A

Project Study Report

on

ANAND RATHI SECURITIES LTD.

Titled
To do a study on various aspects of Financial Planning
strategies provide by anand rathi
Submitted in partial fulfillment for the
Award of degree of
Master of Business Administration

OF
MASTER IN BUSINESS ADMINISTRATION

Submitted To: -

Submitted By:-

Ms. Jaya kundnani

Parul Gupta
MBA Part -II

APEX INSTITUTE OF MANAGEMENT & SCIENCE, JAIPUR

(Approved by AICTE, New Delhi & Affiliated to University of Rajasthan, Jaipur)

[2011 2013],
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ACKNOWLEDGEMENT
I express my sincere thanks to my project guide, Ms. Jaya kundnani For guiding me right
from the inception till the successful completion of the project. I sincerely acknowledge her
for extending their valuable guidance, support for literature, critical reviews of project and
the report and above all the moral support she had provided to me with all stages of this
project.

PARUL GUPTA

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PREFACE

Indian Stock market has undergone tremendous changes over the years. Investment in
Mutual Funds has become a major alternative among investors. The project has been
carried out to have an overview of Mutual Funds Industry and to understand investors
perception about Mutual Funds in the context of their trading preference, explore investors
risk perception & find out their preference over Top Mutual Funds.

The methodology used was data collection using Schedule. Secondary data was collected
from Internet and Books. Primary Data was collected through survey among existing client
along with the other investors. The procedure adopted to select sample was simple random
sampling.

The research design is analytical in nature. A questionnaire was prepared and distributed to
investors. The investors profile is based on the results of a questionnaire that the Investor
completed. The sample consist of 60 from various brokers premises. The target customers
were Investors who are trading in the stock market. The area of survey was restricted to
people residing in JAIPUR.

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INDEX / CONTENTS
COVER PAGE

..1

..3

ACKNOWLEDGEMENT

PREFACE

..4

EXECUTIVE SUMMARY

..5

S.No.
1.

Title

Page No.

Introduction to the Organization

Company Profile
Milestones
AR Core Strengths
Management Team
Acquisition & Division Of Company

6
7
9
9
10
11

List of Products
2.

About Financial Planning (Title of the study)

12
15

Introduction
Objectives of the study
3.

Different types of the products and areas

Demat Account
Mutual Fund
Derivatives (Capital Market)
Commodity Market

16
17
22
64
78

Insurance
4.

Limitation of Study

80

5.

Scope of Study

80

6.

Research Methodology

81

7.

Facts And Findings

82

8.

Analysis and interpretation

83

9.

Conclusion

88

10.

Suggestions

89

11.

Appendix

91

12.

Bibliography

94
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1. Introduction to the company

Company Profile
Milestones
AR Core Strengths
Management Team
Acquisition & Division of Company
List of Products
Mission & Vision

1.1: Company Profile

Anand Rathi (AR) is a leading full services securities firm providing the entire gamut of
financial services. The firm, founded in 1994 by Mr. Anand Rathi today has a pan India
presence as well as an international presence through offices in Dubai and Bangkok. AR
provides a breadth of financial and advisory services including wealth management,
investment banking, corporate advisory, brokerage & distribution of equities, commodities,
mutual funds and insurance, structured products all of which are supported by powerful
research teams.
The firms philosophy is entirely client centric, with as clear focus on providing long term
value addition to clients, while maintaining the highest standards of excellence, ethics and
Professionalism. Private Clients, Corporate and Institutions and was recently ranked by
Asia Money 2006 poll amongst South Asias top 5 wealth managers for the ultra- rich.
In year 2007 Citigroup Venture Capital International joined the group a financial partner.
Anand Rathi provides end to end equity solutions to institutional and individual investors.
Consistent delivery of high quality advice on individual stocks, sector trends and investment
strategy has established us a competent and reliable research unit across the country.
Clients can trade through us online on BSE and NSE for both equities and derivatives. They
are supported by dedicated sales & trading teams in our trading desks across the country.
Research and investment ideas can be accessed by clients either through their designated
dealers, emails, web or SMS.

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1.2: Milestones
1994 TO 1997

Started activities in consulting and Institutional equity sales with staff of 15 in 1994.
Set up a research desk and empanelled with major institutional investors in 1995.
Introduced investment banking businesses in 1997.
Retail brokerage services launched in 1997.
1999 TO 2002

Lead managed first IPO and executed first M&A deal in 1999
Initiated Wealth Management Services in 2001
Retail business expansion recommences with ownership model in 2002
2003:

Wealth Management assets cross Rs.1500 crores

Insurance broking launched
Launch of Wealth Management services in Dubai
Retail Branch network exceeds 50
2004:

Commodities brokerage and real estate services introduced

Wealth Management assets cross Rs.3000crores
Institutional equities business re-launched and senior research team put in place
Retail Branch network expands across 100 locations within India
2005:

Real Estate Private Equity Fund Launched

Retail Branch network expends across 200 locations within India

2006:

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 AR Middle East, WOS acquires membership of Dubai Gold & Commodity Exchange
(DGCX)
Ranked amongst South Asias top 5 wealth managers for the ultra-rich by Asia Money 2006
poll
Ranked 6th in FY 2006 for All India Broker Performance in equity distribution in the High Net
worth Individuals (HNI) Category
Ranked 9th in the Retail Category having more than 5% market share
Completes its presence in all States across the country with offices at 300 + locations within
India
2007:
Citigroup Venture Capital International picks up 19.9% equity stake
Retail customer base crosses 100 thousand
Establishes presence in over 350 locations

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1.3: AR Core Strengths

Breath of Services:In line with its client centric philosophy, the firm offers to its clients the entire spectrum of
financial services ranging from brokerage services in equities and commodities, distribution
of mutual fund, IPOs and insurance products, real estate, investment banking, merger and
acquisitions, corporate finance and corporate advisory.
Client deal with a relationship manager who leverage and brings together the product
specialists from across the firm to create an optimum solution to the client needs.

1.4: Management Team

AR brings together a highly professional core management team that comprises of
individuals with extensive business as well as industry experience.
The senior Management comprises a diverse talent pool that brings together rich
experience form across industry as well as financial services.

Mr. Anand Rathi Group Chairman

Chartered Accountant
Past President, BSE
Held several Senior Management positions with one of Indias largest industrial groups

Mr. Pradeep Gupta Vice Chairman

Plus 18 years of experience in Financial Services

Mr. Amit Rathi Managing Director

Chartered Accountant & MBA
Plus 12 years of experience in financial services

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1.6: DIVISIONS OF THE COMPANY

Offices of ANAND RATHI are in 197 cities across 28 states & it has also branches in Dubai
& Bangkok with more than 44000 employees. It has daily turnover in excess of Rs. 4bn. It
has 1, 00,000 + clients nationwide. It is also leading distributor of IPOs.
In India where ANAND RATHI is present in 20 STATES:

Andhra Pradesh

Kerala

Assam

Madhya Pradesh

Bihar

Maharashtra

Chhattisgarh

Orissa

Delhi

Punjab

Gujrat

Rajasthan

Haryana

Tamil Nadu

Jammu & Kashmir

Utter Pradesh

Jharkhand

Uttaranchal
West Bengal

Karnataka

1.7: LIST OF PRODUCTS:

Demat Accounts
Mutual Funds
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Derivatives
Commodities
Bonds
Trading Account
Insurance

MISSION
To be Indias first Multinational providing complete financial services solution across the
globe.

VISION
Providing integrated financial care driven by the relationship of trust and confidence.

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2. About Financial Planning

Definition:
Financial Planning is the process of examining a client's personal situation,
financial resources, financial objectives and financial problems in a comprehensive
manner, developing an impartial, integrated plan to utilize the resources to meet
objectives and solve problems, taking the steps to implement that plan once
approved by the client, and monitoring the plan performance to take corrective
action as necessary to assure that results match the plan projections."
- College of Financial Planning

2.1: Introduction:
The only thing permanent in life is change. Time changes. People change. So does life?
You expect life to be much better tomorrow that it is today. Tomorrow, you hope to fulfill all
your dreams and aspiration.
The person may have many dreams, needs and desires. For example, you could be
dreaming of various things like Car, House etc However, in todays world and inflation,
how many of these dreams can you hope to turn in to reality? By planning well, you can
utilize your limited resources to the fullest.
We believe that investors should take a hard look at the fixed income components of their
portfolios and rethink this strategy in the context of more comprehensive, long-term
objectives. Understanding where you are coming from, the priorities in your life and the
challenges you face in a rapidly changing investment horizon. Succeeding in your career,
planning your childrens education, marriages and having more than enough for an
enjoyable retirement are some of the objective most people aim at.
The complexities of todays financial environment have led many individuals and corporations
to conclude that full-time, professional investment management is a necessary element of a
successful investment plan.
Financial Planning is the process of meeting your lifes goals through proper management
of your finances. The process includes gathering relevant financial information, setting your
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goals, examining your current financial situation and formulating strategies for how you can
achieve your goals, given your current financial situation & future plans. At Anand Rathi,
financial planning is the main approach and they gave advice after understanding your
financial needs.
Some investors have failed to recognize the less obvious, but potentially more damaging,
risk of diminished income from staying completely invested in low yielding fixed income
securities or bank deposits.
We believe that investors should take a hard look at the fixed income components of their
portfolios and rethink this strategy in the context of more comprehensive, long-term
objectives. Understanding where you are coming from, the priorities in your life and the
challenges you face in a rapidly changing investment horizon. Succeeding in your career,
planning your childrens education, marriages and having more than enough for an
enjoyable retirement are some of the objective most people aim at.
Nowadays, we hear about the baby boomers everyday. The baby boomers are the
generation born between World War II and the early 60's. They form the largest American
generation, 78 million people or 30.8% of the U.S. population. It is estimated a babyboomer will turn 50 every 7.5 seconds for the next decade. You might say, what does
that have to do with me?
The baby boomer generation includes the parents of most of us. As they begin to retire in
the early part of the next century, when we are in our 20s or 30s, they will start collecting
Social Security. Such a large number of people would put a tremendous strain on the Social
Security system. Many experts have predicted that this will lead to the bankruptcy of the
Social Security system around the year 2010. That's a lesson for all of us--we can't rely
on the government to provide a financially secure retirement, we have to rely on
ourselves.
However, retirement is still four, five decades away; we don't need to worry about it yet!
Wrong. The fact is, the later you start planning and saving, the more money you will have to
save and you will need a higher return on your investments. Starting early requires you to
put away small amounts of money consistently, would not affect your lifestyle and leads to
more money for retirement than starting late. For example, if you start saving $50 a
month at age 25, you can expect to withdraw about $57,000 a year at age 65. But if
you start saving at age 35, you would need to save $200 a month for the same result!
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Dealing with a chronic disease such as arthritis can be difficult. Many of these difficulties
are emotional; some of them are financial. That's why managing your money should be a
part of managing your health. A good way to get started is to have a financial plan.
How can I plan when everything seems so uncertain?
It's true-you can't predict how arthritis may change your life. If you're working now, you may
be able to work for many years to come. Or, you may need to cut back on your hours in the
future, find a new job or even quit working altogether. If you are retired, you may not know
what expenses to expect in the future. But despite these uncertainties.
What exactly is financial planning?
Financial planning is the process of assessing your financial goals, taking an inventory of
the money and other assets you already have to help you reach those goals, and
estimating what you will need in the future. Financial planning also includes:
Part of the problem with the "world of finances" is that it is a huge space with hundreds of
options and its own peculiar vocabulary. If you take it step by step, however, you actually
can penetrate this field and completely understand it. So let's start at the beginning and see
how the most basic things in life directly affect you and your finances.
If you are like most normal folks, you have a job. You go to your job every day. Every week
or two weeks or month, you get a paycheck for some amount. For the sake of example, let
us imagine a fictitious person named Bob, a 24-year-old computer programmer out of
college two years. Bob is paid $3,000 each month, or $36,000 per year.
You have taxes. The government, in an effort to make your life easier, politely lifts
something like a third of your paycheck without your having to do a thing. Poof, it's gone you never even get to touch it. The federal government takes perhaps 23%. The state
government takes perhaps 7%, depending on the state. The social security administration
(FICA) and Medicare take another 7.5% or so. Bob's $3,000 paycheck therefore diminishes
to perhaps $1,850 by the time he sees it:

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Importance:
Now as we already understand the concept of Financial Planning, so what is the
importance of financial planning?
1.

If any person wants to know his/her financial health.

2.

If the person wants to invest the money and take care about the return then this
procedure is very important.

3.

If the person invest once then what is the asset allocation? Means how much portion
goes in to the equity & how much portion goes in to the debt and liquid market?

4.

Through the financial planning, we also taken care of our insurance, risk cover.

5.

Moreover, the last one but most important i.e. Save the tax.

2.2: Objective:
The objective of my project is To do a study on various aspects of Financial Planning
strategies provide by anand rathi. In addition, as we understand a simple meaning of
this means do a financial planning of an individual or company or firm and comparison of
different product available in the market for investment.

To get the knowledge about the stock market.

Learn how to do the work in Corporate.

Understand about the company.

To know the investment strategies for good return.

Understand the risk bearing capacity after entered in security market.

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3. Different types of the products of the company

3.1: Demat account:

Dematerialisation is a process in which you can convert physical share certificates into
electronic shares.Shares should have been transferred in your name / joint names before
sending it for dematerialisation.
The single biggest reason over buying shares in the physical form is that demat shares
credited to your account within 2 to 3 days after the end of the settlement. This is unlike the
average 30 to 40 days taken in receiving back physical shares from the R&T Agent and
sometimes with objections.Further, possibility of loss or theft of the certificates is
eliminated.This is in addition to the 0.50% stamp duty savings, which works out to Rs.50 for
transfer of shares worth of Rs.10,000
Brokers have no fear of bad delivery while selling demat shares. Due to this, they offer
lower brokerage to you.As bad deliveries are eliminated shares are not returned due to
objections, resulting in saving of costs and follow up.
In order to demat your shares/certificates, you have to fill in a Dematerialisation Request
Form in triplicate alongwith the relevant details and submit the same to your DP alongwith
the certificates to be dematerialised. The combination of names in the shares must be
same as that in the account.
What are the requirements to open demat account?
1.

2 photos of a/c holder.

2.

Address proof (two copies)

3.

Pan card (two copies)

4.

Bank pass book/ statement photocopy

5.

1 cancelled cheque

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3.2: Mutual fund:Definition of Mutual Fund:

It is a pool of money, collected from investors, and is invested according to certain

investment objectives.

The contributors and beneficiaries are the same class of people namely the investors

A mutual funds business is to invest the funds thus collected, according to the
wishes of the investors who created the pool

Importance of Mutual Fund:

1.

The ownership is in the hands of the investors who have pooled in their funds.

2.

A team of investment professionals and other service providers manages it.

3.

The pool of funds is invested in a portfolio of marketable investments.

4.

The investors share is denominated by units whose value is called as Net Asset
Value (NAV) which changes everyday.

5.

The investment portfolio is created according to the stated investment objectives of

the fund.

Types of funds :
Open Ended Fund:

In an open-ended fund, investors can buy and sell units of the fund, at NAV related
prices, at any time, directly from the fund.

Open ended scheme are offered for sale at a pre- specified price, say Rs.10, in the
initial offer period. After a pre-specified period say 30 days, the fund is declared open
for further sales and repurchases.

Investors receive account statements of their holdings.

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Close-Ended Fund:

A closed -end fund is open for sale to investors for a specified period, after which
further sales are closed.

Any further transactions happen in the secondary market where closed-end funds
are listed.

The price at which the units are sold or redeemed depends on the market prices,
which are fundamentally linked to the NAV.

Investors receive either certificates or depository receipts, for their holdings

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Characteristics of a Mutual Fund

1-

A mutual fund actually belongs to the investors who have pooled their funds is in the
hands of the investors.

2-

Investment professionals and other service providers, who earn a free for their
services, from the fund, manage a mutual fund.

3-

The pool of funds invested in a portfolio of marketable investments. The value of the
portfolio is updated every day.

4-

The investors share in the fund is denominated by units. The value of the units
changes in the portfolios value, every day. The value of one unit of investment is
called as the net asset value of NAV.

HISTORY
Mutual funds have been on the financial landscape for longer than most investors realize. In
fact, the industry traces its roots back to 19th century Europe, in particular, Great Britain.
The Foreign and Colonial Government Trust, formed in London in 1868, resembled a
mutual fund.
It promised the investor of modest means the same advantages as the large capitalist by
spreading the investment over a number of different stocks. Most of these early British
investment companies and their American counterparts resembled todays closed-end
funds. They sold a fixed number of shares whose price was determined by supply and
demand. Until the 1920s, however, most middle-income Americans put their money in
banks or bought individual shares of stock in a specific company. Investing in capital
markets was still largely limited to the wealthiest investors.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the
arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually
spawning the mutual fund firm known today as MFS Investment Management. State Street
Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later, State Street
Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall and Paul
Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark, an outfit
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that would launch the first no-load fund in 1928. A momentous year in the history of the
mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual
fund to include stocks and bonds, as opposed to direct merchant bank style of investments
in business and trade.

MUTUAL FUNDS TAKE ROOT AND GROW

Mutual funds began to grow in popularity in the 1940s and 1950s. In 1940, there were fewer
than 80 funds with total assets of $500 million. Twenty years later, there were 160 funds
and $17 billion in assets.
The first international stock mutual fund was introduced in 1940; today there are scores of
international and global stock and bond funds.
The complexion and size of the mutual fund industry dramatically changed as new products
and services were added. For example, before the 1970s, most mutual funds were stock
funds, with a few balanced funds that included bonds in their portfolios. In 1972, there were
46 bond and income funds; 20 years later, there were 1,629.

THE INDUSTRY TODAY

The mutual fund industry has enjoyed substantial growth by avoiding the bumps in the road
that have occurred in other financial services sectors.
The principles that exemplify the industrys longstanding commitment to shareholders
ensuring strong regulation, educating investors, and promoting opportunities for long-term
investinghave guided the industry for the past 65 years, and will continue to do so in the
future.

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Mutual Fund Structure

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3.3: Derivatives (Capital Market):Since 2003, Indian capital markets have been receiving global attention, especially from
sound investors, due to the improving macroeconomic fundamentals. The presence of a
great pool of skilled labour and the rapid integration with the world economy increased
Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch
have awarded India with investment grade ratings, indicating comparatively lower
sovereign risks.
The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian
securities market, was established in 1992 to protect investors and improve the
microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was
abolished, removing its administrative controls over the pricing of new equity issues. In less
than a decade later, the Indian financial markets acknowledged the use of technology
(National Stock Exchange started online trading in 2000), increasing the trading volumes by
many folds and leading to the emergence of new financial instruments. With this, market
activity experienced a sharp surge and rapid progress was made in further strengthening
and streamlining risk management, market regulation, and supervision.
The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of
new securities by companies, governments, or public institutions. In the case of new
stock issue, the sale is known as Initial Public Offering (IPO).

The secondary market is the financial market where previously issued securities and
financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in
terms of:

The products traded in the market, viz. equities and bonds issued by the government
and companies, futures on benchmark indices as well as stocks, options on
benchmark indices as well as stocks, and futures on interest rate products such as
Notional 91-day T-Bills, 10-year notional zero coupon bond, and 6% notional 10-year
bond.

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The amount raised from the market, number of stock exchanges and other
intermediaries, the number of listed stocks, market capitalization, trading volumes
and turnover on stock exchanges, and investor population.

The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both
public and private. The various methods by which a company can raise funds are as
follows:
Fund Providers are the entities that invest in the capital markets. These can be
categorized as domestic and foreign investors, institutional and retail investors. The list
includes subscribers to primary market issues, investors who buy in the secondary market,
traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs,
ADR/GDR investors, etc.
Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and transfer
agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers,
custodians, etc.
Organizations include various entities such as BSE, NSE, and other regional stock
exchanges, the two depositories National Securities Depository Limited (NSDL) and
Central Securities Depository Limited (CSDL).
Market Regulators include the Securities and Exchange Board of India (SEBI), the
Reserve Bank of India (RBI), and the Department of Company affairs (DCA).

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Appellate Authority: The Securities Appellate Tribunal (SAT)

Participants in the Securities Market
SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading,
debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs,
portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers,
bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign
venture capital investors, mutual funds, collective investment schemes.

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EQUITY MARKET
History of the Market
With the onset of globalization and the subsequent policy reforms, significant improvements
have been made in the area of securities market in India. Dematerialization of shares was
one of the revolutionary steps that the government implemented. This led to faster and
cheaper transactions, and increased the volumes traded by many folds. The adoption of the
market-oriented economic policies and online trading facility transformed Indian equity
markets from a broker-regulated market to a mass market. This boosted the sentiment of
Investors in and outside India and elevated the Indian equity markets to the standards of
the major global equity markets.
The 1990s witnessed the emergence of the securities market as a major source of finance
for trade and industry. Equity markets provided the required platform for companies and
start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a
result, stock markets became a peoples market, flooded with primary issues. In the first 11
months of 2007, the new capital raised in the global public equity markets through IPOs
accounted for $107bn in 382 deals out of the total of $255bn raised by the four BRIC
countries. This was a sizeable growth from $90bn raised in 302 deals in 2006. Today, the
corporate sector prefers external sources for meeting its funding requirements rather than
acquiring loans from financial institutions or banks.
Derivative Markets
The emergence of the market for derivative products such as futures and forwards can be
traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of price fluctuations in various asset classes. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking in asset
prices. However, by locking in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of risk-averse
investors. This instrument is used by all sections of businesses, such as corporates, SMEs,
banks, financial institutions, retail investors, etc.

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According to the International Swaps and Derivatives Association, more than 90 percent of
the global 500 corporations use derivatives for hedging risks in interest rates, foreign
exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%),
foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchangetraded segment, interest rates, government debt, equity index, and stock futures form the
major chunk of the derivatives.
What are futures contracts?
Futures contracts are standardized derivative instruments. The instrument has an
underlying product (tangible or intangible) and is impacted by the developments witnessed
in the underlying product. The quality and quantity of the underlying asset is standardized.
Futures contracts are transferable in nature. Three broad categories of participants
hedgers, speculators, and arbitragerstrade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the business
community dealing with the underlying asset to a future instrument on a regular
basis. They use futures or options markets to reduce or eliminate this risk.

Speculators have a particular mindset with regard to an asset and bet on future
movements in the assets price. Futures and options contracts can give them an
extra leverage due to margining system.

Arbitragers are in business to take advantage of a discrepancy between prices in

two different markets. For example, when they see the futures price of an asset
getting out of line with the cash price, they will take offsetting positions in the two
markets to lock in a profit.

Important Distinctions
Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is
whether the derivative is traded on the exchange or over the counter. Exchange-traded
contracts are standardized (futures). It is easy to buy and sell contracts (to reverse
positions) and no negotiation is required. The OTC market is largely a direct market
between two parties who know and trust each other. Most common example for OTC is the
forward contract. Forward Contracts are directly negotiated, tailor-made for the needs of the
parties, and are often not easily reversed.

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Distinction between Forward and Futures Contracts:

Futures Contracts

Forward Contracts

Meaning
A futures contract is a contractual

A forward contract is a contractual

agreement between two parties to buy or

agreement between two parties to

sell a standardized quantity and quality of

buy or sell an asset at a future date

asset on a specific future date on a futures

for a predetermined mutually agreed

exchange.

price while entering into the

contract. A forward contract is not
traded on an exchange.

Trading place
A futures contract is traded on the

A forward contract is traded in an OTC

centralized trading platform of an

market.

exchange.
Transparency in contract price
The contract price of a futures contract is

The contract price of a forward

transparent as it is available on the

contract is not transparent, as it is

centralized trading screen of the

not publicly disclosed.

exchange.
Valuations of open position and margin
requirement
In a futures contract, valuation of open

In a forward contract, valuation of

position is calculated as per the official

open position is not calculated on a

closing price on a daily basis and mark-to-

daily basis and there is no

market (MTM) margin requirement exists.

requirement of MTM on daily basis

since the settlement of contract is
only on the maturity date of the
contract.

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Liquidity
Liquidity is the measure of frequency of

A forward contract is less liquid due to its

trades that occur in a particular futures

customized nature.

contract. A futures contract is more liquid

as it is traded on the exchange.
Counterparty default risk
In futures contracts, the exchange

In forward contracts, counterparty

clearinghouse provides trade guarantee.

risk is high due to the customized

Therefore, counterparty risk is almost

nature of the transaction.

eliminated.
Regulations
A regulatory authority and the exchange

A forward contract is not regulated by any

regulate a futures contract.

exchange.

- 27 -

Benefits of Derivatives
a.

Price Risk Management: The derivative instrument is the best way to hedge risk
that arises from its underlying. Suppose, A has bought 100 shares of a real estate
company with a bullish view but, unfortunately, the stock starts showing bearish
trends after the subprime crisis. To avoid loss, A can sell the same quantity of
futures of the script for the time period he plans to stay invested in the script. This
activity is called hedging. It helps in risk minimization, profit maximization, and
reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major
beneficiaries of the futures instrument have been mutual funds and other institutional
investors.

b.

Price Discovery: The new information disseminated in the marketplace is

interpreted by the market participants and immediately reflected in spot and futures
prices by triggering the trading activity in one or both the markets. This process of
price adjustment is often termed as price discovery and is one of the major benefits
of trading in futures. Apart from this, futures help in improving efficiency of the
markets.

c.

Asset Class: Derivatives, especially futures, offer an exclusive asset class for not
only large investors like corporates and financial institutions but also for retail
investors like high net worth Individuals. Equity futures offer the advantage of
portfolio risk diversification for all business entities. This is due to fact that
historically, it has been witnessed that there lies an inverse correlation of daily
returns in equities as compared to commodities.

d.

High Financial Leverage: Futures offer a great opportunity to invest even with a
small sum of money. It is an instrument that requires only the margin on a contract to
be paid in order to commence trading. This is also called leverage buying/selling.

e.

Transparency: Futures instruments are highly transparent because the underlying

product (equity scripts/index) are generally traded across the country or even traded
globally. This reduces the chances of manipulation of prices of those scripts.
Secondly, the regulatory authorities act as watchdogs regarding the day-to-day
activities taking place in the securities markets, taking care of the illegal
transactions.

f.

Predictable Pricing: Futures trading is useful for the genuine investor class
because they get an idea of the price at which a stock or index would be available at
a future point of time.
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EXCHANGE PLATFORM
Domestic Exchanges
Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE)
and National Stock Exchange of India Limited (NSE).

Bombay Stock Exchange (BSE)

BSE is the oldest stock exchange in Asia with an existence of 133 years. The
extensiveness of the indigenous equity broking industry in India led to the formation of the
Native Share Brokers Association in 1875, which later became Bombay Stock Exchange
Limited (BSE).
BSE is widely recognized due to its pivotal and pre-eminent role in the development of the
Indian capital market.

In 1995, the trading system transformed from open outcry system to an online
screen-based order-driven trading system.

The exchange opened up for foreign ownership (foreign institutional investment).

Allowed Indian companies to raise capital from abroad through ADRs and GDRs.

Expanded the product range (equities/derivatives/debt).

Introduced the book building process and brought in transparency in IPO issuance.

T+2 settlement cycle (payments and settlements).

Depositories for share custody (dematerialization of shares).

Internet trading (e-broking).

Governance of the stock exchanges (demutualization and corporatization of stock

exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India.
BSE has always been at par with the international standards. It is the first exchange in India
- 29 -

and the second in the world to obtain an ISO 9001:2000 certification. It is also the first
exchange in the country and second in the world to receive Information Security
Management System Standard BS 7799-2-2002 certification for its BSE Online Trading
System (BOLT).
Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas,
BSE Metal, BSE FMCG
http://www.bseindia.com/
National Stock Exchange (NSE)
NSE was recognized as a stock exchange in April 1993 under the Securities Contracts
(Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The
capital market segment commenced its operations in November 1994, whereas the
derivative segment started in 2000.
NSE introduced a fully automated trading system called NEAT (National Exchange for
Automated Trading) that operated on a strict price/time priority. This system enabled
efficient trade and the ease with which trade was done. NEAT had lent considerable depth
in the market by enabling large number of members all over the country to trade
simultaneously, narrowing the spreads significantly.
The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12,
2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and
Options trading system of NSE, called NEAT-F&O trading system, provides a fully
automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an
online monitoring and surveillance mechanism. It supports an order-driven market and
provides complete transparency of trading operations.
Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty
Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures
http://nseindia.com/
National Stock Exchange (NSE)

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NSE was recognised as a stock exchange in April 1993 under the Securities Contracts
(Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The
capital market segment commenced its operations in November 1994, whereas the
derivative segment started in 2000.
NSE introduced a fully automated trading system called NEAT (National Exchange for
Automated Trading) that operated on a strict price/time priority. This system enabled
efficient trade and the ease with which trade was done. NEAT had lent considerable depth
in the market by enabling large number of members all over the country to trade
simultaneously, narrowing the spreads significantly.
The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12,
2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and
Options trading system of NSE, called NEAT-F&O trading system, provides a fully
automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an
online monitoring and surveillance mechanism. It supports an order-driven market and
provides complete transparency of trading operations.
Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty
Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures
http://nseindia.com/
International Exchanges
Due to increasing globalization, the development at macro and micro levels in international
markets is compulsorily incorporated in the performance of domestic indices and individual
stock performance, directly or indirectly. Therefore, it is important to keep track of
international financial markets for better perspective and intelligent investment.
i.

NASDAQ (National Association of Securities Dealers Automated Quotations)

NASDAQ is an American stock exchange. It is an electronic screen-based equity securities

trading market in the US. It was founded in 1971 by the National Association of Securities
Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of
which was listed on its own stock exchange in 2002. The exchange is monitored by the

- 31 -

Securities and Exchange Commission (SEC), the regulatory authority for the securities
markets in the United States.
NASDAQ is the world leader in the arena of securities trading, with 3,900 companies
(NASDAQ site) being listed. There are four major indices of NASDAQ that are followed
closely by the investor class, internationally.
i.

NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs,
tracking stocks and limited partnership interests listed on the NASDAQ stock market. It
is estimated that the total components count of the Index is over 3,000 stocks and it
includes stocks of US and non-US companies, which makes it an international index. It
is highly followed in the US and is an indicator of performance of technology and growth
companies. When launched in 1971, the index was set at a base value of 100 points.
Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000-mark
and in March 2000, it touched 5048.62. The decline from this peak signalled the end of
the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It
was trading at 1316.12 on November 20, 2008.

ii.

NASDAQ 100: It is an Index of 100 of the largest domestic and international nonfinancial companies listed on NASDAQ. The component companies weight in the index
is based on their market capitalization, with certain rules controlling the influence of the
largest components. The index doesnt contain financial companies. However, it
includes the companies that are incorporated outside the US. Both these aspects of
NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA).
The index includes companies from the industrial, technology, biotechnology,
healthcare, transportation, media, and service sectors.

iii.

Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles
Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow
Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing
companies and nine railroad companies). Today, the index contains 30 blue-chip
industrial companies operating in America. The Dow Jones Industrial Average is
calculated through the simple average, i.e., the sum of the prices of all stocks divided by
the number of stocks (30).

iv.

S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit
in 1957 to further improve tracking of American stock market performance. In 1968 the
US Department of Commerce added the S&P 500 to its index of leading economic
- 32 -

indicators. The S&P 500 is intended to be comprised of the 500 biggest publically-traded
companies in the United States by market capitalization (in contrast to the
FORTUNE 500, which is the largest 500 companies in terms of sales revenue). The
S&P 500 Index comprises about three-fourths of total American capitalization.
http://www.nasdaq.com/
ii.

LSE (London Stock Exchange)

The London Stock Exchange was founded in 1801 with British as well as overseas
companies listed on the exchange. The LSE has four core areas:

i.

Equity markets: The LSE enables companies from around the world to raise capital.
There are four primary markets; Main Market, Alternative Investment Market (AIM),
Professional Securities Market (PSM), and Specialist Fund Market (SFM).

ii.

Trading services: Highly active market for trading in a range of securities, including UK
and international equities, debt, covered warrants, exchange traded funds (ETFs),
exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference
(CFDs), and depositary receipts.

iii.

Market data information: The LSE provides real-time prices, news, and other financial
information to the global financial community.

iv.

Derivatives: A major contributor to derivatives business is EDX London, created in 2003

to bring the cash, equity, and derivatives markets closer together. It combines the
strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.

The exchange offers a range of products in derivatives segment with underlying from
Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from
Kazakhstan, India, Egypt, and Korea.
http://www.londonstockexchange.com/en-gb/

Frankfurt Stock Exchange

It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Brse. The
Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big
share in the European market. The exchange has a few well-known trading indices of the
- 33 -

exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX,
and EuroStoxx 50.
DAX is a blue-chip stock market index consisting of the 30 major German companies
trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading
system of the Frankfurt Stock Exchange.
http://deutsche-boerse.com/
REGULATORY AUTHORITY
There are four main legislations governing the securities market:
a.

The SEBI Act, 1992, which establishes SEBI to protect investors and develop and
regulate the securities market.

b.

The Companies Act, 1956, which sets out the code of conduct for the corporate
sector in relation to issue, allotment, and transfer of securities, and disclosures to be
made in public issues.

c.

The Securities Contracts (Regulation) Act, 1956, which provides for regulation of
transactions in securities through control over stock exchanges.

d.

The Depositories Act, 1996, which provides for electronic maintenance and transfer
of ownership of demat securities.

In India, the responsibility of regulating the securities market is shared by DCA (the
Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the
Reserve bank of India), and SEBI (the Securities and Exchange Board of India).
The DCA is now called the ministry of company affairs, which is under the ministry of
finance. The ministry is primarily concerned with the administration of the Companies Act,
1956, and other allied Acts and rules & regulations framed there-under mainly for regulating
the functioning of the corporate sector in accordance with the law.
The ministry exercises supervision over the three professional bodies, namely Institute of
Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and
the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under
three separate Acts of Parliament for the proper and orderly growth of professions of
chartered accountants, company secretaries, and cost accountants in the country.
- 34 -

http://www.mca.gov.in/
SEBI protects the interests of investors in securities and promotes the development of the
securities market. The board helps in regulating the business of stock exchanges and any
other securities market. SEBI is also responsible for registering and regulating the working
of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers, and such other intermediaries who may be associated with securities
markets in any manner.
The board registers the venture capitalists and collective investments like mutual funds.
SEBI helps in promoting and regulating self regulatory organizations.
http://www.sebi.gov.in/
The RBI is also known as the bankers bank. The central bank has some very important
objectives and functions such as:
Objectives

Maintain price stability and ensure adequate flow of credit to productive sectors.

Maintain public confidence in the system, protect depositors' interest, and provide
cost-effective banking services to the public.

Facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

Give the public adequate quantity of supplies of currency notes and coins in good
quality.

Functions

Formulate implements and monitor the monetary policy.

Prescribe broad parameters of banking operations within which the country's banking
and financial system functions.
- 35 -

Manage the Foreign Exchange Management Act, 1999.

Issue new currency and coins and exchange/destroy currency and coins not fit for
circulation.

Perform a wide range of promotional functions to support national objectives.

http://www.rbi.org.in/home.aspx

The London Stock Exchange.

Participants in the stock market range from small individual stock investors to large hedge
fund traders, who can be based anywhere. Their orders usually end up with a professional
at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. This type of auction is used in stock exchanges
and commodity exchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind, composed of a network
of computers where trades are made electronically via traders.
Actual trades are based on an auction market model where a potential buyer bids a specific
price for a stock and a potential seller asks a specific price for the stock. (Buying or selling
at market means you will accept any ask price or bid price for the stock, respectively.)
When the bid and ask prices match, a sale takes place on a first come first served basis if
there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers
and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time
trading information on the listed securities, facilitating price discovery.
- 36 -

New York Stock Exchange.

The New York Stock Exchange is a physical exchange, also referred to as a listed
exchange only stocks listed with the exchange may be traded. Orders enter by way of
exchange members and flow down to a floor broker, who goes to the floor trading post
specialist for that stock to trade the order. The specialist's job is to match buy and sell
orders using open outcry. If a spread exists, no trade immediately takes place--in this case
the specialist should use his/her own resources (money or stock) to close the difference
after his/her judged time. Once a trade has been made the details are reported on the
"tape" and sent back to the brokerage firm, which then notifies the investor who placed the
order. Although there is a significant amount of human contact in this process, computers
play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer
network. The process is similar to the New York Stock Exchange. However, buyers and
sellers are electronically matched. One or more NASDAQ market makers will always
provide a bid and ask price at which they will always purchase or sell 'their' stock. [1].
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It
was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry
exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the
CATS trading system was introduced, and the order matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away
from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc.
and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the
exchanges to their internal systems. That share probably will increase to 18 percent by
2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and

- 37 -

sellers of securities themselves, according to data compiled by Boston-based Aite Group

LLC, a brokerage-industry consultant[citation needed].
Now that computers have eliminated the need for trading floors like the Big Board's, the
balance of power in equity markets is shifting. By bringing more orders in-house, where
clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees
and capture a bigger share of the $11 billion a year that institutional investors pay in trading
commissions[citation needed].
Market participants
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy
businessmen, with long family histories (and emotional ties) to particular corporations. Over
time, markets have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index funds,
exchange-traded funds, hedge funds, investor groups, banks and various other financial
institutions). The rise of the institutional investor has brought with it some improvements in
market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees
being markedly reduced for the 'small' investor, but only after the large institutions had
managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but
only for large institutions[citation needed].)
However, corporate governance (at least in the West) has been very much adversely
affected by the rise of (largely 'absentee') institutional 'owners'[citation needed].

History

- 38 -

Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish
merchants had already set up every form of trade association and had knowledge of many
methods of financial dealings, disproving the belief that these were originally invented later
by Italians. In 12th century France the courratiers de change were concerned with
managing and regulating the debts of agricultural communities on behalf of the banks.
Because these men also traded with debts, they could be called the first brokers. A
common misbelief is that in late 13th century Bruges commodity traders gathered inside the
house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse",
institutionalizing what had been, until then, an informal meeting, but actually, the family Van
der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van der
Beurze had Antwerp, as most of the merchants of that period, as their primary place for
trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen"
soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended to lower
the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began
trading in government securities during the 14th century. This was only possible because
these were independent city states not ruled by a duke but a council of influential citizens.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company
issued the first share on the Amsterdam Stock Exchange. It was the first company to issue
stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first
stock exchange to introduce continuous trade in the early 17th century. The Dutch
"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts
and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes
Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in
virtually every developed and most developing economies, with the world's biggest markets
being in the United States, UK, Japan, China, Canada, Germany, and France.

- 39 -

The Shanghai Stock Exchange in China.

Importance of stock market

Function and purpose
The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional capital for expansion by selling
shares of ownership of the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up and coming
economy. In fact, the stock market is often considered the primary indicator of a country's
economic strength and development. Rising share prices, for instance, tend to be
associated with increased business investment and vice versa. Share prices also affect the
wealth of households and their consumption. Therefore, central banks tend to keep an eye
on the control and behavior of the stock market and, in general, on the smooth operation of
financial system functions. Financial stability is the raison d'tre of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This eliminates

- 40 -

the risk to an individual buyer or seller that the counterparty could default on the
transaction.
The smooth functioning of all these activities facilitates economic growth in that lower costs
and enterprise risks promote the production of goods and services as well as employment.
In this way the financial system contributes to increased prosperity.
Relation of the stock market to the modern financial system
The financial system in most western countries has undergone a remarkable
transformation. One feature of this development is disintermediation. A portion of the funds
involved in saving and financing flows directly to the financial markets instead of being
routed via the traditional bank lending and deposit operations. The general public's
heightened interest in investing in the stock market, either directly or through mutual funds,
has been an important component of this process. Statistics show that in recent decades
shares have made up an increasingly large proportion of households' financial assets in
many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets
with little risk made up almost 60 percent of households' financial wealth, compared to less
than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has
gone directly to shares but a good deal now takes the form of various kinds of institutional
investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds,
insurance investment of premiums, etc. The trend towards forms of saving with a higher risk
has been accentuated by new rules for most funds and insurance, permitting a higher
proportion of shares to bonds. Similar tendencies are to be found in other industrialized
countries. In all developed economic systems, such as the European Union, the United
States, Japan and other developed nations, the trend has been the same: saving has
moved away from traditional (government insured) bank deposits to more risky securities of
one sort or another.
The stock market, individual investors, and financial risk
Riskier long-term saving requires that an individual possess the ability to manage the
associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability
of (government insured) bank deposits or bonds. This is something that could affect not
only the individual investor or household, but also the economy on a large scale. The
following deals with some of the risks of the financial sector in general and the stock market
in particular. This is certainly more important now that so many newcomers have entered
- 41 -

the stock market, or have acquired other 'risky' investments (such as 'investment' property,
i.e., real estate and collectables).
With each passing year, the noise level in the stock market rises. Television commentators,
financial writers, analysts, and market strategists are all overtaking each other to get
investors' attention. At the same time, individual investors, immersed in chat rooms and
message boards, are exchanging questionable and often misleading tips. Yet, despite all
this available information, investors find it increasingly difficult to profit. Stock prices
skyrocket with little reason, then plummet just as quickly, and people who have turned to
investing for their children's education and their own retirement become frightened.
Sometimes there appears to be no rhyme or reason to the market, only folly.
This is a quote from the preface to a published biography about the long-term valueoriented stock investor Warren Buffett.[4] Buffett began his career with $100, and $105,000
from seven limited partners consisting of Buffett's family and friends. Over the years he has
built himself a multi-billion-dollar fortune. The quote illustrates some of what has been
happening in the stock market during the end of the 20th century and the beginning of the
21st century.

The behavior of the stock market

- 42 -

NASDAQ in Times Square, New York City.

From experience we know that investors may 'temporarily' move financial prices away from
their long term aggregate price 'trends'. (Positive or up trends are referred to as bull
markets; negative or down trends are referred to as bear markets.) Over-reactions may
occurso that excessive optimism (euphoria) may drive prices unduly high or excessive
pessimism may drive prices unduly low. New theoretical and empirical arguments have
since been put forward against the notion that financial markets are 'generally' efficient (i.e.,
in the sense that stock prices in the aggregate tend to follow a Gaussian distribution).
According to the efficient market hypothesis (EMH), only changes in fundamental factors,
such as the outlook for margins, profits or dividends, ought to affect share prices beyond
the short term, where random 'noise' in the system may prevail. (But this largely theoretic
academic viewpointknown as 'hard' EMHalso predicts that little or no trading should
take place, contrary to fact, since prices are already at or near equilibrium, having priced in
all public knowledge.) The 'hard' efficient-market hypothesis is sorely tested by such events
as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent
the largest-ever one-day fall in the United States. This event demonstrated that share
prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed
upon definite cause: a thorough search failed to detect any 'reasonable' development that
might have accounted for the crash. (But note that such events are predicted to occur
strictly by chance , although very rarely.) It seems also to be the case more generally that
many price movements (beyond that which are predicted to occur 'randomly') are not
occasioned by new information; a study of the fifty largest one-day share price movements
in the United States in the post-war period seems to confirm this. [5]
However, a 'soft' EMH has emerged which does not require that prices remain at or near
equilibrium, but only that market participants not be able to systematically profit from any
momentary market 'inefficiencies'. Moreover, while EMH predicts that all price movement (in
the absence of change in fundamental information) is random (i.e., non-trending), many
studies have shown a marked tendency for the stock market to trend over time periods of
weeks or longer. Various explanations for such large and apparently non-random price
movements have been promulgated. For instance, some research has shown that changes
in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at
Risk limits, theoretically could cause financial markets to overreact. But the best

- 43 -

explanation seems to be that the distribution of stock market prices is non-Gaussian (in
which case EMH, in any of its current forms, would not be strictly applicable).

[6] [7]

Other research has shown that psychological factors may result in exaggerated (statistically
anomalous) stock price movements (contrary to EMH which assumes such behaviors
'cancel out'). Psychological research has demonstrated that people are predisposed to
'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something
like seeing familiar shapes in clouds or ink blots.) In the present context this means that a
succession of good news items about a company may lead investors to overreact positively
(unjustifiably driving the price up). A period of good returns also boosts the investor's selfconfidence, reducing his (psychological) risk threshold. [8]
Another phenomenonalso from psychologythat works against an objective assessment
is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly
from that of a majority of the group. An example with which one may be familiar is the
reluctance to enter a restaurant that is empty; people generally prefer to have their opinion
validated by those of others in the group.
In one paper the authors draw an analogy with gambling. [9] In normal times the market
behaves like a game of roulette; the probabilities are known and largely independent of the
investment decisions of the different players. In times of market stress, however, the game
becomes more like poker (herding behavior takes over). The players now must give heavy
weight to the psychology of other investors and how they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced
investors rarely get the assistance and support they need. In the period running up to the
1987 crash, less than 1 percent of the analyst's recommendations had been to sell (and
even during the 2000 - 2002 bear market, the average did not rise above 5%). In the run up
to 2000, the media amplified the general euphoria, with reports of rapidly rising share prices
and the notion that large sums of money could be quickly earned in the so-called new
economy stock market. (And later amplified the gloom which descended during the 2000 2002 bear market, so that by summer of 2002, predictions of a DOW average below 5000
were quite common.)

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Irrational behavior
Sometimes the market seems to react irrationally to economic or financial news, even if that
news is likely to have no real effect on the technical value of securities itself. But this may
be more apparent than real, since often such news has been anticipated, and a
counterreaction may occur if the news is better (or worse) than expected. Therefore, the
stock market may be swayed in either direction by press releases, rumors, euphoria and
mass panic; but generally only briefly, as more experienced investors (especially the hedge
funds) quickly rally to take advantage of even the slightest, momentary hysteria.
Over the short-term, stocks and other securities can be battered or buoyed by any number
of fast market-changing events, making the stock market behavior difficult to predict.
Emotions can drive prices up and down, people are generally not as rational as they think,
and the reasons for buying and selling are generally obscure. Behaviorists argue that
investors often behave 'irrationally' when making investment decisions thereby incorrectly
pricing securities, which causes market inefficiencies, which, in turn, are opportunities to
make money[10]. However, the whole notion of EMH is that these non-rational reactions to
information cancel out, leaving the prices of stocks rationally determined.
The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11 percent,
this occurred on October 13, 2008.[11]

- 45 -

Crashes

Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and
Interest Rates, from Irrational Exuberance, 2d ed.[12] In the preface to this edition, Shiller
warns, "The stock market has not come down to historical levels: the price-earnings ratio as
I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the
historical average. . . . People still place too much confidence in the markets and have too
strong a belief that paying attention to the gyrations in their investments will someday make
them rich, and so they do not make conservative preparations for possible bad outcomes."

- 46 -

Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert
Shiller (Figure 10.1,[12] source). The horizontal axis shows the real price-earnings ratio of the
S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted
price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis
shows the geometric average real annual return on investing in the S&P Composite Stock
Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty
year periods is color-coded as shown in the key. See also ten-year returns. Shiller states
that this plot "confirms that long-term investorsinvestors who commit their money to an
investment for ten full yearsdid do well when prices were low relative to earnings at the
beginning of the ten years. Long-term investors would be well advised, individually, to lower
their exposure to the stock market when it is high, as it has been recently, and get into the
market when it is low."[12]
Main article: Stock market crash
A stock market crash is often defined as a sharp dip in share prices of equities listed on the
stock exchanges. In parallel with various economic factors, a reason for stock market
crashes is also due to panic. Often, stock market crashes end speculative economic
bubbles.
- 47 -

There have been famous stock market crashes that have ended in the loss of billions of
dollars and wealth destruction on a massive scale. An increasing number of people are
involved in the stock market, especially since the social security and retirement plans are
being increasingly privatized and linked to stocks and bonds and other elements of the
market. There have been a number of famous stock market crashes like the Wall Street
Crash of 1929, the stock market crash of 19734, the Black Monday of 1987, the Dot-com
bubble of 2000.
One of the most famous stock market crashes started October 24, 1929 on Black Thursday.
The Dow Jones Industrial lost 50% during this stock market crash. It was the beginning of
the Great Depression. Another famous crash took place on October 19, 1987 Black
Monday. On Black Monday itself, the Dow Jones fell by 22.6% after completing a 5 year
continuous rise in share prices. This event not only shook the USA, but quickly spread
across the world. Thus, by the end of October, stock exchanges in Australia lost 41.8%, in
Canada lost 22.5%, in Hong Kong lost 45.8%, and in Great Britain lost 26.4%. The names
Black Monday and Black Tuesday are also used for October 28-29, 1929, which followed
Terrible Thursday--the starting day of the stock market crash in 1929. The crash in 1987
raised some puzzles-main news and events did not predict the catastrophe and visible
reasons for the collapse were not identified. This event raised questions about many
important assumptions of modern economics, namely, the theory of rational human
conduct, the theory of market equilibrium and the hypothesis of market efficiency. For some
time after the crash, trading in stock exchanges worldwide was halted, since the exchange
computers did not perform well owing to enormous quantity of trades being received at one
time. This halt in trading allowed the Federal Reserve system and central banks of other
countries to take measures to control the spreading of worldwide financial crisis. In the
United States the SEC introduced several new measures of control into the stock market in
an attempt to prevent a re-occurrence of the events of Black Monday. Computer systems
were upgraded in the stock exchanges to handle larger trading volumes in a more accurate
and controlled manner. The SEC modified the margin requirements in an attempt to lower
the volatility of common stocks, stock options and the futures market. The New York Stock
Exchange and the Chicago Mercantile Exchange introduced the concept of a circuit
breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points
for a prescribed amount of time.

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New York Stock Exchange (NYSE) circuit breakers[13]

% drop

time of drop

close trading for

10% drop

before 2PM

one hour halt

10% drop

2PM - 2:30PM

half-hour halt

10% drop

after 2:30PM

market stays open

20% drop

before 1PM

halt for two hours

20% drop

1PM - 2PM

halt for one hour

20% drop

after 2PM

close for the day

30% drop

any time during day

close for the day

Stock market index

Main article: Stock market index
The movements of the prices in a market or section of a market are captured in price
indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and
the Euronext indices. Such indices are usually market capitalization weighted, with the
weights reflecting the contribution of the stock to the index. The constituents of the index
are reviewed frequently to include/exclude stocks in order to reflect the changing business
environment.

- 49 -

Derivative instruments
Main article: Derivative (finance)
Financial innovation has brought many new financial instruments whose pay-offs or values
depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock
index and stock options, equity swaps, single-stock futures, and stock index futures. These
last two may be traded on futures exchanges (which are distinct from stock exchanges
their history traces back to commodities futures exchanges), or traded over-the-counter. As
all of these products are only derived from stocks, they are sometimes considered to be
traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.

Leveraged strategies
Stock that a trader does not actually own may be traded using short selling; margin buying
may be used to purchase stock with borrowed funds; or, derivatives may be used to control
large blocks of stocks for a much smaller amount of money than would be required by
outright purchase or sale.

Short selling
Main article: Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its clients'
shares or its own shares on account to lend to short sellers) then sells it on the market,
hoping for the price to fall. The trader eventually buys back the stock, making money if the
price fell in the meantime or losing money if it rose. Exiting a short position by buying back
the stock is called "covering a short position." This strategy may also be used by
unscrupulous traders to artificially lower the price of a stock. Hence most markets either
prevent short selling or place restrictions on when and how a short sale can occur. The
practice of naked shorting is illegal in most (but not all) stock markets.

- 50 -

Margin buying
Main article: margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to
rise. Most industrialized countries have regulations that require that if the borrowing is
based on collateral from other stocks the trader owns outright, it can be a maximum of a
certain percentage of those other stocks' value. In the United States, the margin
requirements have been 50% for many years (that is, if you want to make a $1000
investment, you need to put up $500, and there is often a maintenance margin below the
$500). A margin call is made if the total value of the investor's account cannot support the
loss of the trade. (Upon a decline in the value of the margined securities additional funds
may be required to maintain the account's equity, and with or without notice the margined
security or any others within the account may be sold by the brokerage to protect its loan
position. The investor is responsible for any shortfall following such forced sales.)
Regulation of margin requirements (by the Federal Reserve) was implemented after the
Crash of 1929. Before that, speculators typically only needed to put up as little as 10
percent (or even less) of the total investment represented by the stocks purchased. Other
rules may include the prohibition of free-riding: putting in an order to buy stocks without
paying initially (there is normally a three-day grace period for delivery of the stock), but then
selling them (before the three-days are up) and using part of the proceeds to make the
original payment (assuming that the value of the stocks has not declined in the interim).

New issuance
Main article: Thomson Financial league tables
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a
29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US
issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe,
Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.

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Investment strategies
Main article: Stock valuation
One of the many things people always want to know about the stock market is, "How do I
make money investing?" There are many different approaches; two basic methods are
classified as either fundamental analysis or technical analysis. Fundamental analysis refers
to analyzing companies by their financial statements found in SEC Filings, business trends,
general economic conditions, etc. Technical analysis studies price actions in markets
through the use of charts and quantitative techniques to attempt to forecast price trends
regardless of the company's financial prospects. One example of a technical strategy is the
Trend following method, used by John W. Henry and Ed Seykota, which uses price
patterns, utilizes strict money management and is also rooted in risk control and
diversification.
Additionally, many choose to invest via the index method. In this method, one holds a
weighted or unweighted portfolio consisting of the entire stock market or some segment of
the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy
is to maximize diversification, minimize taxes from too frequent trading, and ride the general
trend of the stock market (which, in the U.S., has averaged nearly 10%/year, compounded
annually, since World War II).

Taxation
Main article: Capital gains tax
According to much national or state legislation, a large array of fiscal obligations are taxed
for capital gains. Taxes are charged by the state over the transactions, dividends and
capital gains on the stock market, in particular in the stock exchanges. However, these
fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it
could be assumed that taxation is already incorporated into the stock price through the
different taxes companies pay to the state, or that tax free stock market operations are
useful to boost economic growth

- 52 -

SENSEX - The Barometer of Indian Capital Markets

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted"
methodology of 30 component stocks representing large, well-established and financially
sound companies across key sectors. The base year of SENSEX was taken as 1978-79.
SENSEX today is widely reported in both domestic and international markets through print
as well as electronic media. It is scientifically designed and is based on globally accepted
construction and review methodology. Since September 1, 2003, SENSEX is being
calculated on a free-float market capitalization methodology. The "free-float market
capitalization-weighted" methodology is a widely followed index construction methodology
on which majority of global equity indices are based; all major index providers like MSCI,
FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right
from early nineties, the stock market witnessed heightened activity in terms of various bull
and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT'
sectors. More recently, real estate caught the fancy of the investors. SENSEX has captured
all these happenings in the most judicious manner. One can identify the booms and busts of
the Indian equity market through SENSEX. As the oldest index in the country, it provides
the time series data over a fairly long period of time (from 1979 onwards). Small wonder,
the SENSEX has become one of the most prominent brands in the country.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein,
the level of index at any point of time reflects the free-float market value of 30 component
stocks relative to a base period. The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares issued by the company. This
market capitalization is further multiplied by the free-float factor to determine the free-float
market capitalization.

- 53 -

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is
often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing
the free-float market capitalization of 30 companies in the Index by a number called the
Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It
keeps the Index comparable over time and is the adjustment point for all Index adjustments
arising out of corporate actions, replacement of scrips etc. During market hours, prices of
the index scrips, at which latest trades are executed, are used by the trading system to
calculate SENSEX every 15 seconds. The value of SENSEX is disseminated in real time.

Dollex-30
BSE also calculates a dollar-linked version of SENSEX and historical values of this index
are available since its inception. (For more details click 'Dollex series of BSE indices')

SENSEX - Scrip Selection Criteria

The general guidelines for selection of constituents in SENSEX are as follows:
1.

Listed History:The scrip should have a listing history of at least 3 months at BSE.
Exception may be considered if full market capitalization of a newly listed company
ranks among top 10 in the list of BSE universe. In case, a company is listed on
account of merger/ demerger/ amalgamation, minimum listing history would not be
required.

2.

Trading Frequency:The scrip should have been traded on each and every trading
day in the last three months at BSE. Exceptions can be made for extreme reasons
like scrip suspension etc.

3.

Final Rank:The scrip should figure in the top 100 companies listed by final rank. The
final rank is arrived at by assigning 75% weightage to the rank on the basis of threemonth average full market capitalization and 25% weightage to the liquidity rank
based on three-month average daily turnover & three-month average impact cost.

- 54 -

4.

Market Capitalization Weightage:The weightage of each scrip in SENSEX based

on three-month average free-float market capitalization should be at least 0.5% of
the Index.

5.

Industry/Sector Representation:Scrip selection would generally take into account

a balanced representation of the listed companies in the universe of BSE.

6.

Track Record:In the opinion of the BSE Index Committee, the company should have
an acceptable track record.

A stock exchange, (formerly a securities exchange) is a corporation or mutual

organization which provides "trading" facilities for stock brokers and traders, to trade stocks
and other securities. Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment of
income and dividends. The securities traded on a stock exchange include: shares issued by
companies, unit trusts, derivatives, pooled investment products and bonds. To be able to
trade a security on a certain stock exchange, it has to be listed there. Usually there is a
central location at least for recordkeeping, but trade is less and less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages
of speed and cost of transactions. Trade on an exchange is by members only. The initial
offering of stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock
be subsequently traded on the exchange. Such trading is said to be off exchange or overthe-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock
exchanges are part of a global market for securities.

The First Stock Exchanges

- 55 -

In 11th century France the courtiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. As these men also
traded in debts, they could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa
meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three
purses), hung on the front of the house where merchants met.

House Ter Beurze in Bruges, Belgium.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered
inside the house of a man called Van der Burse, and in 1309 they institutionalized this until
now informal meeting and became the "Bruges Bourse". The idea spread quickly around
Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower
the price of government funds. There were people in Pisa, Verona, Genoa and Florence
who also began trading in government securities during the 14th century. This was only
possible because these were independent city states ruled by a council of influential
citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profitsor losses. In 1602, the Dutch East India Company
issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue
stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.
On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside 68
Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties got
renamed to New York Stock & Exchange Board. In the 19th century, exchanges (generally
- 56 -

famous as futures exchanges) got substantiated to trade futures contracts and then choices
contracts.
There are now a large number of stock exchanges in the world. The role of stock
exchanges
Stock exchanges have multiple roles in the economy, this may include the following:[1]
Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for expansion
through selling shares to the investing public.[2]
Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed, or kept in idle deposits with
banks, are mobilized and redirected to promote business activity with benefits for several
economic sectors such as agriculture, commerce and industry, resulting in stronger
economic growth and higher productivity levels and firms.
Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or acquire other
necessary business assets. A takeover bid or a merger agreement through the stock market
is one of the simplest and most common ways for a company to grow by acquisition or
fusion.
Redistribution of wealth
Stock exchanges do not exist to redistribute wealth. However, both casual and professional
stock investors, through dividends and stock price increases that may result in capital
gains, will share in the wealth of profitable businesses.
Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their
management standards and efficiency in order to satisfy the demands of these
shareholders and the more stringent rules for public corporations imposed by public stock
- 57 -

exchanges and the government. Consequently, it is alleged that public companies

(companies that are owned by shareholders who are members of the general public and
trade shares on public exchanges) tend to have better management records than privatelyheld companies (those companies where shares are not publicly traded, often owned by the
company founders and/or their families and heirs, or otherwise by a small group of
investors). However, some well-documented cases are known where it is alleged that there
has been considerable slippage in corporate governance on the part of some public
companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in
2007-08, are classical examples of corporate mismanagement. Companies like Pets.com
(2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001),
Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group
(2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the
most widely scrutinized by the media.
Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open
to both the large and small stock investors because a person buys the number of shares
they can afford. Therefore the Stock Exchange provides the opportunity for small investors
to own shares of the same companies as large investors.
[Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing estates by
selling another category of securities known as bonds. These bonds can be raised through
the Stock Exchange whereby members of the public buy them, thus loaning money to the
government. The issuance of such bonds can obviate the need to directly tax the citizens in
order to finance development, although by securing such bonds with the full faith and credit
of the government instead of with collateral, the result is that the government must tax the
citizens or otherwise raise additional funds to make any regular coupon payments and
refund the principal when the bonds mature.
Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices
tend to rise or remain stable when companies and the economy in general show signs of stability
and growth. An economic recession, depression, or financial crisis could eventually lead to a stock
- 58 -

market crash. Therefore the movement of share prices and in general of the stock indexes can be an
indicator of the general trend in the economy.
Major stock exchanges
Twenty Major Stock Exchanges In The World: Market Capitalization & Year-to-date
Turnover at the end of January 2009

Region

Stock Exchange

Market Value
(millions USD)

Total Share
Turnover
(millions USD)

Africa

Johannesburg Securities Exchange

432,422.1

17,999.7

Americas

NASDAQ

2,203,759.6

2,325,238.3

Americas

So Paulo Stock Exchange

611,695.0

30,748.5

Americas

Toronto Stock Exchange

997,997.4

84,323.0

Americas

New York Stock Exchange

9,363,074.0

1,517,615.7

Asia-Pacific

Australian Securities Exchange

587,602.7

37,400.1

Asia-Pacific

Bombay Stock Exchange

613,187.6

14,425.0

Asia-Pacific

Hong Kong Stock Exchange

1,237,999.5

80,696.8

Asia-Pacific

Korea Exchange

470,417.3

81,755.0

Asia-Pacific

National Stock Exchange of India

572,566.8

39,057.1

Asia-Pacific

Shanghai Stock Exchange

1,557,161.3

142,144.2

Asia-Pacific

Shenzhen Stock Exchange

389,248.3

75,365.5

Asia-Pacific

Tokyo Stock Exchange

2,922,616.3

301,781.5

Europe

Euronext

1,862,930.9

146,173.3

Europe

Frankfurt Stock Exchange (Deutsche Brse) 937,452.9

264,970.3

Europe

London Stock Exchange

1,758,157.7

241,151.1

871,061.4

114,994.0

Europe

Madrid Stock Exchange (Bolsas y Mercados

Espaoles)

Europe

Milan Stock Exchange (Borsa Italiana)

456,206.7

48,094.8

Europe

Nordic Stock Exchange Group OMX1

503,725.8

55,299.9

Europe

Swiss Exchange

761,896.1

63,435.6

Note 1: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius
Stock Exchanges
- 59 -

Sources: World Federation of Exchanges - Statistics/Monthly

Remarks: There are 2 pending major mergers: NASDAQ with OMX; and London
Stock Exchange with Milan Stock Exchange

The London Stock Exchange in the City of London.

New York Stock Exchange, New York City

- 60 -

So Paulo Stock Exchange in So Paulo.

The Tokyo Stock Exchange in Tokyo

- 61 -

Australian Securities Exchange's Sydney Exchange Centre in Sydney.

The Johannesburg Securities Exchange in the City of Johannesburg.

- 62 -

3.4: Commodity market:What is a market?

A market is conventionally defined as a place where buyers and sellers meet to exchange
goods or services for a consideration. This consideration is usually money. In an
Information Technology-enabled environment, buyers and sellers from different locations
can transact business in an electronic marketplace. Hence the physical marketplace is not
necessary for the exchange of goods or services for a consideration. Electronic trading and
settlement of transactions has created a revolution in global financial and commodity
markets.

What is a commodity?
A commodity is a product that has commercial value, which can be produced, bought, sold,
and consumed. Commodities are basically the products of the primary sector of an
economy. The primary sector of an economy is concerned with agriculture and extraction of
raw materials such as metals, energy (crude oil, natural gas), etc., which serve as basic
inputs for the secondary sector of the economy.

To qualify as a commodity for futures trading, an article or a product has to meet

some basic characteristics:
1.

The product must not have gone through any complicated manufacturing activity,
except for certain basic processing such as mining, cropping, etc. In other words, the
product must be in a basic, raw, unprocessed state. There are of course some
exceptions to this rule. For example, metals, which are refined from metal ores, and
sugar, which is processed from sugarcane.

2.

The product has to be fairly standardized, which means that there cannot be much
differentiation in a product based on its quality. For example, there are different
varieties of crude oil. Though these different varieties of crude oil can be treated as
different commodities and traded as separate contracts, there can be a
standardization of the commodities for futures contract based on the largest traded
variety of crude oil. This would ensure a fair representation of the commodity for
futures trading. This would also ensure adequate liquidity for the commodity futures
being traded, thus ensuring price discovery mechanism.
- 63 -

3.

A major consideration while buying the product is its price. Fundamental forces of
market demand and supply for the commodity determine the commodity prices.

4.

Usually, many competing sellers of the product will be there in the market. Their
presence is required to ensure widespread trading activity in the physical commodity
market.

5.

The product should have adequate shelf life since the delivery of a commodity
through a futures contract is usually deferred to a later date (also known as expiry of
the futures contract).

Commodity Market: A Perspective

A market where commodities are traded is referred to as a commodity market. These
commodities include bullion (gold, silver), non-ferrous (base) metals such as copper, zinc,
nickel, lead, aluminium, tin, energy (crude oil, natural gas, etc.), agricultural commodities
such as soya oil, palm oil, coffee, pepper, cashew, etc.
Existence of a vibrant, active, and liquid commodity market is normally considered as a
healthy sign of development of a countrys economy. Growth of a transparent commodity
market is a sign of development of an economy. It is therefore important to have active
commodity markets functioning in a country.
Markets have existed for centuries worldwide for selling and buying of goods and services.
The concept of market started with agricultural products and hence it is as old as the
agricultural products or the business of farming itself. Traditionally, farmers used to bring
their products to a central marketplace (called mandi / bazaar) in a town/village where grain
merchants/ traders would also come and buy the products and transport, distribute and sell
them to other markets.
In a traditional market, agricultural products would be brought and kept in the market and
the potential buyers would come and see the quality of the products and negotiate with the
farmers directly on the price that they would be willing to pay and the quantity that they
would like to buy. Deals were struck once mutual agreement was reached on the price and
the quantity to be bought/ sold.
In traditional markets, shortage of a commodity in a given season would lead to increase in
price for the commodity. On the other hand, oversupply of a commodity on even a single
day could result in decline in pricesometimes below the cost of production. Neither
farmers nor merchants were happy with this situation since they could not predict what the
- 64 -

prices would be on a given day or in a given season. As a result, farmers often returned
from the market with their products since they failed to fetch their expected price and since
there were no storage facilities available close to the marketplace. It was in this context that
farmers and food grain merchants in Chicago started negotiating for future supplies of
grains in exchange of cash at a mutually agreeable price. This type of agreement was
acceptable to both parties since the farmer would know how much he would be paid for his
products, and the dealer would know his cost of procurement in advance. This effectively
started the system of commodity market forward contracts, which subsequently led to
futures market too.

Cash Market
Cash transaction results in immediate delivery of a commodity for a particular consideration
between the buyer and the seller. A marketplace that facilitates cash transaction is referred
to as the cash market and the transaction price is usually referred to as the cash price.
Buyers and sellers meet face to face and deals are struck. These are traditional markets.
Example of a cash market is a mandi where food grains are sold in bulk. Farmers would
bring their products to this market and merchants/traders would immediately purchase the
products, and they settle the deal in cash and take or give delivery immediately. Cash
markets thus call for immediate delivery of commodities against actual payment.

Forwards and Futures Markets

In this case, the agreements are normally made to receive the commodities at a later date
in future for a pre-determined consideration based on agreed upon terms and conditions.
Forwards and Futures reduce the risks by allowing the trader to decide a price today for
goods to be delivered on a particular future date. Forwards and Futures markets allow
delivery at some time in the future, unlike cash markets that call for immediate delivery.
These advance sales help both buyers and sellers with long-term planning. Forward
contracts laid the groundwork for futures contracts. The main difference between these two
contracts is the way in which they are negotiated.
For forward contracts, terms like quantity, quality, delivery date, and price are discussed in
person between the buyer and the seller. Each contract is thus unique and not standardized
since it takes into account the needs of a particular seller and a particular buyer only.
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On the other hand, in futures contracts, all terms (quantity, quality, and delivery date) are
standardized. The transaction price is discovered through the interaction of supply and
demand in a centralized marketplace or exchange.
Forward contracts help in arranging long-term transactions between buyers and sellers but
could not deal with the financial (credit) risk that occurred with unforeseen price changes
resulting from crop failures, inadequate storage or bottlenecks in transportation, factors
beyond human control (floods, natural calamities, etc.), or other economic factors that may
result in unexpected changes, and hence counterparty default risks for parties involved.
This in turn led to the development of futures market. As mentioned above, since futures
are standardized contracts that are traded through an exchange, they can be used to
minimize price risk by means of hedging techniques. Since the exchange standardizes the
quality and quantity parameters and offers complete transparency by using risk
management techniques (such as margining system with mark-to-market settlement on a
real-time basis with daily settlement), the counterparty default risk has been greatly
minimized.
There are many commodity exchanges worldwide. They deal in many commodities. In
India, there are 24 commodity derivatives exchanges, including three at the national level.
Together, these exchanges deal in commodity futures for approximately 80+ commodities.
It is interesting and also necessary to know more about the historical evolution of
commodity markets, commodity exchanges and their operations globally as well as in India.

Brief History of the Development of Commodity Markets

Global Scenario
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It is widely believed that the futures trade first started about approximately 6,000 years ago
in China with rice as the commodity. Futures trade first started in Japan in the 17th century.
In ancient Greece, Aristotle described the use of call options by Thales of Miletus on the
capacity of olive oil presses. The first organized futures market was the Osaka Rice
Exchange, in 1730.
Historically, organized trading in futures began in the US in the mid-19th century with maize
contracts at the Chicago Board of Trade (CBOT) and a bit later, cotton contracts in New
York. In the first few years of CBOT, weeks could go by without any transaction taking place
and even the provision of a daily free lunch did not entice exchange members to actually
come to the exchange! Trade took off only in 1856, when new management decided that
the mere provision of a trading floor was not sufficient and invested in the establishment of
grades and standards as well as a nation-wide price information system. CBOT preceded
futures exchanges in Europe.
In the 1840s, Chicago had become a commercial centre since it had good railroad and
telegraph lines connecting it with the East. Around this same time, good agriculture
technologies were developed in the area, which led to higher wheat production. Midwest
farmers, therefore, used to come to Chicago to sell their wheat to dealers who, in turn,
transported it all over the country.
Farmers usually brought their wheat to Chicago hoping to sell it at a good price. The city
had very limited storage facilities and hence, the farmers were often left at the mercy of the
dealers. The situation changed for the better in 1848 when a central marketplace was
opened where farmers and dealers could meet to deal in "cash" grainthat is, to exchange
cash for immediate delivery of wheat.
Farmers (sellers) and dealers (buyers) slowly started entering into contract for forward
exchanges of grain for cash at some particular future date so that farmers could avoid
taking the trouble of transporting and storing wheat (at very high costs) if the price was not
acceptable. This system was suitable to farmers as well as dealers. The farmer knew how
much he would be paid for his wheat, and the dealer knew his costs of procurement well in
advance.
Such forward contracts became common and were even used subsequently as collateral
for bank loans. The contracts slowly got standardized on quantity and quality of
commodities being traded. They also began to change hands before the delivery date. If the
dealer decided he didn't want the wheat, he would sell the contract to someone who
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needed it. Also, if the farmer didn't want to deliver his wheat, he could pass on his
contractual obligation to another farmer. The price of the contract would go up and down
depending on what was happening in the wheat market. If the weather was bad, supply of
wheat would be less and the people who had contracted to sell wheat would hold on to
more valuable contracts expecting to fetch better price; if the harvest was bigger than
expected, the seller's contract would become less valuable since the supply of wheat would
be more.
Slowly, even those individuals who had no intention of ever buying or selling wheat began
trading in these contracts expecting to make some profits based on their knowledge of the
situation in the market for wheat. They were called speculators. They hoped to buy (long
position) contracts at low price and sell them at high price or sell (short position) the
contracts in advance for high price and buy later at a low price. This is how the futures
market in commodities developed in the US. The hedgers began to efficiently transfer their
market risk of holding physical commodity to these speculators by trading in futures
exchanges.
The history of commodity markets in the United States of America (USA) has the following
landmarks:

Chicago Board of Trade (CBOT) was established in Chicago in 1848 to bring farmers
and merchants together. It started active trading in futures-type of contracts in 1865.

The New York Cotton Exchange was started in 1870.

Chicago Mercantile Exchange was set up in 1919.

Legalized options trading was started in 1934.

Indian Scenario
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History of trading in commodities in India dates back to several centuries. But organized
futures market in India emerged in 1875 when the Bombay Cotton Trade Association was
established. The futures trading in oilseeds started in 1900 when Gujarati Vyapari Mandali
(todays National Multi Commodity Exchange, Ahmedabad) was established. The futures
trading in gold began in Mumbai in 1920. During the first half of the 20th century, there were
many commodity futures exchanges, including the Calcutta Hessian Exchange Ltd. that
was established in 1927. Those exchanges traded in jute, pepper, potatoes, sugar,
turmeric, etc. However, Indias history of commodity futures market has been turbulent.
Options were banned in cotton in 1939 by the Government of Bombay to curb widespread
speculation. In mid-1940s, trading in forwards and futures became difficult as a result of
price controls by the government. The Forward Contract Regulation Act was passed in
1952. This put in place the regulatory guidelines on forward trading. In late 1960s, the
Government of India suspended forward trading in several commodities like jute, edible oil
seeds, cotton, etc. due to fears of increase in commodity prices. However, the government
offered to buy agricultural products at Minimum Support Price (MSP) to ensure that the
farmer benefited. The Government also managed storage, transportation, and distribution
of agriculture products. These measures weakened the agricultural commodity markets in
India.
The government appointed four different committees (Shroff Committee in 1950, Dantwala
Committee in 1966, Khusro Committee in 1979 and Kabra Committee in 1993) to go into
the regulatory aspects of forward and futures trading in India. In 1996, the World Bank in
association with United Nations Conference on Trade and Development (UNCTAD)
conducted a study of Indian commodities markets.
In the post-liberalization ear of the Indian economy, It was the Kabra Committee and the
World BankUNCTAD study that finally assessed the scope for forward and futures trading
in commodities markets in India and recommended steps to revitalize futures trading.

Relevance and Potential of Commodity Markets in India

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Majority of commodities traded on global commodity exchanges are agri-based. Commodity

markets therefore are of great importance and hold a great potential in case of economies
like India, where more than 65% of the population are dependent on agriculture.
There is a huge domestic market for commodities in India since India consumes a major
portion of its agricultural produce locally. Indian commodities market has an excellent
growth potential and has created good opportunities for market players. India is the worlds
leading producer of more than 15 agricultural commodities and is also the worlds largest
consumer of edible oils and gold. It has major markets in regions of urban conglomeration
(cities and towns) and nearly 7,500+ Agricultural Produce Marketing Cooperative (APMC)
mandis. To add to this, there is a network of over 27,000+ haats (rural bazaars) that are
seasonal marketplaces of various commodities. These marketplaces play host to a variety
of commodities everyday. The commodity trade segment employs nearly five million plus
traders.
The potential of the sector has been well identified by the Central government and the state
governments and they have invested substantial resources to boost production of
agricultural commodities. Many of these commodities would be traded on the futures
markets as food-processing industry grows at a phenomenal pace.
The government also has recognized three national level commodity exchanges, which are
trading in more than 85 commodities at present, and the list continues to expand. According
to the experts in the commodities markets, global trends indicate that the volume in futures
trading tends to be 5-7 times the size of commodities' spot trading in the country
(Internationally, the multiple for physical versus derivatives is much higher at 15 to 20
times).
Many nationalized and private sector banks have announced plans to disburse substantial
amounts to finance commodity-trading business. The Government of India has initiated
several measures to stimulate active trading interest in commodities. Steps like lifting the
ban on futures trading in commodities, approving new exchanges, developing exchanges
with modern infrastructure and systems such as online trading, and removing legal hurdles
to attract more participants have increased the scope of commodities derivatives trading in
India. This has boosted both the spot market and the futures market in India. The trading
volumes are increasing as the list of commodities traded on national commodity exchanges
also continues to expand. The volumes are likely to surge further as a result of the
increased interest from the international participants in Indian commodity markets. If these
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international participants are allowed to participate in commodity markets (like in case of

capital markets), the growth in commodity futures can be expected to be phenomenal. It is
expected that foreign institutional investors (FIIs), mutual funds, and banks may be able to
participate in commodity derivatives markets in the near future. The launch of options
trading on commodity futures is also expected after the amendments to the Forward
Contract Regulation Act (1952). Commodity trading and commodity financing are going to
be a rapidly growing business in the coming years in India.
With the liberalization of the Indian economy in 1991, the commodity prices (especially
International commodities such as base metals and energy) have been subject to price
volatility in international markets, since India is largely a net importer of such commodities.
Commodity derivatives exchanges have been established with a view to minimize risks
associated with such price volatility.

Commodity Markets Ecosystem

After studying the importance of commodity markets and trading in commodity futures, it is
essential to understand the different components of the commodity markets ecosystem.
The following illustration shows the different components in the commodity markets
ecosystem:
The commodity markets ecosystem includes the following components:
1.

Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers,

distributors, farmers co-operatives, APMC mandis, traders, state civil supplies
corporations, importers, exporters, merchandisers, oil refining companies, oil
producing companies, etc.

2.

Logistics Companies: Storage and transport companies/operators, quality testing

and certifying companies, valuers, etc.

3.

Markets and Exchanges: Spot markets (mandis, bazaars, etc.) and commodity
exchanges (national level and regional level)

4.

Support agencies: Depositories/de-materializing agencies, central and state

warehousing corporations, and private sector warehousing companies

5.

Lending Agencies: Banks, financial institutions

The users are the producers and consumers of different commodities. They have exposure
to the physical commodities markets, thus, exposing themselves to price risk. In turn, they
- 71 -

depend on logistics companies for transportation of commodities, warehouses for storage,

and quality testing and certification agencies for assessment and evaluation of commodity
quality standards. Commodity derivatives exchanges provide a platform for hedging against
price risk for these users.
Benefits of Trading in Commodity Derivatives
Trading in futures provide two important functions of price discovery and price risk
management with reference to the given commodity. It is therefore useful to all the
segments of the economy and particularly to all the constituents of the commodity market
system. It is important to know how resorting to commodity trading benefits the
constituents.

Benefits to Investors, Producers, Consumers, Manufacturers:

Price risk management: All participants in the commodity markets ecosystem

across the value chain of different commodities are exposed to price risk. These
participants buy and sell commodities and the time lag between subsequent
transactions result in exposure to price risk. Commodity derivatives markets enable
these participants to avoid price risk by utilizing hedging techniques.

Price discovery: This is the mechanism by which a fair value price is determined
by the large number of participants in the commodities derivatives markets. This is
the result of automation and electronic trading systems established on the
commodities derivatives exchanges.

High financial leverage: This is possible in commodity markets. For example,

trading in gold calls for only 4% initial margin. Thus, if one gold futures contract
(each gold futures contract lot size is 1 kg) is valued at Rs 9,00,000, the investor is
expected to deposit an initial margin of only Rs 36,000 to be able to trade. If the price
of gold goes up by even 2%, the investor would make a profit of Rs 18,000 on a
deposit of Rs 36,000 before the expiry of the contract. This is the benefit of
leveraged trading transactions. With futures contracts, the investor trades in the
expectation of the price at a later date. This is possible with a margin deposit, which
is usually between 5% and 10% of the value of the commodity. Correspondingly, the
margins required for equity futures contracts are higher, due to higher volatility in
equity markets as compared to commodities futures contracts. The reason for higher
volatility in equity markets (especially in India) as compared to commodities
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derivatives transactions is due to the fact that delivery is possible in commodity

derivatives transactions.

Commodities as an asset class for diversification of portfolio risk: Commodities

have historically an inverse correlation of daily returns as compared to equities. The
skewness of daily returns favours commodities, thereby indicating that in a given
time period commodities have a greater probability of providing positive returns as
compared to equities. Another aspect to be noted is that the sharpe ratio of a
portfolio consisting of different asset classes is higher in the case of a portfolio
consisting of commodities as well as equities. Even with a marginal distribution of
funds in a portfolio to include commodities, the Sharpe ratio is greatly enhanced,
thereby indicating a decrease in risk for given level of returns. Thus, an Investor can
effectively minimize the portfolio risk arising due to price fluctuations in other asset
classes by including commodities in the portfolio.

Commodity derivatives markets are extremely transparent in the sense that the
manipulation of prices of a commodity is extremely difficult due to globalisation of
economies, thereby providing for prices benchmarked across different countries and
continents. For example, gold, silver, crude oil, natural gas, etc. are international
commodities, whose prices in India are indicative of the global situation.

An option for high net worth investors: With the rapid spread of derivatives
trading in commodities, the commodities route too has become an option for high net
worth and savvy investors to consider in their overall asset allocation.

Useful to the producer: Commodity trade is useful to the producer because he can
get an idea of the price likely to prevail on a future date and therefore can decide
between various competing commodities, the best that suits him. Farmers, for
instance, can get assured prices, thereby enabling them to decide on the crop that
they want to grow. Since there is transparency in prices, the farmer can decide when
and where to sell, so as to maximize his profits.

Useful for the consumer: Commodity trade is useful for the consumer because he
gets an idea of the price at which the commodity would be available at a future point
of time. He can do proper costing/financial planning and also cover his purchases by
making forward contracts. Predictable pricing and transparency is an added
advantage.

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Corporate entities can benefit by hedging their risks if they are using some of the
commodities as their raw materials. They can hedge the risk even if the commodity
traded does not meet their requirements of exact quality/technical specifications.

Useful to exporters: Futures trading is very useful to the exporters as it provides an

advance indication of the price likely to prevail and thereby help the exporter in
quoting a realistic price and thereby secure export contract in a competitive market.

Improved product quality: Since the contracts for commodities are standardized, it
becomes essential for the producers/sellers to ensure that the quality of the
commodity is as specified in the contract. The advent of commodities futures
markets has also enabled defining quality standards of different commodities. The
quality testing and certification agencies contribute towards standardization and
assessment of commodity quality.

Credit accessibility: Buyers and sellers can avail of the bank finances for trading in
commodities. Nationalized banks and private sector banks have come forward to
offer credit facilities for commodity trading. More and more banks are likely to fall in
line looking at the huge potential that commodity markets offer in India.

Benefits to Indian Economy

As the constituents of the Commodities Market Ecosystem get benefited, the Indian
economy is also benefited. Growth in the organized commodity markets and their
constituents implies that there would be tremendous advantages and benefits accrued to
the Indian economy in terms of business generation and growth in employment
opportunities. With India importing bulk of raw material (especially in base metals and
energy), there is scope for minimizing price risk for International commodities for the Indian
economy as a whole. With the consumption of commodities, especially in developing
countries such as China and India increasing rapidly, the prices of commodities are volatile,
thereby, emphasizing the need for organized commodity derivatives exchanges for the
participants in the commodity markets ecosystem.

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Weekly

Technical Analysis
June 1, 2009
Agro

Edible oil & oil seeds

Commodities
Soybean Oil June (487.70)

Soy Oil price after continuous liquidation pressure appears to have taken support
and after sideways movement may move on relief rally. As of now strong
resistance is at Rs 495 , close above that price can edge towards Rs 505 and Rs
518, where as downside support is at Rs 475, close below that will resume its
down trend towards Rs 477, 465 and Rs 460. Overall bias at this juncture price
appears to have taken support and may move on relief rally from this levels.
Buy around Rs 477- Rs 478 for the target of Rs 485 Rs 490, stop can be
placed below Rs 475.
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Weekly Technical Report Agri Commodities

Soybean June (2594.50)

Soybean price appears to have taken pause and are in sideways since last two weeks. As
of now Rs 2380 appears to be strong medium term support and on higher side Rs 2670 is
strong resistance. Key technical resistance is at Rs 2670, Rs 2720 and Rs 2790, where as
downside support is at Rs 2520, Rs 2455 and Rs 2380. Overall bias sideways in
consolidation between Rs 2520 and Rs 2670.

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3.5: Insurance:-

Introduction

The business of insurance is related to the protection of the economic values of assets.
Every asset has a value. The asset would have been created through the efforts of the
owner. The asset is valuable to the owner, because he expects to get some benefits from it.
It is a benefit because it meets some of his needs. The benefit may b e an income or in
some other form. In the case of a factory or a cow, the product generated by it is sold and
income is generated. In the case of a motor car, it provides comfort and convenience in
transportation. There is no direct income. Both are assets and provide benefits.
The Indian Insurance sector has been going through a transition. With the private sector
companies making a foray into the market, the scenario has started to change. Liberalization
of the sector has helped in bringing about several positive developments, including the
expansion of the market size, introduction of new product, and development of new channel
distribution in the market. However, the most important development is that the insurance
companies have become more responsible towards customer needs.
The first visible change can be found in the introduction of new products. The most popular
among the products are the Unit Linked Policies. Riders have already been introduced and
have become very popular. Some of the new policies introduced are:

Policies with reduced of premium for non-smokers

Policies launched for the future benefit of children along with the coverage of the life of
their parents.

Policies for village artisans

Travel insurance scheme for students going abroad for higher studies

Weather insurance policies

Sustainable growth would be possible in an environment which values and promote

financial strength and stability, management capability, and public accountability. IRDA has,
so far, issued 21 regulations, covering all aspects of insurance business.

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INSURANCE REGULATORY
&
DEVELOPMENT AUTHORITY ACT, 1999 (IRDA)
Role of IRDA:
IRDA is a revolutionary piece of legislation. The IRDA was established to regulate, promote,
and ensure orderly growth of the life and general insurance industry.
The authority consists of the following members:

A chairperson

Not more than 5 whole time members

Not more than 4 part time members

Inaction of IRDA:

To exercise all power and function of controller of insurance.

Protection of the interests of the policy holders

To issue, renew, modify, withdraw, or suspend certificate of registration

To specify requisite qualifications and training for insurance intermediaries

To promote and regulate professional organization connected with insurance

To conduct inspection/investigation, etc.

To prescribe method of Insurance Accounting

To regulate investment of funds and margins of solvency.

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4. Limitation
1. Risky Affair: If you are dealing with Investment Part then it is very much risky part.
2. The result of the project will be in accordance with the current market scenario, which is
very volatile in nature.
3. No primary data source has been used.
4. Selling is not an easy job so, its very tough job for me to sell anything in the market
during my project.
5. Time horizon is not sufficient to complete this project i.e. To do a study on various
aspects of Financial Planning strategies provide by anand rathi For this, I need at least
1 Year.

5. Scope of Study

In current scenario, the bank rates have been cut down rapidly due to severe
competition, so people are not going for contemporary deposits because that cannot
provide them the better returns or the desired interest rates. So, they can look for
some other investment options like Mutual Funds, capital market, commodity market
which can provide them higher returns in medium to ling term and can easily meet
their financial goals.

To look out for new prospective customers who are willing to invest in Mutual Funds
and others.

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6. Methodology

There are two ways of collecting data.

1.

Primary data

2.

Secondary data

Primary data is the data, which is collected by an individual for his own purpose. In this
case I collected the data by communicating with people in the company who came to give
training and by going to marketing.

Secondary data is the data that is collected by some other people for their own purpose.
For my project I used companies leaflets, broachers that already exist in the company.

The objectives of the present study can be achieved through a systematic process. The
process may be:
1.

Defining problem and research objectives

2.

Designing research plan

3.

Sources of Data Collection

4.

Analysis of Data

5.

Findings of Data

Defining problem and research objective:

The research objective is to understand about financial products, to do marketing for
financial products and to enter data into excel. The problem is to find where the exact
customer lies and collecting database is the problem.

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Designing research plan:

Plan to collect the references from the people whom I know, I contact them and from them
to them and so on. I will also go for door-to-door marketing and collect some database.

Sources of collecting data:

The sources of collecting data are:
Primary Data and Secondary data
Primary data is the data, which will be collected by the user for his own purpose.
Secondary data is the data, which will be available in the company before itself.
It may be companys old clients, database etc.

Analysis of data:
The data that is collected will be analyzed through statistical tools and tables. This will be
represented through graphs like pie, bar and so on.

7. Findings
After analyzing the data we will come to know that

How many peoples are interested in financial products?

How many know about Anand rathi securities Ltd.?

What type of strategies are you adopting for the good return?

How much risk can you bear by the investment in securities?

How much experience do you have in the stock market?

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8. DATA ANALYSIS AND INTERPRETATION

INVESTMENT IN MUTUAL FUNDS

Interpretation:-

The major part of the sample taken has invested in the Mutual Funds. The demand for the
mutual funds have increased in the past few years with many Foreign entering in the Indian
market, Fidelity, Franklin Templeton, DSP Meryl Lynch to name few. Still there are few who
are not investing in MF.

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EXPERIENCE IN THE MARKET

Interpretation:-

The experience in the market was the factor which influenced the investments. There are
very few who have experience of less than a year. These are those investors who entered
into the market after noticing the rise in the market. the achievement of 20000 mark by
SENSEX was motivational force in this. Major part was having vast experience that is of
more than 4 years.

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Average Investment Period of Investors

Interpretation:The smart investor decides it in advance for how much time he would be keeping his
money in the market and when he should leave squaring up. Many people consider the
investment for 9 Months 2 Years as a right option. Still some want to be invested for over
2 years. The least responded to the 3-9 Months period.

Factors Influencing the Investment Decision of Investors

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Interpretation:- There are many factors which influence the investments decision of the
investors. It may be the current news (political, technological, financial, etc.), Magazines,
friends, etc. in the study it proved that many people trust the brokers most for the
investment decisions. These are the ones who have less experience. The: Self Evaluation
is the next major factor.

HOW MUCH RISK TAKING

Interpretation: The higher the Risk, the more the Profits. The people need to take the risk
to enjoy the benefits. Some investors were willing to take lower risk and this was the reason
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they gave for investing in the MF. Most of the people would like moderate level of risk in
there investments.

Expected Rise in Income

Interpretation:- The optimism is shown in the attitude of the respondents. The confidence
was appreciable with which they are looking forward to a rise in their investments. Major
part of the sample feels that the rise would be of around 15%. Only 8% of the respondents
were confident enough to expect a rise of up to 35%.

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9. CONCLUSION

ANAND RATHI SECURITIES LTD. introduced its services in 1994 and has been running its
services very efficiently. In year 2007 CITIGROUP venture capital international joined the
group a financial partner. Anand Rathi gave an additional boost to the business of the
company. Now the company is looking forward to introduce wealth management,
investment banking, corporate advisory, brokerage & distribution of equities, commodities,
mutual fund and insurance all which are supported by powerful research teams.
During my training period I learned the functions and process of leading Mutual Funds and
Demat Account from identifying a potential customer to the distributions of policy. This
organization has good employees who are professional, customer friendly, knowledgeable
and keen to perform their duties honestly.
However this organization has its own network that has made the working of various
departments easier.

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10. SUGGESTIONS

What I suggest firstly there should be

[1] First Aid kit for New Entrant into Securities Market: - This will be a new step towards
a good service provider in this field. After all, this market depends on the after sales service.
After seeing such a boost in the share market, not only our Adult generation but also the
young generation is also so much excited to enter the share market. now the actual
problem starts specially with the young ones in excitement initially they invests the money &
due to lack of experience they loose big block of money in one go & later they blames the
company about the loss. So, to make them train in the field we should provide them the
initial precautions that they should take while enter into the market.
The More You Care Your Customer More The Faith Will Get Develop From Customer
Side

[2] Provision for Class Room training for the new investors:- for the above reason
same thing to boost there moral and to give them some thing related to the market will help
them. Also some tips can also be given to these investor during the session as a
precaution.

[3] Toll Free Number customers generally want to call to the respective branch for asking
some problems or give free number. It gives a feeling to the customer that company care
for them.

[4] Customer Care for general query handles initially customer want to solve his or her
problem at the moment as it arises. Our relationship manager many times dont have that
much time to discuss all that details on phone, they many sometime get busy with the
meeting with client. So for general query handle we can have a separate section.
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[5] More Appointments of Relationship managers. There should be more appointments

RM so that every customer gets equalized attention.

Note:
The suggestion which I have listed here above are strictly based on the knowledge of the
securities market that. I have acquired during my training of two months durations. All the
suggestions are for the improvement in the functioning of the front end operations of the
Anand Rathi securities Ltd. (Jaipur Branch)
The suggestions are purely based on the problems that I had faced as a management
Trainee.

11. Appendix
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SURVEY FORM

Name..Age
Address
.
Tel. Office ..Res.Mobile..

What is your annual income?

a) 60000-1 lakh b) 1-2 lakh c) 2-3 lakh
d) 3 lakhs & above

How much do you invest out of your total income?

A) Upto 5% b) 5-10% C)more than 10%

What is your investment preference?

a) Fds & insurance b) mutual funds c) property
d) bonds e) share market

What is your expectation of your investment to grow?

a) Steadily b) at an average rate c) fast

What is your perception with respect to returns?

a) Safety of principal b) returns more than inflation c)earning high returns

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Knowledge related to share market:

a) yes b) no c) cant say

For how many years you have been investing?

a) 1-5 years b) 5-10 years c) 10 yrs & above

Factors influencing the investment decisions??

a) Advice from Broker

b) Current News

c) Reviews in Self Evaluation

How much Risk are you willing to take?

a) High

b) Moderate c) Low

What is your preference in Mutual Funds?

a) Equity

b) Income

c) Money market fund

d) ELSS

e) SIP

f) Balanced Fund

g) Other

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12. Bibliography
BOOKS: C.R Kothari: Research Methodology; New age international (p) ltd, publishers, New
Delhi.

NEWSPAPERS: Economic Times

Business Times

WEBSTIES:
www.anandrathi.in

www.amfiindia.com
www.sebi.gov.in
www.mcxindia.com
www.ncdexindia.com
www.nseindia.com
www.bseindia.com
Search engine Google

MAGAZINES:
Business world
Business Today

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