Financial System --1,2,q

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Chapter 1: Theoretical Framework/Conceptual Framework

a) Main Subject:

Overview of Indian Financial Systems

b) Topic related concepts:

.Equity 30 Companies

.Industry wise classification.

.

.Equity Index- What does it indicate?

What does it mean?

c) Difference of BSE & NSE

Chapter 2: The Present Study/Methodology

a) Need Significance of study

b) Objectives of Study

c) Scope of Study

d) Research Design

-Analysis Method

e) Presentation of Study

f) Limitation of Study

Chapter 3: Organization Profile

a) Industry Profile

b) Organization Profile

c) Topic Profile in the Organization (Equity Cash)

Chapter 4: Analysis of Investment in Equity Cash

a) Fundamental Factor

. Fundamental parameters used.

. Domestic & International Factors

b) Technical Factor

. Indicators (Stochastic, RSI, Moving Average)

. Patterns (Continuation & Reversal)

Chapter 5: Findings, Suggestions and Conclusions

a) Findings

b) Suggestionsc) Conclusions

Bibliography



Financial System of any country consists of financial markets, financial

intermediation and financial instruments or financial products.

the financial system is the system that allows the transfer of money between savers and borrowers.[1]

It comprises a set of complex and closely

interconnected financial institutions, markets, instruments, services, practices, and transactions.

Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate

investment funds among firms; they allow intertemporal sm oothing of consumption by households and expenditures by firms; and they enable households

and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies

widely.

A Financial System is a composition of various institutions, markets, regulations and

laws, practices, money manager, analysts, transactions and claims and liabilities.

Financial Controls and Monitoring

Financial controls and monitoring methods have a dual role in supporting in ternal needs and external requirements.There are ¿ve key aspects to ¿nancial

controls and monitoring. These include:

Accounting Records (or Accounts Receivable and Payable):

Establish a process that records every ¿nancial transaction by maintaining paper ¿les, an electronic database, and copying all records in a virtual library.

Your organization needs to be able to demonstrate what funds were received and how funds were spent. Accounting records should be consistent. Choose a

method and regular schedule for tracking income and expenses that works for your organization. This is important in case the organization is audited or if a

funder requests information for a speci¿c item or transaction. A system should also be developed to track donations from individuals to keep donors updated

of the organization¶s progress or to solicit annual and repeat contributions. A separate accounting system should be developed for f unding from foundations

with the original proposal and budget, dates of receipt of funds, notes on allowable expenditures, and reporting requirements so that you can respond to

funders¶ requests for ¿nancial records or in case of audits.

Financial Planning:

Financial planning converts your organization¶s objectives into a budget. The budget serves as a critical planning guide for your staff and governing board. It

is a public record for funders of how you intend to spend the funds received. Financial planning allows you to re view your organization, examining successes

and challenges in the past. Planning also enables you to make projections and set targets, informing strategies for future success.

Financial Monitoring and Reporting:

Drawing from the information in the accounting records, your organization can create internal reports that help monitor progress by comparing budgets to

actual expenses. Frequent reviews and monitoring allows the governing board and staff to measure your organization¶s progress and helps inform decision-

making about the organization¶s or a project¶s future. Internal reports, sometimes called management reports allow you to be forward thinking as you assess

the ¿nancial status of the organization and what w ill be needed to realize your goals. Accounting records are also the sourcefor creating e xternal ¿nancial



reports that demonstrate to funders and other stakeholders how funds have been spent. Funders may require ¿nancial reports at the completion of the

project or periodically during the project¶s implementation.

Governing Board:

A governing board, whether comprised by a board of directors or leadership from the comm unity, serves as stewards of an organization¶s resources.

Governing boards should participate in approving budgets, ¿nancal monitoring and reviews, and agree upon and ensure that internal controls are

implemented. The board treasurer who has skills in accounting should be the lead person in working with the staff in ensuring ¿nancial accountability.

Internal Controls:

Controls are organizational practices that help safeguard your assets and ensure that money is b eing handled properly. Controls help detect errors in

accounting, prevent fraud or theft, and help support the people responsible for handling your organization¶s ¿nances.

Introduction:

Economic growth and development of any country depends upon a well -knit financial

system. Financial system comprises, a set of sub-systems of financial institutions

financial markets, financial instruments and services which help in the formation of

capital. Thus a financial system provides a mechanism by which savings are transformed

into investments and it can be said that financial system play an significant role in

economic growth of the country by mobilizing surplus funds and utilizing them effectively

for productive purpose.

The financial system is characterized by the presence of integrated, organized and

regulated financial markets, and institutions that meet the short term and long term

financial needs of both the household and corporate sector. Bo th financial markets and

financial institutions play an important role in the financial system by rendering various

financial services to the community. They operate in close combination with each other.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely

connected or interlined institutions, agents, practices, markets, transactions, claims, andliabilities in the economy. The financial system is concerned about money, credit and

finance-the three terms are intimately related yet are somewhat different from each



other. Indian financial system consists of financial market, financial instruments andfinancial intermediation. These are briefly discussed below;

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or

transferred. As against a real transaction that involves exchange of money for real goods

or services, a financial transaction involves creation or transfer of a financial asset.Financial Assets or Financial Instruments represents a claim to the payment of a sum of

money sometime in the future and /or periodic payment in the form of interest or

dividend.

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging

from a single day up to a year. This market is dominated mostly by government, banksand financial institutions.

Capital Market - The capital market is designed to finance the long-term investments.The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are

met by the exchange of currencies. Depending on the exchange rate that is applicable,the transfer of funds takes place in this market. This is one of the most developed and

integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short,

medium and long-term loans to corporate and individuals.

Constituents of a Financial System

FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these financial

assets reach the ultimate investor in order to garner the requisite amount. When theborrower of funds approaches the financial market to raise funds, mere issue of

securities will not suffice. Adequate information of the issue, issuer and the security

should be passed on to take place. There should be a proper channel within the financial



system to ensure such transfer. To serve this purpose, Financial intermediaries cameinto existence. Financial intermediation in the organized sector is conducted by awiderange of institutions functioning under the overall surveillance of the Reserve Bankof India. In the initial stages, the role of the intermediary was mostly related to ensure

transfer of funds from the lender to the borrower. This service was offered by banks,FIs, brokers, and dealers. However, as the financial system widened along with the

developments taking place in the financial markets, the scope of its operations also

widened. Some of the important intermediaries operating ink the financial marketsinclude; investment bankers, underwriters, stock exchanges, registrars, depositories,

custodians, portfolio managers, mutual funds, financial advertisers financial consultants,primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets

are different, there may be a few intermediaries offering their services in move than one

market e.g. underwriter. However, the services offered by them vary from one marketto another.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market tosecurities

Investment Bankers Capital Market, Credit Market Corporate advisory services,Issue of securities

Underwriters Capital Market, Money

Market Subscribe to unsubscribed

portion of securities

Registrars, Depositories,Custodians

Capital Market

Issue securities to the

investors on behalf of thecompany and handle share

transfer activity

Primary Dealers SatelliteDealers

Money Market Market making ingovernment securities

Forex Dealers Forex Market Ensure exchange ink

currencies

FINANCIAL INSTRUMENTS

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets

that are near substitutes for money. The term short-term means generally a period upto

one year and near substitutes to money is used to denote any financial asset which canbe quickly converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money2. Treasury Bills

3. Term Money4. Certificate of Deposit5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period.

When money is borrowed or lent for a day, it is known as Call (Overnight) Money.

Intervening holidays and/or Sunday are excluded for this purpose. Thus money,borrowed on a day and repaid on the next working day, (irrespective of the number of

intervening holidays) is "Call Money". When money is borrowed or lent for more than a



day and up to 14 days, it is "Notice Money". No collateral security is required to coverthese transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the termmoney market. The entry restrictions are the same as those for Call/Notice Money

except that, as per existing regulations, the specified entities are not allowed to lendbeyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union

government. It is an IOU of the Government. It is a promise by the Government to pay a

stated sum after expiry of the stated period from the date of issue (14/91/182/364 daysi.e. less than one year). They are issued at a discount to the face value, and on maturity

the face value is paid to the holder. The rate of discount and the corresponding issueprice are determined at each auction.

4.

Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument nd issued indematerialised form or as a Usance Promissory Note, for funds deposited at a bank or

other eligible financial institution for a specified time pe riod. Guidelines for issue of CDsare presently governed by various directives issued by the Reserve Bank of India, as

amended from time to time. CDs can be issued by (i) scheduled commercial banks

excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term

resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs

depending on their requirements. An FI may issue CDs within the overall umbrella limitfixed by RBI, i.e., issue of CD together with other instruments viz., term money, term

deposits, commercial papers and intercorporate deposits should not exceed 100 per cent

of its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paperthe debt obligation is transformed into an instrument. CP is thus an unsecured

promissory note privately placed with investors at a discount rate to face valuedetermined by market forces. CP is freely negotiable by endorsement and delivery. A

company shall be eligible to issue CP provided - (a) the tangible net worth of thecompany, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) theworking capital (fund-based) limit of the company from the banking system is not less

than Rs.4 crore and (c) the borrowal account of the company is classified as a StandardAsset by the financing bank/s. The minimum maturity period of CP is 7 days. Theminimum credit rating shall be P-2 of CRISIL or such equivalent rating by other

agencies. (for more details visit www.indianmba.com faculty column)

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than

one year period, financial instruments; In the equity segment Equity shares, preferenceshares, convertible preference shares, non-convertible preference shares etc and in the

debt segment debentures, zero coupon bonds, deep discount bonds etc.



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Financial Services

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In India the money market is regulated by Reserve bank of India (www.rbi.org.in) and

Securities 7

xchange Board of I

ndia (S7

BI

) [www.sebi.gov.in ] regulates capital market.Capital market consists of primary market and secondary market. All Initial Public Offerings comes under the primary market and all secondarymarket transactions deals in secondary market. Secondary market refers to a market where securities are tradedafter being initially offered to the public in the primary market and /or listed on the Stock

7 xchange. Secondary market comprises of equity markets and the debt markets. In the

secondary market transactions BS7

and NS7

plays a great role in exchange of capitalmarket instruments.



Financial System in India

India has a financial system that is regulated by independent regulators in the sectors of banking, competition,

insurance, capital markets, and different services sectors. In finance, the financial system is the system that

allows the transfer of money between savers and borrowers. It comprises a set of complex and closely

interconnected financial institutions, services, markets, instruments, practices, and transactions.

Structure of Fin8

nci8

l System in Indi8

Financial structure refers to the mix of financial institutions, instruments and markets that channel savings and

other funds to businesses and other borrowers. In a bank-based system, banks play the major role in

channeling funds to businesses. In a market-based system, capital markets - including the stock and bond

markets - are the more important sourceof funds

Components of Financial System in India

The financial system consists four components. These are financial markets, financial services, financial instruments and financial institutions.

y Financial Institution: - Financial Institution can be classified as banking and non banking institutions. Banking Institutions are creators and purveyors of credit while non

banking financial institutions are purveyors of credit. y Financial Markets: - Financial Markets can be classified as primary and secondary markets. A Primary Market deals with new issues and secondary markets is meant for

trading in existing securities.

y Financial Instruments: - A financial instrument is a c laim against an instit ution or a person for payment at a future date of a sum of money in the form of dividend.

y Financial Services: - Financial services are those , which help with borrowing and funding, buying and selling securities, lending and investing, making and enabling

payments and settlements and managing risk exposures in financial markets.

.

Indices & movements .

Whenever the stock market is discussed in the broader sense , its is almost invariably in the

context of the movement of the indices . In India ,the index could be Bombay Stock E

xchange (BSE) Sensitive Index ,or Sensex ,or National Stock Exchan ge (NSE) Nifty .If we

move to a slightly disaggregated level , sectoral indices take centerstage .But what are these

indices , how are they constructed ,and how do they move ?To understand their dynamics ,we

will take BSE indices .Although trading volumes are much higher in the NSE ,BSE indices

are more frequently quoted and discussed

BSE Sensitive Index ,Sensex

The Sensex is a basket of 30 stocks and it was compiled in 1986 .However ,the base of the index is 1979 with a value of 100.Earlier ,the index was based on the µfull marketcapitalisation µmethodology .However ,it was shifted to the µfree ± float market

capitalisation µmethodology with effect from 1 september 2003,as it is globally accepted

as the best practice for the index construction .



The free ±float methodology means that while assigning weights to stocks in anindex ,only the free-float market cap is considered and not its entire market cap .

Why Free ±Float ?

Free Float is a better reflection of the market as it only takes intoaccount the shares available for trade .It helps investors benchmark their performance

against investible stocks in the market .It also suits the passive investors as it helps himfollow the index with little tracking error , i .e. difference in returns between the portfolio

and its benchmark .Free float broadens the universe of stocks from which the index is

constituted .In the full-market cap methodology ,a company with a large market cap butvery low free float would be included in the index.The problem is that the movement of

this stock can influence the index¶s movement but not reflect the realities of the market .

However ,in this case of free-float ,only the float is accounted for.Closely-

held companies can be included ,but their prices will not influence the market beyondwhat is logically warranted .

The compostion of the Sensex has changed many times .The number of constituents,however ,has remained constant at 30 .

How does it change ?

The exchange¶s Index Committee meets every quarter to discuss the issues ralted toindices .The composition ,however ,is reviewed only twice a year ,and every review

meeting may not result in a change of the compostion .The changes in the index are

based on parameters such as listed history ,trading frequency ,industry representation,track record and final rank .The company should figure in the top 100 companies listed

by final rank ,which is arrived at by assigning 75 per cent weight to the rank on the basis

of three-month average full market capitalisation and 25 per cent weight to the liquidityrank ,based on the three- month average impact cost.

If the exchange decides to change the composition of the index ,it announces

this at least six weeks in advance of the actual change .

Does investing in a Sensex company mean higher returns ?

No .Companies are selected in the index on the basis of certain parameters ,but those

parameters but those parameters do not include profitability .They are selected on thebasis of free float and trading volume .And a company with the highest level of free float

could actually be making losses .Therefore ,liquidity is important in stock investing ,butprofits profits are equally important.

However ,the companies in the index ,irrespective of their financial performance

,attract a fair amount of interest from a certain kind of investors.For example ,an index

fund based on the Sensex will invest in stocks exactly in the same proportion as they arein the Sensex .Hence ,it will also buy companies which making losses and ,in effect ,raise

the demand for such stocks and their prices .Passive foreign investors also invest in

frontline companies ,which again pushes up the prices of these companies stocks .In fact,even an active fund manager buys index stocks so as to closely follow the index .So,buying a company from the index may not always be a wise decision .In fact,

companies in the index itself do not perform uniformly and their returns vary .Finally ,aposition in the index is not always secure, and the company may have to go out of the

Sensex if stronger contenders come in .



Other Indices

Apart from the much ±talked about BSE Sensex ,the BSE has 19 other indices

,constituted at different points in time .While indices such as BSE 100 ,BSE 200 and BSE

500 reflect the broader markets,sector-specific indices reflect the under ±currents in aparticular sector .Examples include the BSE ±Healthcare Index ,the BSE Small-Cap Index

,the BSE ±Capital Goods Index and the BSE ± Consumer Durables Index.

BSE Sensex History & Components

WHAT IS THE BSE SENSEX

The BSE Sensex Index is the value-weighted average for the Bombay Stock Exchange. TheSensex is comprised of the 3

9

blue chip stocks from the Bombay Stock Exchange and is theequivalent to the Dow Jones in India. These top 3

9

stocks account for one-fifth of all the marketcapitalization on the Bombay Stock Exchange. Since these basket of stocks reflect thebroader Indian Stock Market, the Sensex is recognized around the world as the key indicator for the health of the Indian economy.

Hours of operation

Session Timing

Beginning of the Day Session 8:00 - 9:00

pre-open trading session 9:00 - 9:15

Trading Session 9:15 - 15:30

Position Transfer Session 15:30 - 15:50

Closing Session 15:50 - 16:05



Option Exercise Session 16:05 - 16:35

Margin Session 16:35 - 16:50

Query Session 16:50 - 17:35

End of Day Session 17:30

The hours of operation for the BSE quoted above are stated in terms the local

time (i.e. GMT +5:30) in Mumbai , India. BSE's normal trading sessions are onall days of the week except Saturdays, Sundays and holidays declared by the

Exchange in advance.

HISTORY OF THE BSE SENSEX

The Sensex started with a base value of 1@ @

and tracking began for the index on April 1, 1979.The Sensex officially began being published to the world in April, 198

A

. The Sensex is the oldest



index in India.

HOW IS THE SENSEX CALCULATED

The BSE Sensex is calculated using the Free-float Market Capitalization Model. The market

capitalization is determined by multiplying the stock by the numbers of outstanding shares. Thiscalculation is performed for all 3

B

stocks and then divided by the Sensex Divisor. The Divisor isderived from the original base value of 1

B B

for the Sensex, so the index can be tracked over time. The Sensex is calculated every 1

C

seconds and then published to investors around theworld in real-time.

SENSEX COMPONENTS

Below are the components of the Sensex as of September,D B B

8.

Name Sector

ACC Housing Related

BHEL Capital Goods

Bharti Airtel Telecom

DLF Universal Limited Housing relatedGrasim Industries Diversified

HDFC Finance

HDFC Bank Finance

Hindalco Industries Metal, Metal Products & Mining

Hindustan Lever Limited FMCG



ICICI Bank Finance

Infosys Information Technology

ITC Limited FMCG

Jaiprakash Associates Housing Related

Larsen & Toubro Capital Goods

Mahindra & Mahindra Limited Transport Equipments

Maruti Udyog Transport Equipments

NTPC Power

ONGC Oil & Gas

Ranbaxy Laboratories Healthcare

Reliance Communications Telecom

Reliance Industries Oil & Gas

Reliance Infrastructure Power

Satyam Computer Services Information Technology

State Bank of India Finance

Sterlite Industries Metal, Metal Products & Mining

Tata Consultancy Services Information Technology

Tata Motors Transport Equipments

Tata Power Power

Tata Steel Metal, Metal Products & Mining

Wipro Information Technology

BSE SENSEX CHART EXAMPLE

Below is the chart example of the BSE Sensex. Notice how the Sensex took a free fall from1

E

,F

1G

.33 to a low of 7,697.39 in three weeks as a result of theF H H

8 credit crisis.



BSE NSE

Full Name: Bombay Stock Exchange Limited

National Stock

Exchange of

India Limited

Key Person: Mr. Madhu Kannan (MD & CEO) Mr. Ravi Narain

(Managing Director)

Claim to fame: Oldest stock exchange in Asia.

Largest stock

exchange in India in

terms of daily

turnover and

number of trades.

What is it?: Indian Stock exchange Indian Stock

exchange

Location: Mumbai, India Mumbai, India



BSE NSE

Established in: 1875 1992

Market capitalization US$1.63 trillion US$1. 9 trillion

Number of members: 951 (Oct 2007) 1,009 as on March

2007

Number of listed

companies (December

2010):

5,034 companies 1,552 companies

Geographical spread: Presence in 417 cities Presence in 1,486

cities

Website: www.bseindia.com www.nseindia.com

Index value (april 4th

2010): 19,468.00 5,838.40

Main Index: BSE Sensex S & P CNX Nifty

Number of trader

workstations: 15,547 (May 2010)

Top trading companies

involumes in main

index (Till March

2007):

Reliance IndustriesLimited, Infosys

Technologies

Limited, Satyam

Computer Services.

Top companies

in terms of market

capitalization in each

index (Till March

2007):

Reliance Industries

Limited, Oil and

Natural Gas

Corporation, Bharti

Airtel Limited

How To Select a Stockbroker?

We often hear stories of people losing all or most of their savings in the stock market .This is in spite

of the fact that equities can give returns which exceeds returns from most other investments

options available in the market .Not only that ,if equities are used as an instrument for long term



investment ,risk get mitigated to a larger extent .So ,why do some people lose money in the stock

market? Are they themselves to be blamed ?

The answer to the question s NO .Most of these people are lay investors .As they lack the time

and resource to do their own research on investment decisions ,they rely mostly on stockbrokers

.Their decisions are not entirely their own but actually guided by the brokers advice .Therefore ,for

people depending on the advice of a broker ,the selection of the suitable broker is crucial.

The factors influencing the selection of a broker are not only just the quality of advice he gives ,but

also the cost of his services and the range of products he offers .Some other factors also need to be

considered because all these will decide the return that you earn from the equity market .

Set your Objective .

The first of any investment making process is to set an objective .The rule applies to the selection of

the broker,too. You have to decide the very purpose of selecting a broker .If you want to trade

regularly,your needs from a broker will be different than if you just want to buy a stock and hold on

to it for the long term .T

o elaborate ,if you want to trade regularly ,you may select a broker whooffers service that complement your trading strategy .In this case,you may look for a broker who

provides many products ,such as futures & options (F& Os) and margin trading .

But here, we assume you need to be new to the world of equities .And so ,your understanding of

products such as F &Os would be limited.Also ,it is advisable not to use a product if your knowledge

of it is limited .Instead of gaining from these products ,you may end up losing money .So ,dont get

attracted to a broker who offers a full range of services .Select one based on your needs.

Cost of opening an account

The cost of opening an account depends mostly on the kind of services you want to use .The broker

who provides a greater number of services will charge more .So ,it is best to select an account where

you get the services you want .This way ,you can avoid paying charges for the services you dont

require .

Trading charges

Brokers charge a commission for the transactions you execute through them .Their charges depends

mostly on the value of your transactions.The greater the volume ,the higher will be the commission

.Naturally ,choosing a broker who charges the least for a transaction will save you a lot of money .

Sometimes ,you may come across brokers advertising low charges for day trading .However

,dont get lured by such advertisements.Instead ,select a broker who charges less for all his

transactions and not just day trading .

How personalised is the service ?

Buying and selling of equities is becoming increasingly simple these days. Most brokers have started

providing e-brokerage services .With this service,you can execute a transaction sitting in your

office,or even home if you have access to the internet .All you need to do is simply place an order on

your screen .Your order gets executed as soon as a counter party comes .



But what if you find some difficulty punching a trade on your screen ,or need some other sort of

help?In this case,you can call your broker and ask for his help .

Naturally ,it becomes important to have a broker who gives personalised services such as these

.Although ,most brokers ,while opening an account ,would claim they provide personalised services

,you should always verify it from people already using that brokers services .If you get positive

feedback ,go ahead .

Q uality of research

Many brokers advertise the research they do on companies .However ,in many cases ,it is noticed

that lay investors cannot comprehend a research report .In that case ,paying for it becomes

worthless .Pay for the research report only if you can take a decision based on it .

The quality of a research is also important .When markets are moving up ,it is easy for a broker to

recommend a stock .As the market goes up ,chances are that the stock recommended by the broker

will also move up .

However ,the real test is when the markets start falling .A recommendation that has consumed a

fair amount of research restricts that stocks fall even in such times .The stockbrokers past record in

recommending such stocks can actually be a good indicator of the quality of his research .

Reputation

A brokers reputation should be among the most important factors in your selection process

.Sometimes ,brokers engage in unethical practices for the benefit of either their client of their own

.But once caught ,they are reprimanded by the market regulator ,the Securities and Exchange Board

of India (Sebi) .It is advisable to avoid brokers who have been reprimanded by Sebi for their

unethical practices .

Resist Tips

A stockbrokers commission depends on the value of shares that that you buy or sell.So ,the

promptness shown by him in giving tips is usually not aimed at increasing your wealth ,but at

generating income for him by convincing you to trade even more frequently .

Ignore short-term trends

Ideally ,a stock should only be bought at its correct price ,that is ,the one supported by its intrinsic

value.A brokers advice is mostly based on noticeable short-term trends ,which could reverse any

time .For them ,every dip is a buy opportunity and every rise is a sell opportunity .

Consider your risk prof ile

A broker usually circulates the same recommendations to all his clients .A stock ,however good ,may

not match every clients risk profile .For example ,fast-growing small companies fit young investors

portfolios ,but they may not be appropriate for older investors .



Dont invest too much in a recommended stock .A broker never pays attention to your existing

portfolio of stocks and recommends any stock that he feels is good.Buying the same stock ( the one

already in your portfolio) aggressively ,or putting all your money in one company can increase your

portfolio risk .

Know when to sell a stock

The success of your stock investments hinges on your selling them at the right time .Otherwise ,all

the gains are notional .When you buy a stock ,you should know the price at which you want to sell it

.This is the point beyond which the stock gets overpriced and the chances of a drop increase.But

dont trust your broker to tell you that .

Introduction to equity market!!!

The Indian equity market or stock market ,has the attention of the common Indian investors more

than ever before .But ,this isnt as if we prefer equity as an asset class to invest in .In fact ,according

to the latest Reserve Bank of India data ,only slightly over 6% of the total household saving goes into

the capital market ,including investments in debentures & mutual funds .So how much of the money

goes directly into equity ?The figure are not available , but they wouldnt be very encouraging.

W

hy is it that Indian investors prefer to stay away from equities and even the highreturns that our market has given dont pull in investments ? Is it the risk ,or the lack of awareness

about this asset class?If it was only risk ,then why are investors not taking to mutual funds even

when funds have clearly defined mandates based on which they try to strike a balance between risk

& return by using the services of qualified professionals ?Obviously ,the obstacle lies elsewhere-in

awareness.



We all work hard throughout our lives to generate income ,but spend very little time to

invest it .We generally stick .avenues that are convenient and dont involve any risk .

Smart investments not only help you achieve your financial goals ,but also enjoy your life to

the fullest .Equity is one such instrument .but most investors steer clear of it either because they

consider it extremely risky ,or simply because they dont understand the dynamics of the stock

market .In reality you can get not only handsome returns but also lower your risk by investing in

equities for a long period.

Gathering Information

It is important to know where to find relevant information about companies .Professional investorshave access to several data bases & reports .Retail investors used to find it difficult to gather

information in the past ,but this is fast changing .With improved focus on investors realtions

,companies are now making information readily available to retail investors .Moreover ,these days

,stock exchanges also publish information in a much more user friendly .For instance ,the Bombay

Stock Exchange (BSE) is now not only providing more information on its website ,but the website is

also easier to navigate ,enabling small investors sitting in any part of the country to access the

information .

Information Channel

PressIndia ,thankfully ,has a vibrant financial press comprising financial newspapers ,magazinesand of course ,TV channels dedicated to stock markets ,providing live tickers for stock prices

.However ,as an investor , you should be careful while reacting,to news on TV .Generally ,there are

too may experts coming up with too much advice .As a long term investors ,its important to

remember why you bought the stock in the fist place and whether there has been a fundamental

change either in your objective or the company thereafter .You should be able to cut the noise and

use only the relevant information .



Company website

If you are a beginner and are planning to buy a new stock ,a company website is a good starting

point to start gathering information .They ,in their investors relations section ,have most of the

information that is needed by a share holder.Here ,you can see the companys financial records for

the last few years .Some companies also have transcript analyst conference calls and analyst

presentations.The website also provides the companys annual reports ,which state its performance

for the past year and also list the challenges it is facing .All this can help an investors decide whether

a company is worth investing in .

Stock market website

Apart form company website,another good source of information is the website of stock exchanges

,such as the BSE and the NSE .For example ,on the BSE website ,if you key in the name of the

company in the requisite slot on the home page ,you are directed to a page providing all the

information regarding current prices ,trading quantity ,52 week high and low ,and monthly prices

,among other things.At the bottom of the same page ,there are links to corporate

information,results ,announcements ,shareholding patters & charts .In the result space ,you can seethe companys past performance ,including that of the last four quarters and the last financial

year.The announcement section also provides information on nay relevant development within the

company .

Research reports of the brokerage houses .

Various brokerage houses publish reports on different sectors of the industry .These reports provide

information not only on a particular stock ,but also on the industry as a whole .Such reports can help

investors determine whether price movements in a share are company specific or industry related.

Structure of the market

The Securities market can be divided into primary market & secondary market .A primary

market is where new securities are issued .These issues may not just be equity issues ,they also be

debt securities issued by companies in the form of bonds.However ,the discussion on the primary

market was limited only to issues in that market .The discussion on the secondary market was also

limited only to merely to its definition i.e the place where trading of securities issued in primary

market happens.

Stock Exchanges .

A stock exchange can be defined as a place where buying and selling of securities (both debt and

equity ) takes place .So , whenever you hear someone buying or selling stocks of a company ,it

means he /she is doing that through some stock exchange .In other words,stock exchange facilities

the trading of securities .In India ,there are 23 stock exchanges .Of these ,the biggest ones are the

Bombay Stock Exchange (BSE) and National Stock Exchnge (NSE),both of which are also called

national exchanges.



Market Regulators

Some people believe that markets work in an efficient manner if they are set free ,i.e their

functioning is left to their participants alone .That however ,is not always correct.With the passage

of time , certain flaws may develop in the system and bigger participants may jeopardise smaller

participants interest .

Thus,the securities market in India ,like in other developed countries ,has a regulator in

the form of the Securities and Exchange Board of India (Sebi ) .

Sebi was formed in 1992 with a view to regulate and develop the capital market .It oversees

the issuance of securities and their trade in the secondary market, and also regulates the behaviour

of various market participants such as stock brokers,sub-brokers & merchant bankers.

Constituents of the securities market

The main participants in the equity market are issuers of the securities ,intermediaries (such as

merchant bankers,brokers and sub- brokers ) and investors who buy these securities .

Issuers -------issuers of securities are companies that want to raise maney from the capital market

.Money is raised through the issuance of debt securities or equities .

Investors-----they are the market participants who buy securities .The regulators divides investors

into categories like qualified institutional bidders (QIBs) ,domestic institutions and retail

investors.QIBs are institutional investors who are considered to have more expertise and they dealwith complex investments .This category includes foreign institutional investors, domestic financial

institutions ,mutual funds & pension funds ,among others .

The other category comprises non institutional investors such as corporate and investors other

than retail investors .Retail investors are the ones who invest less than Rs 1 lakh in the public issues .

Merchant Bankers ----These are representatives of companies coming with an issue .They ensure

that the issuer company complies with all the relevant regulations.They are penalised by the market

regulator if there is non compliance on their part.

Depository This institution is like a bank which maintains investors accounts .However ,unlike a

bank account ,it dosent keep investors money in that account .Instead ,a depository maintains

accounts for investors which hold securities in a dematerialised form,i.e an electronic form rather

than physical share certificates .

A depository helps in transferring the ownership of shares from one account to another when

trade takes place between the owners of these accounts .This reduces the paper work involved in

the trade and expedites the transfer .It also reduces the risk associated with physical shares ( such as

damaged or fake securities ) as the shares are in the electronic form .In India ,there are two



depositories ,National Securities Depository Limited (NSDL) and Central Depository Service (India )

Limited (CDSL) .

These depositories also select agents through which they provide services .These agents are

called depository participants and they could be banks ,financial institutions and Sebi-registered

trading members.

TRANSACTION OF SHARES .

The stock market facilitate the buying and selling of securities .For this ,they provide

platforms where buyers and sellers can transact without meeting at a physical location .Earlier , the

trade used to take place through an open outcry system where buyers and sellers used to meet at

the trading floor in the stock exchange .Today ,however all transactions are done either through

trading screens available with members of stock exchange or internet trading facility .Here ,a buyer

or a seller simply has to punch the buy o sell quantity on his screen and the trade takes place if a

matching counter party is found .

To transact ,all you need to do is to place an order with your broker .Also ,today most brokers

provide Internet based trading platforms .This enables you to buy or sell shares using the Internet

facility from any place you like .

Segments of stock market

Spot market It means that a transaction takes place when shares are bought for cash and

delivered immediately .So ,if you place an order ,and a counter party is found ,money will be

transfered from your account to the sellers account and shares same value will be transferred from

his demat account to your demat account .The opposite happens if you place a sell order .This

segment of the market is also known as cash market.

However ,there is another segment in the stock market where delivery of shares happens at a

future date . We call this segment as futures & options (F&O) segment .Ina future transaction ,a

contract is agreed upon to buy or sell shares at a future date at a particular price.

So ,the buyer of the future has an obligation to purchase the agreed quantity of shares on thespecified date at a fixed price .Similarly ,a seller of the futures contract has an obligation to sell the

agreed quantity of shares on the specified date at the price .

The rationale behind entering a future contact is to hedge onself against unfavourable price

movement .So ,if one fears that the shares in his portfolio may drop in value significantly ,he may

enter in to a contract to sell the shares at a fixed price on a future date .This is called as selling a

futures contract .



Many investors use these instruments for trading purpose .Though the gains in trading can be a

windfall ,the losses are also of the same magnitude .Retail investors are therefore ,advised not to

use this as a trading tool .Moreover ,it is advisable to use these contracts only when one has gains a

strong understanding about them .

What is an EQUITY SHARE ??

An equity share of a company is a unit of ownership in that company .Lets take an example

to understand this .Let us assume you want to open a bookshop .Now ,the most imp thing you need

is capital .Say ,you need Rs.1,000 to open a book-shop and you have only Rs 500,you have two

options taking a loan ,or asking someone to become a partnership .To borrow Rs 500, you can

approach a bank.

Let us assume that after a year into the business ,your sale is at Rs 1,000 .After taking

care of the cost of buying books ,which you sold ,you are left with Rs 500 and you pay an interest of

Rs.50 on the loan .Other expenses like rent ,salaries and suchlike come to around Rs. 100 .So ,out of

the Rs1,000 sale you are now left with Rs 350 ,which is your net profit .

Net profits mean you have settled all claims and no one has any claim on this money .This is your

reward for taking risk .This net profit belongs to the entrepreneur ,or the owner of the company and

its the residue after meeting all the expenses or commitment .This is also known as reward for risk .



FORMS OF MARKET

The equity market like all other securities markets,are divided into two categories :primary market &

secondary market .In the primary market ,securities are issued and subsequently listed on the stock

exchanges.Trading in these securities happens in the secondary market.

Most investors deal only with the trading of shares .But it is also necessary to

understand the importance of listing .

Listing basically provides promoters an exit route and other investors an entry as well as exit route

and other investors an entry as well as exit route.Say ,some shareholders feel that the future of a

company is not very bright and its shares are not worth holding .Therefore ,they want to sell their

shares.On the contrary ,some other investors feel the company will do well and its profits will

improve in the future.They want to buy its shares.There is a party that wants to sell and another that

wants to buy .But if the shares arent listed anywhere ,it becomes extremely difficult for either party

to find the other .Stock exchanges , where stocks are listed ,thus ,serve as a platform for investors to

buy any sell shares .

Buying and selling of shares is called secondary market activity .

The functioning of the primary & secondary market



Primary market

Primary market is the place where shares are listed as issues first .Equity capital can be issued in the

form of public issue,rights issue or through private placement .The various types of issues in the

market are :

Public issue

A public issue can also be of two types an initial public offering (IPO) ,or follow-on-public offering

(FPO).

Initial pubic offering.An IPO is used when an unlisted company wants to raise equity capital by

issuing shares .It results in the companys shares getting listed on the stock exchange .An IPO also

provides two ways of raising capital .It could be either by issuing fresh shares ,or by selling existing

shares .A combination of two is also possible .

For example in a company that needed Rs,1,000 to expand the business .In order to raise this capital

,you issue 100 shares of face value of Rs 10 each in the market .This will be called fresh issuance of

shares .Another way to unlock value from your holdings.In this case ,you will sell your existing shares

in the market .In our example ,you had 50 shares initially .In order to unlock some of the value in

your business ,you sell,say,20 of those 50 shares .This approach is called an offer for sale.

There is also another possibility where you can issue fresh shares and sell your holdings

simultaneously to unlock investment n the business.

Follow on public offer(FPO).In a FPO,a listed company issues shares to the public .It can be

either a fresh issue or an offer for sale .The basic difference between an IPO and FPO is that in the

former,an unlisted company issues shares to the pubic ,while in the later ,it is a listed company that

does so .

In both cases ,however ,new shareholders are included in the company and ,as a result

,the existing shareholders stake as proportion of the equity base is usually reduced .To avoid this

situation ,companies go in for a rights issue .

Rights issue (RI)

In a rights issue ,a listed company issues fresh equity shares to existing shareholders .Shares are

offered in a particular ratio,for example ,one share for every four shares held .

There are two reasons why companies prefer this route .First this route is an easier route for

the company to raise capital as the process of floating a rights issue has fewer norms to adhere to

than the FPO route .Second,as mentioned earlier ,stakes of existing shareholders are not diluted as

the fresh shares are issued in proportion to the existing shares.So ,at the end of the process,the

shareholding pattern remains the same .



Private Placement

When a company issues shares to a select group of investors,existing or new ,it is called private

placement of shares.When a listed company does this ,the process is known as preferential

allotment .Sometimes a listed company issues shares only to qualified institutions ,as they are

described by the capital market regulator .This is called qualified institutions institutional placement

and is considered as the procedural requirements are fewer than other methods.

Raising Money in the Primary Market

Not every company can raise in the primary market.Capital market regulator Securities and

Exchange Board of India (Sebi) has put eligibility norms regarding who can and cannot raise capitall

in this market .Sebi is the market regulatory authority and its objective is to protect investors and

promote the development of the securities market.

When a listed company makes a rights issue ,it does not have to meet any eligibility criteria .This

is because it is assumed that the company has met the basics criteria at the time of its listing and

that shareholders already have the necessary information about the company .

A company making a public issue either through an IPO or an FPO ,however ,has to meet certain

criteria before it can access the capital market .The norms (as mentioned on Sebis website ) are:

Entry Norm 1(EN1) :The company shall meet the following requirements :

(a) Net tangible assets of at least Rs 3 crore for three full years;

(b) Distributable profits in at least three years;(c) Net worth of at least Rs 1 crore in the three years;

(d) If there is a change in name ,at least 50 per cent revenue for preceding one year should be

from the new activity ;and

(e) The issue size should not exceed five times the pre-issue net worth.

To ensure that genuine company that does not meet the above mentioned criteria

and needs capital should not suffer,Sebi also has alternative routes-Entry norms(EN)2 & 3 .

EN 2 entails that :

(a) Issue shall be through book building route ,with at least 50 per cent mandatory allotment to

Qualified Institutional Buyers (QIBs) ;and

(b) The minimum post-issue face value capital shall be a compulsory market making for at

least two years .(Market makers are individual entities that hold shares & provide share

liquidity to the market)

EN 3 says :



(a)The projectis appraised and participated go the extent of 15 % by financial institutions or

scheduled commercial banks of which at least 10% comes from the appraiser(s);and

(b)The minimum post issue face value capital shall be Rs 10 crore or there shall be a

compulsory market-making for at least two years.

Primary Market Documents

The documents that a company submits are used by sebi to approve the companys listing and

by investors to understand the companys business and financials.

It is mandatory for any company making a public issue or rights issue of value >Rs 50

lakh to file a draft offer document with sebi .The market regulator examines the details of the

document and issues a letter of observation .The company has to open the issue within 12

months of Sebis observation after making the appropriate change ,if any .It is important to

remember that Sebi does not recommend any issue and does not take any responsibility in

terms of returns and risk associated with an investment in a public issue.

Offer Document

For a public issue or an offer for sale ,this document is a kind of prospectus.For a rights issue ,an

offer document is a letter of offer.What an offer document does is provide all the informantion

that an investors needs to take a decision .Any company that is going to offer a public issue ,files

this document with Registrar of Companies (ROC) and the stock exchange where it want to be

listed .

Importance of an offer document

An offer document is a detailed presentation about the company issuing shares in the primary

market.Its a legal document by the offeror to target share-holders.The cover page gives full

contact details of the company ,legal managers ,registrar,number of shares ,credit rating ,IPO

grading and other such information.The introduction covers details of the business and industry

of the issuing company.It also gives details of capital structure ,fund requirement ,and sources of

financing ,among others.

An important part of offer document lists the risk factors that tell an investor about the

internal and external risks involved in the business.The company talks about its future plans in

its forward-looking statement .Investors should read this carefully as it is necessary to

understand the risk involved in the business for which the money is being raised.

Another section of the interest is the financial statements which deals with the current

status of the companys finances, any change in its accounting policy in the last years, as well as legal

and other information .



Draft offer Document

It is an initial sketch of the offer document .A company has to file it with Sebi at least 21 days before

it files the offer document with the ROC and stock exchanges .You can also read this document as it

is uploaded on Sebis website .Sebi examines this document and specifies changes ,if necessary .

Red Herring Prospectus (RHP)

An RHP is also a prospectus ,but it does not have details of either the amount expected to be

raised from the issue ,or price ,or the number of shares to be sold.It ,however does mention the

upper and lower band of price and the number of shares to be issued.Else ,the issuer may specify

the amount in RHP but decide on the number of shares later.

How is the price of an issue decided ?

The Sebi or any other regulatory body plays no role in the pricing of shares issued to you . The

company ,along with its merchant banker,decides the price at which the shares have to be issued

.This is either done through a fixed price mechanism or a book building process.However ,in both the

cases,the company has to mention both qualitative and quantitative factors it considered to reach

the issue price.

Fixed Price

Under this mechanism ,the issuer fixes a price at which it issues the shares .It can also mention a

price band,with 20 % difference between the lower and upper caps ,when it files the draft offer

document with Sebi .The issuer later sets a fixed price before filing the offer document with the ROC

and the stock exchange.

Book building

In this process ,the shares price is arrived at on the basis of the demand for the issue .Applicants bid

for shares by quoting prices and quantity they are bidding for.The company specifies a price range

for the bids .All the bids ,during the period for which the issue is open ,are collected and the shares

price is decided based on them .This provides the company and the market an opportunity to

discover the stocks price.

The issuer can also revise the price band by informing the stock exchanges and

disseminating the information widely.In such a case,the bidding period is extended by three days but

the total biding period should not exceed 13 days.

Once bidding is over ,shares are allotted to applicants.If the issue is oversubscribed

(applicants are more than shares offered),a lottery is held among applicants and shares arealloted

on a proportional basis.Listing takes place after shares are allotted,which is usually within seven days

of finalisation of the issue .The entire issue takes up to three weeks which includes



refunds,allotment etc.Once the shares are listed ,you can buy or sell them and become a part of the

secondary market.

SECONDARY MARKET

This market is where securities are traded after being offered initially to the public .This market acts

as a platform for investors to get in and out of a particular security .The difference between the

primary & secondary market is that securities are issued for the first time in the primary market

while subsequent trading in them happens in the secondary market.

Why do prices rise?

Stockmarkets often make headlines not only in business papers ,but also in general dailies.You will

find loads of articles about the sensex going up 100 points ,or going down 100 points ,or that a

companys share price went up this much ,or went down that much .Why do share prices move

,sometimes so much in a single day that they make headlines?

There are many reasons for this ,but .basically ,prices area function of demand & supply

.Its like any other market where higher demand and lower supply takes the price up .If more people

want to buy a particular stock at a given point in time ,its price will go up .If only some people are

interested in the stock ,the price will fall .If most investors think the stock price will go up in the

future ,they would like to buy it now at lower prices.In such a case,the demand will exceed the

supply because of which its prices will move up.If the opposite happens ,that is ,a stocks price is

widely expected to fall and people want to offload it at the present higher prices,the stock price will

start falling.But ,why would so many people want to buy or sell a particular stock ?

A stocks price reflects investors expectations of the company .As expectations

change ,the price reflects them.

Events that have an impact on a stocks prices are based on a number of factors ,which

can be broadly classified in to two kinds : company specific reasons and wider market-specific

reasons.



Company-specif ic reasons

There are many company related news flows that trigger buy or sell actions in the market .For

example ,the announcement of financial results,merger and aquistions ,fresh issue of capital

,buybacks ,new plans and new product launches are some of the reasons why stock prices move.

Macroeconomic Factors

Other than company specific fators ,wider macroeconomic movements that may or may not be

directly linked to a particular companys functioning also affect share prices .For example ,economic

factors such as GDP growth ,inflation ,currency movements ,government finances & policies .

Other International Factors

WHY INVEST IN EQUITIES ??

Most of the investment literature often argue that equity is the best performing asset class in the

long term.It outperforms other asset classes such as commodities ,government securities and bonds

over a longer period of time .However if you go by your experience in 2008, you would not agree

with this .The Sensex ( the benchmark index of the Bombay Stock Exchange ).wich consists of 30

large cap stocks in proportion of their market cap, started to fall from its closing value of 20,873 on

8th

jan 2008 and reached a trough at 8,160 on 9th

march 2009- a fall of 61 per cent .

In other words ,if you had invested Rs 10 lakh in constituent companies of the Sensex in the same

proportion to their weight in the index ,your wealth would have reduced to around Rs 3.9 lakh over

this 14-month period.

If you look at this differently .The Sensex was at around 8,100 in November 2005 ,the

same as in march 2009 .This means that Rs 10 lakh invested in the Sensex in November 2005 would

have given you no returns after around three years .

And if you had taken this three year period as long term, your belief in equities will be

shattered.You will instead put your money in asset classes that you consider relatively safer ,such as

bank deposits or government securities .

Although adopting this strategy ensures stable returns ,its not the best trade off

between risk & return .Equity can provide higher returns with an acceptable level of risk .The

challenge lies in understanding the behaviour of equity markets over a long period of time not a

year or three years ,but over a decade or even more .



The study conducted on the Sensex behaviour since 1979, the year of its debut . The results were

interesting ,and gave clarity on the time period for which one should remain invested to get high

stable returns.

Sensex,risk free

Questionnaire (Equity)

1.How much do you invest in the stock market ?

a.

2.What % of your years investment is in equity market?

b. <25%

c. 25-50 %

d. 51-75%

e. >75%

3.Which sector do you invest in ,in the equity market ?

f. Housing

g. Finance

h. Telecom

i. FMCG

j. Capital goodsk. Automobiles

l. Power

m. Oil & gas

n. Information technology

o. Others

4. Do you deal in day trading or delivery calls ?



a.Intraday

b.Positional calls

c.Delivery calls

5.What are the factors you look into while investing ?

a.Bullish

b.Bearish

c.Cant say

6.What will be the future of the equity market as per you ?

a.Bullish

b.Bearish

c.Cant say

7.What is your purpose of investment ?

a. To meet the cost of inflation

b. To earn return on idle resources

c. To generate a specific sum of money for a specific goal in life

d. To make a provision for any uncertain future

8. What attracts you to the equity market ?

9.How long have you been investing in the equity market?

a.

10 .What makes you trade in a particular stock ?

a. News



b. Insider info

c. Street talk /rumors

d. Brokers advice

e. Tips

f. Past experience

g. N.A

11.Rank your understanding and comfort-level with investing in the stock market

a) No experience and no comfort level in investing in stocks

b) No experience, but some level of comfort in stocks

c) Some experience, and interest in stock market investing

d) Reasonable experience and comfort level with the stock market

Extensive background and understanding of the stock marke

Financial System --1,2,q

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