EQUITIES AND DERIVATIVES

Topics
STOCK MARKETS INDIAN STOCK MARKETS INVESTMENT IN STOCKS BROKING BUSINESS BUSINESS OF ADVICE

FIRST STOCK EXCHANGE in the WORLD? FIRST COMPANY LISTED on the STOCK EXCHANGE?

Is this how you feel???

WHAT IS AN EQUITY / SHARE ? HOW SHARES ARE TRADED WHAT IS BROKING BUSINESS

WHAT IS EQUITY ADVISORY

WHAT IS an EQUITY, SHARE or STOCK ?

STOCKS
Stocks or Shares represent the ownership of a company in proportion to stocks or shares held Stock represents a claim on the company's Assets , Earnings and have Voting Rights Holding a company's stock means that you are one of the many owners

FEATURES
Entitled to a portion of the companys profits and have a claim on assets
Claim on profit Dividend, if paid out Claim on Asset Residual claim if business is liquidated

Limited liability
Liability limited to amount paid to buy stocks

Tradability
Stock are tradable at recognised stock exchanges through its members (Stock Brokers)

WHY we NEED STOCK MARKETS?

Capital Requirement of a Company: LONG TERM

Sources of New Capital for companies

Requirements of Capital Providers:??? SHORT TERM / MEDIUM TERM / LONG TERM

Investors can convert their stock into cash

STOCK EXCHANGE
A common place for buyer and sellers

WHY DOES a COMPANY ISSUE STOCKS ?

 Why would the Promoters share the profits with thousands of people when they could keep profits to themselves? The reason is that company needs to raise money. Companies can either borrow it, DEBT FINANCING or raise it by selling part of the company, EQUITY FINANCING

WHAT is the DIFFERENCE BETWEEN BANKING SYSTEM and CAPITAL MARKETS?

Equity Issuance
In practice a company offers its shares to several interested participants; institutions and individuals When a company issues its equity for the first time (through Initial Public Offer) it decides on offer price Post listing, at stock exchanges market participants decide the price.

WHAT is an IPO?

AN EXAMPLE
Recently, The Aditya Birla-owned Idea Cellular, entered the capital market on Feb 12 with an initial public offering (IPO) aggregating Rs. 2,125 crore of equity shares of Rs. 10 each for cash at a premium to be decided through the 100 per cent bookbuilding process The price band for the issue was fixed between Rs 65 and Rs 75 per equity share Shares were issued at Rs.75 and listed at NSE and BSE now trading at Rs.90 per share

WHY COMPANIES go FOR LISTING?

Listing of Securities
A security is said to be listed when, at a stock exchange, it is added to the list of securities in which trading is permitted

WHAT are the ADVANTAGES of LISTING?

FOR CAPITAL PROVIDERS : Ready marketability and liquidity Ensure proper supervision and control in dealing Protect the interest of shareholders FOR COMPANIES : Cost-effective access to capital The highest visibility and the fairest pricing

WHAT are PRIMARY MARKETS and SECONDARY MARKETS?

Primary and Secondary Market

The primary market is where securities are created (by means of an IPO) In the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies When we talk about markets we refer to secondary market

WHAT is the REGULATORY STRUCTURE ?

Ministry of Finance SEBI Stock Exchange Broker Advisor

WHAT are MARKET ACTIVITIES?

Market Place
The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers Interactive ,Information driven and Volume driven Stocks are held and traded in Demat form Tech savvy & Screen based trading Expanding product range Advanced settlement and regulatory mechanism in place Major Stock Exchanges are BSE NSE

Market Activities
Normal working hours 9.55 am to 3.30 pm, Monday to Friday Buying and Selling of stocks during this period moves price up or down When we talk about markets are up or down we refer to market indices

WHAT was the SENSEX / NIFTY YESTERDAY?

DO we need MARKET INDICE?

HOW SENSEX and NIFTY INDICES are CALCULATED?

Some Indices -BSE

Sensex
Seen as barometer of Indian Capital Market Comprises of 30 high market cap / liquid stocks Free Float based calculation

BSE-100
Broad based index of 100 stocks Stocks inclusion based on market activity and industry representation.

Some Indices - NSE

S&P CNX Nifty
Index of well diversified 50 stocks Benchmark for index funds and index based derivatives Market Cap based calculation CNX IT: Index of IT companies BANK NIFTY: Index of Banking Companies

DO you/family INVEST in STOCKS? YES ? NO ?

HOW EQUITY SHARES are TRADED?

Bank A/c

DEMAT

BUYER

BROKER
STOCK EXCHANGE

SELLER

BROKER
Cash

Bank A/c

DEMAT

Shares

The process is not that Easy !

Market liquidity may not be there Large spread in Bid and Ask Impact cost Required quantity is not available to buy / sell Buyer has bought the shares but delivery is not available or vice-versa

BID and ASK for TAJGVK

Order Book Buy Qty 100 100 50 100 300 7522 Buy Price 183.3 183.25 183.2 183.15 183 Total Buy Qty Sell Price 184.4 184.45 184.5 184.75 184.9 Total Sell Qty Sell Qty 22 50 26 1 5 5839

Depository
Shares held in Demutualization form. Transferred in electronics forms. Two types of depositories.
NSDL CDSL

DP With POA and without POA.

DP with POA means investors gives right to its trading member to settle their trades on behalf of him. DP without POA means Investors have to give DIC slips at time when he sold his scrips. Please refer to Statement -1.

Share transfer process

Off- Market Transfer- Transaction take place between same depository. Inter depository Transfer Transaction takes place between two different depository.

LEDGER & BILLING

Ledger Statement of a/c which reveals the daily transaction of the clients. Billing Confirmation of all trades relating gross purchase and gross sale from exchange. Timing between 4:30 to 5:30. Please refer statement -2

Auction and Short Delivery

Auction- Initiated by exchange on behalf of Trading Member. Suppose Mr. A place buy order for 1000 share of TISCO at 11:22:01 for Rs 450 per share and Mr. B places a sell order for 2000 share of Tisco at 11:22:05 for 455 per share. Assume that no other order were available in the system . Mr. B sold extra 1000 share and he have no delivery . Auction Takes Place on T+ 3 days Close Out on T+ 5 Days

Auction Calculated:
The closing price of TISCO on 21st March= 455 Last traded price of TISCO = 450 The Previous day close price on 23rd March = 465. The difference between the closing price on 21st March and Previous close price is Rs 10. Suppose price band of auction is (-/+ 15%). = 465 * 1.15 = 535 Penalty paid by MR. B

Short Delivery
Suppose Mr. A place buy order for 1000 share of TISCO at 11:22:01 for Rs 450 per share and Mr. B places a sell order for 500 share of Tisco at 11:22:05 for 455 per share. Assume that no other order were available in the system . Mr. B sold extra 1000 share and he have no delivery . Auction Takes Place on T+ 3 days Close Out on T+ 5 Days

FOR CLIENTS : What are the STOCK MARKETS for

 Achieving financial goals Speculation ( Perception of easy money) Excitement !!!

NUMBER of PEOPLE INVESTING in the STOCK MARKET? NUMBER of DP ACCOUNTS in INDIA?

CLIENTS

Client Profiling
Profiling is required to assess level of risk tolerance

To categorise client in three categories

Investor Investor & trader Trader

Leads to higher productivity Long term relationship with the client

An Example
Rakesh purchased 1000 shares of Satyam @ 475 per share for long term and at the same time 1000 shares of satyam are bought by Rajiv @ 475 per share and sold it next week @ Rs 490 and booked the profit of Rs.15000 Rakesh is an investor while is Rajiv a Trader

Investors Vs Traders
Investor
For Long Term Follows Fundamentals Stays invested as long as theme is continuing

Trader
For short term Follows Technical

Trades with Stop Loss and Price Target

Client Classification
Type of Clients PCG PCG U-HNI MN+ HNI MNI Net-worth Potential Channel Rs By 2010 > 5 crs > 4 crs 3-5/4 crs 1-3 crs 0.50 LACS PCG, EB 1.50 LACS BR, EB 10 LACS BR, EB Brokerage Rs. p.m. 1,00,000 + 50,000+ 20,000+

10 / 25 25 LACS lacs- 1 crs < 25 lacs <10 lacs

BR, FR, EB 6000+

Retail

Retail

1150 LACS BR, FR, EB 6000-

KNOW YOUR CLIENT

Primary Interest Occupation Risk App-cap Net-worth DayTrader Business High HNI Positional Trader Self Emp Medium MNI Validator Investor Salaried Low Retail Delegator

Participate- Self ion Directed

CLIENT / PRODUCT / CHANNEL

CHANNEL TYPE INVESTOR TYPE HNI MNI Small Investor MF

PREMIUM Delegator

PMS-MF

PMS-MF

Validator

Broking: EQ & CX Internet EQ & CX

Broking: EQ Broking: & CX EQ & CX Internet EQ & CX Internet EQ & CX

DISCOUNT

Self -directed

Allocations
ASSET ALLOCATION STYLE ALLOCATION SECTOR ALLOCATION SCRIP ALLOCATION

DIFFERENT ANALYSIS USED in STOCKS BEFORE TAKING a POSITION

A. Fundamental Analysis B. Technical Analysis & Information

HOW FUNDAMENTAL ANALYSIS is DIFFERENT from TECHNICAL ANALYSIS

Product Grid
Investors are advised by dedicated relationship managers through various advisory products
Market Analysis Regular Yearly Wealth Creation report Quarterly Monthly Weekly Daily
MOSt Momentum Futures Weekly

Technical Analysis

Fundamental Research Inquire Company & Sector reports

Thematic Research

Results Preview

India Budget Coverage Strategy

MOSt Value MOSt Mutual MOSt Morning Research

Guide MOSt Commodity Morning Calls Derivative Strategy Market Dairy Market Hours
Market Information &

Intraday Calls

Pivot Points MOSt Market Action

DO you know COMMONLY USED TERMS in the STOCK MARKETS

 Bull market Bear market Large Cap Shares Mid Cap Shares Blue Chip Shares

 Market Capitalization or Market cap

Floating share x Market price per share

Earnings per share

Equity earnings / Number of Outstanding shares

Price to Earnings ratio (P/E)

Market price per share / Earnings per share

Return on Equity
Equity earnings / Networth

WHAT is the ROLE of a BROKER ? WHAT is BROKING BUSINESS?

Why Broker ?
A stock broker sells or buys stock on behalf of its clients A transaction on a stock exchange must be made between two members of the exchange A typical person may not simply walk into the Bombay Stock Exchange, and ask to trade stock. Such a transaction must be done through a broker

Transaction Network
Equity share trading is regulated through a exchange. The exchange takes care of smooth trading and timely settlement of outstanding dues. All these done through proper network. The exchange have a network of Brokers ,Sub-brokers and a clearing corporation. The brokers and sub brokers under takes the timely delivery and settlement of funds and share. The clearing corporation undertakes the transaction of brokers on behalf of the exchange.
(clear and settle) - (Execute orders)- (Purchase& sale of securities) Stock exchange ------ Brokers----------- buyer/seller

WHAT is the REVENUE MODEL for a TRADITIONAL STOCK BROKER ?

Brokerage Firms And Brokerage

Revenue for a broker is charges and commission, known as brokerage for executing buy/sell order submitted by the clients Eg: If 1000 shares of Reliance @ 1200 are bought by a client and the brokerage charges are 0.50 %, then the brokerage income from this transaction is (1000 x 1200 x0.50%) Rs 6000/-

WHAT are the COST COMPONENT of a CLIENT in a SHARE TRANSACTION

Charges Brokerage Stamp Duty Transaction Charges Contribution to Investor Protection Fund Service Tax Securities Transaction Tax (STT)

Income Source for Broker State Govt. Exchange Exchange ( For Investors) Central Govt. ( On Brokerage) Central Govt.

TRADING NonBrokerage STT 0.006% 0.025%

DELIVERY F&O 0.014% 0.125% 0.0041% 0.017% (only SELL) 12.24%

Service Tax 12.24%

12.24%

Different Types of Brokerages Cash Market

Intraday (0.01%-0.10%) Delivery (0.10%-0.50%)

Derivatives Market
Intraday (0.01%-0.10%) Carry Forward ( )

Cash Market-Intraday
The client wants to earn the price differential in the same day. i.e. The position is entered and squared off in the same trading session The Brokerage rates are typically lower in such kind of transaction, since there is no share settlement There is also a concept of single side and double side brokerage varies from region to region

Benefit For Brokers

Intra day example 1000 share of Reliance bought @ 1100 and sold @ 1150 on the same day, brokerage rate is 0.05% both sides Revenue is (1000 x 1100 x 0.05%) Rs 550 one sided and (1000 x 1150 x 0.05%) Rs 575 = Rs 1125 1000 share of Reliance bought @ 1100 and sold @ 1150 on the same day, brokerage rate is 0.07% one side Revenue is (1000 x 1100 x 0.07%) Rs. 770

Cost Pay by the client

Revenue is (1000 x 1100 x 0.05%) Rs 550 one sided and (1000 x 1150 x 0.05%) Rs 575 = Rs 1125.Charged on Total turnover. Services tax is 12.24% charged on total brokerage =67.32 Transaction charge 0.004 %Charged on total turnover= 44. STT is 0.025% charged on total turnover = 275 Stamp duty is 0.0024% charged on total turnover = 26.4 Total Cost of Purchase = 1100962.72

Cash Market-Delivery
The client purchases or sells in a single trading session which results in actual delivery of stocks The Brokerage rates are higher in such kind of transaction, since there is share settlement

Delivery Example
If 1000 shares of Reliance @ 1200 are bought by a client and the brokerage charges are 0.50 %, then the brokerage income from this transaction is (1000 x 1200 x0.50%) Rs 6000/ If 1000 shares of Reliance @ 1200 are bought by a client and the brokerage charges are 0.20 %, then the brokerage income from this transaction is (1000 x 1200 x0.20%) Rs 2400/ Brokerage income has come down significantly because of pricing Therefore negotiating correct pricing is one of the most important part of converting broking accounts

Derivatives Intraday
The client wants to earn the price differential in the same day. i.e. The position is entered and squared off in the same trading session The Brokerage rates are typically lower in such kind of transaction, since there is minimum value of Rs 200 000 per transaction Brokerage rates vary between 0.01% to 0.10% on the value of transactions There is also a concept of single side and double side brokerage varies from region to region

Intraday Example
A client enters into a contract to buy one lot of Reliance March Futures(150 shares lot) @ 1250 brokerage 0.03% and sells @ 1280 brokerage 0.03% Revenue is (150 x 1250 x 0.03%) Rs 57 and ( 150 x 1280 x 0.03%) Rs 58 so, total is Rs 115 Similarly if the selling is done on the next day with the same brokerage rate then also the revenue will remain the same

Derivatives-Carry Forward
The position is entered and squared off in different trading session The Brokerage rates are typically very much similar to intraday brokerage rates, since in F&O exchanges have not yet started settlement by stock deliveries Brokerage rates vary between 0.01% to 0.10% on the value of transactions

WHY BROKING is a GREAT BUSINESS?

 In the developed markets at least one broking firm is among the top 10 in terms of market capitalization If the market are bullish the broking firms tend to make super normal profits You are aware that bonuses at times exceed the whole years CTC in broking firms This is where a great opportunity lies to make a rewarding and profitable career, if you are able to properly get a hang of direct equities business

Business Risk
Fortunes of a broking firm are cyclical in nature If the market are bearish for a vary long time profits are substantially squeezed

Direct Vs Indirect Investing

Broking Revenue Scope Rs 10 00 000 x 2 times delivery per month x 12 months x 0.30 % delivery brokerage = Rs 72000 Mutual Fund Revenue Scope Rs 10 00 000 x 2 times churning in a year x 2 % = Rs 40000

Risks are higher, since costs are Risks are lower higher and holding period is very less

A BROKARGE FIRM
Two facets Front office and back office Front office: Functions of the front office include acquisition, Relation ship management, Advise and entry of orders. Back office: Clearance processing, ensures payment and shares delivery

WHAT is the DIFFERENCE BETWEEN BROKERAGE FIRM and MOSt?

The product is:

ADVICE

EQUITY Advisory
Recommend Investment and Trading ideas to their clients. The Clients receive the research and the business receives the revenue

Research Team Research Ideas

Strategy Desk Idea Filtering

Advisors Ideas according to Profile

Clients

THANK YOU