OBJECTIVE OF STUDY:

To know the basic terminology of stock market. To make the investor aware about the factors which may affect their investment?

SCOPE OF STUDY:

Derivatives Sebi Stock exchange Commodity market. Stock market Securities Day trading Factor affecting Indian stock market Effect on Indian economy

LIMITATIONS:

Limitations are the limiting lines that restrict the work in some way or other. In this research study also their were some limiting factors, some of them are as under:

1. Data Collection:

The most important constraint in this study was data collection as Secondary data wasselected for study. Secondary data means data that are already available i.e. they refer tothe data which have already been collected and analysed by someone else.

2. Time Period:

Time period was one of the main factor as only one month was allotted and the topiccovered in research has a wide scope. So, it was not possible to cover it in a short span oftime.

3. Reliability:

The data collected in research work was secondary data. So, this puts a question mark on the reliability of this data, which a very important factor of this study as conclusion has been derived from this secondary data only.

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4. Accuracy:

The facts and findings of the data cannot be accepted as accurate to some extent asfirstly, secondary data was collected. Secondly, for doing descriptive research time needed to be more, because in short period you cannot cover each point accurately.

CORE STUDY:

Stock market:

A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008 . The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.)

The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to alisting of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the London Stock Exchange, the Deutsche Borse and the Paris Bourse, now part of Euronext.

The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘StockExchange’ as anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling thebusiness of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange.

A clear starting point for any would-be trader, most people have a rough idea or preconception of what they think a stock market is and how it works. Unfortunately, the answer to this simple question is rather complicated, and can't readily be summed up in one sentence. Indeed, many traders may be hard pushed to articulate exactly what a stock market

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is and the purpose it serves, even after years of serious trading. In this article, we're going to attempt to clear up the ambiguity, and offer a direct and succinct answer to this most foundational of trading questions

Most people understand that a stock market is a place where shares are bought and sold, and in essence this is true. Most people understand a stock market is dominated by traders who speculate on the price of shares to make a profit on the difference between the buying and selling price, and in essence this is true. But a stock is so much more in-depth than these two basic propositions would suggest, and requires some deeper analysis to get to the bottom of what's really going on

A stock market is a primarily a virtual exchange of securities (that is, shares and debentures, which companies use as a means of raising finance) and derivatives (i.e. virtual instruments such as contracts that relate to assets and securities and can be traded). It is virtual in the sense that the market is an intangible concept, rather than a physical place, and as a result of advancing technologies traders can now get involved with little more than a laptop or mobile phone. The market brings together a range of traders of all shapes and sizes - from small, one-man bands trading for their own personal gains through to hedge funds managing billions in assets, and everything in between.

Stock markets list the securities of publicly traded companies, identified in the UK by the appendage 'plc'. As distinct from a regular limited company ('Ltd.'), plc's offer their shares to the public at large, who are generally concerned with trading on the price point of a given share rather than its yield. Shares can change hands several times on a daily basis, and at insignificant levels the company is unconcerned with who owns those shares.

Shares themselves are intangible assets, entitling the bearer to an annual payment known as a 'dividend', paid out of distributable profits, and often corresponding voting rights in proportion to the size of the share held at the AGM, where major strategic decisions such as electing the board are put to the vote. The bearer of a share at any given point is in effect a part owner of the business to which those shares pertain, and it is this aspect that gives a share any underlying value

The price of a share at any given stage is dictated by supply and demand within the market, and rises or falls every time a share is bought or sold. This effectively means that shares are priced by the collective will and attitudes of the market, comprised of all the traders and investment houses that actively trade in those securities.

The price of a share at any given stage is dictated by supply and demand within the market, announcement rises or falls every time a share is bought or sold. This effectively means that shares are priced by the collective will and attitudes of the market, comprised of all the traders and investment houses that actively trade in those securities.

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Stock markets generally trade over a set duration of hours, usually reflecting the working day in their particular region, allowing the zealous trader to trade different markets round the clock - from London to New York to Tokyo - while affording those companies so listed to raise capital in the form of initial share issues to the market. As a result, the markets operate on a slick basis almost around the clock, bringing together buyers and sellers of securities and giving businesses and governments a free, unadulterated bellwether for the economic and commercial outlook of a given sector, industry or economy.

In essence, that's the foundation of what a stock market is, and it's by no means a comprehensive study. Getting to know the markets requires lengthy research and an understanding of business, economics, law and politics. Yet for those that do get to grips with how the markets operate, the allure of trading profits is sufficient rewards for all their hard work.

FUNCTION AND PURPOSE:

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.

An economy where the stock market is on the rise is considered to be an up and coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'etre of central banks. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security.

This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

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RELATION OF THE STOCK MARKET TO THE MODERN FINANCIAL SYSTEM:

The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries.

In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting ahigher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.

THE STOCK MARKET, INDIVIDUAL INVESTORS, AND FINANCIAL RISK:

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have

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turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st century.

SECURITIES AND EXCHANGE BOARD OF INDIA

SEBI Bhavan, Mumbai Headquarters of SEBI

ORGANIZATION DETAILS:

Headquarters Mumbai, Maharashtra, IndiaEstablished 1992Jurisdiction IndiaHead Chairman - U.K. SINHATerm FEBURARY 2011 – 5 YEARS

OFFICIAL WEBSITE:

Website www.sebi.gov.in

SEBI is the Regulator for the Securities Market in India. Originally set up by the Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 being passed by the Indian Parliament.Chaired by U.K.Sinha, SEBI is headquartered in the popular business district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.

ORGANIZATION STRUCTURE:

U. K. Sinha, 1976 batch IAS officer of Bihar cadre was on 3 February 2011 appointed as the eighth Chairman of the market regulator, Securities and Exchange Board of India (SEBI). Sinha had opted for voluntary retirement from service in 2008. U. K. Sinha succeeded outgoing chairman C. B. Bhave who retires on 17 February 2011. He has been

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appointed for a period of three years with effect from the date he assumes charge of the post on or after 18 February 2011 or till he attains the age of 65 years or until further orders, whichever is earlier. U. K. Sinha prior to being appointed as SEBI Chairman worked as UTI AMC Chairman and Managing Director.

FUNCTIONS AND RESPONSIBILITIES:

SEBI has to be responsive to the needs of three groups, which constitute the market:· the issuers of securities· the investors· the market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasiexecutive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court. SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as required under law.

Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT)

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WHAT IS AN ‘EQUITY’/SHARE?

Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 12 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

WHAT IS A ‘DEBT INSTRUMENT’?

Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender.

In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

WHAT IS A DERIVATIVE?

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset.

Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about twothirds of total transactions in derivative products.

WHAT IS A MUTUAL FUND?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc.

Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by

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investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in 13 various asset classes like equity, bonds, debentures, commercial paper and government securities.

The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

WHAT IS AN INDEX?

An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

WHAT IS INVESTMENT?

The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

WHY SHOULD ONE INVEST?

One needs to invest to: Earn return on your idle resources. Generate a specified sum of money for a specific goal in life. Make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy.

WHEN TO START INVESTING?

The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are:

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Invest early Invest regularly Invest for long term and not short term

WHAT CARE SHOULD ONE TAKE WHILE INVESTING?

Before making any investment, one must ensure to:1. obtain written documents explaining the investment2. read and understand such documents3. verify the legitimacy of the investment4. find out the costs and benefits associated with the investment5. assess the risk-return profile of the investment6. know the liquidity and safety aspects of the investment7. ascertain if it is appropriate for your specific goals8. compare these details with other investment opportunities available9. examine if it fits in with other investments you are considering or you have already made10. deal only through an authorised intermediary11. seek all clarifications about the intermediary and the investment12. explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.

WHAT IS THE FUNCTION OF SECURITIES MARKET?

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.

WHICH ARE THE SECURITIES ONE CAN INVEST IN?

Shares Government Securities Derivative products Units of Mutual Funds etc., are some of the securities investors in the securities market

can invest in.

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WHO REGULATES THE SECURITIES MARKET?

The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).

WHAT IS SEBI AND WHAT IS ITS ROLE?

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for: Regulating the business in stock exchanges and any other securities

Markets. Registering and regulating the working of stock brokers, sub–brokers

etc. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from, undertaking inspection, conducting inquiries and audits of

the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and other persons associated with the securities market.

WHAT IS THE ROLE OF A STOCK EXCHANGE IN BUYING AND SELLING SHARES?

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens availablewith the NSE trading members or the internet based trading facility provided by the trading members of NSE.

WHAT IS DEMUTUALISATION OF STOCK EXCHANGES?

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Demutualisation refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.

HOW IS A DEMUTUALISED EXCHANGE DIFFERENT FROM A MUTUAL EXCHANGE?

In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

STOCK TRADING:

WHAT IS SCREEN BASED TRADING?

The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fullyautomated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found.

WHAT IS NEAT?

NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an inmemory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

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HOW TO PLACE ORDERS WITH THE BROKER?

You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement, which every client needs to enter into with his or her broker.

HOW DOES AN INVESTOR GET ACCESS TO INTERNET BASED TRADING FACILITY?

There are many brokers of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.

WHAT IS A CONTRACT NOTE?

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.

WHAT DETAILS ARE REQUIRED TO BE MENTIONED ON THE CONTRACT NOTE ISSUED BY THE STOCK BROKER?

A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following:

Name, address and SEBI Registration number of the Member broker. Name of partner/proprietor/Authorised Signatory. Dealing Office Address/Tel. No./Fax no., Code number of the member given by the

Exchange. Contract number, date of issue of contract note, settlement number and time period for

settlement. Constituent (Client) name/Code Number.

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Order number and order time corresponding to the trades. Trade number and Trade time. Quantity and kind of Security bought/sold by the client. Brokerage and Purchase/Sale rate. Service tax rates, Securities Transaction Tax and any other charges levied by the

broker. Appropriate stamps have to be affixed on the contract note or it is mentioned that the

consolidated stamp duty is paid. Signature of the Stock broker/Authorized Signatory.

WHAT IS THE MAXIMUM BROKERAGE THAT A BROKER CAN CHARGE?

The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.

WHY SHOULD ONE TRADE ON A RECOGNIZED STOCK EXCHANGE ONLY FOR BUYING/SELLING SHARES?

An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counter-party risk which is assumed by the clearing corporation, access to investor grievance and redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor Protection Fund etc.

HOW TO KNOW IF THE BROKER OR SUB BROKER IS REGISTERED?

One can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.

WHAT PRECAUTIONS MUST ONE TAKE BEFORE INVESTING IN THE STOCK MARKETS?

Here are some useful pointers to bear in mind before you invest in the markets:

Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.

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Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades.

All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.

Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day. Take informed decisions by studying the fundamentals of the company. Find out the

business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor.

If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.

Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.

Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.

Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.

Be cautious about stocks which show a sudden spurt in price or trading activity. Any advise or tip that claims that there are huge returns expected especially for acting

quickly, may be risky and may to lead to losing some, most, or all of your money.

WHAT DO’S AND DON’TS SHOULD AN INVESTOR BEAR IN MIND WHEN INVESTING IN THE STOCK MARKETS?

Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.

Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly.

Ensure that you give all your details in the ‘Know Your Client’ form. Ensure that you read carefully and understand the contents of the ‘Risk Disclosure

Document’ and then acknowledge it. Insist on a contract note issued by your broker only, for trades done each day. Ensure that you receive the contract note from your broker within 24 hours of the

transaction. Ensure that the contract note contains details such as the broker’s name, trade time and

number, transaction price, brokerage, service tax, securities transaction tax etc. and is signed by the Authorised Signatory of the broker.

To cross check genuineness of the transactions, log in to the NSE website (www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue account payee cheques/demand drafts in the name of your broker only, as it appears on the contract note/SEBI registration certificate of the broker.

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While delivering shares to your broker to meet your obligations, ensure that the delivery instructions are made only to the designated account of your broker only.

Insist on periodical statement of accounts of funds and securities from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately.

Please ensure that you receive payments/deliveries from your broker, for the transactions entered by you, within one working day of the payout date.

Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from a family members’/ friends’ bank accounts.

Similarly, the Demat delivery instruction slip should be from your own Demat account, not from any other family members’/friends’accounts.

Do not sign blank delivery instruction slip(s) while meeting security payin obligation. No intermediary in the market can accept deposit assuring fixed returns. Hence do not

give your money as deposit against assurances of returns. ‘Portfolio Management Services’ could be offered only by intermediaries having

specific approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for Portfolio Management.

Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery instruction slip with anyone. While meeting pay in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form.

Be cautious while taking funding form authorised intermediaries as these transactions are not covered under Settlement Guarantee mechanisms of the exchange.

Insist on execution of all orders under unique client code allotted to you. Do not accept trades executed under some other client code to your account.

When you are authorising someone through ‘Power of Attorney’ for operation of your DP account, make sure that:

Your authorization is in favour of registered intermediary only. Authorisation is only for limited purpose of debits and credits arising out of

valid transactions executed through that intermediary only. You verify DP statement periodically say every month/ fortnight to ensure that

no unauthorised transactions have taken place in your account. Authorization given by you has been properly used for the purpose for which

authorization has been given. In case you find wrong entries please report in writing to the authorized

intermediary. Don’t accept unsigned/duplicate contract note. Don’t accept contract note signed by any unauthorised person.

Don’t delay payment/deliveries of securities to broker. In the event of any discrepancies/disputes, please bring them to the notice of the broker

immediately in writing (acknowledged by the broker) and ensure their prompt rectification.

In case of sub-broker disputes, inform the main broker in writing about the dispute at the earliest. If your broker/sub-broker does not resolve your complaints within a

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reasonable period please bring it to the attention of the ‘Investor Services Cell’ of the NSE.

While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE, it is very important that you submit copies of all relevant documents like contract notes, proof of payments/delivery of shares etc. alongwith the complaint. Remember, in the absence of sufficient documents, resolution of complaints becomes difficult.

Familiarise yourself with the rules, regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction.

STOCK EXCHANGE:

A stock exchange, (formerly a securities exchange) is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.

Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.

A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation). There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.

This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

THE ROLE OF STOCK EXCHANGES:

Stock exchanges have multiple roles in the economy, this may include the following:

1. Raising capital for businesses:

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The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

2.Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms.

3.Facilitating company growth:

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

4.Redistribution of wealth:

Stock exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.

5.Corporate governance:

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government.

Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors).

However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002),

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MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

6.Creating investment opportunities for small investors:

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

7.Government capital-raising for development projects:

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

8.Barometer of the economy:

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

BOMBAY STOCK EXCHANGE:

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INTRODUCTION:

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as "The Native Share & Stock Brokers' Association" in 1875.BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widelyrecognized. It migrated from the open outcry system to an online screen-based order driventrading system in 1995.

Earlier an Association Of Persons (AOP), BSE is now a corporatisedand demutualised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of world's best exchanges, Deutsche Borse and Singapore Exchange, as its strategic partners.Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector byproviding it with an efficient access to resources.

There is perhaps no major corporate in India which has not sourced BSE's services in raising resources from the capital market. Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors.

The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has entered into an index cooperation agreement with Deutsche Borse. This agreement has made SENSEX and other BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its iSharesAR brand, has created the 'iSharesAR BSE SENSEX India Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It bring to the investors a trading tool that can be easily used for the purposes of investment, trading, hedging and arbitrage. SPIcE allows small investors to take a long-term view of the market. BSE provides an efficient and transparent market for trading in equity,

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debt instruments and derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of India. BSE has always been at par with the international standards. The systems and processes are designed to safeguard market integrity and enhance transparency in operations. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification.

It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT). BSE continues to innovate. In recent times, it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a larger number of investors. It has successfully launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting System) to facilitate information flow and increase transparency in the Indian capital market. While the Directors Database provides a single-point access to information on the boards of directors of listed companies, the ICERS facilitates the corporates in sharing with BSE their corporate announcements.

BSE also has a wide range of services to empower investors and facilitate smooth transactions:

1. Investor Services:

The Department of Investor Services redresses grievances of investors. BSEwas the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264 programmes were held in more than 200 cities.

2. The BSE On-line Trading (BOLT):

BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities.BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India.

3. BSEWEBX.com:

In February 2001, BSE introduced the world's first centralized exchangebasedInternet trading system, BSEWEBX.com. This initiative enables investors anywhere inthe world to trade on the BSE platform.

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4. Surveillance:

BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis theprice movements, volume positions and members' positions and real-time measurement ofdefault risk, market reconstruction and generation of cross market alerts.

5. BSE Training Institute:

BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspectsof the capital market and financial sector. More than 20,000 people have attended the BTIprogrammes

6. Awards:

The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR).

The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March31 2007 have been awarded the ICAI awards for excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian capital market.

7. History:

For the premier stock exchange that pioneered the securities transaction business in India, over a century of experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then princely amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited (BSE).

Over the decades, the stock market in the country has passed through good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock Index-SENSEX- that subsequently became the barometer of the Indian stock market.

The launch of SENSEX in 1986 was later followed up in January 1989 by ntroduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras.

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The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006.

With a view to provide a better representation of the increasing number of listed companies, larger market capitalization and the new industry sectors, BSE launched on 27th May, 1994 two new index series viz., the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has come a long way in attuning itself to the varied needs of investors and market participants. In order to fulfil the need for still broader, segment-specific and sector-specific indices, BSE has continuously been increasing the range of its indices. BSE-500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECk Index. Over the years, BSE shifted all its indices to the free-float methodology.

NATIONAL STOCK EXCHANGE OF INDIANSE

Type Stock ExchangeLocation Mumbai, IndiaCoordinates19°3′37″N 72°51′35″E / 19.06028°N72.85972°E / 19.06028; 72.85972Owner National Stock Exchange of India LimitedKey people Mr. Ravi Narain (Managing Director & CEO)Currency INRNo. of listings 1587MarketCap US$ 1.46 trillion (2006)IndexesS&P CNX NiftyCNX Nifty JuniorS&P CNX 500Website http://www.nse-india.com/

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NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading.Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions.

The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalisation. other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006[update], the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India . In October 2007, the equity market capitalization of the companies listed on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

ORIGINS:

NSE building at BKC The National Stock Exchange of India was promoted by leading Financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

INNOVATIONS:

NSE has remained in the forefront of modernization of India's capital and financial markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to trade

securities in India. Since the success of the NSE, existent market and new market structures have followed the "NSE" model. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd."

in India. NSCCL was a landmark in providing innovation on all spot equity market (andlater, derivatives market) trades in India. Co-promoting and setting up of National Securities Depository Limited, first depository

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in India. Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the

wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives,

particularlyon an equity index, in India. After four years of policy and regulatory debate andformulation, the NSE was permitted to start trading equity derivatives. Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in

India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBCTV18,it is the one of the most important stock exchange in the world.

S&P CNX NIFTY:

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialised company focused upon the index as a core product. IISL has a Marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services.

The total traded value for the last six months of all Nifty stocks is approximately 65.68% of the traded value of all stocks on the NSE

Nifty stocks represent about 65.34% of the total market capitalization as on Mar 31, 2009.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.16% S&P CNX Nifty is professionally maintained and is ideal for derivatives trading

SENSEX & THE NIFTY:

The Sensex is an "index". What is an index? An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.The Sensex is an indicator of all the major companies of the BSE.The Nifty is an indicator of all the major companies of the NSE.

If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock

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price of most of the major stocks on the BSE have gone down. Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is theNational Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi.These are the major stock exchanges in the country. There are other stock exchanges like theCalcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE.Most of the stock trading in the country is done though the BSE & the NSE.

Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”.

THE REASONS FOR STOCK PRICES GOING "UP" AND "DOWN":

Stock prices change every day because of market forces. By this we mean that stock prices change because of “supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up!

Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. (Basics of economics!) Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling. If you know this you will know what prices go upand what prices go down!

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

Dalal Street watches with great attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection.

If a company's results are better than expected, the price jumps up. If a company's results disappoint and are worse than expected, then the price will fall. Of course, it's not just earnings that can change the feeling people have about a stock. It would be a rather simple world if this were the case! During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all

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know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors otherthan current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price very very rapidly.

THE REASONS FOR WHICH COMPANIES ISSUE STOCKS:

Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares willsomeday be worth more than what they paid for them. The first sale of a stock, which isissued by the private company itself, is called the initial public offering (IPO).

It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

Stock Picking –Having understood all the basics of the stock market and the risk involved, now we will go into stock picking and how to pick the right stock. Before picking the right stock you need to do some analysis.

There are two major types of analysis:1. Fundamental Analysis2. Technical Analysis

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Fundamental analysis is the analysis of a stock on the basis of core financial and economic analysis to predict the movement of stocks price. On the other hand, technical analysis is the study of prices and volume, for forecasting of future stock price or financial price movements.

Simply put, fundamental analysis looks at the actual company and tries to figure out what the company price is going to be like in the future. On the other hand technical analysis look at the stocks chart, peoples buying behavior etc. to try and figure out what the stock price is going to be like in the future.

We will go into the basics of “fundamental analysis”. Technical analysis is a little more complicated. It is much more of an "art" than a science. It depends more on experience and involves some statistics and mathematics, so explaining technical analysis is out of thescope of this article.

RETAIL PARTICIPATION:

Retail participation in the stock market has dropped significantly in June. According to BSE data, “clients” — including small investors, high net worth individuals and a section of day-traders — bought and sold Rs 77,426 crore worth of shares in June as against the average monthly figure of Rs 1.33-lakh crore in 2010 and Rs 1.4-lakh crore in 2009.

The combined average daily turnover in the cash segment on the BSE and NSE slipped to Rs 12,800 crore, a fall of 33 per cent over the average trading volume in 2010 (Rs

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19,225 crore) and 38 per cent from 2009 (Rs 20,775 crore). A rise in deliverable volume, in percentage term, also indicated the low level of participation of day-traders. The deliverable volumes with respect to the total traded quantity on the BSE increased to 40 per cent against the 2009-10 average of 32 per cent. The corresponding figure on the NSE is about 30 per cent (22 per cent).

Mr U. R. Bhat, Managing Director of Dalton Capital Advisors, told Business Line that the market was evidently and increasingly moved by the institutions. “Majority of the retail players, who are not out of the ring, currently have found greater safety in buying option contracts. These are limited risk and high potential gain propositions. The proprietary players, on the other hand, are concentrating on higher risk and gain play in selling options,” he observed.

Mr Saurabh Mukeherjea, head of equities at Ambit Capital, felt that the clear drop in retail volumes could be attributed to the fact that millions of them lost badly in the previous bull-run that ended in January 2008. “They seem convinced that the market, riddled as it is with information asymmetries, does not give a fair deal to the small guy”.

According to him, mutual funds have been hit hard by the crucial change in rules by the market regulator two years ago. “Mutual funds could not incentivise sales agents through frontloaded commissions and as a result lost their position of strength in the market”.

According to Mr Ajay Jaiswal, President (Research) of Microsec, migration of the retail players more to the derivatives, particularly to options contracts, from the cash segment is a recent phenomenon. “This was behind reduction in retail participation in the cash segment,” he added.

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“Retail participation is not rising even though the key indices recovered in the last 8 days. The most compelling reason for this is absence of market reforms,” said Mr Kishor Ostwal, Managing Director of CNI Research. “Many companies refuse to meet analysts, who only perhaps can throw light on the prospects of a stock. Small investors, in the absence of any valuation guidelines, are apparently chary of investing in B group shares,” he added.

A month after it launched a market-making initiative to boost liquidity in derivatives, the BSE Ltd is set to provide incentives to brokers to get retail clients to trade in that segment. The bourse will pay roughly Rs100 to retail brokers for each client who trades derivatives for the first time on the bourse, an exchange executive said, which was confirmed by another official.

“So far, it is the brokers who have started trading derivatives,” said one of the executives. “To bring in retail participants, the scheme will encourage first-time investors to try out the product.” Both officials at the 134-year-old bourse declined to be named because the scheme has not been made public yet. BSE’s spokesperson declined comment on the development.

The exchange, Asia’s oldest, is also likely to tweak the recently launched incentive scheme for market makers to ensure consistent volumes across trading hours and to make it more remunerative to trade options. While index futures have seen a sharp rise in volumes in the past few weeks, options have lagged behind.

Options are derivatives that provide a buyer with the right to bet on the price movement of an asset without placing the buyer under any obligation to transact in case the bet turns wrong. The seller of the option earns a premium paid by the buyer. Market makers provide two-way quotes on a contract. They are brokers who take the risk of holding a certain number of contracts with themselves to facilitate trading and, in turn, are remunerated by the exchange.

Total derivatives turnover in the past week rose 40 times compared with the average daily turnover in the six months preceding the market-making scheme on BSE, and touched a record Rs 1,600 crore on Thursday. The average derivatives turnover of Rs 1,438 crore in the past week was roughly 62% of its cash turnover.

BSE’s derivatives platform had been virtually lifeless since exchange-traded derivatives were introduced in India 10 years ago. BSE’s younger and larger rival, the National Stock Exchange (NSE), enjoys a near monopoly in equity derivatives. NSE’s market share in equity derivatives, which was nearly 100% till a month ago, is now roughly 99%. Brokers and market observers welcomed the growth of BSE’s derivatives platform saying it will spur innovation and drive healthy competition among exchanges, but cautioned there are several challenges for BSE, and it is still too early to predict the outcome of it latest initiatives in derivatives.

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“BSE’s ascendancy is a positive development, but it will take several years to catch up with NSE,” said Hyderabad-based Rajesh Chakrabarti, associate professor of finance, Indian School of Business (ISB). “Besides, as BSE gains market share, one would expect NSE to come up with similar schemes.” The market is likely to gain though. Investors stand to gain from such competition as it will keep transaction charges in check and allow them more choice, Chakrabarti said.

“These moves are welcome steps and will encourage a few investors but to build a retail investor base, the exchange will have to sustain the momentum in volumes growth,” said Vinay Agarwal, executive director, equities broking at Angel Broking Ltd. “These are early days yet and many investors will prefer to wait for a few months till they see high liquidity on a consistent basis.” BSE’s key advantage lies in the fact that its benchmark Sensex index is widely tracked across the globe by investors. So far, it is just Sensex futures that have attracted liquidity.

“Spreads have fallen to 1-2 points, or 0.0001%, on Sensex futures during peak hours of trading,” said Alok Churiwala, managing director of Churiwala Securities Pvt. Ltd, a Mumbai-based proprietary trading firm, which also has retail clients, and is a participant in BSE’s market making scheme. Index futures based on the 30-share Sensex account for roughly 90% of the total derivatives turnover on BSE, with index options and stock derivatives accounting for the rest. This is contrary to the industry trend where index options have outpaced futures and account for the lion’s share of the total derivatives pie.

Index options as a percentage of total derivatives turnover of NSE has grown nearly 30 percentage points in two years to 73% as they attract lower taxes. Index options turnover has averaged Rs 93,039 crore on NSE this year, while index futures saw an average turnover of Rs 15,726 crore. BSE’s incentives to options traders is based on the premium on options rather than on the notional turnover and is inadequate, many brokers said.

The bourse is considering ways to make the incentive scheme more attractive for options traders, said the executive quoted above. “It is a challenge to minimize risks and ensure sufficient interest at the same time.” The bourse is also planning to split its market-making scheme for different trading hours instead of allocating limits for the entire day so that trading momentum does not die down in the later hours.

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Futures traders under the current scheme are not incentivized for any trades once futures turnover on the bourse crosses Rs 1,000 crore, and that slows the momentum. This might change once the incentive scheme is tweaked. The growth in derivatives volumes in BSE is commendable at a time when markets have been utterly listless, but there are several challenges ahead, said Churiwala.

BSE’s success so far has been thanks to market regulator Securities and Exchanges Board of India’s (Sebi) decision to allow incentivized trading in illiquid derivatives in June. The key challenge for BSE will to be to raise the proportion of non-incentivized trades and the ability of the bourse to attract a wide variety of investors. Most of the derivatives trading on the bourse have been incentivized so far.

Sebi has allowed incentivized trading only till six months a period which might be inadequate to build sufficient volumes, several traders said. “Retail investors would continue to trade derivatives only on NSE till they see a similar liquidity on BSE,” said Karan Mutha, head of equity and derivatives advisory at HSBC Invest Direct Securities (India) Ltd.

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INVESTMENT DECISIONS

People lose money in stock markets more because of their own mistakes, than any market turmoil and other such things. For instance, it has generally been observed that equity investments are often guided by greed and investors seldom do their homework before putting their hard-earned money in stock markets.

Besides, they often resort to speculation and keep 'timing the market', which has not proven to be a great strategy. Lots of investors also presume that the market will only go northwards and the bull run will never end. But that never happens. Not in any market of the world. But that's how it is. Here are 10 such mistakes that equity investors generally make:

1. Guided by greed: Many investors have been losing money in stock markets owing to their inability to control greed and fear. The lure of quick wealth is difficult to resist, particularly in a bull market. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time and, thus, lose their hard-earned money in many cases.

2. Following herd mentality: Following herd mentality is another reason for the investors’ losses. “It has been witnessed that the typical buyer’s decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. So, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy may backfire in the long run,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

3. Resorting to speculation: Investors also face losses because they speculate and buy shares of unknown companies. They should, therefore, avoid relying on random tips and go for long-term gains only.

4. Lack of research: Proper research should be undertaken before investing in stocks. But this is rarely done. Investors generally go by the name of a company or the industry they belong to. But this is not the right way of putting one’s money into the stock market.“Therefore, if one doesn’t have time or temperament for studying the markets, one should always take the help of a suitable financial advisor,” says Kapur.

5. Creating leveraged positions: Many investors suffer from creating heavy positions in the futures segment without really understanding the risks involved. Instead of creating wealth, however, these investors burn their fingers very badly in case the sentiment in the market reverses.

6. Panic selling: In a bear market, investors panic and sell their shares at rock bottom prices. Trading on the bourses was suspended on May 17, 2004, May 18, 2006 and recently on January 22, 2008. Investors who had taken speculative positions lost heavily when blood was on the street. Even investors who had the capacity to hold on to their investments, lost faith in the markets and sold their investments in a hurry, thus incurring heavy losses.

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7. Timing the market: Many investors try to time the market. But this has not proven to be a great strategy. Historically, in fact, it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great Bull Run. Therefore, only prudent investors who put in money systematically, in the right shares and hold on to their investments patiently have made outstanding returns. So it’s not ‘timing the market’, but ‘time in the market’ which creates wealth. Hence, it is prudent to have patience and always keep a long-term broad picture in mind.

8. Putting all eggs in one basket: Another mistake which investors generally make is non-diversification of their portfolio. They generally put all their money in limited and favourite stocks which are in momentum. So, investors should diversify their portfolio across industries and size of the companies. Also, it is important to diversify across asset classes – equities, real estate,bonds, commodities, cash etc.

9. Avoiding financial planning: Investors also do not apply financial planning practices in their investment approach. They should follow an asset allocation model and invest only in long-term funds in the equity markets. They should also keep rebalancing their overall portfolio from time to time to keep their exposure to equity markets at the desired ratio of the total portfolio.

10. No monitoring of portfolio: We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence, we need to constantly monitor our portfolio and keep affecting the desired changes in it. If one can’t review one’s portfolio due to time-constraint or lack of knowledge, they should take the help of a financial advisor.

HOW CORPORATE BONDS CAN WORK FOR RETAIL INVESTORS:

Indian households saved 22 % of the gross domestic product (GDP) in FY11. About half of their savings went to physical assets such as gold and real estate. Financial savings comprised of 13% in currency, 47% in bank deposits, 24% in insurance, 9% in pension and provident funds (PF) and 7% in small savings. A majority of the financial savings is unlikely to earn real returns in FY12. This composition reflects that Indians are great savers but poor investors.

Increased allocation to physical saving is also proving the point that financial savings probably have not given adequate real returns to Indian households. Inadequate real return on financial savings is mostly hitting the retail investors. High networth individuals (HNIs) are able to generate far higher real returns due to a combination of factors such as the scale and size of investment, borrowing capacity, superior knowledge and range of investment products. The Indian society is experiencing widening inequality as HNIs are able to compound their already higher wealth at a faster pace than the retail investor is being able to do with their meagre wealth.

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Corporate bonds can provide adequate real returns to investors. Corporate fixed deposits (FDs) were a part and parcel of an average investor’s life in a not so distant past. The corporate FD market lost its appeal and diminished in size as investors looked at coupon rates rather than safety, distributors bothered for incentive rather than client interest and regulations were bypassed through innovative structures such as the plantation scheme. Focus on return on principal rather than return of principal lead to decline of the corporate FD market.

The corporate bond market could have easily filled the void left by corporate FDs. However, in spite of several steps taken by regulators to develop the corporate bond market, it remains a glass-half-full-or-half-empty story. Introduction of trading and settlement system such as negotiated dealing system for gilts, hedging products such as interest rate futures, increased foreign institutional investor (FII) participation has deepened the corporate bond market. A lot of thinking has been done to further develop the corporate bond market, but it has not been converted into actions.

Some steps can be taken to deepen the corporate bond market, which is necessary to migrate physical saving to financial saving and provide long-term financing for infrastructure development.

• Include corporate bonds as an acceptable security in collateralized borrowing and lending obligation with reasonable margin.

• Allow pension and PF trusts to invest in higher credit corporate bonds from the limited freedom of investing in dual highest credit rated bonds.

• Allow pension and PF trusts to sell the shorter maturity corporate bonds in the market to create liquidity at the short end and appetite for investment at the long end.

• Incentivize insurance companies to sell the shorter maturity corporate bonds in market to create liquidity.

• Introduce netting in corporate bond settlement (delivery versus payment III) like in the gilt market encouraging efficient utilization of capital.

• Expand interest rate futures across the maturity spectrum to generate liquidity.

• Introduce speedy and sure enforcement of security. Investor’s confidence on measures like section 138 in case of cheque bouncing has evaporated in the time consuming process of law. A high-yield market can’t develop in India, unless there is surety of enforcement of security. A lot of doubts are prevailing about fundamental matters like options and sell of pledged securities, among others. These fears are pushing investors towards highest rated bonds, depriving lower rated issuers from market access.

• Encourage larger size of issuance by capping stamp duty on issuance and allowing re-issuance of security.

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• Lay out clear processes for attracting FII flows in infrastructure debt starting with simpler definition of infrastructure and asset-backed model of financing.

• Bring OIS (swap for hedging) market on the exchange to facilitate better participation as well as reduce the settlement risk.

• Reduce the cost of retail distribution of bonds. It can be done through combining the initial public offer process with placement through the exchange or online platform. Allow appropriate advertisement for secondary placement of bonds to gain traction from retail investors.

• Popularize structured products through generic exchange-traded products.

Retail investors’ participation in Indian equity markets has declined over the last two decades as their experience has been unpleasant. Entry in a bullish market and exit in a bearish market along with wrong stock selection has caused this unpleasant experience. Structured products could act as a good bridge for money moving from fixed income to equity by providing safety of debt and partial return of equity. An exchange-based distribution will bring the much-needed transparency in structured products and enhance retail participation.

MID-CAP IT COMPANIES OUTPERFORM LARGER PEERS:

A large number of mid-cap IT stocks have outperformed both the benchmark IT index as well as large-cap peers in the past one year. Shares of Mindtree Ltd, Hexaware Ltd, NIIT Technologies Ltd, KPIT Cummins Ltd have risen by 87%, 76%, 54% and 39% respectively, compared to a 9% drop in the CNX IT index. Shares of Tata Consultancy Services Ltd, the best performing large-cap IT company, have risen by merely 4%.The better performance on the stock market is a function of these companies’ superior financial performance in recent times.

According to a report by Emkay Global Financial Services, in FY11 and FY12, the above-mentioned four mid-cap IT companies have grown revenues by 29% and 28% respectively. During the same periods, large-cap peers have grown revenues by 26% and 18% respectively. The report adds that the trend is likely to continue “as mid-tier companies continue to gain from the disaggregation of large deals into smaller deals (according to ISG TPI data, the number of $25-99 million deals have increased by roughly three times over CY02-11). Disaggregation of large deals into smaller ones is aiding higher participation rates for mid-tier companies.” Because of the trend of disaggregation, they can bid for smaller pieces of the transaction that they can handle. Given their relatively smaller revenue base (averaging $350 million), just a few such deal wins will lead to high growth.

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As the Emkay report points out, while TCS needs to garner $2 billion of incremental revenues to grow by 20% in FY13, Hexaware needs additional revenues of just $60 million.But haven’t large companies always faced this constraint? How then did they grow faster in the past? According to an analyst with a foreign brokerage, large companies grew at higher-than industry rates when deal flow was strong and the large clients they were servicing were increasing their outsourcing budgets. In such an environment, it was relatively easy to ‘mine’ existing customers. But now, Indian IT’s largest customers have either curtailed or maintained outsourcing budgets at previous levels.

With the trend of disaggregation of deals, these customers are open to engage smaller vendors at lower price points. Of course, some large vendors such as Tata Consultancy Services Ltd have grown at a higher-than industry rates, thanks to market share gains. But by and large, mid-tier companies are finding it easier to beat industry growth rates.

STOCK INDICES – DOMESTIC MARKET:37

STOCK INDICES – INTERNATIONAL MARKET:

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EQUITY MARKET (BSE) – TURNOVER:

EQUITY MARKET (BSE) – TRADED VOLUME:

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EQUITY MARKET (NSE) – TURNOVER:

EQUITY MARKETS (NSE) – TRADED VOLUME:

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