Trading & Equity

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&rading Equity&rading Equity

ANINDYA


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2

.Trading is not investing Trading is all about.Trading is not investing Trading is all about(converting an investment decision either yours(converting an investment decision either yours

)or your portfolio manager s into a desired )or your portfolio manager s into a desired.portfolio position You will want to do this at.portfolio position You will want to do this at

the least possible cost and in the most timelythe least possible cost and in the most timely.fashion Trading is also about finding pricing.fashion Trading is also about finding pricing

, ,discrepancies in the market jumping on them and, ,discrepancies in the market jumping on them and

. ( )realizing a profit This course deals with. ( )realizing a profit This course deals withthese actionsthese actions

What Trading is All About


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EQUITY TRADING

FX TRADING

COMMODITY TRADING

YPES OFYPES OFTRADINGRADINGQUITY TRADINGQUITY TRADINGX TRADINGX TRADINGOMMODITYOMMODITYTRADINGRADING


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Trading in shares

Cash Trading : This is a delivery based trading system,which is generally done with the intention of takingdelivery of shares or monies.

Margin Trading : You can also do an intra-settlementtrading upto 3 to 4 times your available funds, wherein

you take long buy/ short sell positions in stocks with theintention of squaring off the position within the same daysettlement cycle.

Margin PLUS Trading : Through Margin PLUS you can doan intra-settlement trading up to 25 times youravailable funds, wherein you take long buy/ short sellpositions in stocks with the intention of squaring off the

position within the same day settlement cycle. MarginPLUS will give a much higher leverage in your accountagainst your limits.

Spot Trading : This facility can be used only for sellingyour demat stocks which are already existing in yourdemat account. When you are looking at an immediate

liquidity option, 'Cash on Spot' may work the best foryou, On selling shares through "cash on spot", money is


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Contd

BTST : Buy Today Sell Tomorrow (BTST) is afacility that allows you to sell shares evenon 1st and 2nd day after the buy orderdate, without you having to wait for the

receipt of shares into your demat account. CallNTrade : CallNTrade allows you to

call on a local number in your city & tradeon the telephone through our Customer

Service Executives. Market Order : You could trade by placing

market orders during market hours thatallows you to trade at the best obtainable

price in the market at the time ofexecution of the order.


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What is Forex trading

Forex trading stands for foreign exchangetrading, and its one of the fastest-growing financial trading markets on theplanet. You can trade 24 hours a day, sixdays a week, from home, from anywherein the world. (Yes, you can even trade athome in your skivvies, if you like.) WithForex trading, one nations currency istraded against another nations currency.

In fact, Forex is the largest financialmarket in the world, with nearly $2 trillionin trades every day. Thats more thanthree times the aggregate amounts of theUS Treasury and Equity marketscombined. And everyone can participate


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Commodity Trading

A commodities exchange is an exchange wherevarious commodities and derivatives productsare traded.

Most commodity markets across the world tradein agricultural products and other raw materials(like wheat, barley, sugar, maize, cotton, cocoa,coffee, milk products, pork bellies, oil, metals,etc.) and contracts based on them.

These contracts can include spot prices, forwards,futures and options on futures. Othersophisticated products may include interestrates, environmental instruments, swaps, orocean freight contracts.


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Indias Place in WorldMarket

C O M M O D I T Y I N D I A W O R L D S H A R E R A N K

R IC E (P A D D Y ) 2 4 0 2 0 4 9 1 1 .7 1 TH IR D

W H E A T 7 4 5 9 9 1 2 .3 5 S E C O N

P U L S E S 1 3 5 5 2 3 .6 4 F IR S T

G R O U N D N U T 6 3 5 1 7 .1 4 S E C O N

R A P E S E E D 6 4 0 1 5 .0 0 TH IR DS U G A R C A N E 3 1 5 1 2 7 8 2 4 .6 5 S E C O N

TE A 0 .7 5 2 .9 9 2 5 .0 8 F IR S T

C O F F E E (G R E E N ) 0 .2 8 7 .2 8 3 .8 5 E IG TH

JU TE A N D JU TE F IB E R S1 .7 4 4 .0 2 4 3 .3 0 S E C O N

C O TTO N (L IN T) 2 .0 6 1 8 .8 4 1 0 .0 9 TH IR D


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Commodity Exchangein India

The Government of India permittedestablishment of National

level Multi-Commodity exchanges in the year2002. They are

Multi Commodity Exchange (MCX) located atMumbai

National Commodity and Derivatives Exchange

Ltd (NCDEX) located at Mumbai

National Board of Trade (NBOT) located atIndore

National Multi Commodity Exchange (NMCE)

located at Ahmedabad.


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Primary Market

An Overview


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Introduction

Issuers of Securities

Government and Corporate

Issuers create and issue fresh Securities inexchange for funds

Public/Private Issue

Face Value/Premium/Discount

Domestic Market /International Market


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Issues Norms

Entry Norm I (EN I): The company shall meet thefollowing requirements:

(a) Net Tangible Assets of at least Rs. 3 crores for 3 fullyears.

(b) Distributable profits in at least three years

(c) Net worth of at least Rs. 1 crore in three years

(d) If change in name, at least 50% revenue for preceding1 year should be from the new activity.

(e) The issue size does not exceed 5 times the pre- issuenet worth


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Exceptions

The following are eligible for exemption from entrynorms.

(a) Private Sector Banks(b) Public sector banks(c) An infrastructure company whose project has beenappraised by a PFI or IDFC or a bank which was earliera PFI and not less than 5% of the project cost isfinanced by any of these institutions.

(d) Rights issue by a listed company


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Pricing of Issues

Free Pricing

SEBI does not play any role in price fixation.

Fixed Price/Book Building

The company and merchant banker are however required to give fulldisclosures of the parameters which they had considered whiledeciding the issue price.

Book Building A process undertaken by which a demand for the

securities proposed to be issued by a bodycorporate is elicited and built up and the pricefor the securities is assessed on the basis of the

bids obtained for the quantum of securitiesoffered for subscription by the issuer. Thismethod provides an opportunity to the market todiscover price for securities.


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Book Building Options in Book building

75 % Book Building

100 % book Building

Books remain open for 7 working days ( Fixed price issue 10 days)

Only Electronic Bidding

Bids to be submitted through Syndicate members

Issue completed and trading commenced on T + 16 basis Floor price disclosed one day prior to bid date

Price band of 20 %

Green Shoe option

An option of allocating shares in excess of the shares includedin the public issue and operating a post-listing price

stabilizing mechanism in accordance with the provisions ofChapter VIII-A of DIP Guidelines, which is granted to acompany to be exercised through a Stabilising Agent.


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Features Fixed Price

Process

Book Building

ProcessPricing Price at which the

securities areoffered/allotted is knownin advance to the investor

Price at which securitieswill be offered/allotted isnot known in advance tothe investor. Only anindicative price range isknown.

Demand Demand for the securitiesoffered is known only afterthe closure of the issue

Demand for the securitiesoffered can be knowneveryday as the book isbuilt.

Payment Payment if made at thetime of subscriptionwherein refund is givenafter allocation.

Payment only afterallocation.

ifference between shares offered through bookuilding and offer of shares through normal publicissue


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Promoter The promoter has been defined as a person or persons who are in over-

all control of the company

Promoters Contribution should not be less than 20% of post issue ofcapital in case of offers for sale and public issues by unlistedcompanies.

To bring Full amount of promoter contribution

including premium one day prior to issueopening date.

Exceptions

Public issue of securities listed on a stockexchange for at least 3 years with a dividend

payment record of 3 immediate precedingyears

No identifiable promoter or group exist

Rights Issue


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Lock In of Securities

Promoters minimum contribution in any public issue locked in for 3years.

The Contribution over and above 20 % (minimum) is locked in for oneyear.

The locked in securities can be pledged with banks as collateral.

Merchant Banker

Governed by SEBI Merchant BankRegulations Act 1992

Need to be a Body Corporate other thanNBFC

Required to have a compliance officer

Merchant Banker


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Merchant Banker

Pre-issue process:- The due diligence of companys operations/ management/ business plans/ legal Drafting and design of Offer documents, Prospectus, statutory advertisements

and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and

completion of prescribed formalities with the Stock Exchanges, RoC andSEBI including finalisation of Prospectus and RoC filing.

Appointment of other intermediaries viz., Registrar(s), Printers, AdvertisingAgency and Bankers to the Offer is also included in the pre-issue processes.

The LM also draws up the various marketing strategies for the issue. Post issue:- Including management of escrow accounts, coordinate non-institutional

allocation, intimation of allocation and dispatch of refunds to bidders Finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies

connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business.


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Credit Rating

Sebi Credit rating regulations ACT 1999 Promoted by PFI, SCB, Foreign Banks operating in India,Foreign credit rating agencies with 5 yrs of exp. Bodycorporate having continuous net worth of 100 crores forprevious 5 yrs.

Minimum Net worth of 5 crores. A CRA cannot rate

A security issued by its promoter

Security issued by an associate , subsidiary ,anassociate promoter of CRA if they have a

common chairman, director and employees. For all debt issue greater than or equal to 100 crores , has to be

rated by two different agencies.


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ADR/GDR

Method of raising foreign currency resources

Foreign Convertible currency bonds

ADR/GDR

Depository Receipt negotiable instrument in the form of a certificatedenominated in US dollars

Certificates are issued by an overseas depository bank againstunderlying shares deposited by the issuing company with the bank

The DRs are issued by the bank to the investors

It is a non voting equity holding with all other benefits accrued.

Permits cross border trading and settlement , minimize transaction costs

and broaden the capital base for Institutional Investors.


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Contd

ADR GDR

Negotiable U S certificaterepresenting ownership of shares in a

Non U S corp..

Issued to public or private to marketsinside or outside U S

Quoted and traded in $ in U Smarkets Allows issuer to raise capital in twoor more markets simultaneously

To facilitate the purchase, holdingand sale of non U S Securities by U S

investors.

Underlying shares correspond toGDR are fixed in ratio i.e. 1 GDR =

10 shares

ADRs and GDRs are identical in legal, technical ,operational andadministrative point of view


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Secondary Market

Overview of :

1.) Trading and Settlement.

2.) Order Management.


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Transaction Cycle


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Trading & SettlementProcess


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Contd..


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Market Participants

Exchange NSE/BSE Depository NSDL/CDSL Custodian Depository Participants Clearing Corporation NSCCL/BOI share Holding Stock Broker

A broker is an intermediary who arranges to buyand sell securities on behalf of clients (the

buyer and the seller) also known as CM Clearing Member

Sub Broker Investors


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Trading At NSE

The trading on stock exchanges in India usedto take place through open outcry

NSE introduced a nation-wide on-line fully-

automated screen based trading systemNEAT)

SBTS electronically matches orders on a strictprice/time priority


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Order Placement

NSE has main computer which is connected through VerySmall Aperture Terminal (VSAT) installed at its office.

Brokers have terminals (identified as the PCs in theFigure 1) installed at their premises which are

connected through VSATs/leased lines/modems. An investor informs a broker to place an order on his

behalf. The broker enters the order through his PC,which runs under Windows NT and sends signal to theSatellite via VSAT/leased line/modem. The signal isdirected to mainframe


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Contd ..

The order confirmation message isimmediately displayed on the PC of thebroker.

This order matches with the existing passiveorder(s), otherwise it waits for the activeorders to enter the system.

On order matching, a message is broadcast tothe respective member.


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Contd .

All orders received on the system are sorted with thebest priced order getting the first priority formatching i.e., the best buy orders match with the

best sell order. Similar priced

orders are sorted on time priority basis, i.e. the onethat came in early gets priority over the later one. Orders are matched automatically by the computer

keeping the system transparent, objective and fair. Where an order does not find a match, it remains in

the system and is displayed to the whole market,till a fresh order comes in or the earlier order iscancelled or modified.


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Clearing & Settlement

The clearing and settlement mechanism inIndian securities market has witnessedsignificant changes and several innovations

during the last decade. T+2 rolling settlement has now beenintroduced for all securities. The membersreceive the funds/securities in accordance

with the pay-in/pay-out schedules notifiedby the respective exchanges.


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Contd ..

The obligations of members are downloaded tomembers/custodians by the clearing agency

The members/custodians make available the

required securities in their pool accountswith depository participants (DPs) by theprescribed pay-in time for securities.


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Contd

The depository transfers the securities from thepool accounts of members/custodians to thesettlement account of the clearing agency.

The securities are transferred on the pay-outday by the depository from the settlementaccount of the clearing agency to the pool

accounts of members/custodians.

f NSE


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of NSE


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Process (1) Trade details from Exchange to NSCCL (real-time and end of day trade

file).

(2) NSCCL notifies the consummated trade details to CMs/custodians whoaffirm 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. (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). (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.


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:low Trade ProcessingExchange

Customer BrokerTrading Terminal

Placeorder

Entersorder

Orderconfirm

ClearingCorporation Depository

Trade

Details

Obligation report

ClearingBanks

FundsAvailability

SecurityAvailability

DP

Security

Transfer

SecuritytransferTo CM pool

acct

Securitytransfer

/CC a c


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Auctions

Initiated by Exchange on behalf of trading members for settlement related reasons. On the securities pay-in day, NSCCL identifies short deliveries and the

respective clearing member is debited by an amount equivalent tothe securities not delivered by him and valued at a valuation price

NSCCL conducts a buying-in auction for security shortages on the dayafter the pay-out day through the NSE trading system. If the buy-inauction price is more than the valuation price, the member isrequired to make good the difference.

Close Out all shortages not bought are deemed closed at highest priceof the trading period or closing price on auction day plus 20%


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Order Management

NSE is Order driven market

Order management consists of

Entering orders

Order modification

Order cancellation Order matching


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Entering Order

Active vs. Passive Order (price, time stamping) Order Book

Regular lot, Stop loss, special terms, retail debt order,auction orders

Symbol and Series

Quantity Price

Principal or Client

Order types/conditions


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Order modification

Modify during market hours Change unexecuted quantity, price

Cannot change client code

Cannot exceed price limits

User value is adjusted


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/rder Types Conditions

TimeDay, IOC

Price Market, Stop loss, Limit, ATO

QuantityDQ, MF, AoN, Quantity Freeze

Other conditionsPro, Client, Warehouse


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Order Matching

Touch Line

Best buy order, Best sell order By Price

By Time

Trade Management

Matching of ordersTrade verificationTrade Modification

Trade Cancellation


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Trading & Equity

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