on the rise only now. The Internet charges are becoming
minimal and the Internet is soon becoming a way of life in India. It is in this scenario that
online trading is becoming more the way of trading in India.
60
61
62
63
RESEARCH OBJECTIVE
The main objective of the study is to check literacy ratio of Derivatives & Commodities and
their potential market among the people of Rajkot City.
2.
3.
4.
5.
To know the influencing force behind the decision making while trading in derivatives
and Commodities.
6.
To find out the best pattern to educate about Derivatives & Commodities.
7.
To find out the medium which is the best suitable for trading on Derivatives &
Commodities.
.
64
SOURCES OF DATA
There are mainly two sources of data i.e.
(1) Primary
(2) Secondary
Primary Data:
The data, which is collected directly from the respondents to the base of knowledge and belief
of the research, are called primary data.
The normal procedure is to interview some people individually to get a sense of how people
feel about the derivatives & commodities segment.
So far as our research is concerned, primary data is the main source of information. We have
collected data through Questionnaire and information from respondent.
Secondary Data:
When data are collected and compelled from the published nature or any others primary data
is called secondary data.
So far as our research is concerned, we have not collected any information from any sources.
So, we have not used secondary data for our research
65
SAMPLING PROCESS
It is very true that its very difficult to do the research with the whole universe. As we know
that it is not feasible to go for population survey because of the numerous customers and their
scattered location. So for this purpose sample size has to be determined well in advance and
selection of sample also must be scientific so that it represents the whole universe.
So far as our research is concerned, we have taken sample size of 300 respondents. We have
selected Income Earners with savings to invest in Rajkot city.
All the respondents are stratified on the basis of their profession and savings. We have
selected the samples as per our convenience.
Sample universe
Sampling Technique
Sample size
Sampling Unit:
Baroda city
Stratified and Random
150 respondents
Professional
Random
Random
Government Employees
Random
Random
66
SCOPE OF STUDY
The research that is being conducted by us will be useful in the following respect.
This will help the company, how to make people aware about derivatives &
commodities by imparting best education.
This will help the company to know the taste of masses and turn it towards derivatives
& commodities.
This will also help to select the right media for advertising to create brand awareness as
well as to give knowledge of the products.
This will also help to select right medium for trading in derivatives & commodities
segment.
This will help the company to reduce the obstacles which come in the way for the
development of derivatives & commodities segment.
67
Personal Bias:
People may have personal bias towards particular investment option so they may not give
correct information and due to which conclusion may be derived.
2.
Time Limit:
The time duration of the research is short thats why the information is not covered fully.
3.
Area:
The area was limited to Baroda city only, so we can not know the degree of the literacy outside
the city.
4.
Sample Size:
The last limitation is Sample size, taken by us is of 150 only; due to which we may not get the
proper results.
68
Gender Ratio
Male
Female
93
57
Out of the sample size of 300, the break up of the gender ratio has come up as above.
2.
Age
21 35
91
Age
36 50
12
51 65
47
Above 66
0
3.
Educational Qualification
Qualification
Post Graduate
57
Graduate
93
Under Graduate
0
4.
Occupation
Professionals
57
Business Man
23
69
Govt. Employees
36
5.
Nos.
Percentage
Bank FD
115
77
Mutual Fund
69
46
Shares/ Equity
93
62
Postal Scheme
104
69
Insurance
115
77
Real Estate
81
54
G-secs
57
38
Bonds/Debentures
69
46
Jewellery
115
77
It can be seen from the graph that the respondents have given first preference for investment to
Bank FD. Insurance and Jewellary are at 77% while postal schemes, shares/equities have
almost equal share with second and third position. We can say that the respondents are not in
favor of taking risk. But by seeing the shares on second preferences we can say that people are
now turning towards capital market.
70
6.
Nos.
103
57
23
Percentage (%)
69
38
15
When asked to the respondents that out of the given three options in which they are trading.
Equity got the first preference by 69%. While derivatives i.e. F&O has got second rank and
commodities has been least preferred now a days.
71
7.
Nos.
46
47
57
Percentage (%)
31
31
38
On asked about their preferences for trading in future, the respondents have shown equal
interest in equity and commodity with 38% followed by derivatives. From this we can say that
commodity segment has got a brighter future.
72
8.
Nos.
Percentage (%)
35
34
23
23
23
15
12
12
08
08
While questioned about the constraints which hold them back from trading in derivatives and
commodities, respondents have given the maximum votes to their Risk awareness and lack
of funds with 23% each. While the lack of knowledge about derivatives and commodities is
also one of the big constraints followed by lack of guidance.
73
9.
Derivative
Factors
Risk Reduction
To Increase Leverage
Investment
Arbitrage
Speculation
Nos.
28.4
21.9
24.6
11.4
13.7
Rank
1
3
2
5
4
While investigating the factors which have been given the maximum importance by investors
while trading in derivatives and commodities we have come up with Risk Reduction as the
first priority with 28.4%, while 24.6% people have considered it as an investment option near
to that almost 22% people are using derivatives and commodity as a tool to increase the
leverage. So, in future derivatives and commodities can be highlighted as an investment option
which given higher leverage.
74
10.
Factors which people takes into consideration while taking the decision to trade in
Factor
Percentage (%)
Rank
Independently
14.3
Broker/Agents advice
News Channel
11.6
9.3
5
8
Internet
Advice of Friends/Colleagues
11.3
12
6
2
9.7
12
11.8
News Papers
Business Magazines
On asked to the respondents that while deciding to trade in derivative commodities, whom do
they consider the reliable source of information. We come up with the conclusion that most of
investors take their decision independently. While they consider Business Magazines, Advice
of friends/colleagues and services of well known stock broking houses equally important. Also
brokers have a good knowledge on investment. So, stock broking houses like Sharekhan can
plan out their strategy to increase the trading on derivatives and commodities.
11.
75
Tools
Classroom Teaching
Literature
Self-Experience
Internet
Documentaries
Seminars
Nos.
57
57
103
47
35
Percentage (%)
38
38
69
31
23
When the respondents were asked about the learning technique on derivatives and
commodities, the most of them preferred preference self experience that is they wanted to learn
through trial n error: after all Experience is The Best Teacher.
76
12.
Time
1 day
2 days
3 days
2 hrs per day over 1 month
Cant say
Nos.
23
46
12
22
47
Percentage (%)
15
31
8
15
31
When asked about the time which the respondents would like to devote for learning about
derivatives and commodities, 31% were not sure about the time limit. It means it depends and
varies on person to person.
77
13.
Medium
Stock Broking Cos. (Branded)
Franchisees
Brokers
Online
Percentage (%)
33.1
15.3
25.8
25.8
Rank
1
3
2
2
While finding out the medium which people consider the most reliable while trading
derivatives and commodities, the respondents gave maximum vote to Branded Stock Broking
Houses like Sharekhan, ICICIdirect.com, and Kotakstreet.com. While the second choice was
local brokers. So from the above we can say that if proper attention is given on online trading
and brokers the chances of development of derivatives and commodities would be increasing.
78
14.
Broking Company
India Bulls
ICICIdirect
Kotak Street
Karvy
Sharekhan
5 Paisa
HDFC Securities
Motilal Oswal
Marwadi
Percentage (%)
10.20
29.30
14.10
08.90
25.00
05.10
03.80
01.20
02.40
Rank
4
1
3
5
2
6
7
9
8
This question was one of the most crucial for investigating the mind share of stock broking
houses. In this question we came up with the company which is one of the leading in stock
broking industry i.e. ICICIdirect.com the next close challenger was Sharekhan.com followed
by Kotakstreet.com.
15.
False
79
Cans Say
54.8
32.7
12.5
In this question we asked eight sub questions on derivatives and commodities segment. Almost
55% questions were correctly answered by the respondents; while 32.7% were false. So, we
can say that the people have more or less knowledge about derivatives and commodities.
80
CONCLUSION
Most of the people in Rajkot City are investing in fixed return Instruments.
Those people who want to invest in Derivatives & Commodities are investing mainly for
reducing risk and they consider them as investment tool.
People generally want to take trading decisions independently or under the guidance of
Friends or Well Known Stock Broking Houses.
Literature and Self Experience can be taken as the best method to impart education about
derivatives & commodities.
More than 55% of the respondents are familiar with the Derivatives & Commodities.
81
RECOMMENDATION
Sharekhan needs to make its marketing team strong and also it should increase
marketing activities such as promotional campaigns.
Sharekhan should turn existing customers (who are trading in Equity only) towards
Derivatives & Commodities.
Sharekhan can also use Newspapers and Local New Channels as a medium of
advertising.
Sharekhan may also use its helpline number for giving education on Derivatives &
Commodities.
Company may appoint special team for giving education & attracting people towards
trading on Derivatives & Commodities.
82
APPENDIX
1.
Gender:
Male
Female
2.
Age:
21-35
36-50
3.
Education:
_________________________
4.
Occupation:
Professional
Businessmen
Employees working
Govt. Employee
in Pvt. Firms
Others
5.
6.
Bank FD
Postal Scheme
G-Secs
Mutual Funds
Insurance
Bonds/Debentures
Shares/Equity
Real Estate
Jewellary
Commodity
8.
Above 66
Of this investment options, with which are you familiar and already invest in?
Equity
7.
51-65
Derivatives (F&O)
Commodity
If Questions 6& 7 are not applicable, then what are the constraints that are
holding you back?
Risk taking ability
Regulatory constraints
Fund Facilities
Lack of knowledge
Lack of Guidance
Non-Availability of Options
with your broker
83
9.
If you are trading in derivatives & commodities or you want to be in, which
factors will you give importance? (Give Rank)
Risk Reduction
Speculation
Investment
Arbitrage
How do you take decisions if you want to trade in Derivatives & commodities? (Give
Rank)
Independently
Advice of Friends/colleagues
Broker/Agents advice
News channels
Newspapers
Business Magazines
Internet
11.
12.
Internet
Literature
Documentaries
Self-Experience
Seminars
How much time will you be able to devote for learning derivatives &
Commodities?
13.
1 day
2 days
3 days
Cant say
According to you, which medium is the most reliable for trading in derivatives
& Commodities? (Give Rank)
Stock broking cos. (Branded)
Brokers
Franchisees
Online
84
14.
15.
2. ________________
3. ________________
;
False (X)
a.)
b.)
c.)
If a fund gave a return of 16% in 2004, it will give at least 16% in 2005
d.)
e.)
f.)
g.)
h.)
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BIBLIOGRAPHY
Kothari C.R., Research Methodology, New Delhi, Vikas Publishing House pvt.Ltd.
1978
WEBSITES:
1. www.Google.com
2. www.bseindia.com
3. www.nseindia.com
4. www.sharekhan.com
5. www.ncdex.com.
6. www.mcx.com
NEWSPAPERS:
ECONOMIC TIMES
TIMES OF INDIA
FINANCIAL EXPRESS
SHAREKHANS VALUE LINE MAGAZINE
86