SUMMER INTERNSHIP PROJECT ON STUDY OF DERIVATIVES AT MERITS CAPITAL MARKET SERVICES PVT. LTD.

Submitted in the partial fulfillment of the PGDM program

Submitted by Prateek Batra 18/038

Corporate Mentor Mr. Saurabh Shrivastav Relationship Manager

Faculty Mentor Ms. Shalini Vermani Professor

APEEJAY SCHOOL OF MANAGEMENT NEW DELHI JULY 2011

ACKNOWLEDGEMENT

Every individual from dusk to dawn of life need some co-operation from the surrounding environment. My self too is not an exception to others. It is very difficult to complete a project work without the help of some well-wisher.

consider

it

is

great

privilege

to

acknowledge

my

gratitude

to

Mr. Dilmeet Singh (M.D.)

Mr. Guneet Singh(Vice President-Operations) and

Mr.Bishan Singh Negi(Branch Head)for giving his kind cooperation and valuable guidance and information he has.

I am indeed grateful to Mr. Saurabh Shrivastav(Relationship Manager) Mr. Sunil (Relationship Manager) for helping me in the collection of valuable information about the topic selected and also for his guidance in the preparation of the project. I am greatly indebt to all the employees of Merits Capital. For their kind co-operation during collection of data and information that helped me in conducting such projectwork.

also

express

my

sincere

thanks

to

Prof.

Alok

Saklani

(Director)

Ms. Manupriya Bali (placement officer) Ms. Divya Jindal (placement committee incharge) for giving me opportunity to undertake the project work and Guide for their inspiring guidance and timely suggestions during this project.

Prateek Batra

PREFACE
Share trading in India is undergoing a transition and consolidation phase witnessed never before. The competition is likely to become so severe after the entry of many players, retaining a customer is most difficult practice for any service provider.

Though India has a very big untapped market but the players will not flourish unless they change the way the customers are being served. Given the awareness level of today customers every player has to treat with care and make the customer feel that he is the king. Number of Online Share trader in India has crossed the line. More and more customers are coming under this umbrella and many of the existing one are changing pavilion. So customer retention and satisfaction is now more important as it was never before. Players keep coming with new schemes in order to attract new customers and retain the existing one. This is being supplemented with increased advertising and brand building efforts. Success of any organization depends upon its being proactive.

I am very lucky as I got an opportunity to work with Merits Capital which is showing phenomenal growth and success in the Securities.

My topic was study of derivatives . This project is an effort to do a depth study and analysis of various known and unknown reasons for customer satisfaction and retention. To err is human and I am not an exception, valuable comments are always welcomed since it will motivate to work with greater zeal and efficiency in the future.

DECLARATION
I undersigned here by stating that the report entitled STUDY OF DERIVATIVES is a genuine and bonafied work prepared by me under a guidance of Mr. SAURABH SHRIVASTAVA (Relationship Manager)

The empirical findings in this project report are based on the data collected by myself. The matter presented in this report is not copied from any source. I understand that any such copy is liable to the punishment in way the university authorities deem fit.

This project report is submitted to APEEJAY SCHOOL OF MANAGEMENT in a partial fulfillment of the course of.

POST GRADUATE DIPLOMA IN MANAGEMENT

PLACE: NEW DELHI

PRATEEK BATRA

TABLE OF CONTENTS

PARTICULARS Executive Summary Objective Of Study Chapter 1 - Introduction to Topic Chapter 2 Company Profile Background Promoters Vision and Mission Product and Services Marketing Strategies Competitors Taxation Policies HR Policies Major Problems Achievements Prospects Chapter 3 About the Project Chapter 4 Literature Review Chapter 5 Research Methodology Chapter 6 Data Analysis and Findings Chapter 7 Conclusions Chapter 8 Recommendations Chapter 9 Bibliography Chapter 10 - Glossary

PAGE NUMBER 7 8 9 21 22 50

51 53 54 62 63 65 66 73 74 80 81 82 83 84 85 91

EXECUTIVE SUMMARY
Conceptually the mechanism of stock market is very simple. People who are exposed to the same risk come together and agree that if anyone of the person suffers a loss the other will share the loss and make good to the person who lost.

The initial part of the project focuses on the job and responsibilities I was allotted as a summer trainee. It also makes the readers aware about the techniques and methodology used to bring this report alive. It also describe about the objective of this study. It also enlightens the readers about Merits Capital strategies to acquire new customers. Further the project tells us about the profile of the company (Merits Capital). It provides knowledge to the readers regarding the companys history, mission, vision, customer base and the reasons to be associated with the company. Also it gives special emphasis on the selling of products and management of the company.

The next few chapters are devoted to the study of the Derivative Market and Derivative Instruments in a very basic way. It also suggests some of the strategies that can be applied to earn more even when the market is too much volatile. The readers can also find the comparative analysis of the Derivative Market and the Cash Market in the Indian context. . The next part of the project throws light upon my findings and analysis about the company and the suggestions for the company for better performance.

OBJECTIVE OF THE STUDY

To find out whether the Derivative Instruments are applicable in the Indian Stock Market which can work both in good and bad times so that it can minimize our risk and maximize our returns. As a result one can have conviction in his portfolio in the hugely volatile stock market because a difficult and serious problem for all investors today is that there is entirely too much free information, hype, promotion, personal opinion, and advice about derivative instruments are there in stock market. One get it from friends, relatives, people at work, the Internet, brokers, stock analysts, advisers, entertaining cable TV market programs, and other media. It can be very risky and potentially dangerous.

Realistically, there are not too many people one can listen to if he want to avoid confusing, contradictory, and faulty personal market opinions. So one need to confine himself to just a very few sources of relevant facts and data and a sound system that has proven to be accurate and profitable over time.

Therefore, the objective of the Dissertation is to do in depth research on these derivative instruments.

CHAPTER 1

INTRODUCTION TO TOPIC

SHARES
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in the company becomes one of the owners of the company

INDUSTRY OVERVIEW
A Brief History of Stock Exchanges

Do you know that the world's foremost marketplace New York Stock Exchange (NYSE), started its trading under a tree (now known as 68 Wall Street) over 200 years ago? Similarly, India's premier stock exchange Bombay Stock Exchange (BSE) can also trace back its origin to as far as 125 years when it started as a voluntary non-profit making association. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in statements like 'The BSE Sensitive Index rose 5% today'. Obviously, stocks and stock markets are important. Stocks of public limited companies are bought and sold at a stock exchange. But what really are stock exchanges? Known also as tNews on the stock market appears in different media every day. he stock market or bourse, a stock exchange is an organized marketplace for securities (like stocks, bonds, options) featured by the centralization of supply and demand for the transaction of orders by member brokers, for institutional and individual investors. The exchange makes buying and selling easy.

All stock exchanges perform similar functions with respect to the listing, trading, and clearing of securities, differing only in their administrative machinery for handling these functions. Most stock exchanges are auction markets, in which prices are determined by competitive bidding. Trading may occur on a continuous auction basis, may involve

10

brokers buying from and selling to dealers in certain types of stock, or it may be conducted through specialists dealing in a particular stock. But where did it all start? The need for stock exchanges developed out of early trading activities in agricultural and other commodities. During the middle Ages, traders found it easier to use credit that required supporting documentation of drafts, notes and bills of exchange. India's other major stock exchange National Stock Exchange (NSE), promoted by leading financial institutions, was established in April 1993. Over the years, several stock exchanges have been established in the major cities of India. There are now 23 recognised stock exchanges Mumbai (BSE, NSE and OTC), Calcutta, Delhi, Chennai, Ahmedabad, Bangalore, Bhubhaneswar, Coimbatore, Guwahati, Hyderabad, Jaipur, Kochi, Kanpur, Ludhiana, Mangalore, Patna, Pune, Rajkot, Vadodara, Indore and Meerut. Today, most of the global stock exchanges have become highly efficient, computerised organisations. Computerised networks also made it possible to connect to each other and have fostered the growth of an open, global securities market. INDIAN STOCK MARKET-A brief profile The two main stock markets of India are:NSE BSE

In all there are 23 stock exchanges in India, but the two most popular amongst all of them are:National Stock Exchange(NSE) Bombay stock exchange(BSE)

Now, lets discuss the history, functionality and other important details about these two important stock exchanges of India.

11

History of BSE and its brief profile:Indian stock markets are one of the oldest in Asia. Its history dates back to a 200 years ago. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the end of eighteenth century. By 1830s business on corporate stocks and shares in the bank and cotton took place in Bombay. The 1850s witnessed a rapid development of commercial enterprise and the brokerage business attracted many men into this field and by 1860 the number of brokers increased to 60. In 1860-61, the American civil war broke out and cotton supply from United States stopped; and thus the share mania in India begun, due to which the share brokers increased to about 200 to 250. At the end of the American civil war, the brokers who thrived out of this war in 1874, found a place in a street, where they would easily assemble and transact business. This street is nowadays, popularly known as DALAL STREET. In 1887, they formally established in Bombay, and were known as Native Shares and Stock Brokers Association. In 1895, it acquired a premise in the same street and finally was inaugurated in 1899 with the name Bombay Stock Exchange(BSE). In this way the stock market at Bombay was consolidated. NSE:With the liberalization of Indian economy it was found necessary to lift the Indian

stock markets on par with the international standards. The NSE was incorporated in 1992 by industrial development bank of India, industrial credit and Investment Corporation of India, industrial finance corporation of India, all insurance corporations, selected commercial banks and others.

12

NSE is Indias leading stock exchange covering more than 160 cities and towns across the country. It provides the modern fully computerized trading system designed to offer investors across the country a safe and easy way to invest to liquidate investment and securities. Investors in many areas of country did not have the same access and opportunity to trade so there arise the need for setting up the national stock exchange. The NSE network has been designed to provide equal access to investors from anywhere in India and to be responsive to their needs. On its recognition as a stock exchange under the Securities Contract Act, 1956 in April 1993, NSE started operations in the Wholesale Debt Market (WDM) segment in June 1994. Capital market (equities) segment commenced operations in November 1994, and operations in derivative segment started in June 2000. NSE started trading in the capital market segment on November3, 1994 and within one year became the largest exchange in India, in terms of volumes transacted. During the year 2005-06 NSE reported, a turnover of Rs 1,569,556 crores in the equity segment.

13

Online trading process

The various transactions involved in online trading can be shown from the point of view of the

Client Broker Stock Exchange

14

CAPITAL MARKET
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

DERIVATIVE MARKET
A derivative is a financial instrument whose value depends on underlying variables. The most common derivatives are futures, options, and swaps but may also include other tradeable assets such as a stock or commodity or non-tradeable items such as the temperature (in the case of weather derivatives), the unemployment rate, or any kind of (economic) index. A derivative is essentially a contract whose payoff depends on the behavior of a benchmark. One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g.,equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); the market in which they trade (e.g., exchange-traded or over-thecounter); and their pay-off profile. 15

Derivatives are financial contracts, which derive their value off a spot price time-series, which is called "the underlying". The underlying asset can be equity, index, commodity or any other asset. Some common examples of derivatives are Forwards, Futures, Options and Swaps. Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed independently. From a market-oriented perspective, derivatives offer the free trading of financial risks.

IMPORTANCE OF DERIVATIVES
Credit Risk: This is the risk of failure of counterparty to perform its obligation as per the contract. Also known as default or counterparty risk, it differs with different instruments. Market Risk: Market risk is a risk of financial loss as a result of adverse movements of prices of the underlying asset/instrument. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. A firm faces two types of liquidity risks 1. Related to liquidity of separate products 2. Related to the funding of activities of the firm including derivatives. Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects associated with the deal should be looked into carefully.

16

TYPES OF DERIVATIVES

Forwards Futures Options Swaps

Who are the operators in the derivatives market?

Hedgers - Operators, who want to transfer a risk component of their portfolio. Speculators - Operators, who intentionally take the risk from hedgers in pursuit of profit.

Arbitrageurs - Operators who operate in the different markets simultaneously, in pursuit of profit and eliminate mis-pricing.

What

is

Forward

contract?

In a forward contract, two parties agree to do a trade at some future date, at a price and quantity agreed today. No money changes hands at the time the deal is signed.

What

are

Index

Futures?

Index Futures are Future contracts where the underlying asset is the Index. This is of great help when one wants to take a position on market movements

What

are

the

uses

of

Index

Futures?

Index futures can be used for hedging, speculating, arbitrage, cash flow management and asset allocation.

17

HEDGING:
What is hedging?

Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are widely used for hedging. A Hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk. Hedging does not mean maximization of return. It only means reduction in variation of return. It is quite possible that the return is higher in the absence of the hedge, but so also is the possibility of a much lower return

What

are

the

general

hedging

strategies?

The basic logic is "If long in cash underlying - Short Future and If short in cash underlying - Long Future". If you have bought 100 shares of Company A and want to Hedge against market movements, you should short an appropriate amount of Index Futures. This will reduce your overall exposure to events affecting the whole market (systematic risk). In case a war breaks out, the entire market will fall (most likely including Company A). So your loss in Company A would be offset by the gains in your short position in Index Futures.

Who

are

hedgers,

speculators

and

arbitrageurs?

Hedgers wish to eliminate or reduce the price risk to which they are already exposed. Speculators are those class of investors who willingly take price risks to profit from price changes in the underlying. Arbitrageurs profit from price differential existing in two markets by simultaneously operating in two different markets. All class of investors are required for a healthy functioning of the market.

18

Hedgers and investors provide the economic substance to any financial market. Without them the markets would lose their purpose and become mere tools of gambling. Speculators provide liquidity and depth to the market. Arbitrageurs bring price uniformity and help price discovery. The market provides a mechanism by which diverse and scattered opinions are reflected in one single price of the underlying. Markets help in efficient transfer of risk from Hedgers to speculators. Hedging only makes an outcome more certain. It does not necessarily lead to a better outcome.

What

is

an

Option?

Options are contracts that confer on the buyer of the contract certain rights (rights to buy or sell an asset) for a predetermined price on or before a pre-specified date. The buyer of the option has the right but not the obligation to exercise the option. Options come in a variety of forms. Some Option contracts, which have been standardized, are traded on recognized exchanges. Other Option contracts exist that are traded "over-the-counter", i.e., a market where financial institutions and corporate trade directly with each other over the phone. Besides these, options also exist in an embedded form in several instruments. The popular basic instruments/variables underlying options are:

Equity Index Options, Options on individual stocks, Employee Stock Options Interest rates Bond Options, Interest rate Futures Options, Options embedded in bonds, caps & floors, etc

Foreign exchange Plain vanilla calls and puts, barrier Options, various kinds of exotic Options

Others including commodities, weather, electricity, etc.

19

Classification:

Option Seller - One who gives/writes the option. He has an obligation to perform, in case option buyer desires to exercise his option.

Option Buyer - One who buys the option. He has the right to exercise the option but no obligation.

Call Option - Option to buy. Put Option - Option to sell. American Option - An option, which can be exercised anytime on or before the expiry date.

European Option - An option, which can be exercised only on expiry date. Strike Price/ Exercise Price - Price at which the option is to be exercised. Expiration Date - Date on which the option expires. Exercise Date - Date on which the option gets exercised by the option holder/buyer.

Option Premium - The price paid by the option buyer to the option seller for granting the option.

What

are

Call

Options?

A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date. The seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.

20

What

are

put

Options?

A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date.

The seller of the put option (one who is short Put) however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell.

What

is

swap?

A swap is nothing but a barter or exchange but it plays a very important role in international finance. A swap is the exchange of one set of cash flows for another. A swap is a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first. Both payments take place on specified dates. Different formulas are used to determine what the two sets of payments will be.

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CHAPTER 2

COMPANY PROFILE

22

M rg g In o a e in n v tio s E e g g S r ic s n m r in ev e

MERITS CAPITAL MARKET SERVICES PRIVATE LIMITED

ABOUT MERITS:
Merits is an emerging broking house centered at New Delhi who have been riding on an experience of almost 2 decades and operating from the present Registered Office situated at the heart of Delhi, since 1993 .

SPECIALIZATION:
We specialize in broking activities related to Equities, Derivatives, Commodities and Currencies and own membership of NSE-CM, NSEFO, MCX & MCX-SX.

INITIATIVE:
Weve just initiated our expansion drive with Quality Service and Innovations as our banners. Enthused by the immense appreciations received from our existing clients and associates about our quality services and commitment values, we have decided now to roar out our embedded values.

23

INNOVATIVE APPROACH:
Merits Capital has always realized the importance of being innovative in the chosen fields and thrives on the same. We have introduced number of innovative services, systems and strategies to meet the rapidly changing scenario and environment.

COMPLIANCE:
We have endeavored to perform strictly in accordance with the Government / SEBI Regulations in order to safeguard the interest of each individual.

ETHICAL STANDARD:
The main focus of the company is client relationship with ethical and transparent business practices through unbiased investment advice with the objective of achieving sustainable superior investment returns for our clients.

MOTIVE:
The humility to accept changes and imbibe new ideas and concepts underlines the culture at Merits Capital. And, customer satisfaction has been the only motive throughout.

24

PROMOTERS:
Merits is promoted and managed by Mr. Gagandeep Singh (M.D.) along with Mr. Dilmeet Singh (Director) who are young and energetic qualified individuals and had themselves set up the roots of Merits in 1993. Both belong to a well reputed family in Delhi and are known for their undeterred commitment.

VISION:
We envision ourselves as a National company with offices reaching every business city and town of the country spreading our inherent message of committed and quality services.

25

PROFILE OF THE COMPANY

Name of the Company Year of Establishment Head Office

: - Merits Capital Private Limited : - 1993 :- 65,Old Rajinder Nagar Market New Delhi-110060

Corporate Office

:- FF-19,B-1/8,Apsara Arcade , Pusa Road, (Karol Bagh Metro Station) New Delhi - 110005

Nature of Business Services:- Depository services, online services and technical research Number of employees Revenue Website Slogan :- 150 :- data not available :- www.merits.in :- merging innovations emerging services

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PRODUCTS AND SERVICES OF MERITS CAPITAL PRIVATE LIMITED

The different types of products and services offered by Merits Capital Pvt. Ltd. are as follows: Equity and derivatives trading Depository services Online services Commodities trading Dial-n-trade Portfolio management Share shops Fundamental research Technical research

27

SERVICES OFFERED BY MERITS:

We have always endeavored on providing unbeaten services and have designed them in such a way so as to provide excellent trading experience. Following is the list of services that have helped our clients in the past and will continue to help them achieve their future targets through our Innovative approach and Hi-Tech solutions. Trading options in Cash, Derivatives, Commodities and Currencies FREE Internet trading IDs Robust online back office support INSTANT trade confirmation through SMS Well researched trading calls Brokerage rate offered on your demand Branch connectivity through latest technologies Dedicated Relationship Managers available 24 X 7 Surveillance measures for loss protection Excellent strategies for disciplined trading Strategizing for amateurs in trading Numerous account reports intimated daily through SMS Most HI-TECH automation service Start with meagre margin amount Market/news alerts through amplified stereo system in dealing rooms Every 5 minutes valuation of clients portfolio Dedicated dealers with provisioned laptops NIFTY sound alert service FREE Birthday Surprise 50% rebate in brokerage

A lot more eyebrow raisers to comeStay connected!!!

28

BUSINESS SERVICES:

Trading Opportunities: Merits Capital facilitates its clients to trade in the Cash

Market, Derivatives, Commodities and Currencies.

Work online from home/office - FREE Internet trading IDs: To enable our clients

to trade online, we provide each of our clients with trading IDs without any extra cost.*

Robust Online Back Office Support: Merits Capital provides online access to all

the necessary back office reports in detail which can be accessed by associates and clients seamlessly.

All branches are provisioned to be connected through latest technologies viz. MPLS / VPN / Radio Frequency / DSL / Dedicated lease lines, etc.: Merits network of clients and branches is expanding and its necessary for everyone to be connected at all times. Therefore, we assure you options with most reliable connectivity for hassle-free trading.

Personalized services: To us, our clients satisfaction is the paramount and to achieve this at every level, we employ Relationship Managers (RMs) who will be obliged to assist you with the best, in order for you to get maximum from the money you invest.

Meagre margin requirement: Working with Merits Capital you can open your trading account for as low as Rs. 5000/- as a margin amount.

29

INNOVATIVE SERVICES:
INNOVATIVE SERVICES (Innovations flow in the veins of Merits)

An Innovation created out of quest to service people: INSTANT trade confirmation through SMS. Just as you trade; you get a confirmation message on your mobile instantly and automatically.

Unique of their kind dealing rooms with amplified stereo systems for market alerts and daily trading calls: We at Merits Capital make sincere effort for the benefits of the clients and have provided with the appropriate infrastructure. One such attempt is where we provide our clients with dealing rooms where Nifty alerts, trading calls, news, views, etc. are notified with the help of amplified stereo systems, thus keeping them updated with latest ongoing developments related to markets.

Dynamic valuation of clients portfolio every minute at our website.

Nifty sound alerts service - FREE: A real useful time saver. Just login and it generates sound alerts in two different tones depicting bullish/bearish moves at every 7 points movement of Nifty.

Excellent client communication systems: Any actions in clients account informed via SMS and E-Mail (email service upcoming) simultaneously. Such as:

All payments made and received. All deliveries transferred and received to/from client. Daily net obligation Cash Market. Final trade confirmation F&O. Net position carryover along with MTM profit / loss for current Daily debit reminder. month F&O.

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Client holding of securities in our beneficiary along with valuation, communicated weekly.

An excellent strategy: We always strive to work upon complex subjects and tend to make those simplified for our clients. On the track, we have formulated an intelligent strategy to exercise self-discipline in intraday trading. You can freely ask us during interactions.

Most Hi-Tech automation service: This service has already created a strong vacuum amongst Stock Market traders and is extremely awaited. Final testing underway.

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SPECIAL SERVICES:

Self designed brokerage system demand your brokerage: If you own value for us and that value justifies in our designated brokerage structure, we offer you the said privilege of demanding your brokerage. With the challenge of providing competitive brokerage we assure you benefits over your existing arrangements.

Dedicated Dealers: We value your esteem, hence we offer dedicated dealers to voluminous traders who can even move along with you and carry out your trades on their own Laptops, at your instructions.

Strict vigil on Relationship Managers (RMs) who tend to trade in clients accounts without their knowledge: We take our clients investment most seriously and for the protection of investors interest along with many other services that we provide, we carry out strict check on our RMs who may misleadingly trade into clients account without their knowledge. In case anyone is found guilty at any point of time, strict action is taken against him/her.

Well researched trading calls: These form the backbone of quality in our organization. We possess in-house research cell to add value for our clients. Any trader would love to follow those.

Birthday Surprise: On the joyous occasion of your birthday we intent to surprise you by offering very low brokerage charges slashed down to 50% only for your special day. Happy Birthday! Happy Trading!

32

WHY MERITS WHY NOT OTHER BROKING FIRMS:

1. TRUST: Trust is the only factor that has transformed many of our prospective customers to our clients. We intend to maintain the maximum level

of transparency by taking utmost care in communicating each and every transaction of client that takes place in our bounds.

2. STABILITY: Of Merits emerge from 1993 carrying considerable experience and maturity thus qualifying for being a stable organization.

3. INNOVATION: We have been first in the market to introduce the dynamic mobile service that updates each of its clients about every trade that takes place in his/her account. We have a team of experts who are always on the look out for innovative products and solutions that would help to support clients trading activities which is Merits core business.

4. RISK AVERSE: Unlike many other players in the industry we have a well communicated centralized risk management system. This allows us to offer the same level of service to customers across all locations.

5. VALUE : Whether you are a customer with a small or large wallet size, you can expect us to bring you value in every form.

Quality research Quality trade execution Low brokerages Accounts that suit your investment profile Risk profiler Superior customer service

33

6. SERVICE :We believe in high standards of service and thats precisely what we offer. We have developed a strong grip over the market with the unprecedented services we provide to our clients and make them feel privileged.

7. ROBUST TECHNOLOGY: We have developed a highly technological support system and great utility software applications with the use of latest technologies. These technologies have enabled us and our clients to trade better, faster and cheaper.

CHARGE STRUCTURE
Fee structure for General Individual: CHARGE ACCOUNT OPENING BROKERAGE Rs. 300/= Intra-day=0.01% Delivery=0.10%

Annual Maintenance cost be

Rs. Nil in the first year , Rs. 300/= per annum to

Charged second year onwards

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PROCESS OF OPENING AN ACCOUNT

LEAD MANAGEMENT SYSTEM (LMS) / REFERENCES

CONTACT THE PERSON OVER PHONE OR THROUGH EMAIL

FIXING AN APPOINTMENT WITH THE PERSON

YES

GIVING DEMONSTRATION

NO

DOCUMENTATION

FILLING UP THE FORM

SUBMISSION OF THE FORM

LOGIN OF THE FORM

SENDING ACCOUNT OPENING KIT TO THE CLIENT

TRADING

35

Apart from two passport size photographs, one needs to provide with the following documents in order to open an account with Merits Capital Pvt. Ltd.

Photocopy of the clients PAN Card which should be duly attached

Photo copy of any of the following documents duly attached which will serve as correspondence address proof:

a. Passport (valid) b. Voters ID Card c. Ration Card d. Driving License (valid) e. Electricity Bill (should be latest and should be in the name of the client) f. Telephone Bill (should be latest and should be in the name of the client) g. Flat Maintenance Bill (should be latest and should be in the name of the client) h. Insurance Policy (should be latest and should be in the name of the client) i. Lease or Rent Agreement. j. Saving Bank Statement** (should be latest)

Two cheques drawn in favour of Merits Capital Pvt. Ltd. One for account opening fees and other for margin money (minimum margin money is Rs. 5000).

** A cancelled cheque should be given by the client if he provides Saving Bank Statement as a proof for correspondence address.

NOTE: Only Saving Bank Account cheques are accepted for the purpose of Opening an account.

36

TRADING GUIDELINES

FOREMOST RULES FOR TRADING RULES FOR INVESTING FOREMOST:

Three major decisions to be taken while entering the stock market

Do you want to trade or invest? o The rules are absolutely different in both the themes.

What is my risk reward ratio? o Earning rewards should be more than possible losses.

Are you timing the market well? Timing is what all is required at the Stock Market. Masses are running after the choice of scrips which actually does not matter much.

MOST FORBIDDEN PERCEPTIONS PREVAILING AT THE BACK OF TRADERS MIND

"I want to be a millionaire today" or "I want to recover my loss today only". If thought judiciously, a very small amount per day, yields massive returns at the end of the month. "I have a Bad Luck" Luck can never work if the strategies are incorrect. Like, wrong medicine can never heal.

"Aur kitna girega Bazaar.Buy more...Dekhi jayegi." o Then...whatever is seen is not desirable. 37

RULES FOR TRADING:

NEVER trade against the tide. Just swim a bit with the flow/direction of the Market and come out with clean profits or minimal losses.

Do not be obstinate (ziddi) with the Markets. Those are much more powerful.

Obey the Stop Loss as staunchly as your religion. It deceives some times but is an Ultimate Savior. If the Stop Losses execute very frequently, then there is a fault in your strategies, Correct those.

The stop loss should be very near to the trade so that our heart accepts the loss easily when triggered. The longer the gap, more difficult would it be to book loss (Psychological).

Have patience in profits and run away at first step of loss. Trailing stop loss can be used to maximize the profit.

Very few people make losses because of wrong strategies. The major culprit is absolute in-disciplined approach. Discipline is defined as:

Trade quantities should always be uniform.

Chances of profit should be higher than chances of losses in every bout.

Amount of Profit/Loss should be pre-calculated, thought-over and then enacted.

Trades without stop loss bids (Put in the system) are suicidal.

Excitement with the market movements should be well controlled.

38

There is very little room for fundamentals (of Stock) while adopting the trading approach. Only picking the momentum is required.

The scrip chosen should be liquid enough.

A normal human brain is intelligent enough to catch the momentum by just observing. No need to hunt for any tips, it makes you dependent.Believe it.

While doing positional tradingTake it as a thumb rule Never carry your position when in deep loss and always carry it over when in deep profit. You are bound to get better favoring prices, the next day.

The best form of trading approach is Intra-Day which can be judged by any means. It leaves you fresh for 18 hrs. of the day to decide the trend neutrally, next morning.

Golden opportunities never give much time to act. Remember, Tops and bottoms are made just for an instance. So, act fast.

39

 RULES FOR INVESTING:

These investing rules are formed with a symptom based approach so that it is easiest for a layman to take decisions based on common logics. Following are few such symptoms:

Long term investors only need their Broker once or twice a year at the most. You can judge and decide whether you are/you wish to be an investor or a trader.

Start Investing in Good quality stocks when there are no noises about Stock Markets and Stocks are the least favorite gossips in parties. Also, when everybody is saying that stocks are the last thing to have in life. Its the right time. Then sleep over your stocks for at least two years and wait for a boom time.

Boom time is best signified when you hear a rickshaw puller talking about stocks. Sell majority of your stocks and wait for another recession with cash invested in fixed return instruments.

40

MARKETING STRATEGIES
The company is focused on capturing significant growth opportunities in the financial services market and its strategy is driven by the following key principles. A) Aggressively grow the customer base: The companys primary focus is on increasing its customer base by Expanding its geographic presence in new cities as well as increasing its presence in existing cities by opening new branches and franchises. Increasing sales force to provide personal attention and improve customer service, including trained relationship managers operating across the country. By cross selling our various services and wealth management solutions.

The company has a large and well distributed network of branches across India which provides securities broking service. The company believes that this network will enable it to offer its services with increased convenience to the customers and to expand its market share and customer base. This extensive distribution network provides further opportunities cross sell its products and services as it diversify into new business stream.

B) Start dealing in currencies: The company plan to expand its operations by providing investment schemes in currencies to its high net worth clients that offer superior margins and are complementary to existing operations.

41

C) Enforce risk management system: The company has fully automated risk management software, which performs direct monitoring of operational controlling parameters to minimize risks. Merits capitals risk management team performs real time monitoring of clients positions across cash and derivative segments. Clients are informed about their margin requirements through multiple channels including automated sms and e-mail channels. The company employs strict risk management standards to reduce risk and has developed robust recovery processes. The company has well managed control systems along with the external audit which performs checks at regular intervals to identify and rectify discrepancies in the system.

D) Human resources: The companys multi business context posses unique challenges to the human resource function. The companys business is managed by a team of competent and passionate leaders, capable of enhancing their companys standing in the competitive market. The companys employees have a defining role significantly accelerating its growth and transformations, thereby enhancing its position as one of the emerging stock broking houses. The company had a structured recruitment process; the focus is on recruiting people who have the right mindset for working at merits capital, supported by structured training programmes and internal growth opportunities.

During the year. While even economic meltdown impacted the financial health of the organization, the companys focus has been on unlocking the people potential and further developing their functional, operational and behavioral competencies.

E) Internal control system: The company has adequate system of internal control for business processes, with regard to operations, financial reporting, compliance with applicable laws and regulations. Regular internal audits and checks ensure that responsibilities are executed effectively.

42

Major Competitors

Sharekhan
Motilal oswal

Religare securities

India infoline

India bulls

Angel brokings

Indian finance guaranty limited

Fairwealth broking agency

Edelweiss

43

TAXATION CHART

CASH

FUTURES OPTIONS

MCX

JOBBING DELIVERY

(ON PREMIUM SALE)

SERVICE TAX ON BROKERAGE

10.30%

10.30%

10.30%

10.30%

10.30%

TURNOVER CHARGES IN % + SERVICE TAX

0.00345%

0.00345%

0.002%

0.05%

0.0025%

Rs. PER CRORE

345

345

200

5000

250

CLEANING CHARGES IN % + SERVICE TAX

N/A

N/A

0.001%

0.05%

0.001%

Rs. PER CRORE

N/A

N/A

100

5000

100

STAMP DUTY IN %

0.002%

0.01%

0.002%

0.002%

0.001%

44

Rs. PER CRORE

200

1000

200

200

100

S.T.T.

0.0125%

0.0125%

0.17% (ON SALE)

0.17% (ON SALE)

N/A

Rs.PER CRORE

1250

12500

1700 (ON SALE)

1700 (ON SALE)

N/A

S.T.T. ON OPTION EXPIRY %

N/A

N/A

N/A

0.125%

N/A

Rs. Crore N/A N/A N/A 12500 N/A

45

HR policies:
Human Resource Policies of the company are based upon the belief that the success of the company is primarily dependent on its people and that the development of the greatest potential of each employee is good both for the employee and the business and ultimately leads to the growth of the Organization. In view of this basic premise, a comprehensive set of policies is laid down in the subsequent pages of this manual. In its design and implementation, these policies will aim at attracting retaining and motivating personnel to achieve higher goals and attain greater opportunities for advancement in their business career. The guiding principles of these policies are: 1) To be pro-active, fair, competitive and a leader in business. 2) To encourage and facilitate employees potential with regard to the Organizational goals. 3) To enhance and develop potential employees career growth. 4) To offer compensation commensurate with responsibilities, performance. 5) Achievement as we believe in BEST REWARDS FOR BEST PERFORMANCE.

POLICY WITH REGARD TO HRD:

The objectives of documenting and making available these key policies are: 1) To ensure consistency in their interpretation and implementation. 2) To apply all norms on an equitable basis throughout the organization and recognize individual contribution and enterprise.

46

PERFORMANCE APPRAISAL
The appraisal policy of Merits Capital Market services Pvt. Ltd. is to discuss, communicate and share perceptions about an individuals contribution and achievements, so as to give the individual feedback about all that he has done till now, in order to plan for training & developmental activities for improvement and to reward the individual for his/her performance by means of increments, promotions etc. The Appraisal is based on Balanced Scorecard (BSC). The balanced scorecard is a measurement and management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

47

SWOT Analysis:
Analysis of the company on the following parameters: Strength Weakness Opportunities Threats

Strength: Minimum brokerage (1 paisa intra day & 8 paisa on delivery). Delegated relationship manager for each individual client. Online trading through ODIN software and through company website (meritscapital.com). No annual maintenance charges. No custodial charges. It does not keep any condition as to collect minimum amount of brokerage fro its clients. Trading via branch network, telephones and internet account i.e. both online and offline. Equity analysis report to support the investment decisions of its clients. Real time online fund transfer and exposure updating facility with HDFC, ICICI, AXIS. It is provide investment tips to its clients via sms.

48

Weakness: It should improve its marketing campaign. It should expand its branches and franchises. It should register with BSE also (Bombay stick exchange) currently it is member of NSE (national stock exchange). It should improve its ODIN software for online trading. It should deal in currency also.

Opportunity: Scope of online trading on BSE. Market expansion i.e. it should open new branches in small towns and untapped area also. Other services like insurance and mutual fund. The capital market in the last few years has turned out to be one of the favorable avenues for the retail investors.

Threats: Other companies like share khan, indiabulls, indiainfoline and local brokers are major threats to Merits Capital. Changes in SEBI guidelines and other tax implications. Government regulations and policies. Banks with demat facility like SBI (State Bank of India). Industry competition trying for the same target segment.

49

Major problems:
Very low emphasis on marketing campaigns. Less no. of branches as compare to competitors. Small customer base. No exposure to international stock market.

No exposure to BSE. Main focuses on north Indian territory not other territories.

Achievements:
Member of NSE. Member of MCX. Expanded 50 franchisees. Client base is low but clients are loyal.

Future prospects:
To increase customer base. To become member of BSE. To expand branches. To give more emphasis on marketing campaigns. To start dealing in currencies.

50

CHAPTER 3

ABOUT THE PROJECT

51

JOB DESCRIPTION
The company placed me as a Summer Trainee. I have been handling the
Following responsibilities:

To sell the products of the organization. To coordinate the team and also help them to sell the product and also help them in field. To generate the leads by cold calling. To understand customers needs and advising them to make a portfolio as per their investment. To do sales promotion through e-mails,making cold calling and collecting information related with remisers.

AREA ASSIGNED
I covered areas like Delhi, Gurgaon.

TARGET MARKET
Different properties dealers. Charted accountants. Lawyers Travel agencies Transport business Businessmen Corporate Employees etc.

52

DAY TO DAY JOB DESCRIPTION

Reporting time: 9.30 AM
Fixing appointment with clients. Visit clients place. Demonstrate the product on Internet to the client. Completing the formalities like filling the application form and documentation. Cold calling.

In the last few days I even did trading on ODIN software which the company and our clients use to sell or buy shares and it is provided free of cost to our clients.

Few commands of ODIN software are:-

F1- For buy share. (+)

F2- For sell share. (-)

F3- Shows the list of shares which are in pending status.

F4- It shows market watch.

F5- It shows market picture and it shows no. of buyers and sellers available in market (best 5 buyers and best 5 sellers).

F6- It work same as f5.

F7- Order history filter. F8- It shows the executed shares. Alt+f6- It shows net position of client or user.

53

CHAPTER 4

LITERATURE REVIEW

54

Derivatives trading in the stock market have been a subject of enthusiasm of research in the field of finance. Derivatives trading have two attributes on the basis of its effectiveness. So there have often been contrary views among the researchers of what may be the impact of derivatives trading. According to the nature of this instrument it is argued that this could enhance the market efficiency by establishing the market. There are many empirical findings for both there roles of derivatives trading. Here some review of literature for both these results are presented.

Many theories have been developed about the pros and cons of the impact of derivatives trading in the stock market. A common agreement has been found among the studies that the introduction of derivatives products, specially the equity index futures enables traders to transact large volumes at much lower transaction costs relative to the cash market. A major theoretical argument for the benefit of derivatives trading is that it reduces the volatility of the stock market. The logic is that it reduces the asymmetric information among the investors and information reduces the speculation in the trading system. A variety of theoretical arguments have been advanced over the years to explain why speculative trading in general, or the existence of derivatives markets in particular, might affect the volatility of the underlying asset market.

In recent past, the volatility of stock returns has been a major topic in finance literature. Empirical researchers have tried to find a pattern in stock return movements or factors determining these movements. Generally, volatility is considered as a measurement of risk in the stock market return and a lot of discussions have taken place about the nature of stock return volatility. Therefore, understanding factors that affect stock return volatility is an imperative task in many ways.

55

A numbers of theoretical and empirical studies have been done on the impact of the introduction of derivatives in the stock markets on the stock return volatility. The studies are concerned with both the developed as well as developing countries. There are two sets of views according to the theoretical as well as empirical findings. One is of the view that introduction of derivatives has increased the volatility and market performance, through forwarding its speculative roles and the other view is that the introduction of derivatives has reduced the volatility in the stock market thus increasing the stability of the stock market.

The behaviour of volatility in the equity market in India, for the pre and post derivatives period, has been examined using conditional variance for the period of 1999-2003 in (Nath, 2003). He modeled conditional volatility using different method such as GARCH (1,1). He has considered 20 stocks randomly from the Nifty and Junior Nifty basket as well as benchmark indices itself. As result, he observed that for most of the stocks, the volatility came down in the post-derivative trading period. All these methods suggest that the volatility of the market as measured by benchmark indices like S&P CNX Nifty and Nifty Junior have fallen in the post-derivatives period.

The impacts of the introduction of the derivatives contracts such as Nifty futures and options contracts on the underlying spot market volatility have been examined using a model that captures the heteroskedasticity in returns that is recognised as the Generalised Auto Regressive Conditional Heteroskedasticity (GARCH) Model in Shenbagaraman (2003). She used the daily closing prices for the period 5th Oct. 1995 to 31st Dec. 2002 for the CNX Nifty the Nifty Junior and S&P500 returns. Results indicate that derivatives introduction has had no significant impact on spot market volatility but the nature of the GARCH process has changed after the introduction of the futures trading.

56

Both theoretical and empirical aspect of the question of how the speculation, in general, and derivative securities in particular, effects the underlying asset markets has been explained in Mayhew (2000). The theoretical research has revealed that there are many different aspects of the relationship between cash and derivative markets. Although many models predict that derivatives should have a stabilizing effect, this result normally requires restrictive assumptions. At the end of the day, the theoretical literature gives ambiguous predictions about the effects of derivatives markets.

Price discovery and volatility have been examined in the context of introduction of Nifty futures at the National Stock Exchange (NSE) in June 2000 applying Cointegration and Generalised Auto Regressive Conditional Heteroscedasticity (GARCH) techniques respectively from January1998 to October 2002 in Raju and Karande (2003). Their finding suggests that the introduction of futures has reduced volatility in the cash market.

The impact of trading in the Dow Jones Industrial Average index futures and futures options on the conditional volatility of component stocks has been examined in Rahman (2001). The conditional volatility of intraday returns for each stock before and after the introduction of derivatives is estimated with the GARCH model. Estimated parameters of conditional volatility in pre-futures and post-futures periods are then compared to determine if the estimated parameters have changed significantly after the introduction of various derivatives. The data for this study consist of transaction prices from the 30 stocks comprising the DJIA. Transaction prices for April through June 1997 (pre-futures period) and April through June 1998 (post-futures period) are used. The results suggest that the introduction of index futures and options on the DJIA has produced no structural changes in the conditional volatility of component stocks. The null hypothesis of no change in conditional volatility from pre futures to post futures periods cannot be rejected.

57

Gupta (2002) has examined the impact of index futures introduction on stock market volatility. Further, he has also examined the relative volatility of spot market and futures market. He has used daily price data (high, low, open and close) for BSE Sensex and S&P CNX Nifty Index from June 1998 to June 2002. Similar data from June 9, 2000 to March 31, 2002 have also been used for BSE Index Futures and from June 12, 2000 to June 30, 2002 for the Nifty Index Futures. He has used four measures of volatility the first is based upon close-to-close prices, the second is based upon open-to-open prices, the third is Parkinsons Extreme Value Estimator, and the fourth is Garman-Klass measure volatility (GKV). The empirical results indicate that the over-all volatility of the underlying stock market has declined after the introduction of index futures on both the indices.

The impact of the introduction of index futures on the volatility of stock market in India was examined employing daily data of Sensex and Nifty CNX for period of Jan 1997March 2003 in Bandivadekar and Ghosh (2005). The return volatility has been modeled using GARCH framework. They found strong relationship between information of introduction of derivatives and return volatility. They have concluded that the introduction of derivatives has reduced the volatility of the stock market. The same study was done by Hetamsaria and Swain (2003). they have examined the impact of the introduction of index futures on the volatility of stock market in India applying regression analysis. They have used Nifty 50 index price data for the period of Jan 1998 - March 2003. They found that the volatility of the Nifty return has declined after the introduction of index futures.

Darrat, Rahman, and Zhong (2002) have examined the impact of the introduction of index futures on the volatility of stock market in India and causal relationship between volume in the futures market and spot market. They have used EGARCH approach and Granger Causality (G C) test. Their finding suggests that index futures trading may not be blamed for the increasing volatility in the spot market. They found that volatility in the spot market has produced volatility in the futures market.

58

Board, Sandamann and Sutcliffe (2001), have tested the hypothesis that increases in the futures market trading activity increases spot market price volatility. They used the GARCH model and Schewert Model and found that the result does not support the hypothesis. The data samples are taken from the U K market. Jeanneau and Micu (2003) have explained that information based or speculative transaction also creates a link between volatility and activity in asset and derivatives market. This link depends in part on whether the new information is private or public and on the type of asset traded. In theory, the arrival of new private information should be reflected in a rise in the volatility of return and trading volumes in single equity and equity related futures and options.

The majority of studies have employed the standard ARCH or GARCH model to examine volatility shifting. Mostly the findings are supporting the hypothesis that introduction of derivatives has reduced the market volatility. These studies use daily observations to estimate volatility, whereas interday data are used here. Given that financial markets display high speeds of adjustment, studies based on longer intervals such as daily observations may fail to capture information contained in intraday market movements. Moreover, because of modern communications systems and improved technology, volatility measures based on daily observations ignore critical information concerning intraday price patterns. Andersen (1996) pointed out that the focus of the market microstructure literature is on intraday patterns rather than interday dynamics.

This study is also based on the hypothesis that the introduction of the derivatives products has reduced the risk inefficiency in the BSE stock market. Three derivatives products (index futures, stock futures and index options) have been used that have been introduced in the different time periods. The time period is also for about 8 years including the most recent earning period as 2005-2006. Derivatives turnover also have been used for the same return series.

59

The GARCH Model

The GARCH model was developed by Bollerslev (1986) as a generalised version of Engles (1982) Autoregressive Conditional Heteroscedasticity (ARCH). In the GARCH model the conditional variance at time t depends on the past values of the squared error terms and the past conditional variances. It uses the past disturbances to model the variance of the series and allows the variance of error term to vary over time.

Bollerslev (1986) generalized the ARCH process by allowing the conditional variance to be a function of prior period's squared errors as well as its past conditional variance. The advantage of a GARCH model is that it captures the tendency in financial time series data for volatility clustering. It therefore enables us to make the connection between information and volatility explicit, since any change in the rate of information arrival to the market will change the volatility in the market. Thus, unless information remains constant, which is hardly the case, volatility must be time varying, even on a daily basis. A model with errors that follow a GARCH (1,1) process is represented as follows: Yt ht Where, ht Ut = = conditional variance (sigma square) Error term = a + b1Xt + Ut a + b1(Ut-1)2 + b2ht-1 ...1

...2

Equation '1' is called the conditional mean equation and equation '2' is called the conditional variance equation. The coefficient of the error square term can be viewed as a news coefficient, with a higher value implying that recent news has a greater impact on price changes. It can be predicted as the impact of yesterdays (the previous time period) news on todays (present time period) price changes. The coefficient of the variance (ht-1) reflects the impact of old news', in other words it is picking up the impact of prior news on yesterdays variance and as such indicated the level of persistence in the information effect on volatility.

60

This estimation technique enables us to explore the link between information/news arrival in the market and its effect on cash market volatility. Estimated parameters of conditional volatility in pre-futures and post-futures periods are then compared to determine if the estimated parameters have changed significantly after the introduction of the futures.

The GARCH (1,1) framework has been extensively found to be most parsimonious representation of conditional variance that best fits many financial time series (Bollerslev, 1986; Bologna and Cavallo, 2002) and thus, the same has been adopted to model stock return volatility. ARCH and GARCH models have become widespread tools for dealing with time series heteroskedastic models. The goal of such models is to provide a volatility measure--like a standard deviation--that can be used in financial decision concerning risk analysis, portfolio selection and derivative pricing.

Description of Variables used in the Analysis

The variables used are as follows: NIFDR, NIFDRinf0, NIFDRinf1, NIFDRstf0, NIFDRstf1, NIFDRopt0, NIFDRopt1, NIFDRder, INDFN, STFN, NIFJDR, S&P500DR, INDFTO and INOPTN.

NIFDR (NSE Market Return):- This is an index of daily NSE stock market return calculated from the NSE Nifty CNX 50, the share price index having fifty blue chip shares companies. NIFDRinf0:- NSE return for the period of pre index futures introduction from the daily closing price of Nifty 50. NIFDRinf1:- NSE return for the period of post index futures introduction calculated from the daily closing price of Nifty 50. NIFDRstf0:- NSE return for the period of pre stock futures introduction calculated from the daily closing price of Nifty 50. calculated

61

NIFDRstf1:- NSE return for the period of post stock futures introduction calculated from the daily closing price of Nifty 50. NIFDRopt0:- NSE return for the period of pre index options introduction calculated from the daily closing price of Nifty 50. NIFDRopt1:- NSE return for the period of post index options introduction from the daily closing price of Nifty 50. NIFDRder: - NSE return for the period of 2002-2006 to analyse the impact of derivatives turnover calculated from the daily closing price of Nifty 50. NIFJDR:- (NSE Market Return):- This is an index of daily NSE stock market return calculated from the NSE Nifty Junior 50, the share price index having fifty blue chip shares companies. S&P500DR:- This is an index of daily USA stock market return calculated from the S&P500 index, the share price index having 500 blue chip shares companies. INDFN: - This is the indicator of a dummy variable for stock index futures in NSE Nifty 50 Index. STFN: - This is the indicator of a dummy variable for stock futures in NSE Nifty 50 Index. INOPTN: - This is a dummy variable for stock index options introduced in NSE Nifty 50 Index. INDFTO: - This is turn over of the index futures for the period of 2002-2006. This variable is proxy for derivatives turn over in the stock market. calculated

62

CHAPTER 5

RESEARCH METHODOLOGY

63

RESEARCH METHODOLOGY
Methodology Specifies: The objectives of the study. The method of conducting. The tools for collection of data. Approach of measurement and analysis of data. To collect specific data from concerned persons through questionnaire as well as informal decision.

Objective of the present study can be accomplished by conducting a systematic market research. Market research is the systematic design, collection, analysis and reporting of data and findings that are relevant to different marketing situations facing the company. The marketing research process that will be adopted in the present study consists of the following stages

a) Defining the problem and the research objective: The research objective states what information is needed to solve the problem. The objective of the research is to find out the facilities provided in mutual funds and share market and what will be its benefits in the future.

b) Developing the research plan: Once the problem is identified, the next step is to prepare a plan for getting the information needed for the research. The present study will adopt the exploratory approach wherein there is a need to gather large amount of information before making a conclusion. If required, the descriptive and casual approaches may also be used.

64

c) Collection and Sources of data: Market research requires two kinds of data, i.e., primary data and secondary data. Preparing questionnaires that will contain both openended and close-ended questions may collect the primary data. Secondary data will be collected from various journals, books and web sites.

d) Analyze the collected information: This involves converting raw data into useful information. It involves tabulation of data and using statistical measures on them for developing frequency distributions and calculating the averages and dispersions.

e) Report research findings: This phase will mark the culmination of the marketing research effort. The report with the research findings is a formal written document. The research findings and personal experience will be used to propose recommendations to develop the market in online trading.

Sources of information:Primary Sources: Through Questionnaire. Face to face interview.

Secondary Sources: Record maintained by the company. Internet sites likes, www.merits.in , www.google.com , www.money.rediff.com

ANALYSIS
To make our research project most effective in a given time period of two months surveyed the information of the competitors. We undertook both Explorative as well as Conclusive Research Design. The data has been collected from both Primary as well as Secondary sources and we also did the fieldwork for which utmost care has been taken to keep project unbiased from personal opinion

65

CHAPTER 6

DATA ANALYSIS AND FINDINGS

66

Q1.

Where do you invest your savings?

OPTIONS Equity Mutual fund Fixed deposits Insurance

NO OF RESPONDENTS 59 25 9 7

INTERPRETATIONS:
This figure says that most people go for at 1st EQUITY investment then for MUTUAL FUND, FIXED DEPOSITS AND INSURANCE. Because equity gives good return in short time as well as long term as compared to mutual fund

67

Q2.

Which sectors give more return?

OPTIONS Share market Mutual fund

NO OF RESPONDENTS 23 77

23%

77%

Sharemarket

Mutual funds

INTERPRETATIONS:
This pie chart shows that share market give return 77% as compared to mutual fund at 23% return. It signifies mostly more people go for share market as compared to mutual funds.

68

Q3.

Your investment decisions are influenced by

Options Oneself Broker Eco policies Market research Friends/relatives Any other

No of respondents 24 36 20 12 8

40 35 30 e g a25 t n e c20 r e P 15 10 5 0

36

Oneself Brokers

24 20
Eco. Policies Market Ramous

8
Friends/Relatives

Invest ment Decisions

INTERPRETATIONS:
How do investors take their investment decisions is presented in this bar graph. In this graph it is evident that mostly investment decision are taken on the insistence of the brokers firms and companies and that percentage is 36%.

69

Q4. Are you satisfied with your current investment?

OPTIONS YES NO NO OF RESPONENTS 42 58

42% 58%

Yes No

INTERPRETATIONS:
That chat is show the satisfaction level of current investment( in share) and long term investment(mutual fund) than here shows that the satisfaction level in current investment (shares) is 58% and satisfaction in long term investment (mutual fund) is 42%.

70

Q6.What are the factors which you considered before investing in particular company?

OPTIONS Financial potions Current market position Goodwill Future prospects Any other

NO OF RESPONDENTS 24 36 20 12

Financial Positions

40 35 Percentage 30 25 20 15 10 5 0 24

36
Curre nt marke t Positions

20 12 8

G oodwill

Future Prospe cts

Any othe r

factors

INTERPRETATIONS:
What factors are necessary before the investment in company or in firm is show in this bar graph. It is evident that in the current market position accounts for 36% , most investors go for investment after seeing the current market positions and after that the financial position of company which is at 24%, then goodwill of company at 20%,future prospects at 12%,and any other factors at 8%.

71

OBSERVATIONS & FINDINGS

most people go for at 1st EQUITY investment then for MUTUAL FUND, FIXED DEPOSITS AND INSURANCE. Because equity gives good return in short time as well as long term as compared to mutual fund.

77% as compared to mutual fund at 23% return. It signifies mostly more people go for share market as compared to mutual funds.

mostly investment decision are taken on the insistence of the brokers firms and companies and that percentage is 36%.

the

satisfaction

level

of

current

investment(

in

share)

and

long term

investment(mutual fund) than here shows that the satisfaction level in current investment (shares) is 58% and satisfaction in long term investment (mutual fund) is 42%.

the investment in company or in firm is show in this bar graph. It is evident that in the current market position accounts for 36% , most investors go for investment after seeing the current market positions and after that the financial position of company which is at 24%, then goodwill of company at 20%,future prospects at 12%,and any other factors at 8%.

72

Conclusion
From the analysis we can say that if there is more risk there is more return and we can say that share market is totally dependent on the risk taken by the investors in investing in shares. And in mutual funds there is less risk as the money of investors invested in different sectors so it can divide the risk in different portfolio adopted by mutual funds companies.

At last I can say that money invested in this rise and fall market it is better to invest in mutual funds for those investors who are risk adverse and for those who are risk taker it is better for them to invest in share market.

We can also say that in share market customers is decision maker while in mutual funds investors is totally dependent on assets management company, investors do not have active control on money invested by him/her.

In OJT (on the job training)the strategy adopted by me in achieving my target helped me a lot. This strategy helped me in knowing the customer reaction towards share market, customers attitude towards share broking firms and in this I helped how to interact with the customers which is beneficial for me in future.

73

CHAPTER 7

CONCLUSIONS (EXPERIENCE AND LEARNING)

74

I was basically working in the marketing department of the organization my roles was to generate leads and try to convert those leads into our clients. Training started from cold calling to tele-calling and then trading and at last inviting remisers to work for us. I can say it was a mixture of both marketing and finance department where marketing was more in comparison to finance.

Merits capital as a business unit was superb, in my first month of training I was asked to sit in the corporate office which is at Apsara Arcade facing Karol Bagh metro station so the environment at that place was chill but yet pressures were there as

Mr. Dilmeet Sir(M.D) and Mr. Guneet Sir( vice president operations ) sit in that office so it was a mix of happy moments and some pressure moments as well. Then in the second month I was transferred to the head office of Merits which is just 10 minutes walking distance from corporate office there the environment was full of fun and enjoyment because in that office all the colleagues were energetic and there was no pressure from the top level management. But it was a very good learning working under talented and experienced staff members.

The objective of Merits capital:-

To be among the top broking firms

Customer satisfaction

Maximize his/her investments and minimize the losses

Quality services

Helping customers at all possible situations

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The monitoring and the supervision was too good they used to give me the work and after one week the results of that work used to be checked and if any problems occur then they used to suggest ways in order to correct that problem in future.

The responsibilities given to me were: Generate leads Promote the product and services Generate remisers Arranging meeting with customers Trading

The challenges which I faced were: Response from people were not good some people even used abusive languages Prospects were their but could not convert them Got irritated by failure

Achievements: Confidence Improved communication skills Immense knowledge on share market Patience Team work

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LEARNINGS

LEARNINGS: During my summer training, I have learned:

Importance of information technology in the field of stock broking is immense. Stock broking companies run with the help of IT. The terminal through which the brokers buy and sell shares is software that completely depends on the internet. For ODIN software , this terminal has been designed by the software company Right Query Technologies Pvt. Ltd . Buying and selling through internet is fast. As soon as the prices of the shares goes up or comes down then they can be sold or purchased instantly within seconds. Customer Relationship is very necessary for the company to retain the customers. In Merits Capital . I have learned a lot relating to the finance, learned the meaning of the words that are mostly used in the share market. Learned about various products of the Merits Capital , Learned various aspects regarding Share Market. Learned how to use online trading terminal. Learned the various policies of the company. Learned about various products used in the share market especially Demat accounts and Derivatives.

Got the practical knowledge of the market.

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FINDINGS AND OBSERVATIONS:-

Fluctuations are more in secondary market than any other market. There are more speculators than investors. Information plays a vital role in the secondary market. Previously rolling settlement is T+3 days, now it changed to T+4 days and further it will be changing to T+5 days.

It was also observed that many broking houses offering internet trading allow clients to use their conventional system as well just ensure that they do not loose them and

this instead of offering e-broking services they becomes service providers. The number of players is increasing at a steady rate and today there are over a dozen of brokerage houses who have opted to offer net trading to their customers and prominent among them are SHARE KHAN, India bulls, kotakstreet, ICICI direct.

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CONCLUSION
The Indian stock market witnesses both the good as well as the bad time. Most of the people keep them away from bad times that lead to low liquidity in the markets. But for the rest who want to remain in the markets without loosing much of their capital and take leverage of the market movements in both north and south directions, Derivatives Instruments are the tools to be with.

By studying and applying various Derivative Instruments like Futures, Forwards and Option strategies, I came to a conclusion that these instruments are the best ones to turn the bad time into a good one i.e. to earn profits in any market direction.

Therefore, Derivative Instruments are a very good tool that will help us to minimize our risk and maximize our returns so that one can have conviction in his portfolio in the hugely volatile stock market

Finally, the objective of the study is accomplished and I recommend that one should use the Derivative Instruments, as it is very much applicable in the Indian Stock Market.

Things have changed for the better with the Merits Capital going on-line coupled with endeavor to stream line the whole trading system, things have changed dramatically over the last 3 to 4 years. New and advanced technologies have breached geographical and cultural barriers, and have brought the countrywide market to doorstep.

The introduction of on-line trading would influence the investors resulting in an increase in the business of the exchange. It has helped the brokers handling a vast amount of transactions and this can be an efficient trading, delivering, settlement system with adequate protection to investors. The trading of Merits Capital of the first day was Rs. 50 lakhs.

Due to invention of online trading there has been greater benefit to the investors as they could sell / buy shares as and when required and that to with online trading. 79

The brokers has a greater scope than compared to the earlier times because of invention of online trading.

The concept of business has changed today, this is a service oriented industry hence the survival would require them to provide the best possible service to the clients.

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CHAPTER 8

RECOMMENDATIONS

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RECOMMENDATIONS

I recommend the exchange authorities to take steps to educate Investors about their rights and duties. I suggest to the exchange authorities to increase the investors confidences.

I recommend the exchange authorities to be vigilant to curb wide fluctuations of prices.

The speculative pressures are responsible for the wide changes in the price, not attracting the genuine investors to the greater extent towards the market.

Genuine investors are not at all interested in the speculative gain as their investment is based on the future profits, therefore the authorities of the exchange should be more vigilant to curb the speculation.

The company needs to work on its marketing department in order to attract more number of clients under their name and they are capable of doing this but for that they seriously need to work hard in marketing department.

Company should find new marketing people who will only do marketing and the RMs (relationship manager) role should be only confined with dealing to their customers queries and trading on behalf of their clients. If the role gets clashed then there may exist problems which would affect the company and would bring down the morale of its staff. So a proper marketing department should be set up.

Company should try and retain their old staff because these were the people who stood by the company in their hard times so efforts should be made to retain the old n experienced staff.

Branches of the company are basically situated in central delhi , so many people were not even aware about the company so Merits Capital should advertise so that people should get aware about the company and its products and services.

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CHAPTER 9

BIBLOGRAPHY

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BIBLOGRAPHY
www.economictimes.com www.merits.in www.moneycontrol.com www.bseindia.com www.nseindia.com www.sebi.gov.in www.investors.com www.investopedia.com www.wikipedia.com www.google.com

BOOKS: Beri G.C, Marketing Research Gupta C.B, Marketing Management.

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CHAPTER 10

GLOSSARY

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APPENDIX
ADJUSTED STRIKE PRICE: Strike price of an option, created as the result of a special event such as stock split or a stock dividend. The adjusted strike price can differ from the regular intervals prescribed for strike prices. ARBITRAGE: A trading technique that involves the simultaneous purchase and sale of identical assets or of equivalent assets in two different markets with the intent of profiting by the price discrepancy. AT PRICE: When you enter a prospective trade into a trade parameter, the "At Price" (At. Pr) is automatically computed and displayed. It is the price at which the program expects you can actually execute the trade, taking into account "slippage" and the current Bid/Ask, if available. AVERAGING DOWN: Buying more of a stock or an option at a lower price than the original purchase so as to reduce the average cost. BEAR, BEARISH: A bear is someone with a pessimistic view on a market or particular asset, e.g. believes that the price will fall. Such views are often described as bearish. BREAK-EVEN POINT: A stock price at option expiration at which an option strategy results in neither a profit or a loss. BULL, BULLISH: A bull is someone with an optimistic view on a market or particular CANCELED ORDER: A buy or sell order that is canceled before it has been executed. In most cases, a limit order can be canceled at any time as long as it has not been executed. (A market order may be canceled if the order is placed after market hours and is then canceled before the market opens the following day). A request for cancel can be made at anytime before execution.

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CASH SETTLEMENT: The process by which the terms of an option contract are fulfilled through the payment or receipt in Rupees of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock. CLOSING TRANSACTION: To sell a previously purchased position or to buy back a previously purchased position, effectively canceling out the position. COMMISSION: This is the charge paid to a broker for transacting the purchase or the sale of stock, options, or any other security. COMMODITY: A raw material or primary product used in manufacturing or industrial processing or consumed in its natural form. CONTRACT SIZE: The number of units of an underlying specified in a contract. In stock options the standard contract size is 100 shares of stock. In futures options the contract size is one futures contract. In index options the contract size is an amount of cash equal to parity times the multiplier. In the case of currency options it varies. DAY ORDER: An order to purchase or sell a security, usually at a specified price, that is good for just the trading session on which it is given. It is automatically cancelled on the close of the session if it is not executed. DAY TRADE: A position that is opened and closed on the same day. DEBIT: The amount you pay for placing a trade. A net outflow of cash from your account as the result of a trade. DYNAMIC HEDGING: A short-term trading strategy generally using futures contracts to replicate some of the characteristics of option contracts. The strategy takes into account the replicated option's delta and often requires adjusting. EQUITY OPTION: An option on shares of an individual common stock. Also known as a stock option.

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EXCHANGE TRADED: The generic term used to describe futures, options and other derivative instruments that are traded on an organized exchange. FLEXIBLE EXCHANGE OPTIONS (FLEX): Customized equity and equity index options. The user can specify, within certain limits, the terms of the options, such as exrcise price, expiration date, exercise type, and settlement calculation. Can only be traded in a minimum size, which makes FLEX an institutional product. FRONT MONTH: The first month of those listed by an exchange - this is usually the most actively traded contract, but liquidity will move from this to the second month contract as the front month nears expiration. Also known as the NEAR MONTH. FOLLOW-UP ACTION: Term used to describe the trades an investor makes subsequent to implementing a strategy. Through these adjustments, the investor transforms one strategy into a different one in response to price changes in the underlying. HEDGE: A position established with the specific intent of protecting an existing position. Example: an owner of common stock buys a put option to hedge against a possible stock price decline. IMMEDIATE-OR-CANCEL (IOC) ORDER: An option order that gives the trading floor an opportunity to partially or totally execute an order with any remaining balance immediately cancelled. INDEX: The compilation of stocks and their prices into a single number. E.g. The BSE SENSEX / S&P CNX NSE NIFTY. INDEX OPTION: An option that has an index as the underlying. These are usually cash-settled. IN-THE-MONEY (ITM): Term used when the strike price of an option is less than the price of the underlying for a call option, or greater than the price of the underlying for a put option. In other words, the option has an intrinsic value greater than zero. 88

LEAPS: Long-term Equity Anticipation Securities, also known as long-dated options. Calls and puts with expiration as long as 2-5 years. Only about 10% of equities have LEAPs. Currently, equity LEAPS have two series at any time, always with January expirations. Some indexes also have LEAPs. LEGGING: Term used to describe a risky method of implementing or closing out a spread strategy one side ("leg") at a time. Instead of utilizing a "spread order" to insure that both the written and the purchased options are filled simultaneously, an investor gambles a better deal can be obtained on the price of the spread by implementing it as two separate orders. LEVERAGE: A means of increasing return or worth without increasing investment. Using borrowed funds to increase one's investment return, for example buying stocks on margin. Option contracts are leveraged as they provide the prospect of a high return with little investment. MARGIN: The minimum equity required to support an investment position. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm. MARKET BASKET: A group of common stocks whose price movement is expected to closely correlate with an index. MARK TO MARKET: The revaluation of a position at its current market price. MARKET MAKER: A trader or institution that plays a leading role in a market by being prepared to quote a two way price (Bid and Ask) on request - or constantly in the case of some screen based markets - during normal market hours. NET MARGIN REQUIREMENT: The equity required in a margin account to support an option position after deducting the premium received from sold options. NEUTRAL: An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.

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ONE-CANCELS-THE-OTHER (OCO) ORDER: Type of order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount. Can be placed as a day or GTC order. OPTION CHAIN: A list of the options available for a given underlying. OPTIONS CLEARING CORPORATION (OCC): A corporation owned by the exchanges that trade listed stock options; OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all option contracts. OVERVALUED: An adjective used to describe an option that is trading at a price higher that its theoretical value. It must be remembered that this is a subjective evaluation, because theoretical value depends on one subjective input - the volatility estimate. PARITY: An adjective used to describe the difference between the stock price and the strike price of an in-the-money option. When an option is trading at its intrinsic value, it is said to be trading at parity. PUT/CALL RATIO: This ratio is used by many as a leading indicator. It is computed by dividing the 4-day average of total put VOLUME by the 4-day average of total call VOLUME. RATIO CALENDAR COMBINATION: A term used loosely to describe any variation on an investment strategy that involves both puts and calls in unequal quantities and at least two different strike prices and two different expirations. REALIZED GAINS AND LOSSES: The profit or losses received or paid when a closing transaction is made and matched together with an opening transaction. ROLLOVER: Moving a position from one expiration date to another further into the future. As the front month approaches expiration, traders wishing to maintain their positions will often move them to the next contract month. This is accomplished by a simultaneous sale of one and purchase of the other.

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SEC: The Securities and Exchange Commission. The SEC is the United States federal government agency that regulates the securities industry. SETTLEMENT PRICE: The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements, and for other purposes. See mark-to-market. STRIKE PRICE: The price at which the holder of an option has the right to buy or sell the underlying. This is a fixed price per unit and is specified in the option contract. Also known as striking price or exercise price. TECHNICAL ANALYSIS: Method of predicting future price movements based on historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume. TIME DECAY: Term used to describe how the theoretical value of an option "erodes" or reduces with the passage of time. Time decay is quantified by Theta. TRADING PIT: A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock. UNREALIZED GAIN OR LOSS: The difference between the original cost of an open position and its current market price. Once the position is closed, it becomes a realized gain or loss.

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