TABLE OF CONTENTS

 Certificate
Acknowledgement
Executive Summary
Objective of the Study
Methodology
Job Description

Chapter 1. Introduction of Sharekhan Limited

 About Sharekhan Limited

 Products and Services of Sharekhan Limited
 Types of account in Sharekhan Limited
 How to open an account with Sharekhan Limited?
 Research section in Sharekhan Limited
 Awards and Achievements
Chapter 2. Financial system –an overview

 Financial market
 Component of capital market
 Primary and secondary market
 Production in secondary market

Chapter 3. stock exchanges

 Functions of stock exchange

 The Bombay stock exchanfe
 The national stock exchange
Chapter 2. Introduction to Derivatives

 Derivatives defined
 Emergence of Derivatives
 History of Derivatives
 Global Derivative Markets
 Derivatives Market in India
 Participants and Functions
 Types of Derivative Instruments
 Derivative Market at NSE
 Approval for Derivative Trading
 Clearing and Settlements
 Index Derivatives
 Trading
 Order type and Condition
 SEBI Advisory Committee on Derivative

Chapter 3 . Introduction to Futures and Options

 Forward Contracts
 Future Contracts
 Options
 Payoffs for Derivative Contracts

Chapter 4 . Hedging, Arbitrage and Speculation Strategies

 Hedging Strategies with examples

  Arbitrage Strategies with examples
 Speculation Strategies with examples

Chapter 5 . Applicability of Derivative Instruments

 Risk Management: Concept and Definition

 Risk Management with Future Contract
 Risk Management with Options
 Introduction to Option Strategies

Chapter 6 . Achievements in Futures and Options

Segment

 Comparative Analysis of F&O Segment with Cash Segment

 NSE Position
 Top 5 Traded Symbols

Chapter 7 . Conclusion
 ACKNOWLEDGEMENT

A project is never the work of an individual. It is moreover a

combination of ideas,suggestions, review, contribution and work
involving many folks. It cannot be completed without guidelines.

It is my pleasure to acknowledge gratefully to all those honorable

personalities who helped me lot into the creation of this project and
shared their experiences.

I would like to express my deep sense of gratitude to my Industry

guide, Mr.
Sajid ali, Asst. Manager Sales– Sharekhan Ltd., rajender Prasad sarani kolkata,
who spent his valuable time and guided me. Kolkata Branch for
providing information at various point of the project, especially the
discussions on the market.

I am also sincerely thankful to all the faculty members of IILM (BS)

for providing their help and advice whenever it wasneeded.

Finally I wish to extend my sincere acknowledgement to my parents

for their
moral and financial support.
 EXECUTIVE SUMMARY
Conceptually the mechanism of stock market is very simple. People
who are
exposed to the same risk come together and agree that if anyone of
the person
suffers a loss the other will share the loss and make good to the
person who
lost.

The initial part of the project focuses on the job and responsibilities I
was
allotted as a summer trainee. It also makes the readers aware about
the
techniques and methodology used to bring this report alive. It also
describe
about the objective of this study.

It also enlightens the readers about Sharekhan Limited’s strategies to

acquire
new customers. Further the project tells us about the profile of the
company
(Sharekhan Ltd.). It provides knowledge to the readers regarding the
company’s history, mission, vision, customer base and the reasons to
be
associated with the company. Also it gives special emphasis on the
selling of
products and management of the company.

The next few chapters are devoted to the study of the Derivative
Market and
Derivative Instruments in a very basic way. It also suggests some of
the
strategies that can be applied to earn more even when the market is
too much
volatile. The readers can also find the comparative analysis of the
Derivative
Market and the Cash Market in the Indian context.

The next part of the project throws light upon my findings and
analysis about
the company and the suggestions for the company for better
performance.

OBJECTIVE OF THE STUDY

To find out whether the Derivative Instruments are applicable in the
Indian
Stock Market which can work both in good and bad times so that it
can
minimize our risk and maximize our returns. As a result one can
have
conviction in his portfolio in the hugely volatile stock market because
a
difficult and serious problem for all investors today is that there is
entirely too
much free information, hype, promotion, personal opinion, and advice
about
derivative instruments are there in stock market. One get it from
friends,
relatives, people at work, the Internet, brokers, stock analysts,
advisers,
entertaining cable TV market programs, and other media. It can be
very risky
and potentially dangerous.

Realistically, there are not too many people one can listen to if he
want to
avoid confusing, contradictory, and faulty personal market opinions.
So one
need to confine himself to just a very few sources of relevant facts and
data
and a sound system that has proven to be accurate and profitable
over time.

Therefore, the objective of the Dissertation is to do in depth research

on these derivative instruments.
 METHODOLOGY
During this project, I have analyzed the Futures and Options. I have
tried to
analyze the instruments as per the Market Participant and the
Market Trend.
Initially, I have given a brief introduction about the instruments, so
that the
reader is aware of basics of the subject.

I have tried to identify various terms related to derivative trading, for

which I
have introduced a separate chapter, “Terms related to derivative
market”

Then I have tried to segregate the use of Instruments as per the

Market
Participants and Market Trend. I identified hedging, arbitrage and
speculation
strategies using both futures and options, and then segregated them
into a
chapter each. Segregation involved a thorough study of the strategies
and
possible use.

Then I have done a secondary data based study on growth of Indian

Derivative Market, which includes the comparison of derivative
market with cash market, data regarding the traded volume and
number of contracts traded from December 2009 till May 2010. I have
also analyzed the top five most traded symbols in futures and options
segment.

JOB DESCRIPTION
The company placed me as a Trainee. I have been handling the
Following responsibilities:

➢ My job profile was to sale the products of the organization.

➢ My job profile was to coordinate the team and also help them to
sale the
product and also help them in field.

➢ My job profile was to generate the leads by cold calling.

➢ My job profile was to understand customers’ needs and advising

them to
make a portfolio as per their investment .

AREA ASSIGNED
I covered areas like Kolkata and Jamshedpur.

TARGET ASSIGNED

To sell 8 accounts per month.

DAY TO DAY JOB DESCRIPTION

Reporting time: 9.30 AM

Fixing appointment with clients.

Visit clients place.

Demonstrate the product on Internet to the client

Cold calling.
 INTRODUCTION OF SHAREKHAN LTD.

ABOUT SHAREKHAN LIMITED

Sharekhan Ltd. is one of the leading retail stock broking house of SSKI
Group which is running successfully since 1922 in the country. It is
the retail brokingarm of the Mumbai-based SSKI Group, which has
over eight decades of experience in the stock broking business.
Sharekhan offers its customers a
wide range of equity related services including trade execution on
BSE, NSE,
Derivatives, depository services, online trading, investment advice etc.

The firm’s online trading and investment site - www.sharekhan.com -

was
launched on Feb 8, 2000. The site gives access to superior content
and
transaction facility to retail customers across the country. Known for
its
jargon-free, investor friendly language and high quality research, the
site has a registered base of over one lakh customers. The content-
rich and research
oriented portal has stood out among its contemporaries because of its
steadfast dedication to offering customers best-of-breed technology
and
superior market information. The objective has been to let customers
make
informed decisions and to simplify the process of investing in stocks.

On April 17, 2002 Sharekhan launched Speed Trade, a net-based

executable
application that emulates the broker terminals along with host of
other
information relevant to the Day Traders. This was for the first time
that a net based trading station of this caliber was offered to the
traders. In the last six months Speed Trade has become a de facto
standard for the Day Trading
community over the net.

Sharekhan’s ground network includes over 640 centers in 280 cities

in India
which provide a host of trading related services.

Sharekhan has always believed in investing in technology to build its

business.
The company has used some of the best-known names in the IT
industry, like
Sun Microsystems, Oracle, Microsoft, Cambridge Technologies,
Nexgenix,
Vignette, Verisign Financial Technologies India Ltd, Spider Software
Pvt Ltd. To build its trading engine and content. The Morakhiya
family holds a majority
stake in the company. HSBC, Intel & Carlyle are the other investors.

With a legacy of more than 80 years in the stock markets, the SSKI
group
ventured into institutional broking and corporate finance 18 years
ago.
Presently SSKI is one of the leading players in institutional broking
and
corporate finance activities. SSKI holds a sizeable portion of the
market in
each of these segments. SSKI’s institutional broking arm accounts for
7% of
the market for Foreign Institutional portfolio investment and 5% of all
Domestic Institutional portfolio investment in the country. It has 60
institutional clients spread over India, Far East, UK and US. Foreign
Institutional Investors generate about 65% of the organization’s
revenue, with
a daily turnover of over US$ 2 million. The Corporate Finance section
has a list of very prestigious clients and has many ‘firsts’ to its credit,
in terms of the
size of deal, sector tapped etc. The group has placed over US$ 1
billion in
private equity deals.
PROFILE OF THE COMPANY
Name of the company: Sharekhan ltd.

Year of Establishment: 1925

Headquarter : ShareKhan SSKI

A-206 Phoenix House
Phoenix Mills Compound
Lower Parel
Mumbai - Maharashtra, INDIA-
400013

Nature of Business : Service Provider

Services : Depository Services, Online Services

and
Technical Research.

Number of Employees : Over 3500

Revenue : Data Not Available

Website : www.sharekhan.com

Slogan : Your Guide to The Financial Jungle.

Vision

To be the best retail brokering Brand in the retail business of stock

market.

Mission

To educate and empower the individual investor to make better

investment
decisions through quality advice and superior service.
Sharekhan is infact-
• Among the top 3 branded retail service providers
• No. 1 player in online business
• Largest network of branded broking outlets in the country serving
more
than 7,00,000 clients.

REASON TO CHOOSE SHAREKHAN LIMITED

Experience

SSKI has more than eight decades of trust and credibility in the
Indian stock
market. In the Asia Money broker's poll held recently, SSKI won the
'India's
Best Broking House for 2004 ' award. Ever since it launched
Sharekhan as its
retail broking division in February 2000, it has been providing
institutionallevel
research and broking services to individual investors.

Technology
With its online trading account one can buy and sell shares in an
instant from
any PC with an internet connection. One can get access to its
powerful online
trading tools that will help him take complete control over his
investment in
shares.

Accessibility

Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION

services for investors. These services are accessible through its
centers across the country over the internet (through the website
www.sharekhan.com) as well as over the Voice Tool.

Knowledge

In a business where the right information at the right time can

translate into
direct profits, one can get access to a wide range of information on
Sharekhan limited’s content-rich portal. One can also get a useful set
of knowledge-based tools that will empower him to take informed
decisions.

Convenience

One can call its Dial-N-Trade number to get investment advice and
execute his transactions. Sharekhan ltd. have a dedicated call-centre
to provide this
service via a Toll Free Number 1800-22-7500 & 1800-22-7050 from
anywhere in India.
Customer Service

Sharekhan limited’s customer service team will assist one for any
help that
one may require relating to transactions, billing, demat and other
queries. Its
customer service can be contacted via a toll-free number, email or live
chat on www.sharekhan.com.

Investment Advice

Sharekhan has dedicated rese

arch teams of more than 30 people for
fundamental and technical researches. Its analysts constantly track
the pulse
of the market and provide timely investment advice to its clients in
the form of
daily research emails, online chat, printed reports and SMS on their
mobile
phone.

PRODUCTS AND SERVICES OF SHAREKHAN LIMITED

The different types of products and services offered by Sharekhan

Ltd. are as
follows:

Equity and derivatives trading

Depository services

Online services

Commodities trading
Dial-n-trade

Portfolio management

Share shops

Fundamental research

Technical research
TYPES OF ACCOUNT IN SHAREKHAN LIMITED

Sharekhan offers two types of trading account for its clints

➢ Classic Account (which include a feature known as Fast Trade
Advanced
Classic Account for the online users) and
➢ Speed Trade Account

CLASSIC ACCOUNT
This is a User Friendly Product which allows the client to trade
through
website www.sharekhan.com and is suitable for the retail investor
who is risk-averse and hence prefers to invest in stocks or who does
not trade
too frequently. This account allow investors to buy and sell stocks
online
along with the following features like multiple watch lists, Integrated
Banking, Demat and digital contracts, Real-time portfolio tracking
with
price alerts and Instant credit & transfer.

This account comes with the following features:

a. Online trading account for investing in Equities and Derivatives

b. Free trading through Phone (Dial-n-Trade)

I.Two dedicated numbers(1800-22-7500 and 39707500) for

placing the orders using cell phones or landline phones
II.Automatic funds transfer with phone banking facilities (for
Citibank and HDFC bank customers)
III.Simple and Secure Interactive Voice Response based
system for authentication
IV.get the trusted, professional advice of Sharekhan limited’s
Tele Brokers
V.After hours order placement facility between 8.00 am and
9.30 am

c. Integration of: Online Trading +Saving Bank + Demat Account.

 d. Instant cash transfer facility against purchase & sale of shares.

e. IPO investments.

f. Instant order and trade confirmations by e-mail.

g. Single screen interface for cash and derivatives.

SPEED TRADE ACCOUNT

This is an internet-based software application, which enables one to

buy and
sell in an instant. It is ideal for active traders and jobbers who
transact
frequently during day’s session to capitalize on intra-day price
movement.

This account comes with the following features:

a. Instant order Execution and Confirmation.

22

b. Single screen trading terminal for NSE Cash, NSE F&O & BSE.

c. Technical Studies.

d. Multiple Charting.

e. Real-time streaming quotes, tic-by-tic charts.

f. Market summary (Cost traded scrip, highest value etc.)

g. Hot keys similar to broker’s terminal.

h. Alerts and reminders.

i. Back-up facility to place trades on Direct Phone lines.

j. Live market debts.

CHARGE STRUCTURE

Fee structure for General Individual:

Charge Classic Account Speed Trade Account

Account Opening Rs. 750/= Rs. 1000/=

Intra-day – 0.10 % Intra-day – 0.10 %

Brokerage Delivery - 0.50 % Delivery - 0.50 %

Depository Charges:

Rs. NIL
Account Opening Charges

Rs. NIL first year Rs. 399/= p.a. from

Annual Maintenance Charges second calendar year onward
HOW TO OPEN AN ACCOUNT WITH SHARE KHAN
LIMITED ?

For online trading with Sharekhan Ltd., investor has to open an

account.

Following are the ways to open an account with Sharekhan Ltd.:

One need to call them at phone number provided below and asks
that he
want to open an account with them.

a. One can call on the Toll Free Number: 1-800-22-7500 to speak to

a Customer Service executive

b. Or If one stays in Mumbai, he can call on 022-66621111

One can visit any one of Sharekhan Limited’s nearest branches.

Sharekhan has a huge network all over India (640 centers in 280
cities).
One can also log on to “http://sharekhan.com/Locateus.aspx” link to
find out the nearest branch.

One can send them an email at info@sharekhan.com to know about

their products and services.

One can also visit the site www.sharekhan.com and click on the
option
“Open an Account” to fill a small query form which will ask the
individual to give details regarding his name, city he lives in, his
email
address, phone number, pin code of the city, his nearest Sharekhan
Ltd.
shop and his preferences regarding the type of account he wants.
These information are compiled in the headquarter of the company
that
is in Mumbai from where it is distributed through out the country’s
branches in the form of leads on the basis of cities and nearest share
shops. After that the executives of the respective branches contact the
prospective clients over phone or through email and give them
information regarding the various types of accounts and the
documents
they need to open an account and then fix appointment with the

prospective clients to give them demonstration and making them

undergo the formalities to open the account. After that the forms that
has collected from the clients, is scrutinized in the branch and then it
is
sent to Mumbai for further processing where after a few days the
clients’
account are generated and activated. After the accounts are activated,
a
Welcome Kit is dispatched from Mumbai to the clients’ address
mentioned in the documents provided by them. As soon as the clients
receive the Welcome Kit, which contains the clients’ Trading ID and
Trading Password, they can start trading and investing in shares.

Generally the process of opening an account follows the following

steps:

LEAD MANAGEMENT SYSTEM (LMS) / REFERENCES

CONTACT THE PERSON OVER PHONE OR THROUGH EMAIL

 FIXING AN APPOINTMENT WITH THE PERSON

DOCUMENTATION

FILLING UP THE FORM

SUBMISSION OF THE FORM

LOGIN OF THE FORM

SENDING ACCOUNT OPENING KIT TO THE CLIENT

TRADING

Apart from two passport size photographs, one needs to provide with
the
following documents in order to open an account with Sharekhan
Limited.:

Photocopy of the clients’ PAN Card which should be duly attached

Photo copy of any of the following documents duly attached which

will
serve as correspondence address proof:
a. Passport (valid)
b. Voter’s ID Card
 c. Ration Card
d. Driving License (valid)
e. Electricity Bill (should be latest and should be in the name of the
client)

f. Telephone Bill (should be latest and should be in the name of the

client)
g. Flat Maintenance Bill (should be latest and should be in the name
of the client)
h. Insurance Policy (should be latest and should be in the name of
the client)
i. Lease or Rent Agreement.
j. Saving Bank Statement** (should be latest)

Two cheques drawn in favour of Sharkhan Limited, one for the

Account
Opening Fees and the other for the Margin Money (the minimum
margin money is Rs. 5000).

** A cancelled cheque should be given by the client if he provides

Saving
Bank Statement as a proof for correspondence address.
NOTE: Only Saving Bank Account cheques are accepted for the
purpose of
Opening an account.

RESEARCH SECTION IN SHAREKHAN LIMITED

Sharekhan Limited has its own in-house Research Organization

which is
known as Valueline. It comprises a team of experts who constantly
keep an eye on the share market and do research on the various
aspects of the share
market. Generally the research is based on the Fundamentals and
Technical
analysis of different companies and also taking into account various
factors
relating to the economy.

Sharekhan Limited’s research on the volatile market has been found

accurate
most of the time. Sharekhan's trading calls in the month of November
2007
has given 89% strike rate.

Out of 37 trading calls given by Sharekhan in the month of November

2007, 33hit the profit target. These exclusive trading picks come only
to Sharekhan
Online Trading Customer and are based on in-depth technical
analysis.

As a customer of Sharekhan Limited, one receives daily 5-6 Research

Reports on their emails which they can use as tips for investing in the
market. These reports are named as Pre-Market Report, Eagle Eye,
High Noon, Investors Eye, Daring Derivatives and Post-Market Report.
Apart from these, Sharekhan Limited issues a monthly subscription
by the name of Valueline which is easily available in the market.
AWARDS AND ACHIEVEMENTS

SSKI has been voted as the Top Domestic Brokerage House in the
research category, twice by Euromoney Survey and four times by
Asiamoney Survey.

Sharekhan Limited won the CNBC AWARD for the year 2004.
POLL RESULTS: BROKER PREFERENCE

5paise 119 13.45%

Sharekhan 194 21.92%
Motilal oswal 38 4.29%
ICICI Direct 192 21.69%
HDFC 46 5.20%
Indiabulls 121 13.67%
Kotak 59 6.67%
Others 116 13.11%
 CHAPTER: 2
FINANCIAL SYSTEM OVERVIEW

FINANCIAL SYSTEM- AN OVERVIEW:

The financial system of any country consists of specialized and non-

specializedfinancial institutions, organized and unorganized financial markets,
financial instruments and services that facilitate flow of funds from areas of
surplus funds to the areas of deficit. Financial system is a composition of
various institutions, markets, regulations, law practices, money managers,
analysts, etc. By making funds available, the financial system helps the
growth of modern economics and the increase in the standard of living
among the citizens.

FINANCIAL MARKETS:

A financial market can be defined as the market in which financial assets are
created or transferred. Financial assets represents represent a claim to the
payments of a sum of money sometime in the future and/or periodic payment
in the form of interest or dividend. Financial Market performs an important
function of mobilization of savings and channeling them into the most
productive uses. The participants in the financial markets are financial
institutions, agents, brokers, dealers, borrowers, lenders, savers and others
who are interlinkedby the laws, contracts and communication networks.
Financial markets consist of Primary and Secondary Markets. The Primary
markets deal in new financial claims and securities and hence are known as
new issue markets. Thesecondary market deals in securities already issued,
existing or outstanding. Financial markets are also classified as Money and
Capital Markets. Money markets deals with

transactions in short-term instruments (with period of maturity one year or

less, e.g. treasury bills), while capital market deals with transactions in long-
term instruments (with period of maturity above one year, e.g. corporate
debentures and government bonds). On the basis of the type of the financial
claim, financial markets are classified as Debt and Equity markets. By the
timing of delivery, financial markets are classified as Cash or Spot markets
and Forward or Future markets.

The classification of Financial markets can be summarized as follows:

o Money Market
o Debt Market
o Forex Market
o Capital Market.

MONEY MARKETS:

Money markets can be defined as a market for short term money and
financial assets that are near substitutes for money (any financial assets that
can be quickly converted into money with minimum transaction cost). One
more important function of this market is to channel savings into short term
productive investments like working capital. Money market aids banking,
operates as a medium of integration between sub markets, promotes
maintaining of minimum reserve in the form of cash and liquidity and controls
the interest rates.

Money market is a collection of market for the instruments like Call money,
Treasury bills, Commercial papers, Certificate of deposits, Money Market
Mutual Funds, etc. A certain degree of flexibility in the regulatory framework
exists and there are constant endeavors for introducing a new instruments or
innovating dealing techniques. It is a wholesale market andthe volume of
funds or financial assets traded are very large i.e. in crores of rupees.

ORGANIZED MONEY MARKET:Indian financial system consists of money

market and capital market. The money market has two components - the
organized and the unorganized. The organized market is dominated by
commercial banks. The other major participants are the Reserve Bank of
India, Life Insurance Corporation, General Insurance Corporation, Unit Trust
of India, Securities Trading Corporation of India Ltd., Discount and
Finance House of India, other primary dealers, commercial banks and mutual
funds. The core of the money market is the inter-bank call money market
whereby short-term money borrowing/lending is effected to manage
temporary liquidity mismatches. The Reserve Bank of India occupies a
strategic position of managing market liquidity through open market
operations of government securities, access to its accommodation, cost
(interest rates), availability of credit and other monetary management tools.
Normally, monetary assets of short-term nature, generally less than one year,
are dealt in this market.

UN-ORGANIZED MONEY MARKET: Despite rapid expansion of the organized

money market through a large network of banking institutions that have
extended their reach even to the rural areas, there is still an active
unorganized market. It consists of indigenous bankers and moneylenders. In
the unorganized market, there is no clear demarcation between shortterm
and long-term finance and even between the purposes of finance. The
unorganized sector continues to provide finance for trade as well as personal
consumption. The inability of the poor to meet the ‘creditworthiness’
requirements of the banking sector make them take recourse to the
institutions that still remain outside the regulatory framework of banking. But
this market is shrinking.

FOREIGN EXCHANGE MARKET:

Every sovereign country in the world has a currency, which is a legal tender
in its territory, and which does not act as money outside its boundaries.
Foreign exchange or Forex market is the one where a country’s currency is
traded for another. The rate at which one currency is converted to another is
known as the rate of exchange. Forex market is the largest financial market in
the world having a daily turn over of couple of trillion dollars. The key

participants in the Forex market are importers (who need foreign currency to
pay off their imports), exporters (who want to convert their foreign currency
receipts into domestic), traders (who make a market in the foreign currency),
foreign exchange brokers (who bring together buyers and sellers),
speculators (who tries to profit from exchange rate movements) and portfolio
managers who buy and sell foreign currency. Speculative transactions
account for more than 95% of the turnover on the Forex markets.
In India, the key participants in the Forex markets are RBI, banks and
business undertakings. Business undertakings can participate in the Forex
market only to the extent that they need cover for the exchange exposure
arising from a merchant transaction or a foreign currency borrowing and
cannot resort to speculative transaction. One reason justified
for the existence of the Forex market is that each nation has decided to keep
their sovereign right to have control on their own currency. If every country
had the same currency, then there will be no need for a foreign exchange
market.

CAPITAL MARKET

The function of the financial market is to facilitate the transfer of funds from
surplus sectors (lenders) to deficit sectors (borrowers). Normally, households
have investible funds or savings, which they lend to borrowers in the
corporate and public sectors whose requirement
of funds far exceeds their savings. A financial market consists of investors or
buyers of securities, borrowers or sellers of securities, intermediaries and
regulatory bodies. Financial market does not refer to a physical location.
Formal trading rules, relationships and communication networks for
originating and trading financial securities link the participants
in the market. Capital markets provide the resources needed by medium and
large-scale industries for investment purposes unlike money markets that
provide the resources for working capital needs. While money markets deal in
short-term claims (with a period of maturity 1 year or less) capital market
deals in long-term claims (with a period of maturity more than 1 year). Stock
market and Government bond markets are example of capital markets.
Capital market consists of primary and secondary markets. The primary
marketscreate long-term instruments through which corporate entities borrow
and the secondary market provides liquidity and marketability to these

instruments. Companies can raise capital in the primary market through the
issue of shares and debentures for which prior approval of The SEBI is
required. The secondary market that operates through the medium of stock
exchanges is that segment of the capital market where securities already
issued are traded. The primary market in which public issue of securities is
made through a prospectus is a retail market and there is no physical
location. Offer for subscription to securities is made to investing community.
The secondary market or stock exchange is a market for trading and
settlement of securities that have already been issued. The investors holding
securities sell securities through registered brokers/sub-brokers of the stock
exchange. Investors who are desirous of buying securities purchase
securities through registered broker/sub-broker of the stock exchange. It may
have a physical location like a stock exchange or a trading floor.
Since 1995, trading in securities is screen-based and Internet-based trading
has also made an appearance in India. The secondary market consists of 22
stock exchanges. The secondary market provides a trading place for the
securities already issued, to be bought and sold. It also provides liquidity to
the initial buyers in the primary market to re-offer the securities to any
interested buyer at any price, if mutually accepted..

CAPITAL MARKET PARTICIPANTS: There are several major players in the

primary market.These include the merchant bankers, mutual funds, financial
institutions, foreign institutional investors (FIIs) and individual investors. In the
secondary market, there are the stock exchanges, stock brokers (who are
members of the stock exchanges), the mutual funds, financial institutions,
foreign institutional investors (FIIs), and individual investors. Registrars
and Transfer Agents, Custodians and Depositories are capital market
intermediaries that provide important infrastructure services for both primary
and secondary markets.

3.3 COMPONENTS OF CAPITAL MARKET:

Following are the three main components of capital market:

1. New Issue Market
2. Financial Institutions
3. Stock Market

1. NEW ISSUE MARKET

The new issue market represents the primary market where new securities,
i.e. shares or bonds that have never been previously issued, are offered.
Both the new companies and the existing ones can raise capital on the new
issue market. The prime function of new issue market is to facilitate the
transfer of funds from willing investors to the entrepreneurs setting
up new corporate enterprise or going for expansion, diversification, growth or
modernization. Besides, the helping corporate enterprise in securing their
funds, the new issue market channelises saving of individuals and others into
investors. Issuing companies and the investors respectively represents the
two facets of this market, i.e. supply and demand. Also there is participation
of intermediaries, which help, in selling, transferring, underwriting etc. These
agencies include financial institution, underwriters, brokers, merchant
bankers, etc.

It must be noted that although the functions and organization of new issue
market are quiet different from that of the secondary (stock) market, the
sentiment in the stock market influence the activity of new issue market.
Successful issue of new securities is a highly specialized activity and requires
both experience and skill. There are number of methods of marketing new
issue of securities. And the choice of method selection depends upon
number, character and sentiment of prospective buyers.
2. FINANCIAL INSTITUTIONS

Specialized Financial Institutions are the most active constituent of the Indian Capital
Market. Such organizations provide medium and long-term loans on easy
installments to big business house. Such institutions help in promoting new
companies during economic depressions.

The need for establishing financial institutions was felt in many countries
immediately after the Second World War to reestablish war-shattered economies.
Need for such institution was more in underdeveloped countries.
Following are the main special financial institutions that are most active constituents
of the Indian Capital Market.

1. The industrial Finance Corporation of India. (I.F.C.I)

2. The Industrial Credit and Investment Corporation of India. (I.C.I.C.I)
3. The Refinance Corporation of India. (R.F.C.)
4. State Financial Development Corporation. (S.F.Cs.)
5. National Industrial Development Corporations. (N.I.D.C.)
6. State Industrial Development Corporations. (S.I.D.Cs.)
7. National Small Industries Corporations. (N.S.I.C.)
8. Industrial Development Bank of India. (I.D.B.I.)
9. Unit Trust of India. (U.T.I.)
10. Life Insurance Corporation of India. (L.I.C.)
11. Nationalized Commercial Banks. (N.C.B.)
12. Merchant Banking Institutions. (M.B.Is.)

3. STOCK MARKET

Capital Market also includes Stock market. It is a place where securities which have
been issued the past are traded. It is a secondary market. In stock market the
participants are Stock Exchanges, Brokers and the investors. The investors want
liquidity of their investments. The securities, which they hold, should be easily
sold when they need cash.
Similarly there are others who want to invest in new securities. So there
should be a place where securities should be purchased and sold. Stock
exchange provides such a place where securities of different companies can
be purchased and sold via stock market.

One can trade in stock market two ways:

1. On Market
2. Off Market
In On market trading is done via stock exchanges, where the buyer and seller
don’t know each other. But one can also trade Off market without the
interference of stock exchange may be through stock broker or not. For
example: Raja and Gandhi are neighbors, Raja wants to Sell the shares of
Zodiac JRD, which he holds and Gandhi is ready to buy them at that price
they can enter into contract off market.

DEBT MARKET:

Traditionally debt instruments are known for generating a predetermined

income for a given period of time, other than in cases of default. Hence they
are also known as fixed income instruments. The debt markets in advanced
are significantly larger and deeper than equity markets. But in India, the trend
is just the opposite. The development of debt market in India has not been as
remarkable as in the equity market. However the debt markets in India have
undergone a considerable change in the last few years. Characterized by
regulated interest rates, limited players and lack of trading earlier, the
markets have become more integrated and less regulated. The debt market
in India is divided into two categories:

 Government securities market consisting of Central Government

and State Government securities.
 Bond market consisting of FI bond, PSU bonds and Corporate
bonds/debentures

3.4 PRIMARY AND SECONDARY MARKET:

There are two ways for investors to get shares from the primary and
secondary markets. In primary markets, securities are bought by way of
public issue directly from the company. In Secondary market share are traded
between two investors.

PRIMARY MARKET

Market for new issues of securities, as distinguished from the Secondary

Market, where previously issued securities are bought and sold. A market is
primary if the proceeds of sales go to the issuer of the securities sold. This is
part of the financial market where enterprises issue their new shares and
bonds. It is characterized by being the only moment when the enterprise
receives money in exchange for selling its financial assets. Stocks available
for the first time are offered through new issue market. The issue may be a
new company or an existing company. These issues may be of new type or

the security used in the past. In the new issuing houses, investment bankers
act as the channel of distribution for the new issues. They take responsibility
of selling the stocks to the public.

THE FUNCTION OF PRIMARY MARKET:

The main service functions of the primary market are origination, under
writing and distribution. Origination deals with the origin of the view issue.
The proposal is analyzed in terms of the nature of security, the size of issue,
timing of the issue and floatation method of issue. Underwriting contract
makes the shares predictable and removes the elements of uncertainty in the
subscription. Distribution refers to the sale of the securities to the investors.
This is carried out with the help of the lead manager and broker to the issue.

IPO – INITIAL PUBLIC OFFERING

Public issues can be classified into Initial Public offerings and further
public offerings. In a public offering, the issuer makes an offer for new
investors to enter its shareholding family. The issuer company makes
detailed disclosures as per the DIP guidelines in its offer document and offers
it for subscription. Initial Public Offering (IPO) iswhen an unlisted company
makes either a fresh issue of securities or an offer for sale of its existing
securities or both for the first time to the public. This paves way for listing and
trading of the issuer’s securities.

IPO is new shares Offered to the public in the Primary Market .The
first time the company is traded on the stock exchange. A prospectus is
issued to read about its risk before investing. IPO is a company's first sale of
stock to the public. Securities offered in an IPO are often, but not always,
those of young, small companies seeking outside equity capital and a public
market for their stock. Investors purchasing stock in IPO’s generally must be
prepared to accept very large risks for the possibility of large gains.
Sometimes, just before the IPO is launched, Existing share Holders get very
liberal bonus issues as a reward for their faith in risking money when the
project was new.

SECONDARY MARKET

The market where securities are traded after they are initially offered in the
primary market. Most trading is done in the secondary market. To explain
further, it is Trading in previously issued financial instruments. An organized
market for used securities. Examples are the New York Stock Exchange
(NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE,
bond markets, over-the-counter markets, residential mortgage loans,
governmental guaranteed loans etc.The secondary market is the financial
market for trading of securities that have already been issued in an initial
private or public offering. Alternatively, secondary market can refer to the
market for any kind of used goods. The market that exists in a new security
just after the new issue, is often referred to as the aftermarket. Once a newly
issued stock is listed on a stock exchange, investors and speculators can
easily trade on the exchange, as market makers provide bids and offers in
the new stock.

PRODUCTS DEALT IN SECONDARY MARKET

EQUITY: The ownership interest in a company of holders of its common and

preferred stock. The various kinds of equity shares are as follows –
EQUITY SHARES: An equity share, commonly referred to as ordinary share
also represents the form of fractional ownership in which a shareholder, as a
fractional owner, undertakes the maximum entrepreneurial risk associated
with a business venture. The holders of such shares are members of the
company and have voting rights. A company may issue such shares with
differential rights as to voting, payment of dividend, etc.

RIGHTS ISSUE/ RIGHTS SHARES: The issue of new securities to existing

shareholders at a ratio to those already held.

BONUS SHARES: Shares issued by the companies to their shareholders

free of cost by capitalization of accumulated reserves from the profits earned
in the earlier years.

PREFERRED STOCK/ PREFERENCE SHARES: Owners of these kind of

shares are entitled to a fixed dividend or dividend calculated at a fixed rate to
be paid regularly before dividend can be paid in respect of equity share. They
also enjoy priority over the equity shareholders in payment of surplus. But in
the event of liquidation, their claims rank below the claims of the company’s
creditors, bondholders / debenture holders.

CUMULATIVE PREFERENCE SHARES. A type of preference shares on

which dividend accumulates if remains unpaid. All arrears of preference
dividend have to be paid out before paying dividend on equity shares.

CUMULATIVE CONVERTIBLE PREFERENCE SHARES: A type of

preference shares where the dividend payable on the same accumulates, if
not paid. After a specified date, these shares will be converted into equity
capital of the company.

PARTICIPATING PREFERENCE SHARE: The right of certain preference

shareholders to participate in profits after a specified fixed dividend
contracted for is paid. Participation right is linked with the quantum of
dividend paid on the equity shares over and above a particular specified
level.
SECURITY RECEIPTS: Security receipt means a receipt or other security,
issued by a securitisation company or reconstruction company to any
qualified institutional buyer pursuant to a scheme, evidencing the purchase or
acquisition by the holder thereof, of an undivided right, title or interest in the
financial asset involved in securitization.

GOVERNMENT SECURITIES (G-Secs): These are sovereign (credit risk-

free) coupon bearing instruments which are issued by the Reserve Bank of
India on behalf of Government of India, in lieu of the Central Government's
market borrowing programme. These securities have a fixed coupon that is
paid on specific dates on half-yearly basis. These securities are available in
wide range of maturity dates, from short dated (less than one year) to long
dated (upto twenty years).

DEBENTURES: Bonds issued by a company bearing a fixed rate of interest

usually payablehalf yearly on specific dates and principal amount repayable
on particular date on redemption of the debentures. Debentures are normally
secured/ charged against the asset of the company in favour of debenture
holder.

BOND: A negotiable certificate evidencing indebtedness. It is normally

unsecured. A debt security is generally issued by a company, municipality or
government agency. A bond investor lends money to the issuer and in
exchange, the issuer promises to repay the loan amount on a specified
maturity date. The issuer usually pays the bond holder periodic interest
payments over the life of the loan. The various types of Bonds are as follows-

ZERO COUPON BOND: Bond issued at a discount and repaid at a face

value. No periodic interest is paid. The difference between the issue price
and redemption price represents the return to the holder. The buyer of these
bonds receives only one payment, at the maturity of the bond.

CONVERTIBLE BOND: A bond giving the investor the option to convert the
bond into equity at a fixed conversion price.
COMMERCIAL PAPER: A short term promise to repay a fixed amount that is
placed on the market either directly or through a specialized intermediary. It is
usually issued by companies with a high credit standing in the form of a
promissory note redeemable at par to the holder on maturity and therefore,
doesn’t require any guarantee. Commercial paper is a money market
instrument issued normally for a tenure of 90 days.

TREASURY BILLS: Short-term (up to 91 days) bearer discount security

issued by the Government as a means of financing its cash requirements.
 CHAPTER: 6
STOCK EXCHANGES

FUNCTIONS OF STOCK EXCHANGES

The importance of stock exchanges will be clear from the following functions
performed by stock exchanges:

1. ENSURES LIQUIDITY OF CAPITAL: The stock exchange provides

place where shares and stock are converted into cash. It provides a
ready market for buyers and sellers of securities. If exchanges were not
there many persons would have fear of blocking their savings in
securities.

2. CONTINUOUS MARKET FOR SECURITIES: The securities once

listed continue tobe traded irrespective of the fact that owners go on
changing. Exchanges provide regularmarket for trading in securities.

3. EVALUATION OF SECURITIES: The investors can evaluate the worth

of their shares from price quoted at different stock exchanges for those
securities. The securities are quoted under free atmosphere of demand
and supply and prices are set on the basis of free market.

4. MOBILIZING SURPLUS SAVINGS: Through stock exchanges the

investors are given a safe platform to invest their savings. Hence stock
exchanges play an important role in mopping up surplus funds of
investors.

5. HELPFUL IN RAISING NEW CAPITAL: The new concerns raise

capital for first time and the existing units increase their capital for
further expansion and diversification purposes.The new concerns get
themselves registered so that the shares they issue can be further
tradedat exchanges.
6.SAFETY IN DEALINGS: The dealings in stock exchanges are governed
by well definedrules and regulations of Securities contract act; 1956.
There is no scope of manipulating thetransactions. Every transaction is
done according to the procedure laid done and there is nofear in minds of
trading parties.

7.LISTING OF SECURITIES: Only listed securities can be traded in stock

exchanges.Every company desires of listing its securities will apply to the
exchange authorities. Butlisting is allowed after critical examination of
capital structure, management and prospectusof company. Hence provide
security to a limit but it does not guarantee the financial stability,so the
investors should make analysis before investing.

8. CLEARING HOUSE FOR BUSINESS INFORMATION: The companies

listingsecurities with exchange have to provide financial statements,
annual reports and otherreports to ensure maximum publicity of
corporations operations and working. The economicand other information
provided at stock exchanges help companies to make their policies.

9. PLATFORM FOR PUBLIC DEPTS.: The stock exchanges are also

organized market for government securities. However there is no any
provision for a separate counter for government securities but these are
traded through brokers dealing in these securities.

10. FAIR PRICE DETERMINATION: The prices in the stock market are
determined by the interplay of forces of supply and demand. In stock
exchange there is active bidding and two way auction takes place as a
result there is a free competition in the stock market. The price is
determined where the bargain is stuck. Stock exchanges also perform
other functions that are useful for tax purposes and hence protect the
investor’s interest by eliminating dishonest and irregular practices in the
brokerage of trade.
 THE BOMBAY STOCK EXCHANGE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a
rich heritage. Popularly known as "BSE", it was established as "The Native
Share & Stock Brokers Association" in 1875. It is the first stock exchange in
the country to obtain permanent recognition in 1956 from the Government of
India under the Securities Contracts (Regulation) Act, 1956.The Exchange's
pivotal and pre-eminent role in the development of the Indian capital market
is widely recognized and its index, SENSEX, is tracked worldwide. Earlier
an Association of Persons (AOP), the Exchange is now a demutualised and
corporatized entity incorporated under the provisions of the Companies Act,
1956, pursuant to the BSE(Corporatisation and Demutualization) Scheme,
2005 notifiedby the Securities and Exchange Board of India (SEBI).

With demutualization, the trading rights and ownershiprights have

been de-linked effectively addressing concernsregarding perceived and real
conflicts of interest. The Exchange is professionally managed under the
overall direction of the Board of Directors. The Board comprises eminent
professionals, representatives of Trading Members and the Managing
Director of the Exchange. The Board is inclusive and is designed to benefit
from the participation of market intermediaries.

In terms of organization structure, the Board formulates larger

policy issues and exercises over-all control. The committees constituted by
the Board are broad-based. The day-to-day operations of the Exchange are
managed by the Managing Director and a management team of
professionals.
The Exchange has a nation-wide reach with a presence in 417
cities and towns of India. The systems and processes of the Exchange are
designed to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading volumes on
the Exchange showed robust growth.
THE NATIONAL STOCK EXCHANGE

The National Stock Exchange (NSE) is India's leading stock exchange

covering various cities and towns across the country. NSE was set up by
leading institutions to provide a modern, fully automated screen-based
trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity.
It has set up facilities that serve as a model for the securities industry in terms
of systems, practices and procedures. NSE has played a catalytic role in
reforming the Indian securities market in terms of microstructure, market
practices and trading volumes. The market today uses state-ofart information
technology to provide an efficient and transparent trading, clearing and
settlement mechanism, and has witnessed several innovations in products &
services viz. demutualization of stock exchange governance, screen based
trading, compression of settlement cycles, dematerialization and electronic
transfer of securities, securities lending and borrowing, professionalization of
trading members, fine-tuned risk management systems, emergence of
clearing corporations to assume counterparty risks, market of debt and
derivative instruments and intensive use of information technology.

MISSION

NSE's mission is setting the agenda for change in the securities markets in
India. The NSE was set-up with the main objectives of:

 establishing a nation-wide trading facility for equities, debt instruments

and hybrids,

 ensuring equal access to investors all over the country through an

appropriate communication network,

 providing a fair, efficient and transparent securities market to investors

using electronic trading systems

 enabling shorter settlement cycles and book entry settlements

systems, and
 Meeting the current international standards of securities markets.