Buying and Selling of Securities

7/28/2019 Buying and Selling of Securities

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Financial System

The financial system is the backbone of any

country

Financial System

Money market

Capital market

GILT securities market

Foreign Exchange market


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STOCK MARKETS IN THE WORLD


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Stock exchanges are open markets that trade infinancial assets like stocks, bonds, futures, options etc.It usually refers to the secondary market

The securities contract act defines stock market as anassociation, organization or body of individualswhether incorporated or not established for a purposeof assisting, regulating and controlling business of

buying, selling and dealing in securities.

There are a number of major stock exchanges acrossthe world and each of them plays an important role in

determining the overall financial and economiccondition of any economy


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Major Stock Exchanges in the World


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Rank Economy Stock Exchange Location MarketCap

TradeValue

1 United States& Europe

NYSE Euronext New York City 14,242 20161

2 United States& Europe

NASDAQ OMX (US &North Europe)

New York City 4,687 13552

3 Japan Tokyo Stock Exchange Tokyo 3,325 3972

4 UnitedKingdom

London Stock Exchange London 3,266 2837

5 China Shanghai StockExchange

Shanghai 2,357 3658

6 Hong Kong Hong Kong Stock

Exchange

Hong Kong 2,258 1447

7 Canada Toronto Stock Exchange Toronto 1,912 1542

8 Brazil BM&F Bovespa So Paulo 1,229 931

9 Australia Australian SecuritiesExchange

Sydney 1,198 1197


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Rank Economy Stock Exchange Location MarketCap

TradeValue

10 Germany Deutsche Brse Frankfurt 1,185 1758

11 Switzerland SIX Swiss Exchange Zurich 1,090 88712 China Shenzhen Stock

ExchangeShenzen 1,055 2838

13 Spain BME SpanishExchanges

Madrid 1,031 1226

14 India Bombay StockExchange Mumbai 1,007 148

15 South Korea Korea Exchange Seoul 996 2029

16 India National StockExchange of India

Mumbai 985 589

17 Russia MICEX-RTS Moscow 800 51418 South Africa JSE Limited Johannesburg 789 372


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Even central banks watch movement of stock

markets to make sure if the economy isfunctioning smoothly

This was highlighted in September 2008, whenstock markets plunged in response to fallingfinancial institutions in the US and central bankhad to step in to try and improve liquidity andease economic crisis.


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Main Characteristics of Stock Markets


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It is an organized market

It provides a place where registered andapproved securities can be bought and sold

easily In a stock exchange, transactions take place

between its members or their authorized users

All transactions are regulated by rules and bylaws of the concerned stock exchange.

It makes complete information available topublic in regard to prices and volume oftransactions taking place every day


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Functions of Stock Markets


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Provides ready and continuous market

By providing a place where listed securities can

be bought and sold regularly and conveniently,a stock exchange ensures a ready andcontinuous market for various shares,

debentures, bonds and government securities.This provides a high degree of liquidity to theholdings in these securities as the investors can

encash their holdings when they want.


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Provides information about prices

A stock exchange maintains complete record of

all transactions taking place in differentsecurities every day and supplies regularinformation on their prices and sales volume to

press and other media. In fact, now a days youcan get information about minute to minutemovement in prices of selected shares on TV

channels like CNBC...


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Provides safety to dealings and

investments

Transactions of the SE are conducted onlyamongst its members with adequatetransparency and in strict conformity to its rules

and regulations which include the procedureand timings of delivery and payment to befollowed. This gives high degree of safety


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Helps in mobilization of savings and

capital formation

Efficient functioning of stock market creates a

an active and growing primary market. Thisfacilitates mobilizing savings for investment inindustrial and commercial establishments and

contributes to capital formation.


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Barometer of economic and business

condition Stock exchanges reflect the economic health of a

country, as the shares prices are highly sensitive

to changing economic, social and politicalconditions.

The share prices rise during the periods ofeconomic prosperity and vice versa.

This, in short, reflects the investors assessment of

the economic and business conditions in acountry, and acts as the barometer whichindicates the general conditions of the atmosphere

of business.


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Advantages of Stock Market


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To Companies- Listed companies enjoy a better goodwill and

credit-standing as they are supposed to befinancially sound and transparent.

- The market for their securities is enlarged as the

investors all over the world become aware of suchsecurities and have an opportunity to invest

- As a result of enhanced goodwill and higherdemand, the value of their securities increases andtheir bargaining power in collective ventures,mergers, etc. is enhanced.


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- The volume of activity at the stock exchangesand the movement of share prices reflect thechanging economic health. Since government

securities are also traded at the stockexchanges, the government borrowing is highlyfacilitated. The bonds issued by governments,

electricity boards, municipal corporations andpublic sector undertakings (PSUs) are found tobe on offer quite frequently


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BUYING AND SELLING OF

SECURITIES


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Capital markets are subdivided into two types

Primary Markets: These are markets whereissuers and buyers of new offerings of stocks

and bonds come together

Secondary Markets: These are the marketswhere trading of previously purchased

securities takes place


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How Are Securities Traded In Secondary

Markets The buyers and sellers participate in the market

with the help of intermediaries like stockbrokers

Selling investor

Buying investor Broker representing buying investor

Broker representing selling investor


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Stock Quotes In The Exchange


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Individual Stock Quote


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Bond quotes in the market


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Individual Bond Quote


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Types of Orders


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A single order can be either a buy order or a

sell order. Every buy order will need a corresponding sell

order to get executed and vice versa

Let us see different types of orders that traderscan use for execution of trade


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Orders based on Time Conditions


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Immediate or Cancel order Immediate or Cancel order (IOC): In an IOC order, as

the name suggests, the matching price should be

available immediately otherwise the order will becanceled

A partial match of order is allowed that means

quantity does not need to be matched and in that caseunmatched quantity will be canceled.

For example, if an order is placed for 10000 shares and

if the order is matched only for 5000, then only 5000shares are traded and the order for the other 5000shares will be canceled.


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Good till date/ canceled order Good till date order: In a good till date order,

the order will stay open till the defined date.Orders will be canceled if they are not executedby that date.

Good till canceled order: This order is valid tillits canceled by the customer, if not executed.

**Acceptance of different types of ordersvaries from exchange to exchange and maydepend upon brokers.


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Market Orders Market Orders are orders to buy or sell a

contract at current price, whatever the price

may be. In an active market the market orderwill surely be executed but not necessarily atexact price that the trader intended.

For eg: A market order placed at when thestock was at 100 rs might get executed at 100,below or above 100,

Market orders are used when you definitelywant your order to be processed and are willing

to risk slightly different price.


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Limit Orders Limit Order: Limit orders are orders to buy or

sell a contract at specific or better price. Theymay or may not get filled depending upon theway the stock is moving.

If one places a buy limit order at Rs 100, it willget executed at Rs 100 or below. If its a selllimit order, it will get executed at or above rs

100. limit order are used when you want tomake sure you get a suitable price and arewilling to risk not being filled at all.


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Stop Orders Stop orders are similar to market orders, in that

they are orders to buy or sell a contract at the

best available price, but they are only processedif the market reaches a specific price.

For example, if the market price is 567, a tradermight place a buy stop order with a price of572. If the market then trades at 572 or above,the trader's stop order will be processed as a

market order, and will then get filled at thecurrent best price.


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Stop Orders...contd Stop orders are processed as market orders, so

if the stop (or trigger) price is reached, theorder will always get filled, but not necessarilyat the price that the trader intended.

Stop orders will trigger if the market trades ator past the stop price, so for a buy order, thestop price must be above the current price, and

for a sell order, the stop price must be belowthe current price.


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Margin Trading


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Margin account is a brokerage account in whichthe broker lends the customer cash to purchasesecurities. The loan account is collateralized by thesecurities and the cash

Purchasing on margin means borrowing some ofthe money used to buy securities.

Shorting a security means borrowing it and sellingit, with the understanding that at some future dateyou will buy the security and return it, thereby

covering the short. You do it because youbelieve the securitys value will decline, so youhope to sell high now, then buy low later.


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Margin requirements amount to security

deposits. They exist to protect your brokeragainst losses.

If the value of the stock drops considerably theinvestor would either have to sell the stock ordeposit more cash into his account


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Initial and Maintenance margin There are two types of margins required to bemaintained in such accounts Initial Margin andMaintenance Margin

The initial margin requirement is the amountrequired to be collateralized in order to open aposition.

Thereafter, the amount required to be kept incollateral until the position is closed is the

maintenance requirement. The maintenancerequirement is the minimum amount to becollateralized in order to keep an open position. Itis generally lower than the initial requirement.


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Maintenance margin allows the price to moveagainst the margin without forcing a margincall immediately after the initial transaction.

On instruments determined to be especiallyrisky, however, the regulators, the exchange, orthe broker may set the maintenancerequirement higher than normal or equal to theinitial requirement to reduce their exposure tothe risk accepted by the trader.


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Margin Call

When the margin posted in the margin accountis below the minimum margin requirement, the

broker or exchange issues a margin call.

The investors now either have to increase the

margin that they have deposited or close outtheir position.

They can do this by selling the securities,

options or futures if they are long and bybuying them back if they are short.

But if they do none of these, then the brokercan sell their securities to meet the margin call.

If a margin call occurs unexpectedly it can cause a


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If a margin call occurs unexpectedly, it can cause adomino effect of selling which will lead to other

margin calls and so forth, effectively crashing anasset class or group of assets.

This situation most frequently happens as a resultof an adverse change in the market value of theleveraged asset or contract.

It could also happen when the margin requirementis raised, either due to increased volatility or due tolegislation.

In extreme cases, certain securities may cease toqualify for margin trading; in such a case, thebrokerage will require the trader to fully fund their

position or liquidate it.


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The current liquidating margin is the value of asecurities position if the position were liquidated now.In other words, if the holder has a short position, this

is the money needed to buy back; if they are long, it isthe money they can raise by selling it.

The maintenance margin is not collateral, but a daily

payment of profits and losses. Futures are marked-to-market every day, so the current

price is compared to the previous day's price. The

profit or loss on the day of a position is then paid to ordebited from the holder by the futures exchange

This is possible, because the exchange is the central


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p , gcounterparty to all contracts, and the number of long

contracts equals the number of short contracts. Certainother exchange traded derivatives, such as options onfutures contracts, are marked-to-market in the same way.

The seller of an option has the obligation to deliver theunderlying of the option if it is exercised. To ensure theycan fulfill this obligation, they have to deposit collateral.This premium margin is equal to the premium that theywould need to pay to buy back the option and close outtheir position.

Additional margin is intended to cover a potential fall in

the value of the position on the following trading day.This is calculated as the potential loss in a worst-casescenario.


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Calculation of Margin on Futures

Below's the tabular info of Stocks traded in Futuressegment in Indian Stock Market.

You can easily calculate the margins required for afutures lot. For example, Titan Industries lot size is1000 shares & margin required is 23%. Titan is

currently trading at 225 Rupees a share. So lotvalue of Titan is 1000 x 225 = 2,25,000 Rupees.Margin required is 23% of 2,25,000 which

amounts to 51,750 Rupees. Similarly, you cancalculate margin required for all stocks.

Sr.No Stock Name Lot Size Margin%

1 3I INFOTECH 8000 33

2 ABAN OFFSHORE 1000 25


22 BAJAJ HINDUSTAN 8000 21

23 BALRAMPUR CHINIMILLS

4000 23


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3 ABB 250 19

4 ALSTOM PROJECTSINDIA

500 26

5 ABG SHIPYARD 1000 17

6 ACC 250 14

7 ADANI ENTERPRISES 500 30

8 ADANI POWER 4000 329 CORE EDUCATION

TECHNOLOGIES1000 17

10 ALLAHABAD BANK 2000 22

11 ALOK INDUSTRIES 11000 19

12 ANDHRA BANK 2000 19

13 APOLLO TYRES 4000 23

14 HEXAWARETECHNOLOGIES

4000 21

15 DELTA CORP 2000 28

16 ARVIND 4000 27

17 ASHOK LEYLAND 8000 21

18 ASIAN PAINTS (INDIA) 125 17

19 AUROBINDO PHARMA 2000 24

20 BAJAJ AUTO 250 14

21 BAJAJ HOLDINGSINVESTMENT LI

500 18

MILLS

24 BANK OF BARODA 500 18

25 BANK OF INDIA 1000 24

26 BATA INDIA 500 20

27 BEML 500 18

28 MPHASIS 1000 17

29 BF UTILITIES 500 24

30 BGR ENERGYSYSTEMS 1000 29

31 BHARATELECTRONICS

250 17

32 BHARAT FORGE 1000 19

33 BHARAT PETROLEUM

CORPN

500 15

34 BHARTI AIRTEL 1000 16

35 BHARAT HEAVYELECTRICALS

1000 20

36 BHUSHAN STEEL 1000 21

37 BIOCON LIMTED 1000 19

38 BOMBAY DYEING&MFG CO

1000 20

39 BOMBAY RAYONFASIONS

1000 17

40 RELIANCEINFRASTRUCTURE

500 20

41 CAIRN INDIA LMITED 1000 14

42 CANARA BANK 500 20


43 CENTRAL BANKOF INDIA 2000 21

44 CENTURY TEXTILES & INDUSTRIES 1000 21


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45 CESC 1000 21

46 CHAMBAL FERTILISERS& CHEMICAL 2000 19

47 CIPLA 1000 14

48 CNX BANK NIFTY 25 11

49 CNX INFRASTRUCTURE INDEX 100 11

50 CNX IT INDEX 50 11

51 CNX PSE INDEX 75 11

52 COAL INDIA 1000 14

53 COLGATE-PALMOLIVE (INDIA) 250 17

54 TATA COFFEE 250 17

55 CROMPTON GREAVES 2000 22

56 CUMMIN INDIA 500 18

57 DABUR INDIA 2000 17

58 DEVELOPMENT CREDIT BANK 8000 22

59 KINGFISHER AIRLINES 8000 24

60 DECCANCHRONICLE HOLDINGS 4000 29

61 DENA BANK 4000 25

62 DHANLAXMI BANK 4000 31

63 DISH TV INDIA 4000 24

'


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Margin Account


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Examples for Margins


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Assets Liabilities

1000 shares 25,000 Initial Margin 15000

Borrowing 10000

25000 25000

You buy 100 shares of NTPC @ Rs250 each

Initial margin is 60%, Maintenance margin40%

You put 100*250*0.60

You borrow 100*250*0.40


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NTPC price goes down to 150

Your maintenance margin becomes 5000/15000= 30%

This will trigger a margin call

Assets Liabilities

1000 shares 15,000 Maintenance Margin 5000

Borrowing 10000

15000 15000


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h i d


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Returns when no margin used

((100-50)*500)/((500*50))*100

= 100%

R h i d


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Returns when margin was used

Size of purchase transaction = 500*50 = 25000

Margin requirement = 25000*0.60 = 15000 Investor borrowing = 25000*0.40 = 10000

Sale proceeds = 500*100 = 50000 Return on trade = (50000-10000)/15000 =

266%

Example for understanding when


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Example for understanding when

maintenance margin call would occur Investor purchased 500 shares of a stock at Rs

50 each stock. If the initial margin was 60%and maintenance margin was 30% when willthe margin call be triggered?

= 50(1-0.60)/(1-0.3) = 28.57

Date post:	03-Apr-2018
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Buying and Selling of Securities

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