Securities trading

Introduction• Securities : Equities or debentures of publicly traded

companies that are bought and sold through brokerage firms.

• Trading : Purchase or sale of a specific security through a registered representative or a firm

• Securities trading : Financial activity involving transactions of property such as stocks, bonds, commodities, and currency.

Rewards• The profits that can be made in the short term by

trading securities is enormous.

• Investors who can time the market have the ability to reap the highs while re-buying at lows. Unlike long-term investors who ride out the high and lows of investments.

• Mutual fund managers make a living by moving capital in and out of securities by timing news, technology and sales reports.

Risks• Many long-term financial advisers compare trading

securities to gambling.

• The investor may be lucky once or twice, but more than likely does not have the resources or time to follow the international market and how it affects domestic securities for well-timed trades.

• Ultimately, the possibility of high returns is slapped with the reality of extremely fast losses.

Risks cntd

• Additionally, the constant buying and selling, even for successful investors, may have a good portion of profits eaten up by capital gains taxes.

Types of Orders

Placing orders correctly is probably one of the most important aspects of trading. It is vital that you understand and use the correct order when you trade.

Types of orders cntd

• Market orders : This is an order to buy or sell a specific number of shares at the best price available at the time the order is routed to the trading floor.

• Limit orders : A limit order permits you to specify the lowest or highest price at which you will sell or buy a specified number of shares. A buy limit order is placed below the current market price .

Types of orders cntd

• Stop loss orders : Probably the most important and most commonly used order. It can be used to establish a new position, limit a loss on an existing position, or protect a profit. A stop order specifies a price at which an order is to be executed.

• Stop limit order : This order is a combination of both a stop and a limit order. This type of order specifies both a stop price where the trade is activated and a limit price to close the position. Once the stop is elected, the order becomes a limit order.

Types of orders cntd

• Market on open (MOO) : This order as the name implies will be executed at the opening price of the market.

• Market on closed (MOC) : Order is executed on the close of the market. In some markets the actual closing price may be different from the settlement price particularly if it's a fast moving market.

• Market if touched (MIT) : Like the stop order the MIT order is executed if the market price reaches the MIT price you have elected.

Types of orders cntd

• Good till cancelled : This type of order is also known as an 'open order' the order remains in effect until the order is executed or the trader cancels the order.

• Fill or kill (FOK) : This order is sent to the pit and should be executed immediately. If the order cannot be filled immediately the order is canceled.

Types of orders cntd

• All or none : This is essentially a limit order to buy or sell a security. The important point of this order is that the total order must be filled or none of it.

• Day order : An order that terminated automatically at the end of the day.

Margin trading

• Buying on margin is borrowing money from a broker to purchase stock.

• You can think of it as a loan from your brokerage. • Allows to buy more stock than you'd be able to

normally. • To trade on margin, you need a margin account. This

is different from a regular cash account, in which you trade using the money in the account.

Basics of Margin Trading

• Minimum margin.• Initial margin.• Maintenance margin.• Margin call.• Margin securities - Collateral.

Margin call

• If the equity (value of securities minus what you owe the brokerage) in your account falls below the maintenance margin, the brokerage will issue a "margin call".

• A margin call forces the investor to either liquidate his/her position in the stock or add more cash to the account.

Margin Trading- Advantages

• Leverage : Amplifies every point that a stock goes up. If you pick the right investment, margin can dramatically increase your profit.

• Opportunity to amplify your returns• No comparison between time spent and

money gained.

Margin trading : Risks

• Double edged sword. (leverage)• Interest should not be forgotten.• Lose more than the initial investment in case

of loss.

Clearing and settlement procedure

• There are many key role players

a)Clearing corporation,

b)Clearing members,

c)Custodians,

d)Clearing banks,

e)Depositories,

f) Professional clearing member.

Clearing Corporation• The clearing corporation is responsible for post-trade activities

such as risk management and clearing and settlement of trades executed on a stock exchange.

• The first clearing corporation to be established in the country and also the first clearing corporation in the country to introduce settlement guarantee is the National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE. NSCCL was incorporated in August 1995.

• It was set up with the objectives of bringing and sustaining confidence in clearing and settlement of securities; promoting and maintaining short and consistent settlement cycles; providing counter-party risk guarantee, and operating a tight risk containment system.

Clearing Members

• Clearing Members are responsible for settling their obligations as determined by the clearing corporation.

• They do so by making available funds and/or securities in the designated accounts with clearing bank/depositories on the date of settlement.

Custodians

• Custodians are clearing members but not trading members. They settle trades on behalf of trading members. Once the custodian is confirms that he would settle trade, then clearing corporation assigns that particular obligation to him.

• As on date, there are 13 custodians empanelled with NSCCL.

• Example : Axis bank, Standard chartered bank etc.

Clearing banks

• They are a key link between the clearing members and Clearing Corporation to effect settlement of funds.

• Every clearing member is required to open a dedicated clearing account with one of the designated clearing banks.

• There are 13 clearing banks.

Depositories

• The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa as per the schedule of allocation of securities.

• The two depositories in India are the National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL).

Professional clearing members

• NSCCL admits special category of members known as professional clearing members (PCMs). PCMs may clear and settle trades executed for their clients individuals, institutions etc.).

• In such cases, the functions and responsibilities of the PCM are similar to that of the custodians. PCMs also undertake clearing and settlement responsibilities of the trading members.

Clearing and settlement process

Clearing and Settlement Process

1. Trade details from Exchange to NSCCL.

2. NSCCL notifi es the consummated trade details to clearing members/custodians who affirm back. Based on the affirmation, NSCCL applies multilateral netting and determines obligations.

3. Download of obligation and pay-in advice of funds/securities.

4. Instructions to clearing banks to make funds available by pay-in time.

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5. Instructions to depositories to make securities available by pay-in-time.

6. Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs and credit its account and depository does it)

7. Pay-in of funds(NSCCL advises Clearing Banks to debit account of custodians/CMs and credit its account and clearing bank does it)

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8. Pay-out of securities (NSCCL advises depository to credit pool account of custodians/CMs and debit its account and depository does it)

9. Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and clearing bank does it)

10. Depository informs custodians/CMs through DPs.

11. Clearing Banks inform custodians/CMs.

Core process involved

• Trade recording.• Trade confirmation.• Determination of obligation.• Pay- in of funds and securities.• Pay-out of funds and securities.