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GLOSSARY

1 Basic Capital Market Instrument

2 Regulatory Framework
• Security Laws
• Taxation

3 Players
• Investors
• Traders

4 Terminology / Jargon
• Mutual Funds
• Primary Market
• Secondary Market
• Indices
• Demat
• Stock market manipulations
• Equity Research
• Derivatives ,Options & Futures
• Risk & Return
• Mergers & Acquisition

A PRIMER TO THE PRIMARY MARKETS

BASIC CAPITALMARKET INSTRUMENTS

1 Stock or share
An ordinary share represents the form of fractional ownership of a company in which a shareholder,
as a fractional owner, undertakes maximum entrepreneurial risk associated with the business
venture... If the business fails to succeed, the claim of the ordinary shareholder on the residual
amount left comes last after all other stakeholders, such as employees, creditors, lenders,
government, preference shareholders, etc.

2 Preference share
A preference share means a share, which carries a right for a dividend of a fixed amount, or an
amount calculated at a fixed rate, before dividend is distributed to equity shareholders. However,
this right is not like any other debt obligation. This is because if a company is not making profit it is
not liable to pay dividend to preference shareholders, but the company is required to pay interest to
its other creditors. Usually dividend payable on preference shares if not paid, is accumulated and
paid in subsequent years. Preference shares are also redeemed, in the event of winding up of a
company to the extent of principle value and unpaid dividend before making any payments to equity
shareholders.

3 Cumulative Convertible Preference Share (CCP)


A Cumulative Convertible Preference share has two distinct features mainly the dividend is
accumulated if not paid in a year and the Preference share is convertible into equity shares as per
the terms of the issue of Preference shares.

4 Debenture
A debenture represents the smallest unit of public lending to a company. A debenture holder
receives a fixed stream of interest, unlike the uncertain stream of dividends that a shareholder
receives. Payment of interest is a legal obligation on the part of the company. Also, usually a
debenture is required to be secured against the assets of a company.

5 Convertible debenture
A debenture which is convertible either optionally or compulsorily into equity shares at a later date
(at the time of redemption or the period as specified in the conditions of the debentures) is called
convertible debenture. The price (face value plus premium if any) is determined as per the
conditions mentioned in the debentures.
Statutes & Regulatory Authorities

1 Security Contract Regulation Act (SCRA)


It is a Law passed by Indian Government with a view to prevent undesirable transactions in
securities by regulating the business of dealing therein, by providing for certain other matters
connected therewith. This act is called the Securities Contracts Regulation Act, 1956. It extends to
the whole of India.

2 Securities and Exchange Board of India (SEBI)


SEBI was constituted in the year 1992 under the overall administrative control of Government of
India (Ministry of Finance) for the regulation and orderly functioning of the stock exchanges and the
securities industry to fully protect the rights of the investors, to prevent trading malpractice's and
promote healthy growth of capital markets. It was given a statutory status in 1992 under the SEBI
Act.

3 Registrar of companies
The Registrar of Companies is an authority under the Companies Act where all the companies have
to register their Memorandum of association, Articles of Association and all reports such as annual
repots, any mergers, etc.

4 Company Law Board (CLB)


CLB is a statutory body appointed under the Companies Act. It administers various powers granted
to it under the Companies Act for smooth functioning of the companies in the country.

5 Stock Exchange
Stock Exchange is the place where buyers and sellers of stocks meet. The prices of the shares are
decided by demand and supply of the shares. The buyers and sellers are represented by the
brokers. Hence, the stock exchange is an association of individual members called member brokers
(or simply members or brokers), formed for the express purpose of regulating and facilitating the
buying and selling of securities by the public and institutions at large. A stock exchange in India
operates with due recognition from the government under the Securities and Contracts
(Regulations) Act, 1956. The member brokers are essentially the middlemen, who carry out the
desired transactions in securities on behalf of the public (for a commission) or on their own behalf.
Some exchanges are formed and managed by limited companies whose shareholders may be
members of the exchange and thereby have license to offer brokerage services to members of
public. Some exchanges which are formed by limited companies may have brokers who are not
necessarily shareholders of the exchange company also

6 Broker
A company or an individual who is a member of the stock exchange and acts as a middleman
between the buyer and seller of securities in that market. Broker charges fees for his services.
Currently the brokers have to be registered with Securities and Exchange Board of India in order to
carry out his activities.

Taxation

1 Capital Gain
When an asset is bought, and it is likely to generate benefit for period longer than 1 year, it is
usually capitalized in books of accounts. This is called a Capital asset. When an investor buys a
capital asset i.e. stocks, securities, real estate, gold, etc the gains realized on selling are called
capital gains.

2 Short -Term Capital gain


When an equity investor buys a security and sells within a short period, usually less than one year,
then the gains made are called short-term capital gains. These gains are clubbed with investor's
ordinary income for tax purposes and charged normal tax rate as applicable. For Real estate
consideration trade done within 3 years time is treated as short-term capital gain. The exact period
for reckoning short term or long term gains depends on the accounting and taxation practices of
respective countries.

3 Long-Term Capital gains


The gains realized in the buy-sell of an asset, if the asset is held for more than the short-term
period, (one year in case of equity/debentures and if real estate then more than 3 years, as per
current Indian laws) are called long term capital gains.

Types of Investors

1 Indian Corporates & Non Corporate Entities


An ordinary share represents the form of fractional ownership of a company in which a shareholder,
as a fractional owner, undertakes maximum entrepreneurial risk associated with the business
venture... If the business fails to succeed, the claim of the ordinary shareholder on the residual
amount left comes last after all other stakeholders, such as employees, creditors, lenders,
government, preference shareholders, etc.

2 Non Resident Indian (NRI)


The definition of Non Resident Indian is given in the Indian Income Tax Act. As per that, an
individual is a non resident Indian if he satisfies one of the following conditions, - He is in India in
the previous year for a period of 182 days or more; or - He is in India for a period of 60 days or
more during the previous year and 365 days or more during 4 year preceding the previous year.

3 Mutual Fund
A Mutual Fund is a collective savings scheme. An Asset Management Company (AMC) manages the
pool of money. The AMC usually come out with various schemes declaring the type of investment
that will be undertaken on those funds. For example if most of the money is likely to be invested in
interest bearing securities, then the scheme is called Income scheme.

A debenture represents the smallest unit of public lending to a company. A debenture holder
receives a fixed stream of interest, unlike the uncertain stream of dividends that a shareholder
receives. Payment of interest is a legal obligation on the part of the company. Also, usually a
debenture is required to be secured against the assets of a company.

4 Financial institution (FI)


Financial institution is a financial intermediary, which conducts the business of lending and
borrowing of money. FIs are governed by the RBI and Ministry of Finance regulations. E.g. ICICI,
IFCI, HDFC, etc.

5 Foreign Institutional Investor (FII)


Foreign Institutional Investor means an institution or Pension Fund, Mutual Fund, Investment Trust,
Asset Management Company, Bank, Nominee Company and Incorporated / Institutional Portfolio
Manager or their Power of Attorney holder established or incorporated outside India which proposes
to make investment in India in securities, it also includes domestic asset management company or
domestic portfolio manager who manages funds raised or collected or brought from outside India for
investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional
Investor. Foreign Institutional Investors have been permitted to invest in Indian securities markets
since September 1992 when the Government of India issued the Guidelines for Foreign Institutional
Investment. In November 1995, the SEBI (Foreign Institutional Investors) Regulations, 1995 have
been notified based on the earlier guidelines There are around 500 FIIs registered in India at
present.

6 Overseas Corporate Body (OCB)


Overseas corporate body is a legal entity incorporated outside India, where an NRI holds 60% or
more of its share capital or beneficial interest.

7 Offshore Fund
A fund promoted by a domestic asset management company abroad is called offshore fund.
Offshore funds are usually promoted for investing in one or few specific countries. These are called
country funds.

Types of Traders

1 Bull
In market there are traders/investors who take position i.e. Buy position by buying the shares in
anticipation that price of the particular share will rise in the future. After the share prices rise, they
would sell them off for a profit. These traders/investors are known as bulls.

2 Bears
In market there are traders/investors who take position i.e. Sell position by selling the shares in
anticipation that price of the particular share will fall in the future. These traders will buy back the
shares when the prices actually do fall to make a profit. These traders/investors are known as
bears.

3 Stag
Stag is an investor who buys the shares in the primary market from public issue in anticipation of
rise in prices on the listing of the shares on stock exchange. They try to encash the profit between
the issue price and the listing price of the share.

TERMINOLOGY / JARGONS

Mutual Fund Terms

1 Open Ended Scheme


Open-Ended Schemes do not have a fixed maturity and are highly liquid schemes. All redemptions
and fresh investments in this scheme is done directly with the Mutual Fund at net asset value
("NAV") related prices.

2 Close Ended Schemes


Close-Ended Schemes have fixed maturity period and investment in these schemes is done at the
time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock
exchanges where they are listed. Some close-ended schemes give you an additional option of selling
your units directly to the Mutual Fund through periodic repurchase at NAV related prices.

3 Net Asset Value (NAV)


Net Asset Value is the common expression among Mutual Funds and denotes
Net Asset Value (N A V). NAV per Unit is equal to
NAV = Market value of the assets of the scheme - Liabilities/ Units Outstanding

4 Asset Management Company (AMC)


The AMC is the corporate entity, which markets and manages a mutual fund scheme and in return
receives a management fee paid from the fund corpus. SEBI specifies that an AMC must be a
separate entity from the trust, which owns the mutual fund.

5 Front end/entry load and Back end / exit load


These terms are common in Open ended mutual fund schemes. Mutual Funds incur various
expenses during an issue, which are charged to the scheme. Funds may charge these expenses
either fully or partly to the schemes. Such a charge is called a Sales load, Entry load or Front end
load. The maximum sales load that can be charged to a scheme at the time of an initial public offer
is 6 % of the unit capital raised. Similarly when an investor choose to withdraw from a fund, the
value of deductions effected from NAV is called Back end load or Exit load. Back End loads are
imposed since premature withdrawals carry a transaction cost to the AMC. SEBI has prescribed that
total of Front end and Back end loads should not exceed 6% of the NAV of the corpus.

Primary Market Terms

1Primary Market
Primary market refers to issue of new shares, Debentures, Shares with attached options like
warrants by new as well as existing companies. These shares will be listed on specified stock
exchanges after the completion of allotment and compliance with other prescribed formalities.

2 Public Issue
When an existing company offers its shares in the primary market it is called public issue. Often IPO
and Public issue are used interchangeably.

3 New issue or IPO (Initial Public Offering )


When the company offers its shares to the investors for the first time its called initial public offering.
At the time of IPO the companies' shares are not listed on any stock exchange.
4 Underwriter
Underwriter to issue of capital is the one that agrees to take up securities, which are not fully
subscribed by shareholders in case of a Rights issue or by members of public in case of a public
issue. He makes a commitment to get the issue subscribed either by others or by him. The
underwriter is like an insurance company to the issuer company. The underwriter charges
underwriting fees to the issuer company for his services. He is paid underwriting charges even if the
issue is fully subscribed.

5 Share Certificate Nos


The companies issue physical stock to the shareholder. The certificate carries a number, which
remains in the records of the companies. This is called certificate number. The certificate number is
different from distinctive numbers of shares. One share certificate would carry distinctive number of
one or more number of shares.

6 Distinctive Numbers)
Distinctive numbers are the numbers given by the company to the shareholder for the shares held
by them. The companies use this for their records.

7 Prospectus
A prospectus is a document that must accompany the application forms of all public issues of
securities, whether ordinary shares, or debentures. Typically, a prospectus contains the terms and
conditions of the issue, along with the specific feature of the security, the purpose for which the
issue is made, the company's track record, the risk inherent in the project for which the capital is
being raised and so on.

8 Face value
Face Value (Par Value) implies the value at which a share is originally recorded in the balance sheet
as capital. In India face value is normally Rs 10 or Rs. 100. But now as per relaxation by SEBI,
companies are coming out with issues with different face values e.g. HCL Technologies (Rs. 4). Zee
has split the face value of shares from Rs. 10 to Rs 1.

9 Partly Paid Share


When a company gives the option to investor to apply for the shares on part payment of the face
value then till the remaining amount is paid the share is called partly paid share

10 Dividend
A company from its post tax profit distribute some proportion to shareholders. This income for the
shareholders is called dividend. Currently dividend income is tax free in the hands of investors, but
the company is required to pay dividend tax directly to the Government

Corporate Terms

1 Company
Company is an incorporated association of many persons, which is an artificial person in law, having
a common seal and a perpetual succession. Thus on incorporation, a company becomes a separate
legal entity different from the persons forming it. The liabilities of the members of a company
extend only to the unpaid value of the shares held by them. This is called a limited liability
company. It is possible to form a Company whose liability is limited by guarantee or even a
company with unlimited liability of the shareholders.

2 Distinction between Private limited company and Public limited company


A private limited company is closely held company. It can have minimum 2 and maximum 50
members. There is a restriction on transfer of shares without consent of others. The shares of
private limited company are not listed. There are restrictions on inviting Capital from Members of
public for a private limited company. A public limited company can have more than 50 members.
The company can invite public subscription for its shares or debentures. The company must have
minimum 7 members and 3 directors.

3 Board of Directors
A director includes any person occupying the position of a director by whatever name (Section 13 of
the Companies Act' 88 ). Only an individual can be a director (Section 253). The directors of the
company are collectively referred to as the Board of Directors. An individual director or any group of
directors can exercise their power only after the delegation by the board. The directors have the
direction, superintendence and control of the affairs of the company. The day-to-day management
of the affairs of the company is delegated to the managerial personnel by the board.

4 Registrar and Share Transfer Agent (R & T Agent)


An R & T agent is an agency appointed by a Public Limited company to carry out the service of
transfer of shares from one member to another, register such transfers in its book of members,
distribute dividend warrants to shareholders, etc.

5Common seal
The company on the share certificate for authentication puts a stamp on the share certificate known
as company seal. The Company seal is also affixed on important agreements and contracts by the
Company

6 Company Secretary
Company Secretary is the member of association of Institute of Company Secretaries of India who
engages himself in the practice of the profession of the Company Secretaries or offers to perform or
perform services in relation to the promotion, forming, incorporation, amalgamation, reconstruction,
reorganization or winding up of companies.

7 Subsidiary companys
A Company is a subsidiary of the other if, but only if, - that other controls the composition of its
board of directors or - where the first mentioned company is an existing company in respect of
which the holders of preference shares issued before the commencement of this act have the same
voting rights in all respects as the holders of equity shares, exercises or controls more than half of
the total voting power of such company; - where the first mentioned company is any other
company, holds more than half in nominal value of its equity share capital or - the first mentioned
company is a subsidiary of any company, which are that others subsidiary.

8 Managing agent
When a company appoints some other company to manage and run the operations on commission
basis the company is called managing agent.

9 Are all public limited companies necessarily listed?


Most Public limited companies can get themselves listed, but it's not necessary that all Public
companies are listed.

10 Meaning of a Company listed on the Stock Exchange


A Company, which comes out with a public issue, has to offer investors the option to trade their
shares i.e. an exit route where they can sell their shares. For this, company has to apply to the
stock exchange to get approval for their shares to be traded on the same. If the stock exchange
approves the company's application then company's shares get listed on the exchange for trading.
Usually the Stock Exchanges and the company enter into an agreement, which is called "The Listing
Agreement". The listing agreement stipulates obligations of the listed company to the Members of
public as well as shareholders on dissemination of information regarding the working of the
company.

11 Multiple listing
A Company gets its shares listed on more than one exchange for better access of the investors. This
is called multiple listing.

12 Resolution
Any decision of the company has to be taken by consent of members or board of directors. This is
called resolution.

13 General Body meeting


A General Body Meeting is a meeting of the members, as on a record date of the Company. Every
company limited by shares, and every company limited by guarantee and having a share capital,
shall, within a period of not less than one month nor more than six months from the date at which
the company is entitled to commence business, hold a general meeting of the members of the
company which is General Body meeting.
14 Annual General Meeting (AGM)
The AGM is a meeting called annually of the members to transact routine business such as
approving of accounts, electing directors etc. It also transacts special business such as enhancing
borrowing limits, sale/purchase of undertaking of the Company, etc. Every company shall in each
year hold in addition to any other meetings a general meeting as its annual general meeting and
shall specify the meetings as such in the notice calling it; and not more than fifteen months shall
elapse between the date of one annual general meeting of a company and that of next.

15 Extraordinary general body meeting


All general body meetings other than annual general body meeting are called Extraordinary General
Body Meeting (EGM). The EGM is called usually to transact urgent business, which cannot wait till
the AGM. There are provisions in the Company's Act whereby the members can also requisition such
meetings

16 Proxy
Any member of a company entitled to attend and vote at meeting of the company is entitled to
appoint another person (whether a member or not) as his proxy to attend and vote instead of
himself; but a proxy so appointed does not have any right to speak at the meeting. Usually the
Corporate members send in their representatives as proxies.

Basic Secondary Market Terms

1 Secondary Market
Secondary market is the market where you can buy or sell shares, which are listed on Stock
exchanges.

2 Brokerage and the maximum Brokerage charged by a Broker


Brokerage is the commision charged by the broker for purchase/sale transaction through him. The
maximum brokerage chargeable, as stipulated by SEBI, is at present 2.5% of the trade value.

3 Additional charges other than brokerage that can be levied on the investors
Apart from the brokerage the trading member can charge :
• Transaction charges payable to Stock exchange for facilitating smooth trading.
• Stamp duty payable to various State governments. • Investor Protection Fund.
• Contingency Fund. • Insurance Fund • Excise Duty payable to Revenue authorities in the form of
Service Tax.
• Penalties arising on behalf of clients (investors) for non compliance of the relevant requirements.

4 Specified or 'A' group, 'B1' , 'B2', ' F ' and 'Z' Group shares
At (BSE) Bombay Stock Exchange the shares are classified in different categories. 'A' Group is a
category where there is a facility for carry forward (Badla) for a period not exceeding 90 days. It
contains the shares of the companies which have fairly good growth record in terms of dividend and
capital appreciation. The scrips in this group are classified on the basis of equity capital , market
capitalisation, number of years of listing on the exchange, public share holding, floating stock,
trading volume etc. 'B1' Group is a subset of the other listed shares that enjoy higher market
capitalization and liquidity than the rest. 'B2' Group of shares comprises the shares not covered in
the above two categories. 'F' Group represents the debt market ( fixed income securities ) segment.
'Z' Group category comprises of shares of the companies which does not comply with the rules and
regulations of the Stock Exchange.

5 Security code
For the trading purpose on BOLT (BSE online terminal) all the scrips have been assigned numeric
codes which have to be keyed in at the time of transaction. This is called security code.

6 Scrip symbol
For NSE trading scrips are represented by their symbols depending upon their names. These are
known as scrip symbols.

7 Market lots
When the company issues shares to the public, the face value is decided and the minimum number
of shares to be transacted per single transaction is decided. This minimum number of shares per lot
is known as market lot. This is done to facilitate easy trading of shares on the stock exchange.
Hence for all physical shares traded on the stock exchange, the deliveries are to be made in market
lots only by the seller unless specifically agreed to otherwise. Before dematerialization minimum lot
used to be 50 or 100 shares for Rs. 10 and 5 or 10 shares for Rs. 100 face value. After
dematerialization, minimum lot has become one for all shares which are traded in dematerialized
form.

8 Contract Note
Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. A
contract note is issued by the broker in the prescribed format and manner, establishing a legally
enforceable relationship between the member and client in respect to the trades stated in that
contract note. Contract notes are made in duplicate, and the member and client both keep one copy
each.

9 Points to be checked by an investor to check the validity of a contract note


Name and address of the Trading member, SEBI registration number, details of trade like order no.,
trade no., trade time, security name, quantity, rate, brokerage, settlement no., details of other
levies, signature of authorized signatory and the arbitration clause stating that the trade is subject
to the jurisdiction of Mumbai must be present on the face of the contract note.

10 Documents an Investor should receive from the broker and when


The Transactions executed by the broker for the clients can be confirmed by the following methods.
• Orally by the word of mouth on telephone or personal meeting.
• By faxing the details or the Contract Note.
• On line ,if the trading is via internet.
• The confirmation given will be followed by Contract Note evidencing the transactions executed
within 24 hours of the trade being executed.

11 Book-Closure and Record dates


An important aspect of investing in securities is to understand the purpose and implications of book
closure or record date. Since the security holders of a company keep changing practically every day,
when a company has to distribute benefits in the form of interest, dividends, bonus shares or rights
issues, the company has to ascertain as to who should receive the benefits. For this purpose, for
each benefit to be distributed to the shareholders, a company announces in advance, a record/book
closure date. The benefits are then distributed to those security holders whose names appear on the
register of the company on that date. To receive this benefit from the company, an investor who
has bought the security on a cum-benefit basis must make sure that the security is sent for
registration of his name before the book closure date.

12 Portfolio
The set of all securities held by an investor is called his portfolio. The portfolio may contain just one
security. However, since in general no one puts all the eggs in one basket, it will contain several
securities. Such a portfolio is known as a diversified portfolio.

13 Private Placement
When a company offers its shares to group of investors by passing the right/public issue, to
selected group of investors, then it is called a private placement of shares. There are SEBI
guidelines, which regulate such issues by a listed company.

14 Preferential Issue
When a company offers its shares to selected investors who may be promoters of the company,
associates, shareholders of the Group Company, etc. then the issue is called a preferential issue.
There are SEBI guidelines, which regulate such issues by a listed company.

15 Rights Issue
Whenever an existing company makes a fresh issue of equity capital or convertible debentures, the
existing shareholders or convertible debenture holders have the first right to subscribe to the issue
in proportion to their existing holdings. Only what is not subscribed to by the existing shareholders
can be issued to the public. Thus, an issue offered to the existing shareholders as their right is
known as Rights Issue, as opposed to an issue open to the public at large, in which case we call it a
public issue.
16 Bonus Issue
When we invest in shares we expect more than just the dividends from the earnings of the company
after paying off the dues of all other stakeholders. The company after distributing the dividends
keeps remaining earnings as reserves. The reserves plus equity capital is called Networth. When
company's reserves are satisfactory, the management by book entry, issues shares from reserves
to shareholders and credits the equity capital by the same amount. This are called bonus shares.
This increases the liquidity of the company's shares as number of shares increase. The market price
of the company's shares usually comes down as per the ratio in which the shares are issued.
Shareholders are benefited as they get more shares but the returns in real terms accrue only if the
company is able to maintain the same growth.

17 Rights Issue
When investor applies for the registration of shares in his/her name, he/she can apply jointly. That
means there will be two/three applicants for the same shares. First holder is entitled to all rights.
But at the time of selling, the approval of all the joint holders is necessary.

18 Calls
Calls are the sums payable on a partly paid share. The Company after having issued partly paid
shares would call upon the shareholders to pay the balance calls as and when they require.

19 Order books
There may be several buy orders and several sell orders at various prices with different quantities.
These orders for buy-sell trades for any share giving the prices and quantities of shares are
arranged in descending orders. This listing of all the orders is called order book.

20 Touchlines
This term is often used when trading on the BOLT( BSE On Line Trading)system. Touchline is the
prices at which buy and sell order can be executed. Hence the best buy and sell price for a scrip
form the touchline.

21 Delivery V/s Payment (DVP)


Delivery v/s payment means exchanging simultaneously for money. Often there is a time lag
between pay in and pay out. The time lag may be of a couple of hours or even. In the absence of
DVD, the buyers have to pay in money and the sellers have to deliver shares ahead of time and wait
for the payout to take place. The time gap between delivery and payment increases the market risk.

22 ISIN Number
ISIN (International Securities Identification Number) is an identification number given to the
security of an issuer company by the International securities organisation in consultation with SEBI.
These numbers are unique and facilitate international trade.

Margin

1 Definition
After a buy/sell trade takes place, the prices of the stock may move up or down. This movement in
price may result in profit/loss to the investor. To guard against the possibility of the loss not being
paid by the investor, the margins are collected by the brokers from the investors. On successful
completion of the transaction, the margin is refunded. When a trade takes place, on the stock
exchange, the stock exchange or the clearing house guarantees honoring of the trade between
members/brokers. To secure the trade, the stock exchange asks from the members/brokers some
proportion of total transaction value as a safety deposit, in case the broker/member defaults in
honoring the commitment to the exchange. This is known as margin. The stock exchange levies
different margins as per the situation requirements.

• Different types of margins are


• Gross Exposure Margin
• Daily margin
• Carry Forward Margin
• Special Margin
• Mark to Market Margin
• Volatility Margin
• Concentration Margin
• Adhoc Margin

a) Daily margin
A client and a broker is required to deposit/make available margin for open positions either on the
buy side or on the sell side at the end of the day. This is known as daily margin. It is intended to
take care of eventualities that might occur between 2 trading days.

b) Carry forward margin


On exchanges which provides for trading on carry forward basis from one settlement to another as
per the SEBI guidelines an additional margin needs to be paid on positions which are carried over.
The daily margin is refunded at the end of the settlement while the carry forward margin is
collected.

c) Special Margin
In order to curtail heavy, unhealthy transaction positions in particular scrip (normally illiquid, small
cap stocks) Exchange specifies special margin to be paid for both the buy side and the sell side of
the transaction. This is specified in absolute amount to be paid generally in cash form.

d) Mark to Market margin


When a trader takes a buy/sell position and the market price moves against the trade i.e. for a buy
trade price declines and for sell trades price moves up, the trader has to pay the difference between
the trade price and the closing price as a margin. This margin is known as mark to market margin.
This is usually done at the close of the business day

E.g. A trader buys 100 shares of Reliance at Rs. 250 and the price closes at Rs. 245 he has to pay
the difference of Rs. (250-245) i.e. RS. 5 per share totaling RS. 500 as mark to market margin.

E.g. A trader sells 100 shares of Gujarat Ambuja at Rs. 250/- per share, and the price of Gujarat
Ambuja closes at Rs 260/- then the difference of Rs 10 per share on 100 share totaling Rs 1000 will
be mark to market margin. At the broker level the mark to market profits are not adjusted against
mark to market losses.

e) Volatility Margin
In order to control the volatility or very wide fluctuations in the scrip price, SEBI imposes from time
to time a margin, which is called as Volatility Margin. The objective of this margin is to ensure that
in case there is a very wide fluctuation in the price of the scrip, both the buyers and seller honour
their commitments to each other and the integrity of the market is not endangered. Generally the
method adopted to calculate the volatility is by working out the difference between the highest price
and the lowest price over a 45 day transaction cycle and comparing it with the lowest price. The
margin is accepted in cash or in form of demat shares.

f) Ad-hoc Margin
As prescribed by SEBI Ad-hoc margins are imposed on brokers carrying very large position over all
or in certain illiquid small value stocks.

g) Gross Exposure Margin


The end of the day net outstanding scripwise position results in open exposure between
client/broker and broker/exchange. The total of net open positions is know as gross exposure. The
exchange insists on the broker making certain security available to it in the form of cash/bank
guarantee/shares, etc. to take care of gross exposure. This is known as Gross exposure margin.
Generally, it needs to be paid in advance of the trade.

Why are Margins levied on

1 Buyers
If the buyer fails to honor his commitment of taking delivery by paying cash or by squaring off the
trade, the stock exchange can use the margin taken from the trader to settle his trade so that the
settlement procedure for whole market does not get disrupted. It is a cushion available for meeting
likely losses in case the buyer does not honor his commitment to the market.
2 Sellers
If the seller fails to honor his commitment of giving delivery or by settling the trade at a loss and
paying cash due to loss in a trade, the stock exchange can use the margin taken from the trader to
settle his trade so that the settlement procedure for the whole market does not get disrupted.
Again, it is a cushion available for meeting likely losses in case the seller does not honor his
commitment to the market.
2 T+1 or T+2n
T+1 is the settlement of trade after 1 day of the date of trading.
T+2 is the settlement of trade after 2 days of the date of trading.
3 Rolling Settlement

In a rolling settlement the trade has to be settled on the T+ Nth day. Every day's trades are netted
on a daily basis. Squaring off can be done on the same day otherwise the trades have to be settled
by paying cash or giving security. In India currently T+5 is operational. This is different from weekly
settlement wherein the trades are netted off on a weekly basis and settled subsequently.

4 Definition
It is a trading mechanism, which allows us to buy shares, even if we do not have the requisite
amount of money, or sell shares if you don't have the deliveries. It is also known as carry forward
trading. Badla charges are known as contango charges. As per the current SEBI regulation one can
take either buy or sell position in specified shares in the Bombay Stock Exchange and carry it
forward till 90 days or else the person has to settle the trade by taking delivery by paying cash or
giving delivery if he has sold the shares. In any of trades the investor/trader has to pay margins as
per the stock exchange specification.

Indices

1 Index
An index is a simple barometer of the underlying scrips in the market. It is statistical average,
simple or weighted average, of a few leading shares in the market. The number so arrived at is
called an index. BSE 30 or SENSEX is such an average of thirty leading shares traded in the BSE.
Some indices may track a large number of shares average whereas some may track particular
industries. This is called a sector specific index.

2 Significance of Index movements


If the share price index today is 5000, with the average share price in 1984-85 taken as 100,it
means that on an average, share prices in the market have gone up by about 50 times since 1984-
85. The year for which the average price is assumed to be 100 (in this case, 1984-85) is known as
the base year. The base year keeps on changing with time, when this happens the indices before
and after the introduction of the new base year can not be compared directly. Ups and downs of an
index reflect the changing expectations of the stock market about future earnings of India's
corporate sector. When the index goes up, it is because the stock market thinks that the
prospective earnings will be better than previously thought. When prospects of earnings in the
future become pessimistic, the index drops. The ideal index gives us instant-to-instant readings
about how the stock market perceives the future of India's corporate sector. Every stock price
moves for three possible reasons: - news about the company (e.g. a product launch, or the closure
of a factory) - news about the industry - news about the economy as a whole including political and
sentimental factors. Each stock contains a mixture of these three elements - stock, industry and
economy news. When we take an average of returns on several stocks, the individual stock news
tends to cancel out. On any one day, there would be good stock-specific news for a few companies
and bad stock-specific news for others. In a good index, these will cancel out, and the only thing left
will be news that is common to all stocks. That is what the index will capture. The current method of
averaging is to take a weighted average, and give each stock a weight proportional to its market
capitalization.

3 ICE Stocks or ICE Index


The stocks falling in Information Technology, Telecommunication and Entertainment industries are
referred to as ICE Stocks. The Index based on above stocks is called ICE Index.

4 S&P CNX 500 Equity Index


The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalisation weighted. Stocks
are selected based on their market capitalisation, industry representation, trading interest and
financial performance. However, the overriding need has been to ensure that the industry
weightings in the index dynamically reflect the industry weightings in the market. The S&P
CNX~500 Equity Index currently contains 79 industry groups representing over 73% of total market
capitalisation and over 98% of total turnover making it an optimal market benchmark.

5 CNX MidCap 200 Index


For the trading purpose on BOLT (BSE online terminal) all the scrips have been assigned numeric
codes which have to be keyed in at the time of transaction. This is called security code.

6 S&P CNX Nifty and CNX Nifty Junior


The CNX MidCap 200 Index comprises 200 companies. The MidCap Universe for this index has been
defined as companies having an average market capitalisation (over the preceding 12 months)
between Rs.1.5 billion (US$ 35 million) and Rs. 15 billion (US$ 353 million). The distribution of
industries in the index represents the industry distribution in the MidCap Universe. The index
represents 71% of the total midcap market capitalisation and 72% of its trading value making it an
optimal index for stock market performance of the MidCap segment.

7 NATEX or National Index


Natex is developed by BSE, which is more broad based index than the sensex. Natex reflects the
price movements of 100 actively traded shares of five major exchanges viz. Bombay, Calcutta,
Delhi, Ahmedabad and Madras.Their base year is 1983. Whether the stock market is depressed or
buoyant is reflected by either the downward or upward movement respectively of this indices.

8 NASDAQ
'Nasdaq' is an acronym of the National Association of Securities Dealers. It represents the indices of
Technology stocks listed on New York Stock Exchange.

Demat

1 Meaning of Dematerialized stocks


The dematerialization of physical stock is done on the request of the investor and the depositories
hold it. Since the shares now appear only as an electronic record in the books of the depository, it is
called dematerialized stock.

2 Meaning of Physical stock


The company issues a share certificate to the shareholder as a proof of his holding in the company.
This is known as physical stock since the certificate exists physically.

3 Depository
A depository is the place where shares are "deposited" or withdrawn from. The depository may hold
the share on behalf of the clients in physical form or dematerialized form. All deposits and
withdrawals of shares are accounted by the depository similar to a bank account operation. This
method does away with all the risks and hassles normally associated with paperwork. Consequently,
the cost of transacting in a depository environment is considerably lower as compared to
transacting in physical form.

4 Depository Participant
A depository participant (DP) is an agent of the depository and is authorized to offer depository
services to investors. According to SEBI guidelines, financial institutions, banks, custodians,
stockbrokers, can become depository participants in a depository.

5 NSDL and CDSL


NSDL stands for National Securities Depository Limited. It is promoted by IDBI, UTI and National
Stock Exchange. CDSL stands for Central Depository Services Limited. It is promoted by Bombay
Stock Exchange (BSE), Bank of Baroda, HDFC Bank, State Bank of India and Bank of India.

6 Rematerialisation of Shares
It is the process through which shares held in electronic form in a depository are converted into
physical form.

Types of Traders
1 Market Maker /Jobber
Market maker is the one who gives two way quotes for a security at any point of time. He can do
this if he has financial strength and the shares to deliver. He is the liquidity provider in the scrip. A
market maker would offer to do transaction on either side as chosen by the counter party at the
prices indicated by the market maker for the quantities offered. The market maker assumes the
price risk, the liquidity risk and the time risk. Price risk means that he may not be able to cover his
position at the same or better price than the price at which he did the original transaction. Liquidity
risk means that he may not be able to liquidate his purchase position and may have to take
deliveries and vice versa. Time risk means that the market maker may have to hold the inventory
for an unknown period of time and lose the interest on his investments. E.g. Market maker will give
quotes for Satyam as Buy 100 shares at Rs. 5000 and Sell 100 shares at Rs. 5010. To cover for the
risk involved, he keeps difference between buy and sell quote.

2 Tarvaniwala
When a jobber gives two way qoutes and does the transaction, the difference he gets between
these two way spread is called Tarvani and the trader is called Ttarvanivala.

3 Arbitrage
A simultaneous buy and sale of an asset to get the benefit of price difference is called arbitrage.
Arbitrage is of different types: price differences between two exchanges, between spot and futures
market etc.

E.g. If on the BSE price of SBI is Rs.250 and on NSE is Rs.253 one can buy the shares on BSE if he
has the money and sell simultaneously on NSE if he has the shares with him for delivery and make
risk free profit of Rs.3 per share.

4 Arbitrageur
The persons who do arbitrage as a business are called arbitrageurs.
Auction

1 Auction of Stocks
Auction is a mechanism which is used when a member broker selling shares defaults on the delivery
ie. if he has delivered short ( shares fewer than what they have sold) or their deliveries are bad or if
they have not rectified the company's objections reported against them. The exchange resorts to
Auction to fulfil its obligation towards the broker buying the shares.

2 Modus Operandi of Auction


Investors can ask their broker member to sell their securities in the Auction. However they should
ensure that.
• Shares are readily available for delivery (pay-in day of securities for auction is held within 1 or 2
days of auction) and

• Shares delivered are good delivery (no opportunity provided for rectification of bad delivery)

• Securities not delivered on auction pay-in day or bad delivery of securities delivered in auction are
directly squared off at a price specified by the Exchange/Clearing Corporation.

3 Close out
If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction,
the transactions are squared up as per SEBI guidelines. As per the guidelines in force, the
transaction is squared up at the highest price from the relevant trading period till the close-out day
or at 20% above the last available trading price whichever is higher.

Nature of Shares

1 Blue Chip Shares


Shares of large, financially strong and well established companies which have stood up against all
kinds of market conditions and which have good profitability and dividend track records are referred
to as blue chip Shares.
2 Growth Shares
These are shares of companies, which have out-performed others in the Industry, Shares of such
companies grow at a rate faster than others in terms of sales and profitability. E.g. Infosys, Wipro,
Satyam and NIIT are current examples of growth stocks in the Indian IT industry.

3 Value Stocks
Value stocks are those stocks that currently have a low market sentiment and are underpriced
relative to their intrinsic worth.

4 Defensive Shares
These Shares are generally neutral to business cycles. These shares have low fluctuations in their
prices and are fairly stable.

5 Cyclical Shares
These shares are in commodity companies and their prices depend on cyclical fluctuations of the
economy. If the economy is doing well, they appreciate otherwise, their prices would fall.

6 Turn Around Shares


The shares, which belong to the companies that, have large accumulated losses but which show
signs of recovery or making profits.

STOCK MARKET MANUPILATIONS

Price Manipulative Terms

1 Inside information
Nonpublic knowledge about a corporation possessed by corporate officers, directors, major
stockholders, or others who hold private inside information allowing them to benefit from buying or
selling the stock.

2 Insider trading
When persons aware of private price sensitive information about a company take trading decisions
based on that information, it is known as insider trading. In most countries including India trading
on publicly unknown price sensitive information is illegal and punishable under the law.

3 Price rigging
When a person or person acting in concert with each other collude to artificially increase or decrease
the prices of a security, that process is called price rigging.

4 Front running
When a person buys ahead of certain information becoming public knowledge on his own behalf or
someone else it is called front running. So when a trader anticipates buying from institutions
(domestic, FII, Mutual Funds) in near future they buy the shares to sell them on later date. This is
called front running operation done by trader.

5 Circular Trading
When some informed investors indulge in trading between themselves in order to manipulate price
and/or volume traded in the scrip is called circular trading. E.g. A buys 100 shares of SBI from B. B
sells this shares at higher/lower (negotiated between them) to C. C sells them once again to A at
some higher/lower price. In this trading, actual funds and shares have not changed owners, but in
the process price and volumes get manipulated. This is circular trading.
Research Terms

1 Fundamental Analysis
Investing in Equity shares requires you to know about the company you are investing into, in some
level of depth. Eg.You need to examine the company's line of business, its management capability,
its financial performance, its market share, technological prowess and various factors. Such a
detailed study of corporate performance is called 'Fundamental Analysis'.

2 Technical Analysis
Some experts believe that tracking past prices of equity shares will provide adequate guidance as to
its future path. These experts configure complex charts and mathematical averages of the price
movements to accurately predict its future. This analysis is called 'Technical Analysis'.

3 Rally
Material rise in the price of a share, or a material rise in the share market index, after a period of
stagnancy or a declining trend.

4 Relative Strength
Price wise performance of a share as compared with other shares or the share price index.

5 Dead-Cat Bounce
A deceptive, temporary recovery in share prices.

6 Valuation
Valuation is an exercise to find the intrinsic value of an asset. This helps the investor in making
decisions about when to buy the asset or to sell.

7 Networth
Networth is the sum of paid up equity capital and reserves (the amount of retained earnings for the
past years after paying all stakeholders and distribution of dividend).

8 Book value
Book value of a share is networth divided by number of shares outstanding

9 Profit before tax (PBT)


The residual amount left with the company from the earnings after paying all the dues of
stakeholders i.e. employees, government agencies (excise, sales tax, etc), operating expenditure,
debt obligation, etc is called profit before tax.

10 Earning per share (EPS)


Earning per share is the ratio of net profit to the number of paid up equity shares.

11 What is Cash Earning per share (CEPS)


Cash earning per share ratio is the ratio of sum of profit after tax and depreciation to number of
outstanding equity shares.

12 Price Earning (P/E) ratio


Price earning ratio is the ratio of market price of the security to the earning per share (EPS) of the
company. This indicates usually, the market perception of the potential of the scrip.

13 Payout Ratio
Payout Ratio is how much percentage of Earnings is distributed as dividend.
It is defined as

Payout Ratio = Dividend per share (DPS) / (EPS) x 100 Earnings Per

If the payout ratio Share is 40%, it means that 40% of the company's profits after tax have been
distributed as dividend and 60% transferred to reserves. A very high dividend payout may not be
healthy, if the IRR (Internal Rate Of Return) is higher than the return an investor will get if he
invests the amount of dividend distributed outside

14 Fully Diluted earnings


When a company issues bonus shares or rights shares or comes out with an IPO, the share capital
of the company goes up. In such case, the earnings of the companies are to be considered on the
enhanced equity capital. When this is done it is called fully diluted earnings.

15 Top Down or Bottoms Up Approach


These terms are used while doing fundamental analysis of Stocks. Top down refers to first find
about the economy, the industry in which the company is operating and then move on to analyze
the company's performance. Bottoms up approach on the other hand assumes that the impact of
economy and the industry is reflected in the fundamentals of the company ,which if studied
carefully , will reveal the potential for appreciation in the scrip.
16 Debt Trap
When highly leveraged company does not perform satisfactorily it falls into debt trap. Servicing of
large debt may not leave the company with any profit or operating cash, which in turn will lead to
further borrowing. Unless there is a dramatic turnaround in the company's profits, the trap closes
on it, forcing liquidation. Countries which borrow heavily, often fall into the trap, and may have to
accept humiliating conditions proposed by lender countries for further

Miscellaneous
1 Dividend, Cum-dividend and Ex-Dividend
When an Investor buys a shares with cum-dividend (or cum Bonus or cum rights or other benefits),
he is entitled for the dividend , bonus shares or rights for which the books are to be closed. When
an investor buys the share ex-dividend (ex bonus or ex rights or other benefits), he is not entitled
to these benefits but the previous owner would be entitled to them.

2 Stock Lending
It is a mechanism through which seller going short can borrow stocks to meet his obligations. It
provides for the lending of securities for a price to short sellers. The lender of the scrip earns
additional returns by lending his stocks for a specified period to those who need them to discharge
their delivery obligations.

3 Company Objection
When Investors send share certificates along with the transfer deeds to the company for
registration, the registration is some time rejected if the signature differs, shares are fake, forged or
stolen , or if there is a court injunction preventing the transfer of the shares etc.

4 Deep Discount Bond


A Deep Discount Bond is long term bond where the initial amount invested keeps growing based on
the interest accumulated on the principal amount. For E.g. Bonds where an investment of Rs. 2800
today could yield Rs.100,000 after 30 years.

5 Global Depository Receipt (GDR)


Global Depository Receipt (GDR) are receipts denominated in US Dollar giving the owner the right to
convert the underlying shares by surrendering them to the depository holding the underlying
shares. Depositories are normally big international banks, which receive dividends, reports, etc. The
underlying shares are called depository shares.

GDRs are listed on stock exchanges such as London, Luxembourg, etc. In GDRs only qualified
institutional investors can participate which restricts retail entry decreasing the depth of the market.

E.g. GDRs of Reliance, ITC etc are listed on London exchange.

6 American Depository Receipt (ADR)


American Depository Receipts (ADR) are depository receipts issued in US. For this, the companies
issuing receipts has to file the prospectus with US regulator Securities and Exchange Commission
for their approval and follow their strict accounting and disclosure procedures. ADRs increase retail
participation. ADRs are listed in stock exchanges in the US. usually NASDAQ or New York Stock
Exchange.

7 Transfer of Shares
Transfer refers to transfer of ownership of shares from one person to another through a sale or gift
when accompanied by a transfer deed.

8 Transmission of Shares
Transmission refers to transfer of ownership of shares by operation of law in case of death or
insolvency from the owner to his legal heirs or creditors.

9 An Angel investor
Companies or persons providing venture capital for the new start ups, as they are not able to access
the capital markets at that point of time. Often angel investors also help the Promoters by way of
sourcing/assisting in finding managerial personnel, strategizing etc.Pricewise performance of a
share as compared with other shares or the share price index.
10 Arbitrator
When there is a dispute between two or more parties, it is resolved by unbiased persons -
arbitrators - who are familiar with the areas of controversy. This also cuts down on time to resolve
the disputes. All stock market contracts are subject to arbitration.

11 Circuit Filter
To check the excessive volatility of shares, SEBI has come with a set of rules to determine the fixed
price bands for different securities within which they can move within a day. As per SEBI directive,
all securities traded at or above Rs.10/- and below Rs.20/- have a daily price band of ±25%, traded
below Rs. 10/- have a daily price band of ± 50%, traded at or above Rs. 20/- have a daily price
band of ± 8%.

However recently the price band is extended to 12% for 200 active scrips. After the 8% price band
is hit and it doesn't recover from that level for next 30 minutes, the circuit is further released for
4% more. The previous day's closing price is taken as the base price for calculating the price. As the
closing price on BSE and NSE can be significantly different, this means that the circuit limit for a
shares on BSE and NSE can be different.

12 Investors Protection Fund (IPF)


Investor's Protection Fund was set up by The Stock Exchange in July , 1986 to meet the claims of
investors against defaulter members.

13 Trade Guarantee Fund ( T G F )


The Stock Exchange has constituted a Trade Guarantee Fund to guarantee settlement of bonafide
transactions of members of the exchange inter-se which form part of the Stock Exchange
settlement system, so as to ensure timely completion of settlement of contracts and thereby protect
the interest of investors and the members of the exchange.

14 BIFR
BIFR is Board of Industrial Finance and Reconstruction. The government had set up this board to
rehabilitate the sick companies if possible or to liquidate them. When the networth of a company is
eroded, the company is referred to the BIFR.

15 Venture Capital
Venture capital is basically equity finance in relatively new companies when it is too early to go to
the capital market to raise funds. However, such investment is not exclusively equity investment. It
can also be made in the term of loan finance/convertible debt to ensure a running yield on the
portfolio of venture capitalist. Venture capital financing involves high risk-return spectrum. Some of
the ventures yield very high return compensating the loss from unsuccessful investments. In brief,
Venture capitalists acts as a financial intermediary between investors looking for high returns and
entrepreneurs who need institutional capital as they are not yet ready /able to go to the public.

Mergers & Acquisitions

1 Merger
Merger involves dissolving of two firms and creating one new entity or continuing of one of the old
entity names.

Mergers represent a very important form of corporate restructuring. Mergers, as used in financial
literature, subsume both absorption and consolidation. Example of absorption : Hindustan Lever and
Ponds merged but the resultant entity remained Hindustan Lever.

A consolidation involves a combination of two or more firms as a result of which a new firm comes
into being and the existing firms are dissolved. E.g. Hindustan Ciba Geigy and Sandoz merged to
form Novartis

2 Takeover
A takeover involves the acquisition of a certain or entire block of equity capital of a company, which
enables the acquirer to exercise control over the affairs of the company. SEBI has specified a
takeover code, which the acquiring company has to follow so that investor interests are protected.
3 SWAP RATIO
When two or more companies merge or demerge, a consideration is payable to shareholders of
merged entity. For example, company A is merging into Company B, then company B has to pay
consideration to shareholders of company A. This may be in cash or by shares of the company B.
When the shares are being issued to shareholders of company A, a reasonable ratio is worked out
by valuation experts. This ratio is called swap ratio. Consider following examples:

• 1. A and B company merge to make company C and shares of company C are given to
shareholders of A and B based on individual ratio worked out for each company.
• E.g. Hindustan Ciba and Sandoz merged to form the new entity Novartis. The ratio in which the
shares of Novartis were issued to Hindustan Ciba and Sandoz is called SWAP RATIO.

• 2. Company A merges into B and shares of B are given to shareholders of A on a fixed ratio.
• E.g. Times Bank has merged into HDFC Bank. The Swap Ratio decided was 5.75 : 1. ie. for every
5.75 shares held in Times Bank by it's shareholder 1 Equity share of HDFC Bank was alloted.

• 3. A merges into B and shareholders of A are given shares of C, held as investments by B in a


fixed ratio.

• 4. Company A divests its one division into separate company and existing shareholders are given
shares in the new company.
• E.g. Recently Sterlite Industries has decided to split into 3 units viz. Copper , aluminium and
telecom cables.

4 Employee Stock Option Plan (ESOP)


The companies in order to reward and retain its employees offer them option to buy the shares of
the company. This is known as Employee Stock Option Plan (ESOP). Usually the options are
exercisable at a price lower then the market price. They are regulated by SEBI and have Tax
Implications as prescribed by the act from time to time.

5 Dawn Raid
In takeover attempt an individual or a company instructs brokers to buy all available shares of the
target company at current market prices as soon as stock exchanges open for business on a
particular date. With that as a base the bidder makes an attractive offer to the other shareholders in
order to make a full takeover bid.

Derivatives, Options & Futures

1 Derivatives
Derivatives are hedging instruments to be used against price risk. Securities providing payoffs that
depend on or are contingent on the values of other assets such as a commodity price, bond and
stock price, or market index values. The underlying instrument in any derivative instrument is the
physical asset or a security.

2 Futures
Futures contract is a firm legal commitment between a buyer and a seller in which they agree to
exchange something at a specified price at the end of a designated period. The buyer agrees to take
delivery of something and pay the agreed price and the seller agrees to make delivery for the
agreed consideration.

3 Index
An Index is a representative of a set, and is generally the indicator of status of the set. In a stock
market context, Index is an indicator of the broad market. For instance, by tracking the changes of
the BSE Sensex, NSE Nifty one can effectively gauge market moods in India. Any Index is an
average of its constituents. For example, the BSE Sensex is a weighted average of prices of 30
select stocks, where the weight is the market capitalization of individual stocks. Market
capitalization is the product of stock price and number of shares issued by the company.

4 Index futures
Index futures are future contracts where the underlying asset is the Index. This is of great help
when one wants to take a position on market movements. Suppose one feels that the market is
bullish and the Sensex would cross 5,000 points. Instead of buying shares that constitute the Index
one can buy the market by taking a position on the Index future.

5 Difference between the Forward and Future Contracts


Forward contracts are Over the counter (OTC) contracts whose terms are agreed upon by the
counter parties. Whereas Futures are traded on exchanges where the terms are standardized by the
exchange.

6 Options
An option is the right, but not the obligation, in the hands of the holder, to buy or sell an asset at a
particular price on or before a particular date. This is different from futures wherein there is an
obligation on both the buyer and seller to perform the contract.

7 Call and Put Options


A call option gives the holder the right to buy while a put gives him the right to sell the underlying
security / asset.
Risk & Return

1 Systematic risk
Risk in holding securities is generally associated with the possibility that realized returns will be less
than the returns that were expected. The source of such disappointment is the failure of dividends
(interest) and/or the appreciation in security price to materialize as expected.
Forces that contribute to variations in returns-price or dividend (interest) - constitute the elements
of risk. Some influences are external to the firm and cannot be controlled, and affect large number
of securities. Other influences are internal to the firm and are controllable to the large degree.
In Investments, those forces that are uncontrollable, external, and broad in their effect are called as
sources of systematic risk.

Systematic risk refers to that portion of total variability in return caused by factors affecting the
price of all securities. Economic, political, and sociological changes are
sources of systematic risk. Their effect is to cause prices of nearly all-individual common stocks
and/or all individual bonds to move together in the same manner.
For E.g. if the economy is moving towards recession and corporate profits shift downward, stock
prices may decline across the board and nearly all the stocks listed on the BSE move in the same
direction as the BSE Index. This happens due the systematic risk in the market.

2 Unsystematic risk
Unsystematic risk is the portion of total risk that is unique to a firm or industry. Factors such as
management capability, consumer preferences, and labor strikes cause systematic variability of
returns in a firm. Unsystematic factors are largely independent of factors affecting securities
markets in general. Because these factors affect one firm, they must be examined for each firm.

3 Bench marking of returns


For the returns on the stocks we have in our portfolio, some comparison must be there to find out
whether our choice of stocks are giving optimum returns or not. For this purpose we compare them
against some benchmark such as BSE Sensex or CNX Nifty, etc. This is called benchmarking of
returns.

4 BETA
Beta measures non-divesifiable risk. Beta shows how the price of a security responds to market
forces. In effect, the more responsive the price of a security is to changes in the market, the higher
will be its beta. Beta is calculated by relating the returns on a security with the returns for the
market. Market return is measured by the average return of a large sample of stocks, such as the
BSE SENSEX or S&P CNX Nifty. The beta for the overall market is equal to 1 and other betas are
viewed in relation to this value.

Betas can be positive or negative. However, nearly all betas are positive and most betas lie
somewhere between .4 and 1.9.

Investors will find beta helpful in assessing systematic risk and understanding the impact market
movements can have on the returns expected from a share or stock. For e.g., if the market is
expected to provide a 10 percent rate of return over the next year, a stock having a beta of having
a beta of 1.80 would be expected to experience an increase in return of approximately 18 percent
(1.8*10%) over the same period. This particular stock is much more volatile than the market as a
whole.

5 Stock Co-relations
When the security price moves in some trend which some short of relationship can be established to
the trend of some other security or index then the two are said to co-relate. The relation is called
correlation. The correlation can be positive or negative.

Positive co-relation implies if one of the two moves up, the other will also move up and vice versa.

Negative co-relation implies if one of the two moves up the other will move down and vice versa.

Technical Definition- A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.

6 Hedging
Hedging is a mechanism to reduce investment risk using call options, put options, short selling, or
futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of
a portfolio, by reducing the risk of loss. Suppose you have a portfolio and there is a likelihood of a
war, in such an event the value of your portfolio would diminish. You would not like to sell off your
entire portfolio because of tax issues or liquidity problems. The best hedge would be to sell Index
futures. The loss on your portfolio would be covered by the gains on sell position in Index futures.

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