TRADING OF SHARES:

How does it Reflect it in on Index

Trading of Shares
Traditional Trading System Dealings at a stock exchange are permitted only in the listed securities. The term 'listing of securities' means that the security concerned has been included in the list of securities to be transacted at the Stock Exchange. Only listed securities are allowed to be traded on a stock exchange. Therefore, at the time of making a public issue, companies declare that the security concerned has either been listed one or more stock exchanges or, an application has been made for that purpose listed securities fall in two categories: i) Cash List: It involves ready delivery, and ii) Forward List: It enjoys forward trading privilege. A security can be listed by the Stock Exchange, if the issuer company fulfils the prescribed conditions. Transactions at the Stock Exchanges are undertaken through the brokers. Brokers are also now-a-days regulated by Securities and Exchange Board of India. When a person intends to buy or sell shares/bonds of a company, he places an order for the same with a broker registered at the stock exchange. Broker's authorised clerk will carry out the customer's order at the trading floor of the stock exchange by undertaking a transaction with another broker or jobber. Jobber is a person who quotes two-way prices-the bid price and the offer price. After a transaction is finalised, it is noted in the notebooks. Contract notes are prepared and sent to the customer intimating the transaction undertaken for him.

On-line Trading System The Information Technology has brought out revolutionary changes in the operation of stock exchanges in India. The traditional method of trading without the use of technology was time consuming and inefficient. Further, it imposed limits on trading volumes and efficiency. To overcome those defects and to provide efficient and transparent services, the NSE has introduced a Nation-wide online fully automated Screen Based Trading System (SBTS). Now other stock exchanges have also been forced to adopt SBTS and today India can boast that almost 100% trading take place through electronic order matching.

HUB ANTENNA

SET LITE EL SETELLITE

NSE MAINFRAME NSE E-Trading of

BROKER'S PREMISES

Under the On-Line Trading System, the trading floor dealings have been discarded. National Stock Exchange (NSE) has a main computer (Above shown picture 1) which is connected through Very Small Aperture Terminal (VSAT) installed at its office. The main computer runs on a fault tolerant STRATUS main computer at the exchange. Brokers have terminals installed at their premises which are connected through VSATS/ leased lines/Modems. When investors inform their brokers to place orders either for purchase or sales, the brokers enter the orders through their PCs which run under Windows OS and send signal to the satellite via VSAT. The signal is then directed to mainframe computer kept at NSE via VSAT at NSE office. A message relating to order activity is broadcast to the respective members. The order confirmation message is immediately displayed on the PC of the broker. This order will be executed if it matches with the existing passive order(s). Otherwise, it will wait for the active orders to enter the system till it is matched. On order matching, a message is broadcast to the respective members. The trading system operates on a Strict Price/Time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching. In other words, the best buy order should match with the best sell order. If more orders are similar priced, then orders are sorted on time priority basis, i.e., the first come gets the top priority. All dealings are transparent, objective and fair since all orders are matched automatically by the computer. In case an order does not find a match, it remains in the system displaying it to the whole market till a fresh order comes in or the earlier order is cancelled or modified. BSE- BOLT system A revolutionary change of great significance has taken place with the introduction of on-line trading system by Bombay Stock Exchange (BSE), which has replaced the traditional system trading shares. The Bombay

Stock Exchange introduced this system, which is known as Bombay Stock Exchange On-Line Trading (BOLT). Now all scrips on BSE are being traded through BOLT. Trading on the BOLT System is conducted from Monday to Friday between 9:15 a.m. and 3:30 p.m. normally. The brokers and their agents conduct trading under the BOLT system from their trading work stations (TWS). At every TWS, the BOLT system displays touchline which will share the best bid and offer prices presently available in the market. The Bolt system also displays at every TWS Market view which will provide detailed market information on each listed stock. A Memorandum of Understanding (MoU) between BSE and other exchanges is signed to allow BSE to install its terminals in their areas. The Modus Operandi of On-Line Trading is very simple. As soon as a broker receives an order from his customer, he feeds the details of the order into the computer, e.g. the name of company, no. of shares to be purchased/sold, the ceiling price or the price at which the transaction is intended to be made and the time within which is to be completed. The screen of the computer will fully display the present details regarding the security concerned. If the present position does not facilitate the transaction, the computer will store the order and will match it with a corresponding reverse order, as soon as it is feasible. It means that as and when the desired shares are available for sale at the desired price the deal is struck and the computer screen will display the completion of the transaction. The broker will, thereafter, issue the contract note. Advantages of On-line Trading It makes the securities market transparent, as the customer can himself see the market price on the screen. It makes the security market wide and deep. It serves a larger number of investors spread over different locations and covers a large number of securities. The difference in prices of securities at different locations/markets is reduced.

 It is very convenient, fast and efficient. There is a zero possibility of arising errors and fraud transactions. Other exchanges have also been permitted to set-up computerised screen based trading system. They can also expand nation-wide subject to certain conditions.

Types of orders An investor can have his buy or sell orders executed either at the best price prevailing on the exchange or at a price that he determines. Accordingly, an investor may place two types of orders namely, market order or limit order.

Market orders In a market order, the broker is instructed by the investor to buy or sell a stated number of shares immediately at the best prevailing price in the market. In the case of a buy order, the best price is the lowest price obtainable; in the case of a sell order, it is the highest price obtainable. When placing a market order, the investor can be fairly certain that the order will be executed, but he will be uncertain of the price until after the order is executed.

Limited orders While placing a limit order, the investor specifies in advance the limit price at which he wants the transaction to be carried out. In the case of a limit order to buy, the investor specifies the maximum price that he will pay for the share; the order has to be executed only at the limit price or a lower price. In the case of al limit order to sell shares, the investor specifies the minimum price he will accept for the share and hence, the order has to be executed only at the limit price or a price higher to it. Thus for limit orders to purchase shares the investor specifies a ceiling on the price, and for limit orders to sell shares the investor specifies a floor price. Limit orders are generally place away from the market which means that the limit price is somewhat removed from the prevailing market price. In the case of a limit order to buy, the limit price would be below the prevailing price and in the case of a limit order to sell, the limit price would be above the prevailing market price. The investor placing limit orders believes that his limit price will be reached and the order executed within a reasonable period of time. But the limit order may remain unexecuted.

There are certain special types of orders which may be used by investors to protect their profit or limit their losses. Two such special kinds of orders are stop orders (also known as stop loss orders) and stop limit orders.

Stop orders/Stop loss orders A stop order/stop loss order may be used by an investor to protect a profit or limit a loss. For a stop order the investor must specify what is known as a Stop Price. It is a sell order, the stop price must be below the market price prevailing at the time of placing the order. If, subsequently, the market price reaches or passes the stop price, the stop order will be executed at the best available price. Thus, a stop order can be viewed as a conditional market order, because it becomes a market order when the market price reaches or passes the stop price.

Examples will help to clarify the working of stop orders. Suppose an investor has 100 shares of a company which were purchased at Rs. 35 per share. The current market price of the share is Rs. 75. The investor thus has earned a profit or Rs. 40 per share on his share holding. He would very much like to protect this profit without foregoing the opportunity of earning more profit if the price moves still upwards. This can be achieved by placing a stop sell order at a price below the current market price of Rs. 75, for example at Rs. 70. Now, if the price subsequently falls to Rs. 70 or below, the stop sell order becomes a market order and it will be executed at the best price prevailing in the market. Thus, the investor will be able to protect the profit of around Rs. 35 per share. On the contrary, if the market prie of the share moves upwards, the stop sell order will not be executed and the investor retains the opportunity of earning higher profits on his holding.

Stop orders can also be used to minimise loss in trading. Suppose that a share is currently selling for Rs. 125 and an investor expects a fall in the price of the share. He may place an order for sale of teh share at the current market price of Rs.125 hoping to cover up his position by purchasing the share at a lower price and thus make a profit on the deal.

This type of a transaction is known as a short sale. If price of the share falls as anticipated by the investor, he would make a profit. There is a possibility that the price may move upwards and in that case the investor has to purchase the share at a higher price to cover up his position and meet his sales commitment. This will result in a loss to the investor. This loss can be minimised by placing a stop buy order at a price above the current price of Rs. 125, for example at Rs. 130. Now, if the price of the share rises to Rs. 130 or above, the stop buy order will become a market order and will be executed at the best price available in the market. Suppose that the stop buy order was executed at Rs. 131, then the loss of the investor is liited to Rs. 6 per share, that is, the difference between selling price of Rs. 125 and the buying price of Rs. 131 per share. One disadvantage of the stop orders is that actual price at which the order is executed is uncertain and may be some distance away from the stop price. Stop limit orders The stop limit order is a special type of order designed to overcome the uncertainty of teh execution price associated with a stop order. The stop limit order gives the investor the opportunity of specifying a limit price for executing the stop orders; the maximum price for a stop buy order and the minimum price for a stop sell order. With a stop limit order teh investor specifies two prices, a stop price and a limit price. When the market price reaches or passes the stop price, the stop limit order becomes a limit order to be executed within the limit price. Hence, a stop limit order can be viewed as a conditional limit order. Example Let us consider two examples. Consider a share that is currently selling at a Rs. 60. An investor who holds the share may place a stop limit order to sell with stop price of RS. 55 and limit price of Rs. A52 or higher would be activated. Here the order will be executed only if the share is available at Rs. 52 or above. Thus a stop limit order may remain unexecuted.

Consider an investor who desires to make a short sale of a particular share at its current market price of Rs. 85. That is, he intends to sell the share without owning it but hoping to buy it later from the market at a lower price. He may also place a stop limit order to buy theh share to minimise his loss in case the share price move upwards contrary to this expectations. He may specify a stop price of Rs. 90 and a limit price of Rs. 93 for his stop limit order to buy the share with limit price of Rs. 93 would be activated. The order would be executed at a price of Rs. 93 or lower, if such price is available in the market.

This disadvantage of a stop limit order is that it may remain unexecuted. The stop order results in certain execution at an uncertain price, while a stop limit order results in uncertain execution within a specified price limit. Trading in stock exchanges takes place continuously during the official trading hours. Stock exchange are open five days a week, from Monday through Friday. An investors may place orders for trade through his broker at any time during the official trading hours, but he needs to specify the lime limit for the validity of the order. The time limit on an order is essentially an instruction to the broker about the time within which he should attempt to execute the order. Day Orders A day order is an order that is valid only for the trading day on which the order is place. If the order is not executed bly the end of the day, it is treated as cancelled. All orders are ordinarily treated as day orders unless specified as other types of orders. Week Orders

These are orders that are valid till the end of the week during which the orders are placed. They expire at the close of the trading session on Friday of the week, unless they are executed by then. Month Order These are orders that are valid till end of the month during which the orders are placed. Month orders expire at teh close of the trading session on the last working day of the m`onth. Open order Open orders are orders that remain valid till then are executed by the brokers or specifically cancelled by the investor. They are also known as good till cancelled orders or GTC orders. However, brokers generally seek periodic confirmation of open orders from the investors

Fill or Kill orders These orders are also known as F0K orders. These orders are meant to be executed immediately. If not executed immediately, they are to be treated as cancelled. Speculation People who buy and sell securities in the stock exchanges may have different motivations for doing so. A person may be interested in getting a good rate of return, earned on a rather consistent basis, for a relatively long period of time. For this he will choose the shares of a company which is fundamentally strong and has the potential for growth in the future. Such a person is a genuine investor who invests his money in securities for longterm returns. There may be other persons who have a short-term perspective on their trading activities on the stock exchanges. A person may be interested in making a quick short-term profit from the fluctuations in the prices of securities in the stock market. Such a person is known as a Speculator. Speculators are traders who intend to make high returns within

a short span of time, making use of the short-term fluctuations in security prices. Speculators constantly monitor the movement of share prices in the market. On the basis of their analysis of share price movements and on the basis of the evaluation of various information regarding the performance of companies, the speculative traders speculate on the future course of prices. They believe that mispricing of securities occurs periodically in the market. Sometimes, some securities may be overpriced (that is, their price may be higher than their intrinsic value) and at other times some securities may be underpriced. Speculators attempt to exploit such mispricing of securities, because it is presumed that the mispricing would be corrected by the market eventually. Long Buy If a speculator feels that a security which is correctly priced at the moment is likely to show a rising trend, then he would like to buy the security for the purpose of selling it at a higher price when the price rises as anticipated. The speculator in this case is said to take a long position with respect to that security. He is not interested in taking delivery of the security, but intents to sell it off as quickly as possible to gain some profit. Hence, he would not like to hold his long position for an extended period. He would like the mispricing to be corrected at the earliest, preferably, on the same day. Such kind of a speculative activity is known as long buy.

Short Sale On the contrary, if a speculator estimates that a security is overpriced and its price is likely to decline shortly, he would like to sell the security at the current price and buy it sometime later when the price declines so as to deliver the security sold at the time of settlement of the trade. Ordinarily, a person sells securities which he owns. Here, the speculator is selling a security which he does not now or possesses in the hope that he would be

able to deliver the security on the due date by buying it at a lower price within a short period of time. He hopes to gain some profit in the transaction. The speculator in this case is taking a Short Position with respect to the security by engaging in a short sale. Fundamentally, a short sale is the sale of a security that is not owned by the seller at the time of the buying the security sometime in the near future. He will be able to make a profit out of the short sale transaction only if he is able to buy the security at a lower price. If the price of a security moves up against his anticipations, he will suffer a loss.

Speculation involve s high amount of risk. The speculators take long or short positions on the basis of their estimation or speculation about the future movement of prices. If the prices of securities do not move in the expected directions within a short time, the speculators suffer losses. TYPE OF SPECULATORS Trader engaged in speculative activity in the stock market are described by different names based on the type of activity they generally engage in. The prominent among them are bulls, bears, stag and lame duck. Bulls/Tejiwallas A trader who expects a rise in prices of securities is known as a bull. He, therefore, takes a long position with respect to securities. He engages in long buy anticipating a rise in prices of securities. The bulls will be able to make profit only if the prices rise as anticipated; otherwise they will suffer losses. When there is an overbought condition in the market, that is, the purchases made by speculators exceed the sales made by them; the bulls begin to spread good rumours about companies so as to raise the price of their shares. This activity is called a bull campaign. When the prices of securities are generally rising in the market, resulting in buoyancy and optimism in the stock market, the market is said to be in a bullish phase.

Bears/Mandiwallas A bear is a pessimist who expects a decline in the price of securities. He, therefore, takes a short position on securities by engaging in short sales. He attempts to cover up his short position by buying the securities at lower price when prices decline. He may engage in a bear raid so as to bring down the prices of securities. Spreading unfavourable rumours about companies with their intention of creating a decline in their share prices is known as a bear raid. The bear will suffer a loss if the prices of securities rise after he takes a short position on securities. When there is a general decline in prices of securities in the stock market, the market is said to be bearish Lame ducks A lame duck is abear who has made a short sale but is unable to meet his commitment to deliver the securities sold by him on account of rise in prices of securities subsequent to the short sale. He is said to be struggling like a lame duck. Stag A stage is a trader who applies for shares in the new issues market just like a genuine investor. A stag is an optimist like the bull and expects a rise in the prices of securities that he has applied for. He anticipates that when the new shares are listed in the stock exchange for trading, they would be quoted at a premium, that is, above their issue price. As soon as the stag receives the allotment of shares, he would sell them at athe stock exchange at however, suffer a loss if price of the new shares do not riese as anticipated when they are listed for trading. Jobber/Taravaniwallas Jobbers are those brokers who specialise in selected scrips. They are called Taravaniwallas and they are wholesalers doing both buying and selling in selected scrips only. They are ready to buy and sell simultaneously in selected scrips by quoting both bid and offer prices to the brokers and the

sub-brokers on the trading floor. They earn profit through the margin between buying and selling rates.

Badla Financiers/Badliwallas Badliwallas are those members whose main function is to give finance for carry forward deals in specified securities in return for interest. This interest is called badla rate. They also lend securities for the brokers who have oversold at the time of settlement. Carry forward transactions are facilitated by these financiers. Arbitragers Arbitragers are those brokers who buy securities in one market and sell them in another market to take advantage of the price differences prevailing in different markets for the same scrips. Thus, they deal in intermarket transactions and get profits through differences in prices as between difference

MARGIN TRADING
Investors may purchase securities in the stock exchanges either using their own funds or funds borrowed from banks, brokers, etc. Conservative investors would prefer to use own funds for trading in securities. Other investors may use borrowed funds for buying securities when there is a good opportunity available. Borrowing money from the bank or the broker for purchasing securities is known as Margin Trading. The investor pays a part of the value of the securities to be purchased; the balance is provided by the broker or the banker. The cash paid by the investor is the margin. Example: to buy some securities but ready cash may not be

An investor place buy orders for purchase of some securities worth Rs. 50,000 and pays as cash Rs. 30,000 to the broker, the investors margin is 60 per cent of the value of the securities. The balance amount is supplied by the broker. In margin trading, the investor has to pay interest on the money borrowed to finance the securities transaction. Thus profit of gain from the transaction would be reduced to that extent. Even if there is no gain from the securities transaction, interest on the borrowed funds has to be paid. Margin trading is thus a risky venture. Dealing in securities at the Stock Exchange has traditionally been undertaken on the trading floor of the Stock Exchange. This traditional system is now been largely replaced by computerised on-line system of trading. We shall first deal with the traditional system of trading, followed by the new on-line system.

CLEARING AND SETTLEMENT

Introduction
The clearing and settlement mechanism in Indian securities market has witnessed significant changes and several innovations during the last decade. These include use of the state-of-art information technology, emergence of clearing corporations to assume counterparty risk, shorter settlement cycle, dematerialisation and electronic transfer of securities, fine-tuned risk management system. Till recently, the stock exchanges in India were following a system of account period settlement for cash market transactions. T+2 rolling settlement have now been introduced for all securities. The members receive the funds/securities in accordance with the pay-in/pay-out schedules notified by the respective exchanges. Given the growing volume of trades and market volatility, the time gap between trading and settlement gives rise to settlement risk. In recognition of this, the exchanges and their clearing corporations employ risk management

practices to ensure timely settlement of trades. The regulators have also prescribed elaborate margining and capital adequacy standards to secure market integrity and protect the interests of investors. The trades are settled irrespective of default by a member and the exchange follows up with the defaulting member subsequently for recovery of his dues to the exchange. Due to setting up of the Clearing Corporation, the market has full confidence that settlements will take place on time and will be completed irrespective of possible default by isolated trading members. Movement of securities has become almost instantaneous in the dematerialised environment. Two depositories viz., National Securities Depositories Ltd. (NSDL) and Central Depositories Services Ltd. (CDSL) provide electronic transfer of securities and more than 99% of turnover is settled in dematerialised form. All actively traded scrips are held, traded and settled in demat form. The obligations of members are downloaded to members/custodians by the clearing agency. The members/custodians make available the required securities in their pool accounts with depository participants (DPs) by the prescribed pay-in time for securities. The depository transfers the securities from the pool accounts of members/custodians to the settlement account of the clearing agency. As per the schedule determined by the clearing agency, the securities are transferred on the pay-out day by the depository from the settlement account of the clearing agency to the pool accounts of members/custodians. The pay-in and pay-out of securities is affected on the same day for all settlements. Select banks have been empanelled by clearing agency for electronic transfer of funds. The members are required to maintain accounts with any of these banks. The members are informed electronically of their pay-in obligations of funds. The members make available required funds in their accounts with clearing banks by the prescribed pay-in day. The clearing agency forwards funds obligations file to clearing banks which, in turn, debit the accounts of members and credit the account of the clearing agency. In some cases, the clearing agency runs an electronic file to debit members accounts with clearing banks and credit its own account. On pay-out day, the funds are transferred by the clearing

banks from the account of the clearing agency to the accounts of members as per the members obligations. In the T+2 rolling settlement, the pay-in and pay-out of funds as well as securities take place 2 working days after the trade date.

Settlement Process
While NSE provides a platform for trading to its trading members, the National Securities Clearing Corporation Ltd. (NSCCL) determines the funds/securities obligations of the trading members and ensures that trading members meet their obligations. NSCCL becomes the legal counterparty to the net settlement obligations of every member. This principle is called `novation' and NSCCL is obligated to meet all settlement obligations, regardless of member defaults, without any discretion. Once a member fails on any obligations, NSCCL immediately cuts off trading and initiates recovery. The clearing banks and depositories provide the necessary interface between the custodians/clearing members (who clear for the trading members or their own transactions) for settlement of funds/securities obligations of trading members. The core processes involved in the settlement process are:

(a) Determination of Obligation: NSCCL determines what counterparties owe, and what counter-parties are due to receive on the settlement date. The NSCCL interposes itself as a central counterparty between the counterparties to trades and nets the positions so that a member has security wise net obligation to receive or deliver a security and has to either pay or receive funds. (b) Pay-in of Funds and Securities: The members bring in their funds/securities to the NSCCL. They make available required securities in designated accounts with the depositories by the prescribed pay-in time. The depositories move the securities available in the accounts of members to the account of the NSCCL. Likewise members with funds obligations make available required funds in the designated accounts with clearing banks by the prescribed pay-in time. The NSCCL sends electronic

instructions to the clearing banks to debit members accounts to the extent of payment obligations. The banks process these instructions, debit accounts of members and credit accounts of the NSCCL. (c) Pay-out of Funds and Securities: After processing for shortages of funds/securities and arranging for movement of funds from surplus banks to deficit banks through RBI clearing, the NSCCL sends electronic instructions to the depositories/clearing banks to release pay-out of securities/funds. The depositories and clearing banks debit accounts of NSCCL and credit settlement accounts of members. Settlement is complete upon release of payout of funds and securities to custodians/members. (d) Risk Management: A sound risk management system is integral to an efficient settlement system. NSCCL has put in place a comprehensive risk management system, which is constantly monitored and upgraded to preempt market failures. It monitors the track record and performance of members and their net worth; undertakes on-line monitoring of members positions and exposure in the market, collects margins from members and automatically disables members if the limits are breached.

Types of Settlement Process

In Indian stock market, after trading very next step is to settle the trading. For this various types of settlement procedure available for the investors. For this first shares are divided in two groups such as:
i)

Specified Securities include actively traded shares of large growthoriented companies. Only a limited number of shares fall in this group but they account for major portion of capitalisation in Indian Stock Market.

ii)

Non-Specified Securities are securities other than the specified securities. There are two methods for settlement of transactions in specified securities, these are

a) Carry Forward System: Under this system, the transactions are

settled at the end of each settlement period, which is generally of two weeks commencing on Friday and ending on Thursday of second following week. At the end of the settlement period on Friday, the members decide whether the transaction is settled or if it is to be further carried forward. The carry forward of transactions is called 'badla. In case of non-specified, securities badla transaction were not allowed. The clearing house handles only the money part and actual delivery of securities is handled by members themselves. Badla System or Carry Forward System was abolished on December 13, 1993. In October, 1997 SEBI introduced modified carry forward system. Finally SEBI banned 'badla' on July 2, 2001.
b) Rolling Settlement System: In January, 1998 SEBI introduced

rolling settlement system on a voluntary basis on the Stock Exchanges for securities, which were eligible for demat trading. In January 2000, compulsory rolling settlement was introduced for 10 scrips. By May 2000, the number of such scrips was gradually increased to 163 and with effect from July 2, 2001 to 251. Rolling settlement was extended to the remaining scrips on all stock exchanges by December 31, 2001. Thus, rolling settlement system has substituted the Badla System. Now all the scrips are traded in the rolling settlement mode. Initially, rolling settlement was on T + 5 basis, but from April 1, 2002, settlement cycle for all securities has been shortened to T + 3 basis. It means that payment and delivery of securities is to be completed within three days after the day of the transaction. Thus, the rolling settlement system is a significant improvement in the stock market. It will enhance the efficiency and integrity of the securities market. The payments and deliveries are made by members through the clearing house of the Stock Exchange. They deposit cheques/drafts and securities certificates on the pay-in-day specified

by the Stock Exchange. After examining the same, the cleaning house makes the payment and delivers the securities certificates to the members on the pay-out-day, i.e. next Wednesday The brokers, who trade in securities at the Stock Exchange, have to meet margin requirements also. They have to deposit daily margins in cash for every contract of purchase and sale outstanding at the end of the day f6r scrips in the: specified group only. Generally, the rate of daily margin varies between 5% and 25%. It is calculated on cumulative aggregate purchase and sales by members, remaining outstanding at the end of each day. They have to deposit other margins also as imposed by the stock exchanges. TRANSFER SYSTEM After the transaction is complete by settlement and delivery of share certificates to the buyer, the latter has to get the share certificates transferred in his own name. For this purpose, the transferor has to sign on the prescribed Transfer Deed, which must be duly stamped, dated and witnessed. Thereafter, it is signed by the transferee and along with share certificate is sent to the registered office of the issuer corripany (or its registrars who handle the shareholders' register and transfers). The company will tally transferor's signature with his specimen signatures (given at the time of applying for the shares) and other details. If everything is found in order, the shares are transferred in the name of the transferee 2nd an endorsement to this effect 'is made on the back of the share certificate. Necessary entries are also made in the Register of Members. Share certificates are then sent back to the transferee. Company is allowed two month's time to complete this transfer procedure. The above is the traditional or conventional method of transfer of shares held in the physical form. With the setting up of Depositories, most of the shares are now not held in the physical form, but in dematerialised form. The system of transfer of shares in demat form is very simple, as explained below.

Risks in Settlement
The following two kinds of risks are inherent in a settlement system:

(1) Counterparty Risk: This arises if parties do not discharge their obligations fully when due or at any time thereafter. This has two components, namely replacement cost risk prior to settlement and principal risk during settlement. (a) The Replacement Cost Risk arises from the failure of one of the parties to transaction. While the non-defaulting party tries to replace the original transaction at current prices, he loses the profit that has accrued on the transaction between the date of original transaction and date of replacement transaction. The seller/buyer of the security loses this unrealised profit if the current price is below/above the transaction price. Both parties encounter this risk as prices are uncertain. It has been reduced by reducing time gap between transaction and settlement and by legally binding netting systems. (b) The Principal Risk arises if a party discharges his obligations but the counterparty defaults. The seller/buyer of the security suffers this risk when he delivers/makes payment, but does not receive payment/delivery. This risk can be eliminated by delivery vs. payment mechanism which ensures delivery only against payment. This has been reduced by having a central counterparty (NSCCL) which becomes the buyer to every seller and the seller to every buyer. A variant of counterparty risk is liquidity risk which arises if one of the parties to transaction does not settle on the settlement date, but later. The seller/buyer who does not receive payment/delivery when due, may have to borrow funds/securities to complete his payment/delivery obligations. Another variant is the third party risk which arises if the parties to trade are permitted or required to use the services of a third party which fails to perform. For example, the failure of a clearing bank which helps in payment can disrupt settlement. This risk is reduced by allowing parties to have accounts with multiple banks. Similarly, the users of custodial services face risk if the concerned custodian becomes insolvent, acts negligently, etc. (2) System Risk: This comprises of operational, legal and systemic risks. The operational risk arises from possible operational failures such as errors, fraud, outages etc. The legal risk arises if the laws or regulations do not

support enforcement of settlement obligations or are uncertain. Systemic risk arises when failure of one of the parties to discharge his obligations leads to failure by other parties. The domino effect of successive failures can cause a failure of the settlement system. These risks have been contained by enforcement of an elaborate margining and capital adequacy standards to secure market integrity, settlement guarantee funds to provide counter-party guarantee, legal backing for settlement activities and business continuity plan, etc.

PLAYERS OF TRADE PRACTICE

STOCK BROKERS
Introduction A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyer and the seller). According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, a stockbroker means a member of a recognized stock exchange. No stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A stockbroker applies for registration to SEBI through a stock exchange or stock exchanges of which he or she is admitted as a member. SEBI may grant a certificate to a stockbroker [as per SEBI (Stock Brokers and Sub-Brokers) Rules, 1992] subject to the conditions that:
a) He holds the membership of any stock exchange; b) He shall abide by the rules, regulations and bye-laws of the stock

exchange or stock exchanges of which he is a member.

c)

In case of any change in the status and constitution, he shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange.

d) He shall pay the amount of fees for registration in the prescribed

manner; and

e) He shall take adequate steps for redressal of grievances of the

investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints. While considering the application of an entity for grant of registration as a stock broker, SEBI shall take into account the following namely, whether the stock broker applicant:
a) Is eligible to be admitted as a member of a stock exchange.

b) has

the

necessary

infrastructure

like

adequate

office

space,

equipment and man power to effectively discharge his activities; c) has any past experience in the business of buying, selling or dealing in securities;
d) Is being subjected to any disciplinary proceedings under the rules,

regulations and bye-laws of a stock exchange with respect to his business as a stock-broker involving either himself or any of his partners, directors or employees.

BROKER-CLIENTS RELATIONS
i. Know your client
The TM shall enter into an agreement in the specified format provided by NSE with the client before accepting orders on latters behalf. The said agreement shall be executed on non-judicial stamp paper of adequate value, duly signed by both the parties on all the pages. Copy of the said agreement is to be kept with the TM permanently. In addition to the agreement, the TM shall seek information from the client in the 'Client Registration Application Form' obtaining information like: investor risk profile, financial profile, investor identification details, address details, income, PAN number, employment, age, investments, other assets and financial liabilities. The TM shall obtain recent passport size photographs of each of their clients in case of individual clients and of all partners in case of partnership firms and of the dominant promoter in case of corporate clients. The TM shall also take proof of identification and address of the client.

Trading Member shall make the Constituent aware of trading segment to which Trading Member is admitted, particulars of SEBI registration number, employee primarily responsible for the Constituents affairs, the precise nature of the Trading Members liability for business to be conducted, basic risks involved in trading on the Exchange (equity and other instruments) including any limitations on the liability and the capacity in which the Trading Member acts and the Constituents liability thereon, investors rights and obligations, etc. by issuing to the Constituent a Risk Disclosure Document in such format, as may be prescribed by the Exchange from time to time and shall obtain the same from his Constituents duly signed. Execution of client registration form, member constituent agreement and Risk Disclosure Document is optional in case of institutional clients. A stock-broker shall not deal knowingly, directly or indirectly, with a client who defaults to another stock-broker. There is no limit on the number of clients for a TM.

ii. Unique Client Code

SEBI made it mandatory for all brokers to use unique client codes for all clients. Brokers shall collect and maintain in their back office the Permanent Account Number (PAN) allotted by Income Tax Department for all their clients. Brokers shall verify the documents with respect to the unique code and retain a copy of the document. They shall also be required to furnish the above particulars of their clients to the stock exchanges/clearing corporations and the same would be updated before placing orders for the clients. The stock exchanges shall be required to maintain a database of client details submitted by brokers.

iii.

Margins from the Clients

Members should have a prudent system of risk management to protect themselves from client default. Margins are likely to be an important element of such a system. The same shall be well documented and be made accessible to the clients and the Stock Exchanges. However, the quantum of these margins and the form and mode of collection are left to the discretion of the members (SEBI/MRD/DoP/SE/Cir07/2005 dated February 23, 2005). The margin so collected shall be kept separately in the client bank account and utilized for making payment to the clearing house for margin and settlement with respect to that client.

iv.

Execution of Orders

Where the constituent requires an order to be placed or any of his order to be modified after the order has entered the system but has not been traded, the Trading Member may, if it so desires, obtain order placement/ modification details in writing from the constituent. The Trading Member shall accordingly provide the constituent with the relevant order confirmation/ modification slip or copy thereof, forthwith, if so required by the constituent. Where the constituent requires any of his orders to be cancelled after the order has been entered in the system but has not been executed, the Trading Member may, if it so desires, obtain the order cancellation details in writing from the constituent. The Trading Member shall accordingly provide the constituent with the relevant order cancellation details, forthwith, if so required by the constituent. The Trading Member may, if it so desires, obtain in writing, the delivery and payment requirement in any instructions of an order that it receives from the constituent. Where a Trading Member receives a request for order modification or order cancellation from the constituent, it shall duly bring it to their notice that if the order results in a trade in the meantime, the requests for modification or cancellation cannot be executed.

v. Contract Note

Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. A stock-broker shall issue a contract note to his clients for trades (purchase/sale of securities) executed with all relevant details as required therein to be filled in (refer to SEBI circular no. SMD /SED /CIR/ 23321 dated November 18, 1993). A contract note shall be issued to a client within 24 hours of the execution of the contract duly signed by the TM or his Authorized Signatory. As per Regulation 18 of SEBI (Stock-Brokers & Sub-Brokers) Regulations, 1992, the TM shall preserve the duplicate copy of the contract notes issued for a minimum of five years. The TM shall ensure that: (a) Contract notes are in the prescribed format, (b) Stamp duty is paid, (c) All statutory levies are shown separately in the contract note, and (d) Contract notes are signed by the TM or by an authorised signatory TM. The contract note should contain name and address (registered office address as well as dealing office address) of the TM, the SEBI registration number of the TM, details of trade viz. order number, trade number, order time, trade time, security name, quantity, trade price, brokerage, settlement number and details of other levies.

vi.

Payments/Delivery of Securities to the Clients

Every TM shall make payments to his clients or deliver the securities purchased within one working day of pay-out unless the client has requested otherwise.

vii. Brokerage
The maximum brokerage chargeable by TM in respect of trades effected in the securities admitted to dealing on the CM segment of the Exchange is fixed at 2.5% of the contract price, exclusive of statutory levies. This maximum brokerage is inclusive of sub-brokerage. The

brokerage shall be indicated separately from the price, in the contract note. The TM may not share brokerage with a person who is a TM or in employment of another TM.

viii. Segregation of Bank Accounts

The TM should maintain separate bank accounts for clients funds and own funds. It shall be compulsory for all TMs to keep the money of the clients in a separate account and their own money in a separate account. Funds shall be transferred from the client account to the clearing account for the purpose of funds pay-in obligations on behalf of the clients and viceversa in case of funds pay-out. No payment for transaction in which the TM is taking position as a principal will be allowed to be made from the clients account.

ix.

Segregation of Demat (Beneficiary) Accounts

The Trading Members shall keep the dematerialised securities of Constituents in a separate beneficiary account distinct from the beneficiary account maintained for holding their own dematerialised securities. No delivery towards the own transactions of the Trading Members shall be allowed to be made from the account meant for Constituents. For this purpose, every Trading Member is required to open a beneficiary account in the name of the Trading Member exclusively for the securities of the Constituents (to be referred to as Constituents beneficiary account). A Trading Member may keep one consolidated Constituents beneficiary account for all its Constituents or different accounts for each of its Constituents as it may deem fit. SUB-BROKERS The trading members of the Exchange may appoint sub-brokers to act as agents of the concerned trading member for assisting the investors in buying, selling or dealing in securities. The sub-brokers would be affiliated to the trading members and are required to be registered with

SEBI. A sub-broker would be allowed to be associated with only one trading member of the Exchange. Trading members desirous of appointing subbrokers are required to submit the following documents to the Membership Department of the Exchange: Copy of sub-broker - broker agreement duly certified by the trading members Application form for registration as a sub-broker with Securities and Exchange Board of India (Form B) Recommendation letter to be given by the trading member with whom the sub-broker is affiliated (Form C) The trading member concerned shall be responsible to ensure the settlement of all deals entered into by trading member even though the orders in respect of the deals may have originated from its sub-broker. The trading member shall issue contract notes for all trades in respect of its sub-broker in the name of the sub-broker and the sub-broker shall in turn issue purchase / sale notes to his clients as per the format prescribed by the Exchange. The sub-broker shall split the contract client wise and scrip wise and issue promptly the purchase / sale note accordingly. The sub-broker will be required to adhere to NSEs know your clients requirements. The important documents relating to dealing through a subbroker are given below: Individual client registration application form Non-individual client registration application form Sub-broker client agreement Purchase/Sale Note issued by Sub-brokers acting for constituents

Eligibility A sub-broker may be an individual, a partnership firm or a corporate. In case of corporate or partnership firm, the directors or partners and in the case of an individual sub-broker applicant, each of them shall comply with the following requirements: a) They shall not be less than 21 years of age;

b) They shall not have been convicted of any offence involving fraud or dishonesty;
c) They

shall

have

at

least

passed

12th

standard

equivalent

examination from an institution recognized by the Government; d) They should not have been debarred by SEBI e) The corporate entities applying for sub-brokership shall have a minimum paid up capital of Rs. 5 Lakh and it shall identify a dominant shareholder who holds a minimum of 51% shares either singly or with the unconditional support of his/her spouse. Registration No sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. Sub-brokers are required to obtain certificate of registration from SEBI in accordance with SEBI (Stock Brokers & Sub-brokers) Rules and Regulations, 1992, without which they are not permitted to buy, sell or deal in securities. SEBI may grant a certificate to a sub-broker, subject to the conditions that: a) he shall pay the fees in the prescribed manner;\ b) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints received; c) in case of any change in the status and constitution, the sub- broker shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange; and
d) He is authorised in writing by a stock-broker being a member of a

stock exchange for affiliating himself in buying, selling or dealing in securities. The applicant sub-broker shall submit the required documents to the stock exchange with the recommendation of a Trading Member. After verifying the documents, the stock exchange may forward the documents of the applicant sub-broker to SEBI for registration. A sub-broker can trade in that capacity after getting himself registered with SEBI. The Exchange

may not forward the said application of the sub-broker to SEBI for registration if the applicant is found to have introduced or otherwise dealt with fake, forged, stolen, counterfeit etc. shares and securities in the market. Other Requirements The Trading Member has to issue contract notes for all trades in respect of its sub-broker in the name of the sub-broker and the sub-broker shall, in turn issue purchase/sale notes to his clients as per the format prescribed by the Exchange. The Trading Member with whom the subbroker is affiliated is responsible for: i. ii. iii. Ensuring the compliance by a sub-broker of the Rules, Bye-laws and Regulations of the Exchange. Inspecting that the sub-brokers are registered and recognized. Ensuring that the sub-brokers function in accordance with the Scheme, iv. Rules, Byelaws, Regulations etc. of the Exchange/NSCCL and the SEBI Regulations etc. Informing the sub-broker and keeping him apprised about trading/settlement cycles, delivery/payment schedules and any changes therein from time to time. v. Reporting any default or delay in carrying out obligations by any of the sub-brokers affiliated to him, to all other stock brokers with whom said sub-broker is affiliated. Cancellation of Registration In case a Trading Member/Sub-broker intends to cancel the registration as a sub-broker, the sub-broker is required to submit the original SEBI Registration certificate through their affiliated Trading Member. While applying for cancellation of registration, the affiliated Trading Member needs to give a public notification to this effect. SUB-BROKER-CLIENTS RELATIONS Sub-broker

Sub-broker is an important intermediary between stock broker and client in Capital Market segment. Sub-broker means any person not being a member of a stock exchange who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers.

Registration A broker shall deal with a person who is acting as a sub-broker only if such person is registered with SEBI as a sub-broker. It is a responsibility of a broker to ensure that none of its client is acting as a sub-broker unless it is registered with SEBI. A broker of the Exchange executing transactions on behalf of its clients through a broker of other stock exchange is also required to be registered with SEBI as sub-broker of respective broker. Application for sub-broker registration has to be submitted to the Exchange with recommendation of the associated stock broker, in a prescribed format. Relationship with Clients/Role A sub-broker shall have to enter into a tripartite agreement with its clients and the stock broker specifying the scope of rights and obligations of the sub-broker, stock broker and such client of the sub-broker as per format prescribed by SEBI for dealing in securities in cash segment. There shall be privity of contract between the stock broker and the sub-brokers client. A separate agreement has to be executed for each Exchange. Sub-broker will help the client in redressal of grievance in respect of transactions executed through its associated broker. Sub-broker will also assist and co-operate in ensuring faster settlement of any arbitration proceeding arising out of the transaction entered through its associated

broker and shall be jointly / severally liable to implement the arbitration award. A sub-broker will provide assistance to stock broker and clients introduced to by it to reconcile their accounts at the end of each quarter with reference to all the settlements where payouts have been declared during the quarter. Contract notes A stock broker shall issue contract note as per the format prescribed by the Exchange to client introduced through a sub-broker. A sub-broker shall render necessary assistance to its client in obtaining the contract note from the stock broker. Sub-broker shall not issue any purchase/sale note or confirmation memo to its client. Securities/ Funds Transactions in securities executed on behalf of a client introduced through the sub-broker shall be settled by delivery/ payment between the stock broker and the client directly, in accordance of the rules, regulations and byelaws of the Exchange and such settlements shall not take place through sub-broker. Delivery of securities and payment of funds relating to the transactions of a client introduced by the sub-broker shall be directly between the stock broker and the client of the sub broker. Sub-brokerage Sub-broker is entitled to sub-brokerage not exceeding 1.5% of the transaction value.

INDICES OF INDIAN STOCK MARKET

This stock market concept is not a recent origin for India. It has started earlier Nineteen century. With the change time & introduce of new concept i.e. globalisation, liberalisation, the concept of trading in stock market has gradually changed. Earlier the trading took place by way of

physical form i.e. transfer of share certificate. But it was a time consuming process. The Traditional trading system has a no. of drawback which leads to change the trading system or concept of the Indian stock market. After 1992 onward the stock market converted from physical form to electronic form. India Stock Market is a price sensitive market where the volatility of this market is quite high compare to other foreign stock market. To know about the stock market position, share price, risk involve in trading of share, market direction, different type of measures introduced after the installation of electronic trading (e-trading) system. These measures known indices. In India, there are mainly two Stock Exchange are there i. Bombay Stock Exchange (BSE) ii. National Stock Exchange (NSE)

BOMBAY STOCK EXCHANGE (BSE)

Bombay Stock Exchange, commonly referred to as the BSE, is a stock exchange located on Dalal Street, Mumbai, Maharashtra, India. It is the oldest stock exchange in Asia. The equity market capitalization of the companies listed on the BSE was US$1 trillion as of December 2011, making it the 6th largest stock exchange in Asia and the 14th largest in the world.[1] The BSE has the largest number of listed companies in the world.[2] As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scrips on the stock exchange, the Bombay Stock Exchange has a significant trading volume. The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India. While both have similar total market capitalization (about USD 1.6 trillion), share volume in NSE is typically two times that of BSE.

Bombay Stock Exchange has its own indices known as SENSEX which means Sensitive Index composites of 30 blue chip stock.

NAME OF THE COMPANIES INCLUDED IN SENSEX

Scrips Code Company Name Scrips code Company Name

500875 ITC 500325 RIL 532174 ICICI Bank 500180 HDFC Bank 500010 HDFC 500209 Infosys 500510 L&T 532540 TCS 500696 Hindustan Unilever 500312 ONGC 500112 SBI 500570 Tata Motors 500520 Mahindra & Mahindra 532454 Bharti Airtel 524715 Sun Pharma Calculation of sensex

532555 NTPC 500470 Tata Steel 532977 Bajaj Auto 533278 Coal India 500124 Dr Reddys Lab 500103 BHEL 507685 Wipro 532500 Maruti Suzuki 500182 Hero MotoCorp 500087 Cipla 532155 Gail India 500400 Tata Power 532286 Jindal Steel 500900 Sterlite Inds 500440 Hindalco Inds