MODULE IV

SECONDARY MARKET
The Securities Contract [Regulation] Act 1956 defines stock exchange as "any
body of individuals, whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying, selling or dealing
in securities".
Role and Functions of Stock Exchanges
Stock exchanges have become an essential part for any moderneconomy. They
provide an efficient mechanism for trading in securities. Presently the trading
platform provided in every stockexchange is electronic and hence there is no
need for the buyers and sellers to meet at a physical location. The following
are the specific functions performed by the stock exchanges.
 Stock exchanges provide a market place for the purchase andsale of
securities. In other words, stock exchanges provideliquidity and
marketability to investment in securities.
 Stock exchanges provide the linkage between the savings andthe
investment. They help to channalise the savings intocorporate
enterprises and productive ventures.
 They help in enhancing economic growth by allocatingsavings to the
most efficient avenues of production.
 Stock exchanges serve as a barometer of the economy whichindicates
the market prices of securities. Market price of securityis the outcome of
collective judgement, made by a large numberof buyers and sellers in
the market.
 Stock exchanges provide ready information regarding thevaluation of
securities which indicate the financial health ofcompanies.
 Stock exchanges compel the issuers of securities to improvetheir
performance by widely disseminating the ups and downs inthe prices of
securities.
 Stock exchanges ensure transparency in security transactions.
 Stock exchanges have different measures and mechanisms toensure fair
dealings and protection of the interest of the investors.
Distinctions between Primary Market and Secondary Market
In the primary market, companies offer securities to public with the purpose of
raising capital. The securities so issued are subsequently traded in secondary
market or stock exchanges. In other words,secondary market is a venue where
existing securities are traded. In addition to this basic difference there are
some other notable differences between primary market and secondary
market as givenbelow.
Members of the Stock Exchanges
Transactions in stock exchanges are executed by the members[brokers] who
deal with the investors. A member of a stock exchangeis an individual or
corporate body who holds the right to trade in the listed securities. The
members in a stock exchange and persons authorised to provide services of
the exchange to the investors can be categorised into the following types.
 Stock Brokers
Stock brokers are the trading members of stock exchanges, A stock
broker is an intermediary who arranges to buy or sell securities on
behalf of a client. They play a significant role in the secondary market by
bringing together the buyers and sellers. The trading platform of the
stock exchange is accessible only to the trading members. A client can
have access to the trading platform only through a trading membe. A
broker can be a member of one or more stock exchanges. Apart from
individuals, companies and financial institutions can become members
of a stock exchange. In the case of partnership firms,rules differ between
exchanges. In NSE, registered partnership firms can become members.
But a partnership firm as such is not eligible to become a member of
BSE.
In order to deal in securities one should get admitted into a stock
exchange as a member and then obtain a certificate of registrationfrom
SEBI. The admission of trading members [brokers] to the different
segments of a stock exchange is governed by the provisionsof Securities
Contract [Regulation] Act 1956, SEBI Act 1992, SEBI rules and guidelines
issued from time to time and the bylaws of the concerned stock
exchange. An applicant will be admitted as a member only if the stock
exchange is satisfied on factors like capital adequacy,track record,
educational qualifications and experience.
a) Eligibility
A person is eligible to apply and obtain a membership in a stock
exchange if he or she:
I. is a citizen of India;
II. is not less than 21 years of age;
III. has the minimum educational qualification prescribed;
IV. has not been adjudged as bankrupt;
 V. has not been convicted of an offence involving fraud or
dishonesty;
VI. is not engaged in any business other than that of securities;
VII. has at least two years of work experience in the field
VIII. has minimum net worth and working capital as fixed by
theexchange and
IX. qualifies a written test conducted by the exchange.
A company shall be eligible to be admitted as a member of the stock exchange
if:
i)it is formed as per the provisions of the Companies Act;
ii) it satisfies the financial requirements specified by SEBI;
iii) all the directors are above 21 years of age;
iv) none of the directors of such company is disqualified for beingmember of a
stock exchange;
v)none of its directors is adjudged bankrupt, convicted for anoffence involving
fraud or dishonesty and disqualified otherwisefrom becoming member in a
stock exchange;
vi) not less than two directors satisfy the criteria regardingeducational
qualification and experience and
vii) has minimum paid up equity capital of 30 lakhs.
b)Certificate of Registration from SEBI
A stock broker can apply for registration to SEBI through the stockexchange in
which he is a member. To obtain the certificate ofregistration from SEBI, the
broker applicant:
i) should have the eligibility to be admitted as a member of a
stockexchange;
ii) ii) should have the necessary infrastructure like adequate officespace,
equipment and manpower to effectively discharge theduties;
iii) should have sufficient past experience in the business of
buying,selling or dealing in securities andiv) the applicant or any of
his partners, directors or employees should not have been subjected
to any disciplinary actions by any stock exchange.
Types of Brokers
Based on the nature of operations, brokers in stock exchanges canbe classified
into the following categories
1) Jobbers or Tarawaniwalas
A Jobber or Tarawaniwalla is a broker who buys and sells securities in his
own name. The Jobber functions as a wholesaler in the stockmarket. The
profit he earns from such trade is called 'turn'. They specialise in the
dealings of one or a few number of securities. Jobbers always offer a two
way quote for a security they deal in,i.e., the price at which they are
ready to buy and the price at which they are ready to sell. The difference
between the price at which heis ready to sell and buy is called Jobber's
Spread. A Jobber generally deals with a broker or another Jobber.
Companies appoint Jobbersas market makers to ensure liquidity for their
securities. In India Jobbers are not prohibited from dealing on behalf of
clients.
2) Commission Brokers
Commission brokers are the stock exchange members who act on behalf
of their clients. They either buy or sell securities according tothe
instructions of the clients or enable the clients to trade through them.
They do not specialise in the dealings of any security. The commission or
brokerage charged from clients is their remuneration.
3) Arbitrageurs
An arbitrageur is a specialist who tries to earn profit by exploiting the
price differences of securities, if any, existing in different stock
exchanges. He buys the security from the exchange where it is lower
priced and immediately sells the same in another market where it is
priced high. An arbitrageur makes profit from the small difference in
price by doing large volume of trade.
4) Security Dealers
Security Dealers specialise in transations of government securities,

Sub Brokers
Persons appointed by the trading members or brokers as their agents to assist
the investors in buying, selling or dealing in securities are called sub brokers.
Sub brokers are intermediaries working on behalf of the brokers. Individuals as
well as institutions can be appointed as sub brokers. The sub brokers have to
be affiliated to a stock brokerand get registration from the stock exchange.
They are also required to obtain a certificate of registration granted by SEBI.
Sub brokers cannot transact in securities independently, but can do it only
through the principal broker. A sub broker is permitted to associate withone
trading member only.)
The brokers appoint sub brokers at various places to increase their client base
through localised services. Sub brokers operate from different locations and
bring clients to the principal broker. As remuneration, the sub broker receives
a share not exceeding 40% of the brokerage charged by the principal
broker.The stock broker appointing the sub broker shall be responsible for the
settlement of all security deals of the clients which originate through the sub
broker. They are also responsible to ensure that thesub brokers function in
accordance with the rules and regulations of SEBI and the stock exchange.
Authorised Persons
An authorised person can be defined as "any person - individual,partnership
firm or body corporate - who is appointed by a stock boker and who provides
access to trading platform of a stock exchange as an agent of the stock broker".
Thus authorised persons are appointed by the brokers to procure clients and
enable such clients to access the stock exchange through the broker. Such
authorised persons are eligible for remuneration for their services from the
trading member and shall not charge any amount from the client. The clients
introduced by the authorised person will have a direct relationship with the
trading member
.A trading agreement is entered into between the client and the trading
member. The trading member shall issue the contract notes and bills directly
to the client. The clients shall deliver securities and make payments directly in
the name of the trading member. Similarly, the broker shall deliver securities
and make payments directly to theaccount of the client. One can become
'authorised person' to one trading member only.
Remisier
Remisier is a person engaged by a member-broker in BSE to solicit business in
securities, on a commission basis. The Remisiercan operate BOLT terminals at
the broker's office only. For appointing a Remisier approval of the exchange is
needed but SEBI approval is not necessary.
Code of Conduct for Stock Brokers
SEBI has specified a clear set of code of conduct for all the brokershaving
certificate of registration. Accordingly a stock broker:
1)shall maintain high standards of integrity and fairness in all thedealings of his
business;
i) shall act with due care and diligence in the conduct of business;
ii) shall not indulge in any manipulative or fraudulent transactionsnor
spread rumours for making personal gains;
iii) shall not create false market either singly or jointly which mayact
against the interests of the investors;
iv) shall not involve himself in excessive speculative business
beyondreasonable levels of his financial soundness;
v) vi) shall faithfully execute orders of the clients for buying and
sellingof securities at the best available market price;
vi) shall not refuse to deal with small investors merely on the groundof
the low volume of business involved;
vii) shall issue contract note without delay to his client or client ofthe sub
broker;
viii) shall not discuss, disclose or misuse the details of personal
investments of his clients;
ix) shall not encourage sale or purchase of securities with the soleobject
of getting brokerage or commission;
x) shall not deal for a client who has failed to fulfil his commitments to
any other stock broker;
xi) shall not advertise his business unless permitted by the stock
exchange
Investment and Speculation
All the transactions in securities can be broadly classified into twoas follows.
i) Investment: Investment is the process of deploying financial
resources basically to enjoy long term benefits. The long term
 benefits in securities market are capital appreciation in the form of
increasein the value of the stocks, periodic dividends, receipt of rights
shares,bonus shares, voting rights and the like. People who invest
with such purposes are called investors.
ii) ii) Speculation : Speculation is an attempt to make capital gains from
the price movements of the scrips in the securities marketover a
short span of time. Those who engage in such type of activitie sare
called speculators. Speculators buy and sell securities frequentlyand
are not interested in keeping them for long term. Investors own and
possess the security purchased while speculators quite often settle
the transaction without taking actual delivery. Speculation involves
high risk. If the expectations of the speculator come truehe gets huge
profits and otherwise there will be heavy losses.
Both investment and speculation involve the purchase of assets withan
expectation of return. But they can be distinguished on the basisof the risk
bearing capacity of the parties, expectation of returnsand duration of
investment.
An investor prefers low risk investments, whereas a speculator isprepared
to take higher risk for higher returns. Speculation focusesmore on returns
than on safety. Speculators have no intension ofowning the investment.
Their main motive is to achieve profits throughprice changes. Since an
investor is interested in a good rate of returnon a consistent basis over a
relatively longer duration, he computesthe real worth of the security before
investing in it. On the otherhand the speculator seeks returns from the
market quickly. Thereforemarket expectations and price movements are
the main factorsinfluencing his trading decisions.

Type of Speculators
A speculator is one who deals in securities relying on his own views and
expectations about market trends. Speculators take calculated risks, based
on anticipated future price movements. They hope tomake quick and large
gains but need not be successful always. It is the speculators who infuse
volatility [fluctuations in the market priceof a security] to the capital
market.
Based on the nature of market operations, speculators in stock exchanges
can be categorised as follows
Bull
Bull is an optimistic speculator who buys shares wit an expectation of selling
them at a higher price in future. When there are many buyers in the market
and the prices of securities surge, the market is said to be bullish. When
there is bullish tendency in the market, share price tends to trigger up
again, as a result of better expectations of future.
The term came from the way in which a bull attacks its oponent. A bull
attacs by trying to throw the enemy up into the air using its horns. Bull
markets are characterised by optimism, investor confidence and
expectations that strong results will continue.
Bears
A bear is a speculator who sells shares anticipating a fall in prices. Lator if
the prices fall as expected, he buys the security at lower prices and thus
maes profits. Bear is a pessimist who believes that the prices are likely to
head down.
He acts like the bear which tries to press down its enemy to theground
while attacking. When the market is dominated by the bears,it said to be
bearish. The bearish activities result in further fall in the prices of securities.
A bear market is characterised by low investor confidence and widespread
pessimism. When the market is bearish the number of sellers will be more,
compared to buyers.
Stags
The IPOs of reputed companies will usually be over subscribed by several
times and only a limited number of applicants will get allotment of shares.
Those applicants who do not get allotment willbe ready to pay a higher
price than the issue price to get the shares from the secondary market upon
listing. In order to utilise such asituatioin, bull speculators apply for large
quantity of shares of good companies during new issues. They are called
'stags'. Stags who apply in large quantities and getting allotment, off load
their shares at profit immediately when such shares are listed. They are
 called stags because of their speed in action resembling a stag [male
deer]which runs very fast.
Lame Duck
The phrase 'lame duck' generally refers to a person who is not able to
properly function, especially one who was proficient earlier. A bear
speculator is sometimes referred to as a lame duck when he is unable to
fulfil his commitment to the counter party in the stock market. This
happens when a bear sells secutities without possessing the same (short
selling) faces heavy loss when the market prices goup far higher on
settlement date or when the securities are not available from the market
for settling the trade.

Speculative Transactions
With the abolition of outcry system and introduction of on-line trading,
enforcement of strict regulatory norms, several types of speculative practices
prevailed in the secondary market earlier have disappeared. The following are
some of the speculative transactions prevailing inthe market at present.
 Day Trading or Intra-day Transactions
Day trading is a highly speculative practice. A day trader is one
whoholds securities for a very short time from minutes to hours and
makes numerous trades each day. In day trading, the trades are entered
and closed on the same day. Therefore they are popularly called as
intra-day transactions or simply as 'intra-day'. For doing intra-day
transactions, one has to deposit a certain percentage ofthe amount
involved in the buying or selling of securities, with the broker. The
percentage to be deposited is decided by the client and the broker. The
broker permits the speculator to do business for amounts several times
[say 3 or 5 times] greater than the deposit amount.
The speculator is permitted to keep an amount as margin in his account
with the broker and do business for several times of the deposit
amount. He may buy shares with the expectation that pricewill increase
immediately so that he will be able to sell at a higherrate and make
profit before market closing. If his expectations come true he will make
profit. In contrast to his expectation, if the price decreases he can either
square off the transaction by selling at the lower rate and bear the loss
 or make it a normal transaction by bringing in additional amount and
taking delivery of the securities.
 Short Selling
Short selling is a common type of speculative trade. Normally asecurity
is bought and sold later. The reverse process-selling as ecurity first,
without having it in hand-is called short selling. Inother words, selling
shares which the seller does not own at the time of trade is called short
selling. Short sellers assume that they would able to buy the stock at a
lower rate than the price at which they are sold. If the stock price falls
according to his expectations, he can earn profit which is the difference
between the price at which he has sold it and the market price at which
he squares thetransaction.For example, if an investor 'sells short' 100
shares of ABC companyfor 50 per share and the price of the stock drops
to 35 and squares at that price, his profit is 15 per share or Rs 1,500.But
the short seller loses when the price of the stock increases in contrast to
his expectation. In that case, the only option available is to square it off
by bearing the loss. If he is unable to square off the transaction he has
to incur heavy penalty charged by the exchange.Hence very high risk is
involved in short selling.
 Margin Trading
Margin trading is the system of trade in which one is allowed to invest
in excess of his financial capacity by borrowing funds. In margin trading
an investor provides only a part of the funds needed for the deal and
the balance is raised from banks in the form of borrowing. In 2001, RBI
allowed banks to finance margin trading within the permitted ceiling
limit. The investor needs to bring in 50 % funds requirement of the deal
as margin and the remaining can be borrowed. Banks provide finance to
the investors through the brokers. Investors use this method to own
more securities without fully paying for them. Margin trading is
permitted only in the case of a limited number of actively traded scrips.
 Derivative Transactions
Derivative is a product whose value derives from the value of another
underlying asset. In other words derivative products obtain their value
based on the value of another asset, through a contract between two
parties. The underlying asset can be a security, foreign
exchange,commodity or any other asset. Speculators make use of
derivative products for trading by assessing the possibility, extent and
 direction of price movements of the underlying assets.Derivative
contracts have several variants. The most common variants are
forwards, futures, options and swaps. Of the four,forwards and swaps,
are basically bilateral transactions taking placeover the counter and not
in organised exchanges. A forward contract is a contract between two
parties where price settlement takes place only on a specific future
date, at a pre-agreed price. The word swap simply means 'exchange'.
Swaps are private agreements between two parties to exchange two
assets or in comes in future, based on a pre-arranged formula. Currency
swap andinterest rate swap are the two commonly used swaps,The
other two derivatives - futures and options - are traded in stock
exchanges with speculative objectives. A futures contract is an
agreement between two parties to buy or sell an asset at a certain time
in future at a pre determined price and forwards are basically same with
the difference that futures are standardised contracts traded in
exchanges. Options contracts are basically of two types viz. call option
and put option. Call option gives a person a right to buy [but no
obligation]a given quantity of the underlying asset at a given price on or
before a given future date. On the other hand Put option gives the
buyer a right to sell [but no obligation] a given quantity of the
underlying asset at an agreed price on or before a given date.
 Arbitrage
Arbitrage is the attempt to make profit by exploiting the price
differences existing in different stock exchanges. It involves buying
securities from a low priced market and simultaneously selling them in
the high priced market. The traders who do this type of transactions are
called arbitrageurs. Arbitrageurs need keen observation of the market
and speedy action, to be successful in this field. Since the price
difference per security will be nominal, huge volume of trade is needed
to make profit through arbitrage.

Fraudulent and Unfair Trade Practices

In spite of the control mechanisms initiated by the regulatory
bodies,unscrupulous players may resort to fraudulent and unfair practices in
the market to make profit. SEBI and stock exchanges are always trying to put
down such practices by imposing heavy penalties andother legal measures.
Some such fraudulent and unfair trade practices that normally occur in market
are explained below.
Insider Trading
Trading of a company's securities by an insider having access to price sensitive
information is termed 'insider trading'. An insider isa person having access or
means of access to any price sensitive information of a listed company.
Directors of the company, top officers, auditors, officials of stock exchanges
and SEBI, etc., are considered as insiders.
Insider trading is an offence and hence prohibited as per SEBI[Prohibition of
Insider Trading] Regulations 1992 which was later amended in 2003. The Act
prohibits an insider, possessing any unpublished price sensitive information,
from dealing in securities ofthe company.Price sensitive information means
any information which is directlyor indirectly related to the company, which if
published, is likely tomaterially affect the price of its securities. The following
information is deemed to be price sensitive.
i) Periodical financial results of the company
ii) Intended declaration of interim or final dividends
iii) Issue of securities or buy backs
iv) Any major plan for expansion or execution of new projects
v) Amalgamation, merger or takeovers
vi) Significant change in policies, plans or operations of the company
vii) Disposal of whole or substantial part of the undertaking
Rigging the Market
Rigging the market is an illegal activity through which a group of persons or
institutions creates artificial hike in the price of securities than what is really
justified by market forces. Market rigging is done to attract investors to the
scrips whose prices are manipulated and then sell the securities at the blown
up prices.
There are different ways to create a rigged market. Side-by-sidetrading is one
among them. It is a practice of buying for selling) a security and at the same
time buying for selling) an option on that security, Laddering a stock is another
practice in which a significant amount of stock is purchased when its price is
rising in order to pushthe price even higher with the objective of selling them
when theprice reaches its peak.
Wash Sales
Wash sale is a transaction in which an investor sells a losing security to claim a
capital loss for tax purposes. The security sold is repurchased immediately,
after claiming capital loss on sale. Thus wash sale is just a method to evade tax,
without actually changing their position. In the case of wash sales, securities
are sold at the end of the financial year so as to record a loss for tax
purposes.The same securities are then repurchased, normally at the beginning
of the next financial year, which will help to restore the earlier position and at
the same time reduce tax burden. At present government has banned such
wash transactions.
Cornering the Market
To corner the market is to purchase large quantity of a particular stock so as to
gain control over the supply of the security and manipulate its price. This may
be done through several ways. One strategy is to simply buy a large percentage
of the available securities from the market and create artificial demand.
Purchasing large number of call options of a security is also a type of cornering
in futures market.

Listing of Securities
Listing means admission of securities of a company for trading on a stock
exchange) When a company is listed on a stock exchange, the company and its
securities are included in the official trade list ofthe exchange. The objective of
listing is to provide marketability and liquidity to the securities. Listing, to a
certain extent, ensures investor protection also. Listing increases the credibility
of the issuer company and its securities. In order to get listed a company has to
satisfy strict requirements specified by the exchange. A company which wants
to get listed must apply to the regional stock exchange nearest to its registered
office. The basic norms for listing of securities are uniform for all exchanges.
The company will get listing if it complies with all the rules and norms insisted
by the exchange, subject to the guidelines of SEBI. A company can get its
securities listed on more than one stock exchanges. Stock exchanges charge
listing fee based on the paid up share capital of the company. Listing fee is a
major source of income to the exchange.Once securities are listed, the stock
exchange will ensure compliance of the conditions laid down in the listing
agreement. Listed companies have to make continuous disclosure of financial
results and other material information likely to affect the interests of the
stakeholders or prospects of the company.
Benefits of Listing
The following are the important benefits of listing.
i) Listing assists companies and entrepreneurs to raise capitalrequired
for new projects, expansions, diversification, etc.
ii) Market reflects the actual price of shares as perceived by
theinvestors from time to time and hence listing helps a companyto
have independent valuation of its overall performancefrequently.
iii) Listing enables the company to extend its profile to a largenumber of
domestic and foreign investors, free of cost.
iv) Financial analysts and media reports cover the
performance,problems and prospects of listed companies only.
v) Listing enables companies to make use of the wide networkof stock
exchanges to disseminate information like financialresults, book
closure, announcement of bonus, rights issue, etc.
vi) Securities of listed companies are traded in large volumes sothat the
cost of trading gets reduced.
vii) Listing leads to better and timely disclosures of information whichis
helpful to protect the interests of the investors in particularand
public in general.
Classification of Listed Securities
The NSE and BSE classify their listed stocks in different ways as given below.
a) Categorisation by NSE
NSE classifies the listed securities into three categories based on the
market demand and impact cost. Impact cost represents the cost of
executing a transaction of a given stock.
Group I: Shares which have been traded for at least 80% of the days for
the previous six months and having an average impact cost of less than
or equal to 1%, are included in this group.
Group II: Shares which have been traded for at least 80% of the days for
the previous six months and having an averag impact cost of more than
1% are categorised into this group.
Group III: The remaining shares which are not included in any of the two
categories mentioned above are included in this group.
 b) Categorisation by BSE
At the Bombay Stock Exchange securities in the equity segmentare
classified into A, B, S, T, TS, and Z groups.
A Group: Securities of blue chip companies belong to this category.of
floating stock and large market capitalisation. A group shares are also
called specified shares. They are the most actively traded securities in
the exchange.
B Group: Thisgroup includes rest of the scrips which are not included in
group A, belonging to quality companies with high growth potential.

S Group: This group includes small cap stocks. Such scrips are enrolled
under the name 'BSE Indonext' segment. Companies witha minimum
post issue capital of 3 crore and turnover of an equal amount are
included in this segment.

TGroup: This group represents scrips on which short selling is

notpermitted, and dealings should be settled on a trade to trade basis.
TS Group: This group consists of scrips in the 'BSE Indonext'segment
which are settled on a trade to trade basis.
Z Group: This group was introduced by BSE in 1999. The Z group includes
shares of companies which have failed to comply with its listing
requirements or failed to resolve investor complaints or have not made
the required arrangements for dematerialisation of their securities.
Odd-lot Segment: In the case of companies which havedematerialised
their shares, the market lot is one share.
F Group: Debt market securities which yield fixed income areincluded in
this category.
G Group: Trading in Government securities by the retail investors is
done under this group.

Methods of Trading in a Stock Exchange

With the advent of information technology, the method of trading inIndian
stock exchanges has under gone substantial changes. Earlier the brokers and
agents were to make public announcements of price and other terms of deal in
the trading floor or the exchange. This out cry system was time consuming,
inefficient and tedious. Instead of the same, a nationwide fully automated
trading system is followed now in stock exchanges. The details of the system
are discussed below.
Screen Based Trading
In the beginning of 1990s, the major stock exchanges introduced a nation
wide, electronic, fully automated screen based trading system[SBTS]. With the
introduction of the system, trading shifted from the floor of the exchanges to
the office of the stock brokers. In the case of screen based trading system, an
investor informs a broker to place an order on his behalf. The broker can punch
into the computer the quantity and price at which the client would like to
purchase. The transaction is executed as soon as a matching sale orbuy order
from a counter party is found.
On-line Trading
Now a days majority of the brokers provide internet based trading facility to
their clients. Internet based trading facility enables an investor to buy or sell
securities from any where in the world, through internet. This is done through
a SEBI approved internet based OrderRouting System [ORS] for communicating
the client's orders to the stock exchange through the broker. The ORS enables
investors toplace orders with his broker and have access to the information
and quote rates, on-line. The 'Demat account' also gets updated on-line.
The Trading Process
In order to purchase or sell securities through stock exchanges, the following
steps are required.
Selection of Broker and Opening Account
An investor has to first of all identify a reliable stock broker, enter into an
agreement and open an account with him. For opening the account the
investor has to furnish his identity proof, address proof,age proof, income
details, Permanent Account Number [PAN]obtained from the income tax
authorities, details of bank account,details of investments, other assets and
liabilities and passport size photographs to the stock broker.
On accepting the application of the investor the broker will issue him a unique
client code - user ID and password - which is his identity number in the
securities market. The broker will furnish the details of the client to the stock
exchange and also to the clearing corporation. The broker will arrange to open
an account for the client in the depository [Demat Account] before accepting
ordersfrom him.
Placement and Execution of Orders
Once the accounts with the broking firm and the depository have become
operational the client can start transacting in securities. The client himself can
place orders if he has permission and internet trading facility to do so or he can
transact through the broker. The trading member may provide the client with
order confirmation/modification slip. The order is then placed in the
computerised software system of the exchange to search for matching bids.
When a matching bid is identified the clients order gets executed
automatically. It is possible to cancel an order before it gets executed. If a
suitable match for the order given by the client is not found immediately, then
the orders are stored in the system, on price cum time priority basis. Price
priority means that if two orders are entered into the system, the order having
the best price gets the highest priority. Time priority means if two orders
having the same price are entered, the order entered first gets the first
priority.Currently for shares that are traded in the dematerialised mode the
market lot [minimum order size] is one share.
Types of Orders
There are different types of orders depending upon the conditionsregarding
time, price or quantity specified along with the orders.
a) Orders based on Time Conditions
Day Order: As the name suggests, a day order is an order which is valid
only for the day on which it is entered. The order gets cancelled
automatically at the end of the day if it does not get matched.
Good Till Cancelled [GTC): AGTC order is one which remainsin the
system until it is cancelled by the party. The maximum numberof days a
GTC order can remain in the system is notified by theexchange from
time to time.
Good Till Date/Days [GTD]: A GTD order allows the party tospecify the
date or days upto which the order should stay in thesystem. If it remains
unmatched till the end of the stated period theorder will be
automatically removed. The exchange notifies themaximum number of
days permissible for GTD orders.
 Immediate or Cancel [IOC]: An IOC order is intended to buyor sell a
security as soon as the order is placed. It will be removed ifnot executed
immediately. Partial match is possible for the orderand the unmatched
portion gets cancelled.
Orders based on Price Conditions
Limit Price Order: An order specifying price limit, while enteringthe
order into the system, is known as limit price order.
Market Price Order: An order to buy or sell securities at thebest price
obtainable is termed market price order or best price order.
Stop Loss Price Order: An order that gets activated only whenthe market
price of the security reaches a desired price which isalso called a
threshold price. Until then the order does not enter themarket.
Profit Booking Order:Selling a security when it reaches a price level securing
the minimumexpected profit is called 'profit booking'. Profit booking is possible
when there is a 'bull run' in the market and the prices of securities are likely to
go up again. If the prices surge again the investor would get better profits.
However, if there is a chance for downwardmarket trend, it is safe for the
investor to sell off the position at thedesired price and book profit'.
Orders based on Quantity Conditions
Disclosed Quantity [DQ]: An order with a DQ condition allows to disclose only
a part of the quantity ordered, at a time.
Contract Note
Contract note is a confirmation slip of transactions carried out for a client on a
particular day. The stock broker has to issue a contract note in the prescribed
format to the client showing all the relevant details of the purchases or sales of
securities. Contract note duly signed by the broker shall be issued to the client
within 24 hours ofthe execution of the order, keeping a duplicate copy with
him.The contract note normally contains the name and address of the
registered office as well as dealing office of the broker, his SEBI registration
number, details of each trade including order number,order time, trade
number, trade time, security name, quantity, tradeprice, brokerage,
settlement number, details of stamp duty, STT[Securities Transaction Tax] and
other levies.
Payments/Delivery of Securities to the Clients
The mode of settlement adopted in exchanges is rolling settlement.In this
mode the purchaser shall make funds available and seller shall make the
securities available to the exchange on the second day of every transaction. On
the same date [pay-out day] the exchange make funds and security available to
the concerned brokers.The brokers shall make payment to the client for the
securities sold or deliver the securities purchased within one working day of
the pay-out. Through this process the securities purchased by the client get
credited and the securities sold get debited automatically in his demat account
at the depository.
Brokerage
The brokerage is negotiable between the broker and the client. The maximum
brokerage that can be charged by a broker from his client cannot be more than
2.5% of the contract price. This maximum is does not include taxes and other
statutory levies. Brokerage shall be indicated separately in the contract note.
Practically, the average brokerage charged is much lower than 2.5%.8.5.
Advantages of Screen Based/Online Trading
The electronic trading system provides the following advantages to the
participants.
i) The screen based/on-line trading reduces time, cost, errors and
frauds associated with securities trade. This results in improved
operational efficiency in the secondary market.
ii) The system reduces the scope for price manipulation or arbitrage
and there by decreases the scope for high volatility in the market.
iii) Online trading system allows faster incorporation of sensitive
information into market price and thereby increases the
efficiencyof the market.
iv) It makes the market transparent because the participants
canwatch the movements on real-time basis.
v) The electronic trading system allows large number of
participantsirrespective of their geographical locations.
vi) It reduces the time required for converting the securities intocash
and vice versa.
vii) It provides high flexibility to the users in terms of kinds of
ordersthat can be placed.
 viii) The system provides equal opportunity to every category
ofinvestors because even a single share can be purchased or
soldthrough online system.
ix) It ensures anonymity because the identity of clients is not
revealed.
x) The system has ample mechanism for maintainging detailed
records and proofs for transactions between the clients.Therefore
settlement of disputes, if any, is simple and faster in the case of
online trading.
Clearing and Settlement
After trading, the next phase in a transaction is clearing and settlement.
Currently rolling settlement is followed in the secondarymarket, which is
explained below.

Rolling Settlement
Rolling settlement is a system of settling transactions within a fixed
number of days after the transaction. Under rolling settlement
transactions on the first trading day are settled on the third trading day,
transactions on second trading day are settled on the fourth trading day
and so on. In other words, a transaction on Monday is mandatorily
settled on Wednesday, a transaction on Tuesday is settled on Thursday
and so on. In short, a rolling settlement system of 'T+2' is followed in
India where 'T' is the trading day. All the intervening holidays [bank
holidays, exchange holidays,Saturdays and Sundays] are excluded for
determining the settlement day. Default risk is considerably less in the
case of rolling settlement.The buyers and sellers of securities get their
securities or money in time, without default. Pay-in day is the day on
which the price of the security purchased is paid by the buyer while Pay-
out day is the day on which the price of the security is paid to the seller.
Intermediaries in Clearing and Settlement
Several intermediaries like the clearing corporation, clearingmembers,
custodians, clearing banks, depositories, etc., are involved in the
settlement process. The role and functions of different intermediaries
involved in the settlement process are briefly described below.
Clearing Corporation
Clearing corporation, is an organization associated with an exchange
rato to facilitate confirmation, settlement and delivery of transactions.In
order to ensure that transactions run smoothly, clearingcorporations
become the buyer to every seller and the seller to every sebuyer. They
are also referred to as 'clearing firms" or 'clearing houses', Clearing
corporations are set up with the prime objectiveof improving efficiency
in the transaction settlement process, insulatethe financial system from
shocks of operations related issues.The National Securities Clearing
Corporation Ltd. [NSCCL] established in 1995 was the first clearing
corporation in India. As aresult of the setting up of clearing corporation,
trades are now settled,even if there is default by a member

Clearing Members
Clearing Members of the Clearing Corporations facilitate settlementof
trades done on stock exchanges, Clearing members may bebrokers or
custodians registered with SEBI. They are important intermediaries in
the capital market and an essential link in the depository system.
Clearing members are responsible for settlingtheir obligations as insisted
by the clearing corporation. They confirmthat both funds and securities
are made available by the parties sothat the transactions are settled as
per contract.
Custodians
A custodian is one who helps to register and safeguard the securities of
the clients
Clearing banks
Clearing bank can act as the link between clearing members and clearing
corporation to effect settlement of funds
Depositories
Depositories hold the securities in electronic form on behalf of the
investors and enable easy and fast transfer of securities traded
Process of clearing and settlement
Trade recording
The key details about the trades are automatically recorded in the
electronic trading system to provide a basis for ettlement
Trade confirmation
The parties to the trade agree upon te terms of trade like security,
quantity,price and settlement date
Determination of obligation
At this stage NSCCL intervenes and decides what the counter parties
owe and what they are due to receive on the settlement date
Pay in of Funds and Securities:
The clearing members make the securities available in the designated
accounts of the clearingcorporation, with the depository. Similarly
clearing members withof the clearing corporation funds obligation make
the funds available in the designated account
Pay out of Funds and Securities:
Finally, the clearing corporation instructs the depository and clearing
bank to release pay out of funds and securities. The depository and
clearing bank debit the accountsof the clearing corporation and credit
the accounts of the respectiveclearing members. The clearing and
settlement process is overupon release of pay out of funds and
securities.
Depository System
Depository is a market intermediary established under the Depositories
Act 1996 for keeping and transferring the securities inthe electronic or
dematerialised [Demat] form. Securities can be dematerialised at the
time of issue or subsequently. Issue of securitiesof less than 10 crores
can be made either in physical or dematerialised form. However issue of
securities of 10 crores or more must be in dematerialised form.
Moreover all the issues made through 'book building' must be in
 dematerialised form. A depository can be compared with a bank which
holds the deposited funds and facilitates fund related transactions.
The following are the major differences between a bank and
adepository.Bank and Depository
BANK DEPOSITORY
Holds funds in account Holds securities in account
Transfers funds to other accounts Transfers securities to other
on the instructionof the account accounts on the instructionof the
holder account holder
Facilitates transfers without Facilitates transfers of securities
physical handling of securities without physical handling of
securities
Facilitates safe keeping of money Facilitates safe keeping of
securities

National Securities Depository Limited [NSDL]

The NSDL was established in August 1996. The major promoters of NSDL
are IDBI, UTI and NSE. The other shareholders are HDFC Bank, Deutsche
Bank, Axis Bank, Citibank, Standard Chartered Bank, HSBC, Oriental Bank
of Commerce, Union Bank of India, Dena Bank and Canara Bank.
NSDL provides various services to investors and other participants in the
capital market. Such services include basic facilities like account
maintenance, dematerialisation, rematerialisation, settlement of trades
through market transfers, inter-depository transfers, etc.
Central Depository Services Limited [CDSL]
CDSL was promoted in 1999 by Bombay Stock Exchange Limitedjointly
with State Bank of India, Bank of India, Bank of Baroda,HDFC Bank,
Standard Chartered Bank, Union Bank of India and Centurion Bank. It
was started with an initial capital of 104.50crores.
Dematerialisation of Securities
Dematerialisation is the process of converting physical securities into
electronic form. Companies are required to apply to a depository for
dematerialising their existing securities or the proposed securities,in the case
of a new issue. The depository will evaluate the eligibility of the securities for
admission. Under the SEBI [Depository andParticipants] Regulations 1996
shares, scrips, stocks, bonds, debentures, units of mutual fund, certificate of
deposits, commercial paper, money market instruments, government
securities, odd-lot shares and even unlisted securities are eligible for
dematerialisation.
Dematerialised shares do not have any distinctive number. Dematerialised
shares are fungible, which means that all the holdings of a particular security
will be identical and interchangeable. The investor's ownership of the security
is described in terms of thenumber of shares held. In the depository the
dematerialised securitiesare identified on the basis of ISIN [International
SecuritiesIdentification Number] and the number of shares.
Depository Participant [DP]
The depository provides its services to investors through its agents called
depository participants [DPs]. One has to open a depository account through a
DP, to avail the services of a depository.Depository participants are appointed
by the depository with theapproval of SEBI. Banks, financial institutions, non-
banking finance companies, R&T agents, custodians, clearing corporations and
stock brokers registered with SEBI can become DPs. The depositoriesdo not
charge fees from the investors directly, but they charge theirDPs, who in t
collect fee from their clients.
Benefits of Depositories to an Investor
The following are the benefits available to an investor from adepository and its
dematerialised trading system.
1) A depository enables an investor to buy or sell securities at anytime in any
denominations.
2) Immediate transfer of securities to the account, without delay.
3) Stamp duty is not applicable on transfer of securities in dematform. In case
of physical transfer of securities stamp duty ispayable on the market value of
shares transferred.
4) Elimination of risks associated with physical certificates such asdelays, loss in
transit, mutilation, forgery, theft, etc.
5) Dividend, bonus, rights, interest, etc., are directly credited tothe demat
account so that the security holder need not do anything in such situations.
6) Avoids paperwork involved in transfer of securities.
7) Transaction cost is very low since transactions are in electronicform.
8) Nomination facility is available for demat accounts, as in thecase of bank
accounts.
9)Change in address recorded with the Depository Participantgets
automatically registered with the companies whosesecurities are held by the
investor which avoids separatecorrespondences.
10) Transmission of securities is done directly by the DP whichhelps to avoid
correspondence with companies.
11) Enables holding finvestments in equity, debt instruments andgovernment
securities in a single account.
12) Automatic credit of shares into the demat account arising outof stock split,
consolidation, merger of companies, etc.
13) Depositories provide periodic information regarding the statusof the
account.
14) Banks and other financial institutions prefer to give loans on thesupport of
demat securities.
15) If required, demat account can be temporarily locked withouttransactions.
Rematerialisation
Rematerialisation is the process of converting demant securities into physical
form. If an investor finds that it is more convenient for him to convert the
dematerialised holdings, he can apply to the depository for rematerialisation of
holdings. On application for rematerialisation, the Registrar and Transfer
agents will despatch printed security certificate to him. Rematerialisation of
securitieswill be completed within a period of 30 days from the receipt of
request. Though the investors have a right to hold securities in either physical
or demat form, it is compulsory that trading in securitiesshould be in
dematerialised form [except for odd-lot securities].
Stock market indices
A stock market index is a measurement which indicates the nature, direction
and extent of the day to day fluctuations in the stock prices. Stock market
indices are often described as the barometers of the economy since they
reflect the expectations about the economy as a whole.

Major indices of NSE

S&P CNX: This is the most famous index of NSE and is popularly called Nifty. In
the name of the index S & P stands for the standard and poor C stands for
CRISIL, N stands for NSE and X for index. Nifty stands for national index of fifty
shares
Nifty is constructed out of the values of 50 stocks from among the listed
companies of NSE.
S&P CNX Nifty is computed using market capitalisation weighted method,
wherein the index reflects the total market value of the stocks in the index,
compared to the base period. The base periodof Nifty is 3 November 1995, the
day on which NSE completedone year of operation of its capital market
segment. The base valueof the index was set at 1,000 points.
S&P CNX Defty: This is S&P CNX Nifty measured in USdollars [Defty means
dollar denominated Nifty]. It is developedbasically to help the international
investors who buy and sell Indianstocks. The S&P CNX Defty enables the
investors to measure'their returns on equity investments in India, in dollar
terms.
CNX Nifty Junior: This index is constituted with the next best50 stocks
remaining after the first best 50 in CNX Nifty. Nifty andNifty Junior together
constitute the 100 most liquid stocks on NSE.A stock will not be included in
both the indices at a time. The basedate of nifty junior index is 3 November
1996.
CNX 100: CNX 100 is a diversified 100 stock index representingshare price of
companies chosen from 35 sectors of the economy.
S&P CNX 500: S&P CNX 500 represents price of shares of500 companies
chosen from 72 industries.midde cart
CNX Midcap: CNX Midcap introduced in 2005 is a 100 stockindex that
represents the medium capitalised segment of the stockmarket.The indices of
NSE are reviewed twice a year to include new eligiblestocks and exclude those
shares which do not qualify thepredetermined norms.
Major indices of BSE
SENSEX
On 1st anuary 1986 BSE Came out with its first index – sensex that later became
the most popular index of the country sensex is based on 30 stocks. Its original
base year was 1978 – 79 and base index value was 100
BSE 100
In 1989 BSE launched BSE national index with base year 1983 – 84 and base
index value 100 .it comprised 100 best stocks listed at five major stock
exchanges of india viz Bombay, Calcutta,Delhi, Ahamedabad and Madras.
BSE 200 and DOLLEX 200
To provide better representation of te increasing number of listed companies
and sectors BSE launched these two indices inmay 1994
BSE 500
This index was launched in august 1999 with same year as the base year and
1000 as the base index value. It covers 20 maor induatrial sectors of the
economy
BSE mid cap and BSE small cap
BSE mid cap and BSE small cap indices are introduced to trac the performance
of companies wit smaller market capitalisation

Benefits of Stock Market Indices

The following are the important advantages of stock marketindices.
1) The stock market indices are reliable indicators of the
economicperformance of a country in general and different segmentsof
the economy in particular.
2) They serve as a barometers of the equity market.
 3) They can be used to compare the returns on investments instocks with
other forms of investments such as debtsinstruments, gold, real estate,
etc.
4) They serve as the base for futures and option contracts.Modern
financial products such as Index Funds, Index Futuresand Index Options
are important tools for hedging and riskmanagement in financial
investments.
5) Index is a general indicator which cannot be manipulated asin the case
of individual stock prices.
Blue chip stock
Shares of well established and financially sound companies, with very little
investment risk and good history of earnings and divend payments are often
called blue chip stock.
De-mutualisation of Stock Exchanges
In a stock exchange where the ownership, management and trading are
concentrated in a single group, it is called a 'mutual exchange'.In the case of a
mutual exchange, the broker members own the exchange, manage the
exchange and trade in securities.If the functions of ownership, management
and trading are clearly segregated from one another it is called a demutualised
exchange.The National Stock Exchange [NSE] and Over the Counter Exchange
of India [OTCEI] were started as demutualised exchanges. Later, SEBI notified
Corporatisation and Demutualisation scheme for the other exchanges also.
Currently all the stock exchanges inthe country are demutualised.