INSTITUTE

FOR
TECHNOLOGY
AND
MANAGEMEN
T
INDUSTRIAL
INTERNSHIP
PROGRAM
REPORT

A STUDY
ON

EQUITY AND
DERIVATIVESOPTIONS &
FUTURES

Submitted in
partial fulfillment
of

POST GRADUATE
DIPLOMA IN
MANAGEMENT
(PGDMFINANCE)

Submitted by

Saikat Das
PGDM 1720
Academic Year
(2013-2015)

Under the guidance

of

Dr. Latha Sreeram

Mr. Abhishek Kumar
Consultant Finance
Department
Deputy Manager

Institute for
Technology and
Management,
Kharghar
Karvy
Stock Broking
Limited, Vashi

DECLARATION

This project
entitiled A study on

Equity and
Derivatives (options
& futures) in Karvy
Stock Broking
Limited, is a
benefited work done
by me in partial
fulfillment of my
PGDM Finance
course Management
from Institute for
Technology and
Management,
Kharghar.

I further state that

this report entirely
stand original in its
concepts ideology

and genuine in its

presentation.

I declare that this

report has not been
submitted to any
other
University/Institute
for the award of any
Degree/Diploma.

Saikat Das
PGDM Finance
2013-15
Institute for
Technology and
Management
Kharghar.

CERTIFICATE
OF APPROVAL

This is to
certify that
the
Summer
Internship
Project A

study on
Equity and
Derivatives
(options &
futures)
submitted
by Saikat
Das, a
student of
Institute for
Technology
and
Manageme
nt, as a part
of the
curriculum
of PGDM

Finance has
been
approved.

___________
________
___________
_____
Faculty
Guide
Dean
Dr. Latha
Sreeram
Prof. AS
Adhikari

Consultant
ITM BS
Kharghar
Finance
Department
ITM BS
Kharghar

Shop no. A 43/44,

Vashi Plaza
Sector-17, Vashi,
Navi Mumbai400703

CERTIFICATE

This is to certify
that the project
titled Study on
equity and
Derivativesoptions and
futures is a
bonafide research
work carried out
by Mr. Saikat

Das (PGDM
1720) under our
guidance. This
dissertation has
not formed the
basis for the
award previously
of any
Degree/Diploma,
or any other
similar titles of
any
Institution/Univer
sity.

Mr. Abhishek Kumar

Deputy Manager
Karvy Stock
Broking Ltd
Vashi Branch
Navi Mumbai

ACKNOWLEDGE
MENT

I take this
opportunity to thank
all, whose able
guidance and kind
co-operation helped
me complete my
internship & study
On A study on
Equity and
Derivatives (options

& futures)
successfully.
I am particularly
indebted to Karvy
Stock Broking Ltd,
for providing me the
opportunity to
complete my project
successfully.
Employees of Karvy
always extended
their cooperation and
provided me with
valuable information
regarding the
organization in spite
of their busy
schedule.
I would like to

thank and express

my gratitude towards
Mr. Abhishek Kumar
(deputy Manager)
my project guide,
who has been a
constant source of
inspiration and
encouragement for
me during this
project.
I extend my
gratitude to ITM
Business School for
giving me this
opportunity.
I extend my sincere
gratitude to my Head
of the Institute Dr.

Ganesh Raja, for

giving me the
privilege to do the
Summer Internship
Program. I am
greatly obliged to
my Faculty Guide
Dr. Latha Sreeram
(Chief consultant,
Finance Department)
for her complete
guidance and also
for his valuable
insights on the
project.
Last but not the
least, I would extend
a special word of
thanks to all my

well-wishers for
giving me a helping
hand whenever
needed and for
making the project a
success.

Place: Kharghar,
Navi Mumbai
Signature:
Date:

Saikat Das

EXECUTIVE
SUMMARY:-

The Summer Project

at KARVY
STOCK
BROKING
LIMITED has

given an exposure
into the investment
scenario in India.
The project while
working at
KARVY STOCK
BROKING
LIMITED
includes advisory
services i.e.
educating the
existing and
potential investors
about stock market
as an alternative
source to investment.
This involves
catering to the
queries of the
investors about the

concept of stock
market, the various
options that an
investor can invest
his money into,
funds management
of investors.
This internship
report consists of
overall experience of
working as a part of
KARVY STOCK
BROKING LTD.
This experience
helped me to
understand the
functioning of a
stock broking
company. My

training consisted of
observing how the
trading is done in
live financial market
and also learning
about the various
sectors of investment
like shares, futures,
options, etc.
Analyzing the
investors behavior
includes
understanding the
concerns a person
has towards Stock
Market, his stages in
life and wealth
cycle, the effect of
the investments
made by the peer

groups, effect of the

profession he/she is
in, education
qualification,
importance of tax
benefits, the most
preferred saving tool
etc. and this all is
analyzed with the
help of a schedule
prepared.
Understanding the
significance of
Equity and
Derivatives market,
types of instruments
present in the Indian
Stock Market such as
Shares, Futures,
Options and

Forwards. The
various techniques
used to identify the
trend of the market
and analysing the
scrip before
investing.
Through the
systematic
investment plan
invest a specific
amount for a
continuous period,
at regular intervals.
By doing this, the
investor get the
advantage of rupee
cost averaging

which means that

by investing the
same amount at
regular intervals,
the average cost per
unit remains lower
than the average
market price.
During my
internship, I also
came to know the
various tactics and
strategies of trading
in the financial
markets. I started
from the very basics
of stock market and
earned a very good
knowledge by

observing the
portfolios of
different investors
which indicated their
investing behaviors
in various sectors
and various
segments. The study
is limited to Equity
and derivatives, with
special reference to
Futures and Options
in Indian context.
The study cant be
said as totally
perfect. The study
has only made a
humble attempt to
compare between
equity and

derivatives market in
respect to its risk and
return to investors,
only in Indian
context.

CONTENT
1. OBJECTIVE
S OF THE
STUDY
2. MODUS
OPERANDI
3. INDUSTRY
PROFILE
4. COMPANY
PROFILE
5. INTRODUC
TION TO
STOCK
MARKET.
6. INTRODUC
TION TO
BSE

7. INTRODUC
TION TO
NSE
8. FUNDAME
NTAL
ANALYSIS
9. TECHNICA
L
ANALYSIS
10. INTRODUC
TION TO
DERIVATIV
ES
11. STRATEGIE
S IN
OPTIONS
12. OPTION
GREEKS
13. PORTFOLIO
MANAGEM

ENT
SERVICE
AND
CREATION
14. TRANSMIS
SION AND
TRANSPOSI
TION OF
SHARE
CERTIFICA
TE.
15. LEARNING
S
16. SUGGESTIO
NS
17. CONCLUSI
ONS
18. BIBLIOGRA
PHY

Objectives of the
Study

To study the
movements in stocks
in equity market.

To understand the
Indian stock market
and its various
concepts.

To study in detail the

role of futures and
options market.

To study the role of

derivatives in the
Indian financial

market.

To study the various

strategies in
derivative market.

To study the product

in equity market and
derivative market
(options & Future)

Modus Operandi of
the project
With the help of our
company guide, we
were given

knowlwdge about
equity and derivative
market in depth and
its mechanism. I
have also read some
other similar reports
online to get some
knowledge.
Moreover we are
given individual PCs
to work on getting
more knowledge
about fundamentals

and technicals of
market.
The next task was
given to keep an eye
on the daily changes
that occurs in Stock
market with respect
to economic
conditions as well as
due to changes in
government policies
To complete this
report, there is more

use of secondry
source of
information i.e.
moneycontrol,
calloptionputoption,
nse.com and some
more and further
primary source as
well i.e. clients of
Karvy stoc broking
ltd. Information will
be taken with the
help of questionnaire

method as well as
telephonic survey
technique (only to
Active Karvy
Clients). This data
will be mainly used
to check their
investment patterns
in equity and
derivative market.
Moreover since the
title is on
comparative analysis

of equity and
derivative, it will
also help in
understanding
investor's why they
choose equity over
options and future
and vice versa. I
have already started
the survey method
over phone by
calling clients of
Karvy. Moreover the

clients who visit the

office are also my
part in achieving my
goals in the report.
Finally meeting the
prospective clients
helps a lot in finding
more information.

INDUSTRY
PROFILE

INTRODUCTION
Stock exchanges to
some extent play an
important role as
indicators, reflecting
the performance of
the countrys
economic state of
health. Stock market
is a place where
securities are bought
and sold. It is
exposed to a high
degree of volatility;
prices fluctuate
within minutes and
are determined by
the demand and
supply of stocks at a

given time. Stock

brokers are the ones
who buy and sell
securities on behalf
of individuals and
institutions for some
commission. The
Securities and
Exchange Board of
India (SEBI) is the
authorized body,
which regulates the
operations of stock
exchanges, banks
and other financial
institutions. The past
performances in the
capital markets
especially the
securities scam by

Harshad Mehta has

led to tightening of
the operations by
SEBI. In addition the
international trading
and investment expo
sure has made it imp
erative to better oper
ational efficiency. W
ith the view to impro
ve, discipline and bri
ng greater transparen
cy in this sector,
constant efforts are
being made and to a
certain extent
improvements have
been made.

HISTORY OF
THE STOCK
BROKING
INDUSTRY
Indian Stock
Markets are one of
the oldest in Asia. Its
history dates back to
nearly200 years ago.
The earliest records
of security dealings
in India are meager
and obscure. By
1830's business on
corporate stocks
and shares in Bank
and Cotton presses
took place in
Bombay. Though the

trading list was

broader in 1839,
there were only half
a dozen brokers
recognized by banks
and merchants
during 1840 and
1850.
The1850's witnessed
a rapid development
of commercial enter
prise and brokerage
business attracted
many men into the
field and by 1860 the
number of brokers
increased into 60.In
1860-61 the
American Civil War
broke out and cotton

supply from United

States of Europe was
stopped; thus, the
'Share Mania' in
India begun. The
number of brokers
increased to about
200 to 250.
However, at the end
of the American
Civil War, in1865, a
disastrous slump
began (for example,
Bank of Bombay
Share which had
touched Rs 2850
could only be sold at
Rs. 87). At the end
of the American
CivilWar, the

brokers who thrived

out of Civil War in
1874, found a place
in a street
(nowappropriately
called as Dalal
Street) where they
would conveniently
assemble andtransact
business.In 1887,
they formally
established in
Bombay, the "Native
Share and Stock
Brokers'Association"
(which is
alternatively known
as "The Stock
Exchange"). In 1895,
theStock Exchange

acquired a premise
in the same street
and it was
inaugurated in1899.
Thus, the Stock
Exchange at
Bombay was
consolidated.Thus in
the same way,
gradually with the
passage of time
number of
exchangeswere
increased and at
currently it reached
to the figure of 24
stock exchanges.

Development

An important early
event
in
the
development of the
stock market in India
was the formation of
the Native Share and
Stock
Brokers
Association
at
Bombay in 1875, the
precursor of the
present-day Bombay
Stock
Exchange.
This was followed
by the formation of
associations
/exchanges
in
Ahmedabad (1894),
Calcutta (1908) and
Madras (1937).
In
addition, a large num

ber of ephemeral exc

hanges emerged
mainly in buoyant
periods to recede
into oblivion during
depressing
times
subsequently.
In
order to check such
aberrations
and
promote a more
orderly development
of the stock market,
the
central
government
introduced
a
legislation called the
Securities Contracts
(Regulation)
Act,
1956. Under this
legislation, it is

mandatory on the
part
of a stock
exchanges to seek
government
recognition. As of
January 2002 there
were
23
stock
exchanges
recognized by the
central Government.
They are located at
Ahemdabad, Bangal
ore, Baroda, Bhuban
eshwar, Calcutta, Ch
enni,(the Madrasstoc
k
Exchanges
),
Cochin, Coimbatore,
Delhi,
Guwahati,
Hyderbad, Indore,
Jaipur,Kanpur, Ludhi

ana, Mangalore, Mu
mbai(the National St
ock Exchange or NS
E),Mumbai (The Sto
ck Exchange), papul
arly called the Bomb
ay Stock Exchange,
Mumbai
(OTC
Exchange of India),
Mumbai (The Interconnected
Stock
Exchange of India),
Patna, Pune, and
Rajkot. Of course,
the principle courses
are the National
Stock Exchange and
The Bombay Stock
Exchange
,
accounting for the

bulk of the business

done on the Indian
stock market. While
the recognized stock
exchanges have been
accorded
a
privileged
position,they
are
subject
to
governmental
supervision
and
control. The rules of
a recognized stock
exchanges relating to
the
managerial
powers
of
the
governing
body,
admission,
suspension,
expulsion, and re-

admission of its
members,
appointment
of authorized
representatives and
clerks, so on and
so forth have to
be approved by the
government. These
rules
can
be
amended, varied or
rescinded only with
the prior approval of
the government

COMPANY
PROFILE

KARVY Stock
Broking Limited

KARVY Stock
Broking Limited,
one of the
cornerstones of the
KARVY edifice,
flows freely towards
attaining diverse
goals of the
customer through
varied services. It
creates a plethora of
opportunities for the
customer by opening
up investment vistas

backed by researchbased advisory

services. Here,
growth knows no
limits and success
recognizes no
boundaries. Helping
the customer create
waves in his
portfolio and
empowering the
investor completely
is the ultimate goal.
KARVY Stock
Broking Limited is a
member of:
National Stock
Exchange (NSE)
Bombay Stock

Exchange (BSE)
Hyderabad Stock
Exchange (HSE)
Karvy Investor
Services Limited
Deepening of the
Financial Markets
and an everincreasing
sophistication in
corporate
transactions, has
made the role of
Investment Bankers
indispensable to
organizations
seeking professional

expertise and
counselling, in
raising financial
resources through
capital market apart
from Capital and
Corporate
Restructuring,
Mergers &
Acquisitions, Project
Advisory and the
entire gamut of
Financial Market
activities.
Our quality
professional team
and our workoriented dedication
have propelled us to
offer value-added

corporate financial
services and act as a
professional
navigator for long
term growth of our
clients, who include
leading corporates,
State Governments,
Foreign Institutional
Investors, public and
private sector
companies and
banks, in Indian and
global markets. We
have also emerged as
a trailblazer in the
arena of
relationships, both at
the customer and
trade levels because

of our unshakable
integrity, seamless
service and
innovative solutions
that are tuned to
meet varied needs.
Our team of
committed industry
specialists, having
extensive experience
in capital markets,
further nurtures this
relationship.
Credentials
Emerging as a
leading Investment

Banker with a strong

support from its
Group entities in
Research, Stock
Broking,
Institutional Sales
and Retail
Distribution.
Strong team of
more than 25
qualified
professionals
operating from six
cities; Hyderabad,
Mumbai, Delhi,
Kolkata, Chennai,
and Bangalore apart
from two overseas
offices at New York
(USA) and Dubai.

 One of the largest

retail distribution
networks with over
584 branches in over
389 cities/towns.
Excellent
Institutional Sales
Division.

MISSION
STATEMENT
To Bring Industry,
Finance and People
together.
VISION

STATEMENT
To be pioneering
financial services
company. And
continue to grow at a
healthy pace, year
after year, decade
after decade.
VALUES
Trust
Integrity
Dedication
Commitment
Transparency
Enterprise

Hard work and team

play
Learning &
innovation
Empathy and
humility

REGLATORY
BODIES
MINISTRY OF
FINANCE
a) SEBI (Stock
Brokers, R & T
Agent, Mtual Fund)
b) RBI (Commercial
Banks, NBFCs)

c) Department of IT
(PAN, TAN, e-TDS)

INVESTOR
SERVICE - KEY
FACTS
IPOs handled - 720
financial transaction
processed - 100 mn
number of investor
accounts services 16 mn
corporate clents as
r&t agents - 300
asset
mgmt,companies

services - 11
mutual fund scheme
services 72
KARVY STOCK
BROKING
OFFERS
Personalized Service
Professional Advice
Long Term
Relationship
Access to Research
Report
Transparency and

confidentiality

SERVICES
1.Stock broking
2. Demat services
3. Investment
product distribution
4. Investment
advisory services
5. Corporate finance
& Merchant banking
6. Insurance

7. Mutual fund
services
8. IT enabled
services
9. Registrars &
Transfer agents
10. Loans

Competitive
Advantage KARVY
Market Power
Brand Preference

Customer Value

SWOT ANALYSIS

Strength

Weakness

Good research team.

Technology need to be u

Dedicated employees.

Not enough advertiseme

Strong customer relationship.

Strong brand name.
Wide spread branches and brokers
network..

Opportunity

Threat

Growing IPO issues.

Market uncertainty.

Positive outlook of people towards

financial products.

Galloping competition.
Broad economic factors

Growing consumer awareness about

equity related product.

OBJECTIVES

Market Positioning
Market positioning
statements of Karvy
are At Karvy we
give you single
window service and
We also ensure
your comfort. So,
Karvy focus on the
consumers
who
prefer almost all
investment activities
at same place by
providing number of
various
financial
services. At Karvy a
person can purchase
or
sell
shares,
debentures etc. and

at the same place

also demat it. Karvy
also provides other
investment option to
the same person at
same place like
Mutual
Fund,
Insurance,
Fixed
Deposit, and Bonds
etc. and help the
person in designing
his portfolio. By this
way Karvy provides
comfort
to
its
customers. Karvy is
also
positioned
according to Ries
and Trout. Karvy is
promoted as a no. 1
investment product

distributor and R &

T agent of India.

Target Market
Karvy
uses
demographic
segmentation
strategy and segment
people based on their
occupation. Karvy
uses
selective
specialization
strategy for market
targeting.
Target
person for the Karvy
Stock Broking and
Karvy
Investment

Service are persons

who can work as
sub-broker for the
companies.
Companies focus on
Advisors
of
Insurance and post
office,
Tax
consultants and CAs
for making subbroker.
Marketing channel
System
Karvy uses one level
marketing channel
for
investment
product distribution.

Sub-brokers work as
intermediary
between consumer
and
company.
Company has both
forward
and
backward flow of
activity
through
channel. Company
distributes stationery,
brokerage,
and
information forward
to its sub-broker. The
sub-brokers
send
filled forms, queries,
amount
of
investment etc. back
to the company.

Training Channel
Members
Karvy
provides
training to the subbrokers because they
will be viewed as the
company by the
investors.
The
executives of Karvy
explain various new
schemes
of
investment to the
sub-brokers with its
objective,
risk
factors and expected
return.
Company
also
periodically
arrange seminar to
guide sub-brokers.

Advertising
Promotion:

and

The objective of
advertising of Karvy
is
to
create
awareness
about
services of Karvy
among investors and
sub-brokers
and
increase sub-brokers
of Karvy. Company
doesnt
give
advertisement
in
media
like
TV,
Newspapers,
and
Magazines
etc.
Karvys

advertisement
is
made indirectly by
the
companies
associate with it.
Karvy is R & T
agent of around 700
companies.
They
publish
name,
address and logo of
Karvy
on
their
annual report.
Karvy also publish
its weekly Stock
Market Newsletter
Karvy
Bazaar
Baatein
and
monthly magazine
The Finapolis to
guide investors and
sub-brokers
about

market.
STRATEGIES
Karvy believes that
foremost ingredient
for success in the has
been
the
cooperation ability to
continously evolve
both organizational
strcture and product
offerings,
thereby
remaining on the
cutting
financial
services.
Karvy
believes taht three
capital
viz.,
financial, human and

technology, would
drive the financial
services sector in the
future and draw the
boundaries
for
achieving leadership.
Karvy believes that
the
customized
solutions are now the
key
drivers
for
market share and
profit margins.
ACHIEVEMENTS
1. Among the
top 9 stock
brokers in
India (4% of
NSE

volumes)
2. India's No. 1
Registrar &
Securities
Transfer
Agents
3. Every 20th
trade is done
by KARVY
Stock
Broking Ltd.
4. Among the
top 3
Depository
Participants
5. Largest
Network of
Branches &
Business
Associates

6. ISO 9002
certified
operations by
DNV
7. Among top
10
Investment
bankers
8. Largest
Distributor of
Financial
Products
9. Adjudged as
one of the top
50 IT uses in
India by MIS
Asia
10. Full Fledged
IT driven
operations

trade is done
by KARVY
Stock
Broking Ltd.

INTRODUCTIO
N TO STOCK
MARKET
What is a stock ?
A stock is a partial
ownership
in
a
company
or
an

industry, with rights

to share in its profits.
When an investor
buys a stock of a
company,
he
is
called a shareholder
or a stockholder of
that company. The
benefit of buying a
share is that when
the company profits,
the shareholders also
profit. The company
distributes the profit
among
its
shareholders, which
is
called
the
dividend.
How do you make

profits
stocks ?

with

But many traders

make real profit in
stocks using the
market price of the
stocks. Stocks are
traded in the stock
markets. The face
value is the nominal
value of the stock
that is determined by
the issuer of the
stock. Market price
of a stock is the price
at which currently a
stock is traded in the
market. This price
may be at premium

or lesser than the

face value of the
stock, depending on
the
companys
performance
and
prospects, investors
interests
in
the
company and a lot of
other factors.
Market price of a
stock keeps varying
as traders trade the
stock in the market.
Traders often make
money using these
variations in the
market price of the
stock. Stocks are
bought at lower

market prices and

sold at higher prices
later. This is referred
to as long positions
in market terms.
Similarly stocks can
be sold at a higher
market price and
bought at a lower
price later. Thiis is
referred to as short
positions in market
terms. In these cases,
the difference in the
market prices at the
time of buying and
selling will be seen
as profit by the
traders.

What is the Demat

Account ?
Like opening a bank
account for doing
your
personal
financial
transactions,
you
have to open a
Demat account to
trade in the stock
market.
Demat
account refers to
Dematerialized
account.
This
account helps you to
buy and sell stocks
without the need for
physical
paper
shares.

A Demat Account is
a must for trading
the stocks these
days. To open a
demat account, you
should
select
a
Depository
Participant
(DP).
These days most of
the banks are also
DPs. So you can
contact any of the
DPs
with
your
identity,
address
proof
and
PAN
documents
for
opening a demat
account
for
a
prescribed fee by the
DP. The registered

DPs are also listed in

NSDL and CDSL.

Who is the Stock

Broker ?
Stock Brokers are
members of the
Stock
Exchanges.
Only these members
can
conduct
transactions in the
exchange on behalf
of the individuals
and companies. So if
you want to buy or
sell shares in the

exchange, you have

to contact a stock
broker for doing so.
This
normally
requires
the
individuals to open
an account with the
Stock Broker. So the
individual becomes a
client for the stock
broker.
Once the client
wishes to buy a
stock, the broker
would place the
order in the stock
exchange on behalf
of the client. When
the transaction is

done, the broker

places the price to
the client. The client
pays for the stocks
he bought and the
broker transfers the
stocks into the demat
account of the client
by following the
transaction
and
settlement
procedures.

Stock Markets:
Stock Market is a
market where the
trading of company
stock, both listed

securities
and
unlisted takes place.
It is different from
stock
exchange
because it includes
all the national stock
exchanges of the
country.
For
example, we use the
term, "the stock
market
was
up
today" or "the stock
market bubble."

Stock
Market
Conditions
There are two ways

to
describe
the
general conditions of
the stock market:
1)BULL
MARKET
2)BEAR
MARKET
Bull Market
A Bull Market
indicates
the
constant
upward
movement of the
stock market. A

particular stock that

seems
to
be
increasing in value is
described to be
bullish.
Bear Market
A
bear
market
indicates
the
continuous
downward
movement of the
stock market. stock
that seems to be
decreasing in value
is described to be

bearish.

Stock Exchanges:
Stock Exchanges are
an
organized
marketplace, either
corporation
or
mutual organization,
where members of
the
organization
gather
to
trade
company stocks or
other securities. The
members may act
either as agents for
their customers, or
as principals for their

own accounts.
Stock
exchanges
also facilitates for
the
issue
and
redemption
of
securities and other
financial instruments
including
the
payment of income
and dividends. The
record keeping is
central but trade is
linked
to
such
physical
place
because
modern
markets
are
computerized. The
trade on an exchange
is only by members

and stock broker do

have a seat on the
exchange.

History of Indian
Stock Market:
Indian stock market
marks to be one of
the oldest stock
market in Asia. It
dates back to the
close of 18th century
when the East India
Company used to
transact
loan
securities. In the
1830s, trading on
corporate stocks and

shares in Bank and

Cotton presses took
place in Bombay.
Though the trading
was broad but the
brokers were hardly
half dozen during
1840 and 1850.
An informal group
of 22 stockbrokers
began trading under
a
banyan
tree
opposite the Town
Hall of Bombay
from the mid-1850s,
each investing a
(then)
princely
amount of Rupee 1.
This banyan tree still

stands
in
the
Horniman
Circle
Park, Mumbai. In
1860, the exchange
flourished with 60
brokers. In fact the
'Share Mania' in
India began with the
American Civil War
broke and the cotton
supply from the US
to Europe stopped.
Further the brokers
increased to 250.
The informal group
of
stockbrokers
organized
themselves as the
The Native Share
and
Stockbrokers

Association which,
in
1875,
was
formally organized
as the Bombay Stock
Exchange (BSE).
BSE was shifted to
an old building near
the Town Hall. In
1928, the plot of
land on which the
BSE building now
stands
(at
the
intersection of Dalal
Street,
Bombay
Samachar Marg and
Hammam Street in
downtown Mumbai)
was acquired, and a
building
was

constructed
and
occupied
in
1930.Premchand
Roychand was a
leading stockbroker
of that time, and he
assisted in setting
out
traditions,
conventions,
and
procedures for the
trading of stocks at
Bombay
Stock
Exchange and they
are
still
being
followed.
The following is the
list of some of the
initial members of
the exchange, and

who are still running

their
respective
business:
D.S. Prabhudas &
Company
(now
known as DSP, and a
joint venture partner
with Merrill Lynch)
Jamnadas Morarjee
(now known as JM)
Champaklal Devidas
(now called Cifco
Finance)
Brijmohan
Laxminarayan

In
1956,
the
Government of India
recognized
the
Bombay
Stock
Exchange as the first
stock exchange in
the country under the
Securities Contracts
(Regulation) Act.
The most decisive
period in the history
of the BSE took
place after 1992. In
the aftermath of a
major scandal with
market manipulation
involving a BSE
member
named
Harshad Mehta, BSE

responded to calls
for reform with
intransigence. The
foot-dragging by the
BSE
helped
radicalise
the
position
of
the
government, which
encouraged
the
creation
of
the
National
Stock
Exchange
(NSE),
which created an
electronic
marketplace.
NSE
started trading on 4
November
1994.
Within less than a
year, NSE turnover
exceeded the BSE.

BSE
rapidly
automated, but it
never caught up with
NSE spot market
turnover. The second
strategic failure at
BSE came in the
following two years.
NSE embarked on
the launch of equity
derivatives trading.
BSE responded by
political effort, with
a friendly SEBI
chairman (D. R.
Mehta) aimed at
blocking
equity
derivatives trading.
The BSE and D. R.
Mehta succeeded in

delaying the onset of

equity
derivatives
trading by roughly
five years. But this
trading, and the
accompanying shift
of the spot market to
rolling
settlement,
did come along in
2000 and 2001 helped by another
major scandal at
BSE involving the
then President Mr.
Anand Rathi. NSE
scored nearly 100%
market share in the
runaway success of
equity
derivatives
trading,
thus

consigning BSE into

clearly second place.
Today, NSE has
roughly 66% of
equity spot turnover
and roughly 100% of
equity
derivatives
turnover.

Ca
pit
al
Ma
rke
t:
Th
e
cap
ital
ma
rke
t is
div
ide
d
int
o
two
seg
me

nts
viz:

Prima
ry Market

Secon
dary
Market

Primary Market:

Most companies are

usually
started
privately by their
promoters. However
the
promoters
capital
and
the
borrowed
capital
from
banks
or
financial institutions
might
not
be
sufficient for running
the business over the
long term. That is
when corporate and
the
government
looks at the primary
market to raise long
term
funds
by
issuing
securities
such as debt or

equity.

These securities may

be issued at face
value, at premium or
at discount. Let us
understand
the
meaning of these
terms:

Face
Value:
Face
value is
the
original
cost
of
the
security
as shown
in
the
certificate
/instrume
nt. Most
equity
shares
have
a
face
value of
Rs. 1, Rs.

5, Rs. 10
or
Rs.
100 and
do
not
have
much
bearing
on
the
actual
market
price of
the stock.
When
issuing
securities,
they may
be
offered at
a
discount

or at a
premium.

Premium:
When the
security
is offered
at a price
higher
than the
face
value it is
called a
premium

Discount:
When the
security
is offered
at a price

lower
than the
face
value it is
called a
discount.

Secondary Market:
The
secondary
market
provides
liquidity
to
the
investors in the
primary
market.
Today we would not
invest
in
any
instrument if there
was no medium to
liquidate
our
position.
The
secondary markets
provide an efficient
platform for trading
of those securities
initially offered in
the primary market.
Also those investors

who have applied for

shares in an IPO
may or may not get
allotment. If they
dont then they can
always
buy
the
shares (sometimes at
a discount or at a
premium) in the
secondary market.
Trading
in
the
secondary market is
done through stock
exchange. The Stock
exchange is a place
where the buyers and
sellers meet to trade
in shares in an
organized manner.

The stock exchange

performs
the
following functions:

Provide trading
platform
to
investors and
provide
liquidity

Facilitate
Listing
securities

of

Registers
members
Stock Brokers,

sub brokers

Make
enforce
laws

Manage risk in
securities
transactions

Provides
Indices

and
by-

There are two

leading stock
exchanges in India
which help us
trade are:

National
Stock
Exchange:
National Stock
Exchange
incorporated in
the year 1992
provides
trading in the
equity as well
as debt market.
Maximum
volumes take
place on NSE
and
hence
enjoy
leadership
position in the
country today

Bombay Stock
Exchange:
BSE on the
other hand was
set up in the
year 1875 and
is the oldest
stock exchange
in Asia. It has
evolved in to
its
present
status as the
premier stock
exchange.

INTRODUCTION
TO BSE:

As we read in the
history of Indian
stock exchange; the
stock
exchange,
Mumbai, popularly
known as "BSE".
BSE was established
in 1875 as "The
Native Share and
Stock
Brokers
Association". It is
the oldest one in
Asia, even older than
the Tokyo Stock
Exchange,
which
was established in
1878.
It
is
a
voluntary non-profit
making Association
of Persons (AOP)

and has converted

itself
into
demutualised
and
corporate entity. It
has evolved over the
years into its present
status as the Premier
Stock Exchange in
the country. It is the
first Stock Exchange
in the Country to
have
obtained
permanent
recognition in 1956
from the Govt. of
India
under the
Securities Contracts
(Regulation)
Act,
1956.

The Exchange, while

providing
an
efficient
and
transparent market
for
trading
in
securities, debt and
derivatives upholds
the interests of the
investors
and
ensures redressal of
their
grievances
whether against the
companies or its own
member-brokers. It
also
strives
to
educate
and
enlighten
the
investors
by
conducting investor
education

programmes
and
making available to
them
necessary
informative inputs.
A Governing Board
having 20 directors
is the apex body,
which decides the
policies
and
regulates the affairs
of the Exchange. The
Governing
Board
consists of 9 elected
directors, who are
from the broking
community
(one
third of them retire
every
year
by
rotation), three SEBI

nominees, six public

representatives and
an
Executive
Director & Chief
Executive
Officer
and
a
Chief
Operating Officer.
The Executive
Director as the Chief
Executive Officer is
responsible for the
day-to-day
administration of the
Exchange and he is
assisted by the Chief
Operating Officer
and other Heads of
Department

INTRODUCTION
TO NSE:
The National Stock
Exchange (NSE) is
India's leading stock
exchange covering
364 cities and towns
across the country.
NSE was set up by
leading institutions
to provide a modern,
fully
automated
screen-based trading
system with national
reach. The Exchange
has brought about
unparalleled
transparency, speed
& efficiency, safety

and market integrity.

It has set up facilities
that serve as a model
for the securities
industry in terms of
systems,
practices
and procedures. NSE
has
played
a
catalytic role in
reforming the Indian
securities market in
terms
of
microstructure,
market practices and
trading volumes. The
market today uses
state-of-art
information
technology
to
provide an efficient

and
transparent
trading, clearing and
settlement
mechanism, and has
witnessed
several
innovations
in
products & services
viz. demutualisation
of stock exchange
governance, screen
based
trading,
compression
of
settlement
cycles,
dematerialisation
and
electronic
transfer of securities,
securities
lending
and
borrowing,
professionalisation
of trading members,

fine-tuned
risk
management
systems, emergence
of
clearing
corporations
to
assume counterparty
risks, market of debt
and
derivative
instruments
and
intensive use of
information
technology.
The National Stock
Exchange of India
Limited has genesis
in the report of the
High Powered Study
Group
on
Establishment
of

New
Stock
Exchanges,
which
recommended
promotion
of
a
National
Stock
Exchange
by
financial institutions
(FIs) to provide
access to investors
from all across the
country on an equal
footing. Based on
the
recommendations,
NSE 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
unlike other stock
exchanges in the
country.
On
its
recognition as a
stock
exchange
under the Securities
Contracts
(Regulation)
Act,
1956 in April 1993,
NSE
commenced
operations in the
Wholesale
Debt
Market
(WDM)
segment in June
1994. The Capital
Market
(Equities)
segment commenced

operations
in
November 1994 and
operations
in
Derivatives segment
commenced in June
2000.
NSE's mission is
setting the agenda
for change in the
securities markets in
India. The NSE was
set-up
with
the
following objectives:
1

establ
ishing
a
nation-wide
trading
facility
for
equities, debt

instruments
and hybrids,
2

ensuri
ng
equal
access
to
investors all
over
the
country
through
an
appropriate
communicati
on network,

provi
ding a fair,
efficient and
transparent
securities
market
to
investors

using
electronic
trading
systems,
4

enabli
ng
shorter
settlement
cycles
and
book entry
settlements
systems, and

meeti
ng
the
current
international
standards of
securities
markets.

One of the objectives

of NSE was to
provide a nationwide
trading facility and
to enable investors
spread all over the
country to have an
equal access to NSE.
NSE has made it
possible
for
an
investor to access the
same market and
order
book,
irrespective
of
location, at the same
price and at the same
cost. NSE has been
promoted by leading

financial institutions,
banks,
insurance
companies and other
financial
intermediaries

Trading schedule
Trading on the
equities segment
takes place on all
days of the week
(except Saturdays
and Sundays and
holidays declared by
the Exchange in
advance). The
market timings of

the equities segment

are:
1. Pre-open session
Order entry &
modification Open:
09:00 hrs
Order entry &
modification Close:
09:08 hrs*
*with random
closure in last one
minute.
Pre-open order
matching starts
immediately after
close of pre-open
order entry.

2. Regular trading
session
Normal/Retail
Debt/Limited
Physical Market
Open: 09:15 hrs
Normal/Retail
Debt/Limited
Physical Market
Close: 15:30 hrs
Block deal session is
held between 09:15
hrs and 09:50 hrs.
3. The Closing
Session is held
between 15.40
hrs and 16.00 hrs.

The Exchange may

however close the
market on days other
than the above
schedule holidays or
may open the market
on days originally
declared as holidays.
The Exchange may
also extend, advance
or reduce trading
hours when it deems
fit and necessary.
SENSEX
An abbreviation of
the Bombay
Exchange Sensitive
Index (Sensex) - the

benchmark index of
the Bombay Stock
Exchange (BSE). It
is composed of 30 of
the largest and most
actively-traded
stocks on the BSE.
Initially compiled in
1986, the Sensex is
the oldest stock
index in India.

Method
Calculation
Sensex

for
of

The method adopted

for
calculating

Sensex is the market

capitalization
weighted method in
which weights are
assigned according
to the size of the
company. Larger the
size, higher the
weight age.
The
base
year
chosen
for
calculation of sensex
is 1978-79 and the
base index value is
set to 100 for this
period.
The total value of
shares in the market

at the time of index

construction
is
assumed to be 100
in terms of points.
This is for the
purpose of ease of
calculation and to
logically represent
the change in terms
of percentage. So,
next day, if the
market capitalization
moves up 10%, the
index also moves
10% to 110.
The
stocks
are
selected based on a
lot of qualitative and
quantitative

criterias.
The
construction
technique of index is
quite
easy
to
understand if we
assume that there is
only one stock in the
market. In that case,
the base value is set
to 100 and lets
assumes that the
stock is currently
trading
at
200.
Tomorrow the price
hits
260
(30%
increase in price) so,
the index will move
from 100 to 130 to
indicate that 30%

growth. Now lets

assume that on day
3, the stock finishes
at 208. Thats a 20%
fall from 260. So, to
indicate that fall, the
Sensex
will
be
corrected from 130
to 104(20%fall).

CNX NIFTY
CNX stands for the
Credit Rating
Information Services
of India Limited
(CRISIL) and the
National Stock

Exchange of India
(NSE). These two
bodies own and
manage the index
within a joint
venture called the
India Index Services
and Products Ltd.
(IISL). Without the
additional
abbreviation to S&P
CNX, the index
name would be S&P
CRISIL NSE Index.
Quick Clearing and
Settlement
NSE has introduced
a full range of

clearing
house
facilities; a pan of
securities
is
processed at the
regional
clearing
centers
(Delhi,
Chennai
and
Calcutta). The inter
region
clearing
facility provided at
present, reduced that
risk of the members
because
of
not
getting
timely
delivery of shares or
loss of shares in
transit. The facility is

also expected to
boost delivery based
trading.
So the nifty index is
a bit broader than the
Sensex which is
constructed using 30
actively
traded
stocks in the BSE.
Nifty is calculated
using
the
same
methodology
adopted by the BSE
in calculating the
Sensex but with
three
differences.
They are:

The base year is

taken as 1995
The base value is set
to 1000
Nifty is calculated
on 50 stocks actively
traded in the NSE
50 top stocks are
selected from 23
sectors.
The selection criteria
for the 50 stocks are
also similar to the
methodology
adopted
by
the
Bombay
stock
exchange.

IPO PROCESS
Conditions
1. Net Asset
of Rs. 3
crore in
each
preceding
year.
2. Distributi
on Profit
at least 3
out of 5
preceding

year.
3. Networth
of 1 crore
in
preceding
3 years.
4. Issue size
less than
5 times of
pre issue.
The IPO process in
India consists of the
following steps: 1) Appointment
of merchant
banker and
other

intermediarie
s
2) Registration
of offer
document
3) Marketing of
the issue
4) Post- issue
activities
5) Appointment
of Merchant
Banker and
Other
Intermediarie
s
One of the crucial

steps for successful

implementation of
the IPO is the
appointment of a
merchant banker. A
merchant banker
should have a valid
SEBI registration to
be eligible for
appointment.
A merchant banker
can be any of the
following lead
manager, comanager,
underwriter or
advisor to the issue.
Certain guidelines
are laid down in
Section 30 of the

SEBI Act, 1992 on

the maximum limits
of intermediaries
associated with the
issue:
Size of the
Issue

No. Of lead
Managers

50 cr.

50 100 cr.

100 200 cr.

200 - 400 cr.

Above 400 cr.

5 or more as
agreed by
the board

The number of comanagers should not

exceed the number

of lead managers.
There can only be
one
advisor/consultant to
the issue. There is no
limit on the number
of underwriters.

Other
Intermediaries
Registrar to the
Issue:

Registration with
SEBI is mandatory
to take on
responsibilities as a
registrar and share
transfer agent. The
registrar provides
administrative
support to the issue
process. The
registrar of the issue
assists in everything
from helping the
lead manager in the
selection of Bankers
to the Issue and the
Collection Centres to
preparing the
allotment and
application forms,

collection of
application and
allotment money,
reconciliation of
bank accounts with
application money,
listing of issues and
grievance handling.
Bankers to the Issue:
Any scheduled bank
registered with SEBI
can be appointed as
the banker to the
issue. There are no
restrictions on the
number of bankers to
the issue. The main
functions of bankers

involve collection of
application forms
with money,
maintaining a daily
report , transferring
the proceeds to the
share application
money account
maintained by the
controlling branch,
and forwarding the
money collected
with the application
forms to the
registrar.
Underwriters to the
Issue:
Underwriting

involves a
commitment from
the underwriter to
subscribe to the
shares of a particular
company to the
extent it is under
subscribed by the
public or existing
shareholders of the
corporate. An
underwriter should
have a minimum net
worth of 20 lakhs,
and his total
obligation at any
time should not
exceed 20 times the
underwriters net
worth. A commission

is paid to the writers

on the issue price for
undertaking the risk
of under
subscription.
The maximum rate
of underwriting
commission paid is
as follows:
Nature of Issue

On amount
Devolving On
Underwriters

On amounts
subscribed by
public

Equity shares,
preference
shares and
debentures

2.50%

2.50%

Issue amount
upto Rs.5 lakhs

2.50%

1.50%

Issue amount
exceeding %

2.00%

1.00%

Broker To the Issue:

Any member of a
recognised stock
exchange can
become a broker to
the issue .A broker
offers marketing
support,

underwriting
support,
disseminates
information to
investors about the
issue and distributes
issue stationery at
retail investor level.
Registration Of The
Offer Document
For registration,10
copies of the draft
prospectus should be
filed with SEBI. The
draft prospectus filed
is treated as a public
document. The lead
manger also files the

document with all

listed stock
exchanges.
Similarly, SEBI
uploads the
document on its
website
www.sebi.com. Any
amendments to be
made in the
prospectus should be
done within 21days
of filing the offer
document.
Thereafter the offer
document is deemed
to have been cleared
by SEBI.
Promoters
Contribution:

In the public issue of

an unlisted company,
the promoters shall
contribute not less
than 20% of the post
issue capital as given
in Chapter- IV of the
SEBI Act, 1992.The
entire contribution
should have been
made before
theopening of the
issue.
Lock-in
Requirement
The minimum
promoters
contribution will be

locked in for a
period of 3 years.
The lock-in period
commences from the
date of allotment or
from the date of
commencement of
commercial
production,
whichever is earlier.

Marketing of the
Issue
Timing of the Issue
Retail distribution
Reservation of the

Issue
Advertising
Campaign
Timing of the Issue
An appropriate
decision regarding
the timing of the IPO
should be made,
keeping in mind the
general sentiments
prevailing in the
investor market. For
example, if recession
is prevailing in the
economy (the
investors are
pessimistic in their

approach), then the

firm will not be able
to get a good pricing
for its IPO, as
investors may not be
willing to put their
money in stocks.
Retail distribution:
Retail distribution is
the process through
which an attempt is
made to increase the
subscription.
Normally, a network
of brokers
undertakes retail
distribution. The
issuer company

organises road shows

in which conferences
are held, which are
attended by high
networth investors,
brokers and subbrokers. The
company makes
presentations and
solves queries raised
by participants. This
is one of the best
ways to raise
subscription.
Reservation in the
Issue
Sometimes
reservations are

tailored to a specific
class of investors.
This reduces the
amount to be issued
to the general public.
The following are
the classes of
investors for whom
reservations are
made:
Mutual Funds
Banks and
Financial
Institutions; Nonresident Indians
(NRI) and Overseas
Corporate Bodies
(OCB) The total
reservation for

NRI/OCB should not

exceed 10% of the
post-issue capital,
and individually it
should not exceed
5% of the post issue
capital.
Foreign
Institutional
Investors (FII): The
total reservation for
FII cannot exceed
10% of the postissue capital, and
individually it
should not exceed
5% of the post issue
capital.
Employees:

Reservation under
this category should
not exceed 10% of
the post issue
capital.
Group
Shareholders:
Reservation in this
category should not
exceed 10% of the
post issue capital.
The net offer made
to the public should
not be less then the
25% of the total
issue at any point of
time.
Post-Issue Activities

 Principles of
Allotment: After the
closure of the
subscription list, the
merchant banker
should inform,
within 3 days of the
closure, whether
90% of the amount
has been subscribed
or not. If it is not
subscribed up to
90%, then the
underwriters should
bring the shortfall
amount within 60
days. In case of over
subscription, the
shares should be
allotted on a pro-rata

basis, and the excess

amount should be
refunded with
interest to the shares
holders within 30
days from the date of
closure.
Formalities
Associated With
Listing:
The SEBI lists
certain rules and
regulations to be
followed by the
issuing company.
These rules and
regulations are laid
down to protect the

interests of investors.
The issuing
company should
disclose to the public
its profit and loss
account, balance
sheet, information
relating to bonus and
rights issue and any
other relevant
information.

SEBI

Securities Exchange
Board of India
(SEBI) was set up in
1988 to regulate the
functions of
securities market.
SEBI promotes
orderly and healthy
development in the
stock market but
initially SEBI was
not able to exercise
complete control
over the stock
market transactions.
It was left as a watch
dog to observe the
activities but was
found ineffective in
regulating and

controlling them. As
a result in May 1992,
SEBI was granted
legal status. SEBI is
a body corporate
having a separate
legal existence and
perpetual succession.

Reasons for
Establishm
ent of
SEBI:
With the growth in
the dealings of stock
markets, lot of
malpractices also

started in stock
markets such as
price rigging,
unofficial premium
on new issue, and
delay in delivery of
shares, violation of
rules and regulations
of stock exchange
and listing
requirements. Due to
these malpractices
the customers started
losing confidence
and faith in the stock
exchange. So
government of India
decided to set up an
agency or regulatory
body known as

Securities Exchange
Board of India
(SEBI).

Purpose and Role

of SEBI:
SEBI was set up
with the main
purpose of keeping a
check on
malpractices and
protect the interest of
investors. It was set
up to meet the needs
of three groups.
1. Issuers:

For issuers it
provides a market
place in which they
can raise finance
fairly and easily.
2. Investors:
For investors it
provides protection
and supply of
accurate and correct
information.
3. Intermediaries:
For intermediaries it
provides a
competitive
professional market.

Objectives of SEBI:
The overall
objectives of SEBI
are to protect the
interest of investors
and to promote the
development of
stock exchange and
to regulate the
activities of stock
market. The
objectives of SEBI
are:
1. To regulate the
activities of stock
exchange.

2. To protect the
rights of investors
and ensuring safety
to their investment.
3. To prevent
fraudulent and
malpractices by
having balance
between self
regulation of
business and its
statutory regulations.
4. To regulate and
develop a code of
conduct for
intermediaries such
as brokers,
underwriters, etc.
P/E Ratio

P.E ratio ( price to

earning ratio ) is one
of the most
important and
common stock
valuation ratio. It is a
ratio of companys
current market share
price compared to its
annual earning per
share.
ExampleSuppose a company
is trading at 500. Its
earning per share is
10 for the last 12
months then its P.E
ratio will be
50(500/10)

Generally earning
per share is
calculated for last 12
months so this ratio
is often called
trailing P.E ratio
Significance of
price to
earning ratio
Price to
earning ratio
indicates how
cheaper or
expensive a
stock is. If
P.E ratio of a
stock is 10
then it tells

that investors
are willing to
pay 10 times
of companys
earning to
buy that
stock.
Stocks with
P.E ratio less
than 10 are
quite
cheaper.Thes
e types of
stocks often
provide a
good
opportunity
for buying.
High Price to
earning ratio

indicates that
investors are
expecting
high earning
growth in
future. But
while
investing
dont
consider P.E
ratio as a
standalone
parameter.
If all other
things remain
same then a
500 stock
with P.E ratio
12 is cheaper
than a 20

stock with
P.E ratio 18.

FACTORS TO
LOOK FOR
BEFORE BUYING
STOCK
Management
Project Undertaken
Goodwill
Past Performance
Debt Level
Dividend Declared

P/E Ratio
Volume
Traded/Deliverable
Quantity

Reasons For or
Advantages in
Investing In equity
High Intraday
Margin
High Return
High Liquidity
Direct Investment
Charges (easy)

Tax Benefits

Sectors
Banking
Capital Goods
Clothing
Conglomerates
Consumer Durables
Consumer NonDurables
Drugs
Energy
Financial
Hardware
Industrial Goods

Services
Technology
Utilities
Agriculture
Basic Materials
Chemicals
Communications
Construction
Consumer Goods
Credit
Electronics

Insurance
IT Services
Medical Facilities
Metals and Mining
Real Estate
Software
Transportation

FUNDAMENTAL
ANALYSIS
Fundamental
analysis is the
examination of the
underlying forces

Entertainment
Food and Beverage
Healthcare
Information Technology
(IT)
Investing
Media

that affect the well

being of the
economy, industry
groups and
companies. As with
most analysis, the
goal is to develop a
forecast of future
price movement and
profit from it. At the
company level,
fundamental analysis
may involve
examination of
financial data,
management,
business concept and
competition. At the
industry level, there
might be an

examination of
supply and demand
forces of the
products.
Some
of
the
Fundamental factors
that should be kept
in
mind
while
analyzing
the
company that will
help in deciding
whether to invest in
that company or not,
are as follows: Market
overview
Market
capitalization

 Goodwill
Past
performance
Future
prospect
Management
Dividend
distribution
Attrition rate

THREE PHASES
OF
FUNDAMENTAL
ANALYSIS
1) Understanding of
the macro-economic
environment and

developments
(Economic
Analysis)
2) Analyzing the
prospects of the
industry to which the
firm belongs
(Industry Analysis)
3) Assessing the
projected
performance of the
company (Company
Analysis)

This three phase

examination of
fundamental analysis
is also called

EIC(EconomyIndustry-Company
Analysis) framework
or a top-down
approach.
Here the financial
analyst first makes
forecasts for the
economy, then for
industries and finally
for companies. The
industry forecasts
are based on the
forecasts for the
economy and in turn,
the company
forecasts are based
on the forecasts for
both the industry and
the economy. Also in

this approach,
industry groups are
compared against
other industry
groups and
companies against
other companies.
Usually, companies
are compared with
others in the same
group.For example,
a telecom operator
(Spice) would be
compared to another
telecom operator not
to an oil company.

TECHNICAL
ANALYSIS

Technical analysis
takes a completely
different approach; it
doesn't care one bit
about the "value" of
a company or a
commodity.
Technicians are only
interested in the
price movements in
the
market. Technical
Analysis
is
the
forecasting of future
financial
price
movements based on
an examination of
past
price
movements.

Following are some

technical factors that
should be studied:

Charts
Ratio
Resistanc
e
&
Support

ASSUMPTIONS
OF TECHNICAL
ANALYSIS

 The market value

of a security is solely
determined by the
interaction of
demand and supply
factors operating in
the market.
The demand and
supply factors of a
security are
surrounded by
numerous factors;
these factors are both
rational as well as
irrational.
The security
prices move in

trends or waves
which can be both
upward or
downward
depending upon the
sentiments,
psychology and
emotions of
operators or traders.
The present
trends are influenced
by the past trends
and the projection of
future trends is
possible by an
analysis of past price
trends.
Except minor
variations, stock

prices tend to move

in trends which
continue to persist
for an appreciable
length of time.
Changes in trends
in stock prices are
caused whenever
there is a shift in the
demand and supply
factors.

TOOLS IN
TECHNICAL
ANALYSIS
Line charts

Point and Figure

Chart
Bar Graph
Candle Stick Chart
Line Chart with
Volume
Moving Average

Line Chart
A chart that shows a s
ecuritys price over a p
eriod of time, such as
a day, a month, or a ye
ar. A linechart is constr
ucted by placing points
representing the price
at different points in ti
me, and then connecti
ng the pointswith lines.
It is useful in showing
a security's trend over
time. However, it does
nothing to indicate the
security's high, low,op
en, or close.

Point And Figure

Chart

A chart pattern, pecu

liar to securities, in
which only the signif
icant
value changes of a se
curity, a futures contr
act, or a market aver
age are recorded. Th
e
vertical axis represen
ts price, but, unlike n
early all other charts,
no variable, includin
g
time, is plotted on th
e horizontal axis. Ent
ries on a point-and
figure chart are made
onlywhen a variable
changes by a predete

rmined amount, for e

xample, by one point
or twopoints. A peri
od of days may pass
before an entry is rec
orded. Point and
figure (P&F) is a
charting technique
used in technical
analysis. Point and
figure charting is
unique in that it does
not plot price against
time as all other
techniques do.
Instead it plots price
against changes in
direction by plotting
a column of Xs as
the price rises and a

column of Os as the
price falls.

Bar Chart
A style of chart
used by some
technical
analysts, on
which, as
illustrated
below, the top of
the vertical line
indicates the
highest price a
security traded
at during the
day, and the
bottom
represents the
lowest price.
The closing price

is displayed on
the right side of
the bar, and the
opening price is
shown on the
left side of the
bar. A single bar
like the one
below
represents one
day of trading.

Candle Stick Chart

A chart that
displays the
high, low,
opening and
closing prices for
a security for a
single day. The
wide part of the
candlestick is
called the "real
body" and tells
investors
whether the
closing price was
higher or lower
than the

opening price
(black/red if the
stock closed
lower,
white/green if
the stock closed
higher). The
candlestick's
shadows show
the day's high
and lows and
how they
compare to the
open and close.
A candlestick's
shape varies
based on the
relationship
between the

day's high, low,

opening and
closing prices.

Line Chart With

Volume
There are many

different types of
stock charts: line,
bar, OHLC (openhigh-low-close),
candlestick,
mountain, point-andfigure, and others,
which are viewable
in different time
frames: most
commonly, daily,
weekly, monthly, and
intraday charts.
Each style and time
frame has its
advantages and
disadvantages, but
they all reveal
valuable price and
volume information
that you can use to
make profitable

investing decisions

Moving Average

Moving averages are

plotted on stock
charts to help
smooth out volatility
and point out the
direction a stock
may be trending. It
may also help
provide context for
the price or volume
movements during a
given period as it
makes it easier to
spot divergences
from an established

price trend. The red

line cutting through
the price bars is the
50-day moving
average. It represents
the average price
over the previous 50
trading sessions and
is calculated by
summing the closing
price over the last 50
trading sessions and
dividing by 50. The
black line is the 200day moving average.
It represents the
average price over
the previous 200
trading sessions and
is calculated by

summing the closing

price over the last
200 trading sessions
and dividing by 200.

MARKET
CAPITALIZATIO
N
When understanding
how to allocate
funds for investing
in equities, it is
important to
understand both your

expectation of return
and also your risk
appetite. Once you
are clear on these, it
will be a lot easier
for you to allocate
money between the
various categories of
stocks.
There are three main
classifications when
it comes to stocks Large Cap stocks;
Mid Cap stocks; and
Small Cap stocks.

Here, the term 'cap'

simply refers to the
'market
capitalisation' of the
stock.
And what is market
capitalisation?
It is the value of the
stock that you arrive
at by multiplying the
stock price by the
company's
outstanding number
of equity shares.
Market Capitalisation = Current Stock Price x Number of Shares
outstanding

For a better
understanding, let us
see an example:
Company XYZ has
10,000,000 shares
outstanding and its
current share price is
Rs 8. Based on the
above formula, we
can calculate that
Company XYZ's
market capitalisation
is Rs 8 crore, or
1,00,00,000 shares x
Rs 8 per share.
Market capitalization
is the aggregate
valuation of the

company based on
its current share
price and the total
number of
outstanding stocks.
Definition: Market
capitalization is the
aggregate valuation
of the company
based on its current
share price and the
total number of
outstanding stocks. It
is calculated by
multiplying the
current market price
of the company's
share with the total

outstanding shares of
the company.
Description: Market
capitalization is one
of the most
important
characteristics that
helps the investor
determine the returns
and the risk in the
share. It also helps
the investors choose
the stock that can
meet their risk and
diversification
criterion.
For instance, a
company has 2 crore

outstanding shares
and the current
market price of each
share is Rs100.
Market capitalization
of this company will
be 200,00,000 x
100=Rs 200 crore.
Stocks of companies
are of three types.
The stocks with a
market cap of Rs
10,000 crore or more
are large cap stocks.
Company stocks
with a market cap
between Rs 2 crore
and 10 crore are mid
cap stocks and those

less than Rs 2 crore

market cap are small
cap stocks.

STOCK,
SECTOR, SENSEX
MOVEMENT
Movement In
Stocks
Movement of
a particular
stock
depends upon
the following
things:
Weightage of

that
particular
company in
its sector.
P/E Ratio of
that company
Any
good/bad
news relating
that company
or its sector
Good
financial
results of a
particular
company.
Movement of
other
companies

stocks in that
sector.
Fundamental
factors
of
that
company.
Sector
movement

 Sector
movements
can be
caused when

Stocks ( for
eg. I.T
stocks) can
move the
sector I.e
internal.

External
factors
economy
government

laws
currency
depreciation
(exchange
rate
fluctuations)
If P.E ratio is
less than 10
then it can
move the
market.
Companies
with high
demand of
shares their
P.E ratio will
also be high.

 An another
reason for
sector
movements is
that when FII
's invest
money into
the market it
causes sector
movements
and on the
vice versa
when they
withdraw
their money
from the
market like
in the month
of July when
it is their year

end the
markets
becomes
slow.
FII's cause
more sector
movements
than the
DII's.
The major
sectors in
SENSEX are
I.T sector,
Banking
sector, Oil
and Gas
sector, Steel
sector,

FMCG
sector. When
exchange rate
changes it
affects two
sectors
namely oil
and gas and
the I.T sector.
Each sector
has certain
weightage or
impact on the
SENSEX.
There can be
certain
external
factors that
can affect
only 1 sector

solely.
Bank and
finance
sectors have
the highest
weightage in
SENSEX, so
when the
external
factor that is
when RBI
changes its
interest rates
(repo and
reverse repo
rates) it can
pull down the
finance or
bank sector

which can
affect the
sector
movements
and in turn
result in the
fall of
NIFTY or
SENSEX.

Movement
in SENSEX
Movement of
SENSEX
depends upon
the following
factors:

 External
factors
affecting two
or
more
sectors and
their
weightage in
SENSEX
Movement of
one
sector
having a high
weightage
can
move
other sectors
with it, which
in turn will
cause
the
movement of
the SENSEX

CIRCUIT:Circuit is the
maximum
percentage
change
allowed in
the share
price in a
particular
day. The
circuit is a
upper and
lower limit
beyond
which the
trading is not
allowed.

Different
stocks have
different
circuit limits.
Usually they
are 5%, 10%
and 20%.
There are
two types of
circuits:
1. Buyer
Circuit or
Upper
Circuits and
2. Seller
circuit or
lower circuit.

The purpose
of circuit is
to regulate
the price and
prevent any
malpractise
by traders or
brokers/oprat
ors.
If the shares
are traded in
the options
market also
then there
will not be
any
restrictions
like the
circuit
breakers for

the shares.

WHAT HAPPENS
TO ORDERS
DURING
CIRCUIT
LIMITS?
If the market hits the
upper or lower
circuits, trading is
halted and you
cannot place orders
until the market reopensIf you have
pending orders with
the broker at the
time of circuit break,

such orders can be

modified or
cancelled only once
the trading re-opens.

If SENSEX or
Nifty breaks the
Circuit:

 Movement
in Indices

Time

Close period

10 per cent

Before 1.00 pm

1 hour

1.00 pm to 2.30 pm

hour

 15 per cent

After 2.30 pm

Does not close

Before 1.00 pm

2 hour

1.00 pm to 2.30 pm

1 hour

 20 per cent

After 2.30 pm

Close for the rest of the

day

Any time

Close for the rest of the

day

RESISTANCE &
SUPPORT:Support
and
resistance
is
a

concept in technical
analysis that the
movement of the
price of a security
will tend to stop and
reverse at certain
predetermined price
levels.
A support level is a
price level where the
price tends to find
support as it is going
down. This means
the price is more
likely to "bounce"
off this level rather
than break through
it. However, once the
price has passed this

level, by an amount
exceeding
some
noise, it is likely to
continue dropping
until it finds another
support level.
A resistance level is
the opposite of a
support level. It is
where the price tends
to find resistance as
it is going up. This
means the price is
more
likely
to
"bounce" off this
level rather than
break through it.
However, once the
price has passed this
level, by an amount

exceeding
some
noise, it is likely that
it
will
continue
rising until it finds
another
resistance
level.
Support
and
resistance levels can
be identified by
trend lines (technical
analysis).
Some
traders believe in
using pivot point
calculations.
The more often a
support/resistance
level is "tested"
(touched and
bounced off by
price), the more

significance given to
that specific level.
If a price breaks past
a support level, that
support level often
becomes a new
resistance level. The
opposite is true as
well, if price breaks
a resistance level, it
will often find
support at that level
in the future.
The Importance of
Support and
Resistance
Support

and

resistance analysis is
an important part of
trends because it can
be used to make
trading decisions and
identify when a trend
is reversing. For
example, if a trader
identifies
an
important level of
resistance that has
been tested several
times but never
broken, he or she
may decide to take
profits
as
the
security
moves
toward this point
because it is unlikely
that it will move past

this

level.

Support
and
resistance
levels
both test and confirm
trends and need to be
monitored by anyone
who uses technical
analysis. As long as
the price of the share
remains
between
these
levels
of
support
and
resistance, the trend
is likely to continue.
It is important to
note, however, that a
break beyond a level
of
support
or
resistance does not

always have to be a
reversal.
For
example, if prices
moved above the
resistance levels of
an upward trending
channel, the trend
has accelerated, not
reversed. This means
that
the
price
appreciation
is
expected to be faster
than it was in the
channel.
Being aware of these
important
support
and resistance points
should affect the
way that you trade a

stock. Traders should

avoid placing orders
at
these
major
points, as the area
around
them
is
usually marked by a
lot of volatility. If
you feel confident
about making a trade
near a support or
resistance level, it is
important that you
follow this simple
rule: do not place
orders directly at the
support or resistance
level. This is because
in many cases, the
price never actually
reaches the whole

number, but flirts

with it instead. So if
you're bullish on a
stock that is moving
toward an important
support level, do not
place the trade at the
support
level.
Instead, place it
above the support
level, but within a
few points. On the
other hand, if you
are placing stops or
short selling, set up
your trade price at or
below the level of
support.

INTRADAY
DELIVERY
TRADING:-

AND

Intraday
Intraday
trading refers
to
the
practice
of
buying and
selling
financial
instruments
within
the
same trading
day such that
all positions

will usually
but
not
necessarily
always
be
closed before
the
market
close of the
trading day
that is from
9.15am
to
3.07pm.
If an intraday
trader
is
suffering loss
and he feels
tomorrow
that
particular
stock
will

give
him
profit than if
he
can
convert thr
trade in T+5
days upto the
money he has
in
his
account. And
if he has no
cash in his
account than
company
allows/gives
margins upto
2 times to
settle in 5
days.
In

Intraday

Trading,
company
provides the
trader with
some amount
of margin in
addition
to
his
initial
margin
to
trade in the
market
Intraday
Trading
involves
taking
a
position
in
the markets
with a view
of squaring
that position

before
the
end of that
day.
A day trader
typically
trades several
times a day
looking for
fractions of a
point to a few
points
per
trade,
but
who
close
out all their
positions by
day's
end.
The goal of a

day trader is
to capitalize
on
price
movement
within
one
trading day.
Unlike
investors, a
day
trader
may
hold
positions for
only a few
seconds
or
minutes, and
never
overnight
This Intraday

margin
differs with
the company.
Karvy
provides
a
trader with
10 times of
his
initial
margin. For
example, a
trader
has
initial margin
of
Rs.50,
000, Karvy
will
allow
him to take
position for
stock
of
worth
Rs.5,00,000

for trading in
Intraday.
The
brokerage
charged by
Karvy
in
Intraday
trading
is
0.05% which
is very low as
compared to
the delivery
brokerage
rates.

Why was

Intraday Trading
Introduced?

Intraday
trading
was
introduced to
increase the
volume in the
market.

Because
where a trader
was
buying
100
stocks
due to his
limited
margin, now
he will be able
to buy 1000
stocks because

of his new
margin (which
is 10 times of
his
initial
margin). Also
the Brokerage
amount is less
in
Intraday
Trading
as
there is no
procedure to
hold
the
stocks
for
more than a
day.

Increase the
risk appetite
of customers

Benefit
to
brokers
as
they will now
receive
brokerage on
sale of 1000
shares instead
of 100 shares

Encourages
the customers
to trade as it
serves as extra
income apart
from
the
income from
business
or
salaried jobs.

Of
Trading

Advantages
Intraday

In
day
trading you
can
buy
stocks
without
paying
for
the full price
of the stocks.
The market
makers allow
you pay only
a part of the
price to hold
the
shares.
So, you can
gain more by

investing
less.
In
day
trading you
can always
short sell the
stocks
that
means
you
can always
sell
the
stocks before
buying them
and then buy
the
stocks
before
the
closing of the
market. This
is one benefit

that can give

you
profit
even
when
the price of
the stock is
sure to fall.
The
brokerage of
the intraday
trading
is
always lower
than
the
delivery
trading.
In
day
trading you
are
getting

the profit on
the very day.
So,
you
investment is
for a few
hours only.
Therefore,
even if the
stock price
rises, a little
your profit
percentage is
significant.
You get back
the
money
each
day
after
the
market closes
and
hence

you
can
always start
afresh
the
next
morning.

Disadvanta
ges
Of
Intraday
Trading: The biggest
disadvantage
of intraday
trading is the
time frame.
You have to
sell
the

stocks within
a day. So, if
the
stock
loses
price
you are sure
to
lose
money.

Short Sell: Short selling

is the selling
of a stock
that the seller
doesn't own.
More

specifically, a
short sale is
the sale of a
security that
isn't owned
by the seller,
but that is
promised to
be delivered.
The
short
seller
was
introduced
because
investor were
not willing to
invest
in
bearish
market. First
they used to

wait for the

market/stock
price to come
down
and
then
they
bought shares
which
reduced the
volume
of
shares being
traded.
So
this helped in
motivating
investors to
earn
even
when
the
market
is
bearish.
For example,

if a person A
wants to buy
100 stocks of
XYZ ltd, and
B knows that
the price of
this
stock
will go down,
then he will
sell these 100
stocks to A
virtually and
after selling
the stocks he
must buy the
stocks from
another seller
in the market
and for this,
he will look

for a seller
who is ready
to sell the
same
quantity of
stocks at a
lower price.
If B is able to
find a seller
who will sell
the stocks at
a lower price,
then B will
gain
profit
and if not
then he will
have to buy
the
stocks
from
the
seller
who

might sell at
a
higher
price,
to
complete the
contract but
he will incur
loss.

PROFIT
BOOKING (Short)
Buying back
borrowed
securities in
order to close
an open short
position.

Profit
Booking
refers to the
purchase of
the
exact
same security
at a lower
price
that
was initially
sold short. So
the short-sale
process
involved
borrowing
the security
and selling it
in the market
and
thus
book profit in
market. This

will bring the

market down
as cash is
being
etracted out
of the market
by booking
profit.
From
the
above
example, we
can
understand
the concept
of
short
covering.
When
B
short
100
stocks at the
rate of Rs.20

to A and he
finds a seller
at Rs.17 in
the
market
for
same
quantity of
stocks, then
B will buy
these stocks
and deliver it
to
A
to
complete the
contract and
he will gain
the profit of
Re.3
per
share, this is
called Profit
Booking.
For instance -

let's say that

a
trader
decided
to
short 1,000
shares
of
XYZ
at
Rs.30. The
stock
has
weakened
considerably
since
then,
and is now
trading
for
just Rs.25 per
share.
The
trader
decides
to
take
his
Rs.5,000
profit
(5

points
x
Rs.1,000 per
point). To do
this, he must
close out his
position by
purchasing
1,000 shares
of
XYZ
shares
in
order to exit
his
short
position.
By
purchasing
the
1,000
shares
of
XYZ,
the
trader returns
the borrowed

shares and is
now out of
the position.

SHORT
COVERING
This concept is
more or less same as
profut booking under
short sell but there
investors do not earn
profit. In short they
fail in their strategy

badly and thus to

avoid much loss,
they start buying at
higher rates and thus
faces loss. This
concept makes the
maket bullish or to
go higher as people's
money or losses
enter
into
the
market.

DELIVERY
TRADING

Delivery
based trading
is the most

common
form share
trading done
by most of
the
stock
market
investors
throughout
the world. In
this type of
trading the
investors
have to pay
the full price
of the stock
and
the
stocks
are
deposited in
their Demat
account.

There is no
predefined
time limit in
case of the
delivery
based trading
for
selling
the stocks.
The
brokerage
charged
Karvy
trading
Delivery
0.50%.

by
for
in
is

The
brokerage
charged
in

Delivery is
more
than
that
of
Intraday
because
in
Delivery you
have to hold
the stocks in
Demat
account,
whereas
in
Intraday, you
get the stocks
virtually.
The
settlement in
Delivery
trading
is
done on T+2

basis
.i.e.
when
you
buy or sell
the
stocks,
then
the
settlement is
done on the
second day
after
the
trade
has
been done.
When
an
investor buys
a stock in
Intraday, he
can convert
that stock in
Delivery
before
the

closure of the
Intraday
market which
is at 3.07pm.
If the stock is
converted to
Delivery
from Intraday
then
the
investor can
hold
the
stock for T+5
days.
In
Karvy,
when
the
investor
trades
in
Delivery, he
is allowed to

take
the
position
of
twice of its
initial
margin. For
example, if
the
initial
margin of a
person
is
Rs.50,000
then he is
allowed
to
take position
of
Rs.1,00,000
for trading in
Delivery.
This
additional

margin
provided by
the company
differs
in
various
companies.

Of
Trading

Advantages
Delivery

The biggest
advantage of
delivery
based trading
is that you
are not bound

with time for

selling
the
stock.
You
can hold the
stocks for as
long as you
want. So, you
can always
hold a stock
until you are
getting
a
significant
profit from
the
investment.
Therefore,
with delivery
based trading
you
can
always take

your time to
take
a
decision and
reduce
the
risk of losses.
When
you
are making a
long
term
investment
with delivery
based
trading, you
can
also
benefit from
other things
like
dividends,
split
of

stocks, bonus
shares and so
on. These are
benefits that
the
companies
offer to their
shareholders
from time to
time and you
can
make
significant
profit from
these offers if
you
are
holding the
stocks
for
long period.
In

delivery

trading, the
ownership of
the share lies
with
the
person who
has
purchased the
share because
he purchases
the
share
with his own
money.

Disadvantage
s
of
Delivery
Trading
The

biggest

disadvantage
of delivery
based trading
is the higher
brokerage
rate.
The
brokerage
rate
for
delivery
based trading
is relatively
higher than
the intraday
trading.
You have to
pay the full
price of the
stock
for

delivery
based
trading,
whereas; in
case
of
intraday
trading you
can
buy
stocks
by
paying only a
part of the
stock price.
So, in case of
intraday
trading you
can buy more
stocks
by
investing
less.

 In delivery
based trading
you
can
never benefit
from
short
selling. That
means
you
have to hold
the
shares
before
you
actually sell
them.
These are the
benefits and
disadvantage
s of delivery
based
trading.

Whether you
invest
through
delivery
based trading
or not solely
depends on
your
financial
capacity and
willingness
to take risks.

Brokerage Charges
Of
Different
Broking Firms:-

Company

Intraday charges

karvy
stock 0.05%
broking ltd

Delivery charges

0.50%

SBI
Securities

Cap 0.10%

0.50%

Sharekhan

0.03% - 0.10%

0.03% - 0.5%

Motilal Oswal

0.03% 0.15%

0.30% - 0.50%

Angel Broking

0.02% - 0.03%

0.50%

ICICI Direct

0.15%

0.75%

India bulls

0.05% -0.10%

0.25% - 0.50%

UTI Securities

0.15%

0.85%

IndiaInfoline

0.10%

0.50%

Types Of Charges
Incurred
In
Intraday
&
Delivery Trading
Transactio
Rate
n
Securities Transaction Tax (STT)
Purchase
0.100%
Equity
Delivery
Sell
0.100%

Service
Tax

Effective
Rate

Charged

0.100%
0.100%

Turnover
Turnover

Sell
Transaction Charges
Purchase
Equity

0.025%

0.025%

Turnover

0.0031%

12.36%

0.00348%

Turnover

Delivery

0.0031%

12.36%

0.00348%

Turnover

Product

Equity
Intra-day

Purchase

Sell

Purchase
Equity
Intra-day
Sell
SEBI Turnover Charges
Purchase
Equity
Delivery
Sell
Purchase
Equity
Intra-day
Sell
Stamp duty

0.0031%
0.0031%

12.36%
12.36%

0.00348%
0.00348%

Turnover
Turnover

0.0001%
0.0001%
0.0001%
0.0001%

12.36%
12.36%
12.36%
12.36%

0.00011%
0.00011%
0.00011%
0.00011%

Turnover
Turnover
Turnover
Turnover

Purchase

0.0100%

12.36%

0.0112%

Sell

0.0100%

12.36%

0.0112%

Purchase

0.0020%

12.36%

0.0022%

Equity
Delivery

Equity
Intra-day

Turnover
5000
multiple
Turnover
5000
multiple
Turnover
5000
multiple

Sell

MARKET DEPTH

0.0020%

12.36%

0.0022%

Turnover
5000
multiple

This is a market
depth chart for
3IINFOTECH stock
traded in NSE.
Under this chart,
buyers side for seller
and sellers side is for
buyer. Buyers BID
to purchase from
sellers and Sellers
ASK for price from
buyers We can see
total no of buyers
and sellers as well as
top 5 HIGH Bidder
and 5 lowest price
(ASK) sellers.
Buyers side shows
highest price to
lowest price, for

example in above
chart 2 different
buyers have quoted
highest bid at Rs.
74.55. So this price
will execute first if
any seller wants to
sell this share at
market price. And
then remaining
buyers prices will
execute after highest
price total quantity
gets fully executed
i.e. 7800. Just the
opposite happens for
seller's side. Here
lowest ask price is
shown first i.e in
ascending order

(above chart 74.65

to 74.85). This is one
the useful tool to
predict a stock's
price movement for
a day specially for
intraday traders. Lets
identify the
indicators to predict
the price a. Check if buyers
are more than
sellers, if yes the
price will rise as
there is more
demand for that
stock.
b. More sellers
indicative that there

is a selling pressure
as people are
booking profit and
hence prices will
come down.
c. for the both
above a and b
case buyers
and sellers
should be atleast double.
In the above case
sellers are just more than
buyers it means there are
more number short selling
as people expect price to go
down and book profit.

Security Measures
and Operational
Features of BSE
and NSE:

Automated Trading
System: Today our
country has an
advanced trading
system which is a
fully automated
screen based trading
system. This system
adopts the principle
of an order driven
market as opposed to
a quote driven
system.

NSE operates on the

'National Exchange
for Automated
Trading' (NEAT)
system.
BSE operates on the
BSEs Online
Trading (BOLT)
system.

Order Management
in Automated
Trading System:
The trading system
provides complete
flexibility to
members in the
kinds of orders that

can be placed by
them. Orders are
first numbered and
time-stamped on
receipt and then
immediately
processed for
potential match.
Every order has a
distinctive order
number and a unique
time stamp on it. If a
match is not found,
then the orders are
stored in different
'books'. Orders are
stored in price-time
priority in various
books in the

following sequence:

Best Price, Within

Price, by time
priority.
Price priority means
that if two orders are
entered into the
system, the order
having the best price
gets the higher
priority. Time
priority means if two
orders having the
same price are
entered, the order
that is entered first
gets the higher

priority.

Order Matching
Rules in Automated
trading system: The
best buy order is
matched with the
best sell order. An
order may match
partially with
another order
resulting in multiple
trades. For order
matching, the best
buy order is the one
with the highest
price and the best
sell order is the one
with the lowest

price. This is
because the system
views all buy orders
available from the
point of view of a
seller and all sell
orders from the point
of view of the buyers
in the market. So, of
all buy orders
available in the
market at any point
of time, a seller
would obviously like
to sell at the highest
possible buy price
that is offered.
Hence, the best buy
order is the order
with the highest

price and the best

sell order is the order
with the lowest
price.

Members can
proactively enter
orders in the system,
which will be
displayed in the
system till the full
quantity is matched
by one or more of
counter-orders and
result into trade(s) or
is cancelled by the
member.
Alternatively,
members may be

reactive and put in

orders that match
with existing orders
in the system. Orders
lying unmatched in
the system are
'passive' orders and
orders that come in
to match the existing
orders are called
'active' orders.
Orders are always
matched at the
passive order price.
This ensures that the
earlier orders get
priority over the
orders that come in
later.

Order Conditions
in Automated
Trading System: A
Trading Member can
enter various types
of orders depending
upon his/her
requirements. These
conditions are
broadly classified
into three categories:
Time Related
Condition
Price Related
Condition
Quantity Related
Condition

TimeConditions
Day Order - A Day
order, as the name
suggests, is an order
which is valid for the
day on which it is
entered. If the order
is not matched
during the day, the
order gets cancelled
automatically at the
end of the trading
day.
GTC Order - Good
Till Cancelled
(GTC) order is an
order that remains in

the system until it is

cancelled by the
Trading Member. It
will therefore be able
to span trading days
if it does not get
matched. The
maximum number of
days a GTC order
can remain in the
system is notified by
the Exchange from
time to time.
GTD - A Good Till
Days/Date (GTD)
order allows the
Trading Member to
specify the days/date
up to which the

order should stay in

the system. At the
end of this period the
order will get
flushed from the
system. Each
day/date counted is a
calendar day and
inclusive of
holidays. The
days/date counted
are inclusive of the
day/date on which
the order is placed.
The maximum
number of days a
GTD order can
remain in the system
is notified by the
Exchange from time

to time.
IOC - An
Immediate or
Cancel (IOC) order
allows a Trading
Member to buy or
sell a security as
soon as the order is
released into the
market, failing
which the order will
be removed from the
market. Partial
match is possible for
the order, and the
unmatched portion
of the order is
cancelled
immediately.

Price Conditions
Limit Price/Order
An order that allows
the price to be
specified while
entering the order
into the system.
Market
Price/Order An
order to buy or sell
securities at the best
price obtainable at
the time of entering
the order.
Stop Loss (SL)
Price/Order The

one that allows the

Trading Member to
place an order which
gets activated only
when the market
price of the relevant
security reaches or
crosses a threshold
price. Until then the
order does not enter
the market. A sell
order in the Stop
Loss book gets
triggered when the
last traded price in
the normal market
reaches or falls
below the trigger
price of the order. A
buy order in the Stop

Loss book gets

triggered when the
last traded price in
the normal market
reaches or exceeds
the trigger price of
the order.
E.g. If for stop loss
buy order, the trigger
is 93.00, the limit
price is 95.00 and
the market (last
traded) price is
90.00, then this order
is released into the
system once the
market price reaches
or exceeds 93.00.
This order is added

to the regular lot

book with time of
triggering as the time
stamp, as a limit
order of 95.00

Quantity
Conditions:
Disclosed Quantity
(DQ)- An order with
a DQ condition
allows the Trading
Member to disclose
only a part of the
order quantity to the
market. For
example, an order of
1000 with a

disclosed quantity
condition of 200 will
mean that 200 is
displayed to the
market at a time.
After this is traded,
another 200 is
automatically
released and so on
till the full order is
executed. The
Exchange may set a
minimum disclosed
quantity criteria
from time to time.
MF - Minimum Fill
(MF) orders allow
the Trading Member
to specify the

minimum quantity
by which an order
should be filled. For
example, an order of
1000 units with
minimum fill 200
will require that each
trade be for at least
200 units. In other
words there will be a
maximum of 5 trades
of 200 each or a
single trade of 1000.
The Exchange may
lay down norms of
MF from time to
time.
AON - All or None
orders allow a

Trading Member to
impose the condition
that only the full
order should be
matched against.
This may be by way
of multiple trades. If
the full order is not
matched it will stay
in the books till
matched or
cancelled.

Note: Currently,
AON and MF
orders are not
available on the
system as per SEBI
directives.

INTRODUCTION
DERIVATIVES

TO

The origin of derivatives

can be traced back to the
need of farmers to protect
themselvesagainst
fluctuations in the price
of their crop. From the
time it was sown to the
time itwas ready for
harvest, farmers would
face price uncertainty.
Through the use of
simplederivative products,
it was possible for the
farmer to partially or fully
transfer
price
risks by
locking-in asset prices.

These
were
simple
contracts developed to
meet the needs of farmers
and were basically a means
of reducing risk.A farmer
who sowed his crop in June
faced uncertainty over the
price he wouldr e c e i v e f o r
his
harvest
in
S e p t e m b e r. I n y e a r s
o f s c a r c i t y, h e w o u l d
probably
o b t a i n attractive
prices.
However, during times of
oversupply, he would have
to dispose off hish a r v e s t
at a very low price.
Clearly
this
meant
that the farmer and
h i s f a m i l y w e r e exposed

to a high risk of price

uncertainty.
On the other hand, a
merchant with an ongoing
requirement of grains too
wouldface a price risk that
of having to pay exorbitant
prices
during
dearth,
although favorable prices
could be obtained during
periods of oversupply.
Under
such
circumstances, itc l e a r l y
made sense for the
farmer
and
the
merchant
to
come
together
and
enter
i n t o contract
whereby
the price of the grain to

be
delivered
in
September
could
be
decidedearlier.
What
they
would
then
negotiate happened to be
futures-type
contract,
whichwould enable both
parties to eliminate the price
risk.In 1848, the Chicago
Board Of Trade, or CBOT,
was established to bring
farmersa n d
merchants
t o g e t h e r. A g r o u p o f
traders got together
and created the toa r r i v e contract
that
permitted farmers to
lock into price upfront
and deliver the grain
later.These
to-arrive

contracts proved useful as a

device for hedging and
speculation on pricecharges.
These
were
eventually
standardized, and in 1925
the first futures clearing
housecame into existence.
Today derivatives contracts
exist
on
variety
of
commodities such as corn,
pepper,cotton, wheat, silver
etc. Besides commodities,
derivatives contracts also
exist on a lot of financial
underlying like stocks,
interest rate, exchange rate,
etc.

DERIVATIVES DEFINED
A derivative is a
product
whose
value
is
derived
from the value of
one
or
more
underlying variables
or
assets
in
a
contractual
m a n n e r.
The underlying asset
c a n b e equity, forex,
commodity or any other
asset.
In
our
earlier
discussion, we saw that
wheat farmers may wish
to sell their harvest at a
future date to eliminate
the risk of change
in price by that date.

Such a transaction is an
example of a derivative.
The
price
of
this
derivative is driven by the
spot price of wheat which is
the underlying in this
case.
The Forwards Contracts
(Regulation) Act, 1952,
regulates
the
forward/futures
contracts in commodities
all over India. As per
this the Forward Markets
Commission
(FMC)
continues
to
have
jurisdiction over commodity
futures contracts. However
when
derivatives

trading in securities
was
introduced
in
2001,
the
term
security
in
the
Securities
Contracts
(Regulation) Act, 1956
(SCRA), was amended to
include derivative contracts
in securities. Consequently,
regulation of derivatives
came under the purview
of Securities
Exchange
Board of India (SEBI). We
thus
have
separate
regulatory authorities for
securities and commodity
derivative
markets.
Derivatives
are
securities
under
the
SCRA and hence the

trading of derivatives is
governed
by
the
regulatory framework
under the SCRA. The
Securities
C o n t r a c t s (Regulation)
Act,
1956
defines
derivative to include-A
security derived from a debt
instrument, share, loan
whether
secured
or
unsecured, risk instrument
or contract differences or
any other form of security.

TYPES OF DERIVATIVES
MARKET
1. Exchange Traded

Derivatives
a. National Stock
Exchange
b.Bombay Stock
Exchange

Index Future
Index option
Stock option
Stock future
Interest Rate
Futures
c. National
Commodity &

Derivative exchange

2. Over The Counter

Derivatives

Derivatives in
India
In India, derivatives
markets have been
functioning since the
nineteenth century,
with

organized trading in
cotton through the
establishment of the
Cotton
Trade
Association
in
1875.Derivatives, as
exchange
traded
financial instruments
were introduced in
India
in
June
2000.The National
Stock
Exchange
(NSE) is the largest
exchange in India in
derivatives, trading
in
various
derivatives contracts.
The first contract to
be launched on NSE
was the Nifty 50

index
futures
contract. In a span of
one and a half years
after the introduction
of index futures,
index options, stock
options and stock
futures were also
introduced in the
derivatives segment
for trading. NSEs
equity
derivatives
segment is called the
Futures & Options
Segment or F&O
Segment. NSE also
trades in Currency
and Interest Rate
Futures
contracts

under a
segment.

separate

A series of
reforms
in
the
financial
markets
paved way for the
development
of
exchange-traded
equity
derivatives
markets in India. In
1993, the NSE was
established as an
electronic, national
exchange and it
started operations in
1994. It improved
the efficiency and
transparency of the
stock markets by

offering
a
fully
automated
screenbased trading system
with real-time price
dissemination.
A
report on exchange
traded derivatives,
by the L.C. Gupta
Committee, set up
by the Securities and
Exchange Board of
India
(SEBI),
recommended
a
phased introduction
of
derivatives
instruments with bilevel regulation (i.e.,
self-regulation
by
exchanges,
with
SEBI providing the

overall
regulatory
and
supervisory
role). Another report,
by the J.R. Varma
Committee in 1998,
worked
out
the
various operational
details
such
as
margining and risk
management systems
for
these
instruments. In 1999,
the
Securities
Contracts
(Regulation) Act of
1956, or SC(R)A,
was amended so that
derivatives could be
declared
as
securities.
This

allowed
the
regulatory
framework
for
trading securities, to
be
extended
to
derivatives. The Act
considers derivatives
on equities to be
legal and valid, but
only if they are
traded on exchanges.

Milestones in the
development of
Indian Derivative
Market

November 18, 1996

L.C. Gupta Committee set up to draft a policy framewor

introducing derivatives

May 11, 1998

L.C. Gupta committee submits its report on the p

Framework

May 25, 2000

SEBI allows exchanges to trade in index futures

June 12, 2000

Trading on Nifty futures commences on the NSE

June 4, 2001

Trading for Nifty options commences on the NSE

July 2, 2001

Trading on Stock options commences on the NSE

November 9, 2001

Trading on Stock futures commences on the NSE

August 29, 2008

Currency derivatives trading commences on the NSE

August 31, 2009

Interest rate derivatives trading commences on the NSE

February 2010

Launch of Currency Futures on additional currency pairs

October 28, 2010

Introduction of European style Stock Options

October 29, 2010

Introduction of Currency Options

Two
terms

important

Before
discussing
derivatives, it would
be useful to be
familiar with two
terminologies
relating
to
the
underlying markets.
These are as follows:
Spot Market
In the context of
securities, the spot
market
or
cash
market is a securities
market in which
securities are sold
for
cash
and
delivered

immediately.
The
delivery
happens
after the settlement
period.
Let
us
describe this in the
context of India. The
NSEs cash market
segment is known as
the Capital Market
(CM) Segment. In
this market, shares
of SBI, Reliance,
Infosys, ICICI Bank,
and other public
listed companies are
traded.
The
settlement
period in this market
is on a T+2 basis i.e.,

the buyer of the

shares receives the
shares two working
days after trade date
and the seller of the
shares receives the
money two working
days after the trade
date.
Index
An index is a basket
of identified stocks,
and its value is
computed by taking
the weighted average
of the prices of the
constituent stocks of
the index.

A market index for

example consists of
a group of top stocks
traded in the market
and its value changes
as the prices of its
constituent
stocks
change. In India,
Nifty Index is the
most popular stock
index and it is based
on the top 50 stocks
traded in the market.
Just as derivatives on
stocks are called
stock
derivatives,
derivatives
on
indices such as Nifty
are called index
derivatives.

Definitions of Basic
Derivatives
There are various
types of derivatives
traded on exchanges
across the world.
They range from the
very simple to the
most
complex
products.
The
following are the
three basic forms of
derivatives, which
are the building
blocks for many
complex derivatives
instruments
(the

latter are beyond the

scope of this book):
Forwards
Futures
Options
Swaps

Forwards
A forward contract
or simply aforward
is a contract between

two parties to buy or

sell an asset at a
certain future date
for a certain price
that is pre-decided
on the date of the
contract. The future
date is referred to as
expiry date and the
pre-decided price is
referred
to
as
Forward Price. It
may be noted that
Forwards are private
contracts and their
terms are determined
by
the
parties
involved.

A forward is
thus an agreement
between two parties
in which one party,
the buyer, enters into
an agreement with
the other party, the
seller that he would
buy from the seller
an underlying asset
on the expiry date at
the forward price.
Therefore, it is a
commitment by both
the parties to engage
in a transaction at a
later date with the
price set in advance.
This is different
from a spot market

contract,
which
involves immediate
payment
and
immediate transfer
of asset. The party
that agrees to buy
the asset on a future
date is referred to as
a long investor and
is said to have a long
position. Similarly
the party that agrees
to sell the asset in a
future
date
is
referred to as a short
investor and is said
to have a short
position. The price
agreed upon is called

the delivery price or

the Forward Price.
Forward
contracts
are traded only in
Over the Counter
(OTC) market and
not in stock
exchanges.
OTC
market is a private
market
where
individuals/institutio
ns can trade through
negotiations on a one
to one basis.
Futures
Like

forward

contract, a futures
contract
is
an
agreement between
two parties in which
the buyer agrees to
buy an underlying
asset from the seller,
at a future date at a
price that is agreed
upon
today.
However, unlike a
forward contract, a
futures contract is
not
a
private
transaction but gets
traded
on
a
recognized
stock
exchange.
In
addition, a futures
contract
is

standardized by the
exchange. All the
terms, other than the
price, are set by the
stock
exchange
(rather
than
by
individual parties as
in the case of a
forward
contract).
Als o, both buyer
and seller of the
futures contracts are
protected against the
counter party risk by
an entity called the
Clearing
Corporation.
The
Clearing Corporation
provides
this
guarantee to ensure

that the buyer or the

seller of a futures
contract does not
suffer as a result of
the counter party
defaulting on its
obligation. In case
one of the parties
defaults,
the
Clearing Corporation
steps in to fulfill the
obligation of this
party, so that the
other party does not
suffer due to nonfulfillment of the
contract. To be able
to guarantee the
fulfillment of the
obligations under the

contract,
the
Clearing Corporation
holds an amount as a
security from both
the parties. This
amount is called the
Margin money and
can be in the form of
cash
or
other
financial
assets.
Also,
since
the
futures contracts are
traded on the stock
exchanges,
the
parties have the
flexibility of closing
out the contract prior
to the maturity by
squaring off the

transactions in the
market.
The
basic
flow of a transaction
between
three
parties,
namely
Buyer, Seller and
Clearing Corporation
is depicted in the
diagram below:

Factors
Fluctuation
Future Prices
Interest Rate
Volatility
Time Decency
Open Interest

For
of

Advantage
Brokerage
Margin
Rollover
Tax
Amount Invested
Breakeven
Options
Like forwards and
futures, options are

derivative
instruments
that
provide
the
opportunity to buy or
sell an underlying
asset on a future
date.
An option is a
derivative contract
between a buyer and
a seller, where one
party (say First
Party) gives to the
other (say Second
Party) the right, but
not the obligation, to
buy from (or sell to)
the First Party the
underlying asset on
or before a specific

day at an agreedupon price. In return

for granting the
option, the party
granting the option
collects a payment
from the other party.
This
payment
collected is called
the premium or
price of the option.
The right to buy or
sell is held by the
option buyer (also
called the option
holder); the party
granting the right is
the option seller or
option
writer.

Unlike forwards and

futures
contracts,
options require a
cash payment (called
the
premium)
upfront from the
option buyer to the
option seller. This
payment is called
option premium or
option price. Options
can be traded either
on
the
stock
exchange or in over
the counter (OTC)
markets.
Options
traded
on
the
exchanges
are
backed
by
the
Clearing Corporation

thereby minimizing
the risk arising due
to default by the
counter
parties
involved.
Options
traded in the OTC
market however are
not backed by the
Clearing
Corporation.
There are two types
of
optionscall
options and put
optionswhich are
explained below.
Call option
A call option is an
option granting the

right to the buyer of

the option to buy the
underlying asset on a
specific day at an
agreed upon price,
but
not
the
obligation to do so.
It is the seller who
grants this right to
the buyer of the
option. It may be
noted that the person
who has the right to
buy the underlying
asset is known as the
buyer of the call
option.
The price at which
the buyer has the
right to buy the asset

is agreed upon at the

time of entering the
contract. This price
is known as the
strike price of the
contract (call option
strike price in this
case).
Since the buyer of
the call option has
the right (but no
obligation) to buy
the underlying asset,
he will exercise his
right to buy the
underlying asset if
and only if the price
of the underlying
asset in the market is

more than the strike

price on or before
the expiry date of the
contract. The buyer
of the call option
does not have an
obligation to buy if
he does not want to.
Put option
A put option is a
contract granting the
right to the buyer of
the option to sell the
underlying asset on
or before a specific
day at an agreed
upon price, but not
the obligation to do

so. It is the seller

who grants this right
to the buyer of the
option.
The person who has
the right to sell the
underlying asset is
known as the buyer
of the put option.
The price at which
the buyer has the
right to sell the asset
is agreed upon at the
time of entering the
contract. This price
is known as the
strike price of the
contract (put option
strike price in this
case).

Since the buyer of

the put option has
the right (but not the
obligation) to sell the
underlying asset, he
will exercise his
right to sell the
underlying asset if
and only if the price
of the underlying
asset in the market is
less than the strike
price on or before
the expiry date of the
contract. The buyer
of the put option
does not have the
obligation to sell if
he does not want to.

Terminology
Derivatives

of

Spot price (ST)

Spot price of an
underlying asset is
the price that is
quoted
for
immediate delivery
of the asset. For
example, at the NSE,
the spot price of
Reliance Ltd. at any
given time is the
price
at
which
Reliance Ltd. shares
are being traded at
that time in the Cash

Market Segment of
the NSE. Spot price
is also referred to as
cash
price
sometimes.
Forward price or
futures price (F)
Forward price or
futures price is the
price that is agreed
upon at the date of
the contract for the
delivery of an asset
at a specific future
date. These prices
are dependent on the
spot
price,
the

prevailing
interest
rate and the expiry
date of the contract.
Strike price (K)
The price at which t
he buyer of an
option can buy the
stock (in the case of
a call option) or sell
the stock (in the case
of a put option) on or
before the expiry
date
of
option
contracts is called
strike price. It is the
price at which the
stock will be bought
or sold when the

option is exercised.
Strike price is used
in the case of options
only; it is not used
for
futures
or
forwards.
Expiration date (T)
In the case of
Futures, Forwards,
Index and Stock
Options, Expiration
Date is the date on
which
settlement
takes place. It is also
called
the
final
settlement date.
Types of Options

Options
can
be
divided into two
different categories
depending upon the
primary
exercise
styles
associated
with options. These
categories are:
European Options:
European options are
options that can be
exercised only on the
expiration date.
American options:
American
options
are options that can
be exercised on any

day on or before the

expiry date. They
can be exercised by
the buyer on any day
on or before the final
settlement date or
the expiry date.
Contract size
As
futures
and
options
are
standardized
contracts traded on
an exchange, they
have a fixed contract
size. One contract of
a
derivatives
instrument
represents a certain

number of shares of
the underlying asset.
For example, if one
contract of SBI
consists
of
125
shares of SBI, then if
one buys one futures
contract of SBI, then
for every Re 1
increase in SBIs
futures price, the
buyer will make a
profit of 125 X 1 =
Rs 125 and for every
Re 1 fall in BHELs
futures price, he will
lose Rs 125.
Contract Value

Contract value is
notional value of the
transaction in case
one
contract
is
bought or sold. It is
the contract size
multiplied but the
price of the futures.
Contract value is
used to calculate
margins etc. for
contracts. In the
example above if
SBI futures
are
trading at Rs. 2600
the contract value
would be Rs. 2000 x
125 = Rs. 2.5 lakhs.

Margins
In the spot market,
the buyer of a stock
has to pay the entire
transaction amount
(for
purchasing
the
stock) to the seller.
For example, if
Infosys is trading at
Rs. 2000 a share and
an investor wants to
buy 100 Infosys
shares, then he has to
pay Rs. 2000 X 100
= Rs.2,00,000 to the
seller. The settlement

will take place on

T+2 basis; that is,
two days after the
transaction date. In a
derivatives contract,
a person enters into a
trade today (buy or
sell)
but
the
settlement happens
on a future date.
Because of this,
there is a high
possibility of default
by any of the parties.
Futures and option
contracts are traded
through exchanges
and the counter party
risk is taken care of

by
the
clearing
corporation. In order
to prevent any of the
parties
from
defaulting on his
trade commitment,
the
clearing
corporation levies a
margin on the buyer
as well as seller of
the
futures
and
option
contracts.
This margin is a
percentage
(approximately 20%)
of the total contract
value. Thus, for the
aforementioned
example, if a person
wants to buy 100

Infosys futures, then

he will have to pay
20% of the contract
value of Rs 2,00,000
= Rs 40,000 as a
margin
to
the
clearing corporation.
This
margin
is
applicable to both,
the buyer and the
seller of a futures
contract.
Moneyness of an
Option
Moneyness of an
option
indicates
whether an option is
worth exercising or

not i.e. if the option

is exercised by the
buyer of the option
whether he will
receive money or
not.
The following three
terms are used to
define
the
moneyness of an
option.
In-the-money
option
An option is said to
be in-the-money if
on exercising the
option, it would

produce
a
cash
inflow for the buyer.
Thus, Call Options
are
in-the-money
when the value of
spot price of the
underlying exceeds
the strike price. On
the other hand, Put
Options are in-themoney when the spot
price
of
the
underlying is lower
than the strike price.
Moneyness of an
option should not be
confused with the
profit
and
loss
arising from holding
an option contract. It

should be noted that

while moneyness of
an option does not
depend
on
the
premium
paid,
profit/loss do. Thus a
holder of an in-themoney option need
not always make
profit
as
the
profitability
also
depends
on
the
premium paid.
Out-of-the-money
option
An out-of-the-money
option is an opposite
of an in-the-money

option. An optionholder
will
not
exercise the option
when it is out-of-themoney. A Call option
is out-of-the-money
when its strike price
is greater than the
spot price of the
underlying and a Put
option is out-of-the
money when the spot
price
of
the
underlying is greater
than the options
strike price.

At-the-money
option
An
at-the-moneyoption is one in
which the spot price
of the underlying is
equal to the strike
price. It is at the
stage where with any
movement in the
spot price of the
underlying,
the
option will either
become
in-themoney or out-of-themoney.
Applications
of
Derivatives

Focusing
on
participants in the
derivatives markets
and how they use
derivatives contracts.
Participants in the
Derivatives Market
As equity markets
developed, different
categories
of
investors
started
participating in the
market. In India,
equity
market
participants currently
include
retail
investors, corporate
investors,
mutual

funds, banks, foreign

institutional
investors etc. Each
of these investor
categories uses the
derivatives market to
as a part of risk
management,
investment strategy
or
speculation.
Based
on
the
applications
that
derivatives are put
to, these investors
can
be
broadly
classified into three
groups:
Hedgers
Speculators, and
Arbitrageurs

Hedgers
These investors have
a position (i.e., have
bought stocks) in the
underlying market
but are worried
about a potential loss
arising out of a
change in the asset
price in the future.
Hedgers participate
in the derivatives
market to lock the
prices at which they
will be able to
transact in the future.
Thus, they try to
avoid price risk

through holding a
position
in
the
derivatives market.
Different
hedgers
take
different
positions in the
derivatives market
based
on
their
exposure in the
underlying market. A
hedger
normally
takes an opposite
position
in
the
derivatives market to
what he has in the
underlying market.
Speculators

A Speculator is one
who bets on the
derivatives market
based on his views
on the potential
movement of the
underlying
stock
price.
Speculators
take large, calculated
risks as they trade
based on anticipated
future
price
movements.
They
hope to make quick,
large gains; but may
not
always
be
successful.
They
normally
have
shorter holding time
for their positions as

compared
to
hedgers. If the price
of the underlying
moves as per their
expectation they can
make large profits.
However, if the price
moves
in
the
opposite direction of
their assessment, the
losses can also be
enormous.
Arbitrageurs
Arbitrageurs attempt
to profit from pricing
inefficiencies in the
market by making
simultaneous trades

that offset each other

and capture a riskfree
profit.
An
arbitrageur may also
seek to make profit
in case there is price
discrepancy between
the stock price in the
cash
and
the
derivatives markets.

Uses of Derivatives
Risk management
The most important
purpose
of
the
derivatives market is

risk
management.
Risk
management
for
an
investor
comprises of the
following
three
processes:
Identifying
the
desired level of risk
that the investor is
willing to take on his
investments;
Identifying
and
measuring the actual
level of risk that the
investor is carrying;
and
Making
arrangements which
may include trading
(buying/selling) of

derivatives contracts
that allow him to
match the actual and
desired levels of
risk.
Market efficiency
Efficient markets are
fair and competitive
and do not allow an
investor to make risk
free
profits.
Derivatives assist in
improving
the
efficiency of the
markets,
by
providing a selfcorrecting
mechanism.

Arbitrageurs are one

section of market
participants
who
trade whenever there
is an opportunity to
make
risk
free
profits
till
the
opportunity ceases to
exist.
Risk
free
profits are not easy
to make in more
efficient
markets.
When
trading
occurs, there is a
possibility that some
amount
of
mispricing
might
occur in the markets.
The arbitrageurs step
in to take advantage

of this mispricing by
buying from the
cheaper market and
selling in the higher
market. Their actions
quickly narrow the
prices and thereby
reducing
the
inefficiencies.
Price discovery
One of the primary
functions
of
derivatives markets
is price discovery.
They
provide
valuable information
about the prices and
expected
price

fluctuations of the
underlying assets in
two ways:
First, many of these
assets are traded in
markets in different
geographical
locations. Because of
this, assets may be
traded at different
prices in different
markets.
In
derivatives markets,
the price of the
contract often serves
as a proxy for the
price
of
the
underlying asset. For
example, gold may

trade at different
prices in Mumbai
and Delhi but a
derivatives contract
on gold would have
one value and so
traders in Mumbai
and
Delhi
can
validate the prices of
spot markets in their
respective location
to see if it is cheap
or expensive and
trade accordingly.
Second, the
prices of the futures
contracts serve as
prices that can be
used to get a sense of

the
market
expectation of future
prices. For example,
say there is a
company
that
produces sugar and
expects that the
production of sugar
will take two months
from today. As sugar
prices
fluctuate
daily, the company
does not know if
after two months the
price of sugar will be
higher or lower than
it is today. How does
it predict where the
price of sugar will be
in future? It can do

this by monitoring
prices of derivatives
contract on sugar
(say
a
Sugar
Forward contract). If
the forward price of
sugar is trading
higher than the spot
price that means that
the
market
is
expecting the sugar
spot price to go up in
future. If there were
no derivatives price,
it would have to wait
for two months
before knowing the
market price of sugar
on that day.

Settlement
Derivatives

of

Settlement refers to
the process through
which trades are
cleared
by
the
payment/receipt of
currency, securities
or cash flows on
periodic
payment
dates and on the date
of
the
final
settlement.
The
settlement process is
somewhat elaborate
for
derivatives
instruments which
are exchange traded.
At the NSE, the

National Securities
Clearing Corporation
Limited (NSCCL)
undertakes
the
clearing
and
settlement of all
trades executed on
the F&O segment of
NSE. It also acts as a
legal counterparty to
all trades on the
F&O segment and
guarantees
their
financial settlement.
There
are
two
clearing entities in
the
settlement
process:
Clearing
Members
and
Clearing Banks.

Clearing members
A Clearing member
(CM) is the member
of
the
clearing
corporation
i.e.,
NSCCL. These are
the members who
have the authority to
clear the
trades
executed in the F&O
segment
in
the
exchange.
Settlement
Futures
When
trade

of

two parties
a
futures

contract, both have

to deposit margin
money which is
called the initial
margin.
Futures
contracts have two
types of settlement:
(i) the mark-tomarket
(MTM)
settlement
which
happens
on
a
continuous basis at
the end of each day,
and (ii) the final
settlement
which
happens on the last
trading day of the
futures contract i.e.,
the last Thursday of
the expiry month.

Mark to
settlement

market

To cover for the risk

of default by the
counterparty for the
clearing corporation,
the futures contracts
are
marked-tomarket on a daily
basis
by
the
exchange. Mark to
market settlement is
the
process
of
adjusting the margin
balance in a futures
account each day for
the change in the
value of the contract

from the previous

day, based on the
daily
settlement
price of the futures
contracts
(Please
refer to the Tables
given below.). This
process helps the
clearing corporation
in managing the
counterparty risk of
the future contracts
by requiring the
party incurring a loss
due to adverse price
movements to part
with the loss amount
on a daily basis.
Simply put, the party
in the loss position

pays the clearing

corporation
the
margin money to
cover
for
the
shortfall in cash. In
extraordinary times,
the Exchange can
require a mark to
market
more
frequently
(than
daily). To ensure a
fair mark-to-market
process, the clearing
corporation
computes
and
declares the official
price for determining
daily gains
and
losses. This price is
called
the

settlement
price
and represents the
closing price of the
futures contract. The
closing price for any
contract of any given
day is the weighted
average trading price
of the contract in the
last half hour of
trading.
Final settlement for
futures
After the close of
trading hours on the
expiry day of the
futures
contracts,
NSCCL marks all

positions of clearing
members to the final
settlement price and
the
resulting
profit/loss is settled
in
cash.
Final
settlement loss is
debited and final
settlement profit is
credited
to
the
relevant
clearing
bank accounts on the
day following the
expiry date of the
contract.
Suppose
the above contract
closes on day 6 (that
is, it expires) at a
price of Rs. 1040,
then on the day of

expiry, Rs.
100
would be debited
from the seller (short
position holder) and
would be transferred
to the buyer (long
position holder).
Settlement
Options

of

In an options trade,
the buyer of the
option pays the
option price or the
option premium. The
options seller has to
deposit an initial
margin with the
clearing member as

he is exposed to
unlimited
losses.
There are basically
two
types
of
settlement in stock
option
contracts:
daily
premium
settlement and final
exercise settlement.
Options
being
European style, they
cannot be exercised
before expiry.
Daily
premium
settlement
Buyer of an option is
obligated to pay the
premium towards the

options purchased by
him. Similarly, the
seller of an option is
entitled to receive
the premium for the
options sold by him.
The same person
may
sell
some
contracts and buy
some contracts as
well. The premium
payable and the
premium receivable
are
netted
to
compute the net
premium payable or
receivable for each
client
for
each
options contract at

the
time
settlement.

of

Exercise settlement
Normally
most
option buyers and
sellers close out their
option positions by
an offsetting closing
transaction but a
better understanding
of
the
exercise
settlement process
can help in making
better judgment in
this regard. Stock
and index options
can be exercised

only at the end of the

contract.

CALL OPTION
A call option is an
option contract in
which the holder
(buyer)
has
the
right (but not the
obligation) to buy a
specified quantity of
a security at a
specified
price
(strike price) within
a fixed period of
time
(until
its expiration).

For
the
writer
(seller) of a call
option, it represents
an obligation to sell
the underlying
security at the strike
price if the option
is exercised. The call
option writer is paid
a premium for taking
on
the
risk
associated with the
obligation.
For stock options,
each contract covers
100 shares.
A call option is
defined
by
the
following
4
characteristics:

 There
is an
under
lying
stock
or
index
There
is
an ex
pirati
on
date o
f the
call
optio
n
There
is

a strik
e
price
of the
call
optio
n
The
optio
n is
the
right
to
BUY
the
under
lying
stock
or
index.

This
contra
cts to
a put
optio
n,
which
is the
right
to sell
the
under
lying
stock

call

option is

called
a
"call"
because the owner
has the right to "call
the stock away" from
the seller. It is also
called an "option"
because the owner of
the call option has
the "right", but not
the "obligation", to
buy the stock at the
strike price. In other
words, the owner of
the call option (also
known as "long a
call") does not have
to
exercise
the
option and buy the
stock--if buying the
stock at the strike

price is unprofitable,
the owner of the call
can just let the
option
expire
worthless.
The most attractive
characteristic
of
owning call options
is that your profit is
technically
unlimited. And your
loss is limited to the
amount that you paid
for the option.

Selling
Call
Options
Instead
of
purchasing
call
options, one can also
sell (write) them for
a profit. Call option
writers, also known
as sellers, sell call
options with the
hope that they expire
worthless so that
they can pocket the
premiums. Selling
calls, or short call,
involves more risk
but can also be very

profitable when done

properly.
One
can sell
covered
calls or naked
(uncovered) calls.

Covered Calls
The short call
is covered if
the
call
option writer
owns
the
obligated
quantity of
the
underlying
security. The

covered call
is a popular
option
strategy that
enables the
stock owner
to generate
additional
income from
their
stock
holdings
through
periodic
selling of call
options.
It's an options
strategy
whereby an
investor
holds a long

position in an
asset
and
writes (sells)
call options
on that same
asset in an
attempt
to
generate
increased
income from
the
asset.
This is often
employed
when
an
investor has a
short-term
neutral view
on the asset
and for this
reason hold

the asset long

and
simultaneous
ly have a
short position
via the option
to generate
income from
the
option
premium.
For Eg:For example, let's
say that you own
shares of the TCS
and like its longterm prospects as
well as its share
price but feel in the
shorter term the

stock will likely

trade relatively flat,
perhaps within a few
Rupees of its current
price of, say,
Rs2,270. If you sell
a call option on TCS
for Rs.2,280 , you
earn the premium
from the option sale
but cap your upside.
One of three
scenarios is going to
play out:
a) TCS shares trade
flat (below the
Rs.2,280 strike
price) - the option
will expire worthless

and you keep the

premium from the
option. In this case,
by using the buywrite strategy you
have successfully
outperformed the
stock.
b) TCS shares fall the option expires
worthless, you keep
the premium, and
again you
outperform the
stock.

c) TCS shares rise

above Rs.2,280 -

the option is
exercised, and your
upside is capped at
Rs.2,280 , plus the
option premium. In
this case, if the stock
price goes higher
than Rs.2,280 , plus
the premium, your
buy-write strategy
has underperformed
the TCS shares.

When to Buy Call

Options
If you think a stock
price is going to go

up, then there are 3

trades that you can
make to profit from
a rising stock price:

you can buy

the stock

you can buy

call options on the
stock, or

you can write

put options on the
stock

PUT OPTION:A put option is an

option contract in

which the holder

(buyer)
has
the
right (but not the
obligation) to sell a
specified quantity of
a security at a
specified
price
(strike price) within
a fixed period of
time
(until
its expiration).
For
the
writer
(seller) of a put
option, it represents
an obligation to buy
the underlying
security at the strike
price if the option
is exercised. The put
option writer is paid

a premium for taking

on
the
risk
associated with the
obligation.
For stock options,
each contract covers
100 shares.
A put option, like
a call option, is
defined
by
the
following
4
characteristics:

There
is
an
underlying
stock
or
index
to
which
the

option relates

There
is
an
expiration
date of the
put option

There
is a strike
price of the
put option

The
put option is
the right to
SELL
the
underlying
stock
or
index at the
strike price.
This contrasts

with
a call
option which
is the right to
BUY
the
underlying
stock
or
index at the
strike price.
It is called an "put"
because it gives you
the right to "put", or
sell, the stock or
index to someone
else. A put option
differs from a call
option in that a call
is the right to buy the
stock.
Since put options are
the right to sell,

owning a put option

allows you to lock in
a minimum price for
selling a stock. It is a
"minimum
selling
price" because if the
market
price
is
higher than your
strike price, then you
would just sell the
stock at the higher
market price and not
exercise it.

When to Buy a Put

If we think a stock or
index price is going
to go down, then
there are 3 ways you
can profit from a
falling stock price:
can short the stock
or index
can write a call
option on the stock,
or
can buy a put option on
the stock.

Expiration Cycles:-

Options
contracts
have
a
maximum of
3-month
trading cycle
- the near
month (one),
the
next
month (two)
and the far
month
(three). On
expiry of the
near month
contract, new
contracts are
introduced at
new
strike
prices
for
both call and

put options,
on
the
trading day
following the
expiry of the
near month
contract. The
new contracts
are
introduced
for
three
month
duration
August Options
September Options
October Options

Current month
Near month
Far month

OPTION
STRATEGIES:Long Call
Buying a call
in a bullish
market
hoping that
the market
will go up.
The profit is
unlimited and
the loss is
limited to the
premium
paid.
For the Fig 1,
Sriram
Transport

Finance,
STRIKE
PRICE :
1000 CE
AND
PREMIUM :
40

profit
1000
0
loss
X

1040
-40

 Here 1040 is
the
breakeven
point ie no
profit no loss
and beyond
1040 we
stand to earn
profit and
below 1040
we incur loss.
Suppose Spot
price of Nifty
is at 1200
then we stand
to earn profit
of 160(1200
1040) and

if Nifty is at
Spot price
900 we incur
loss of 140
Short Call
When an
investor takes
a short call
position, the
securitys
price must fal
l in order for
the strategy
to be
profitable.
Not only
must the

price fall, it
must fall by
at least the
price of the
call option.
The farther
the fall, the
greater the
profit.
Conversely,
should the
investors
hence fail
and the
securitys
price thus
rise, the
strategy loses
money for
the investor.

As there is no
boundary for
how high the
price can
rise, the
potential
losses are
unlimited.
Limited
profit and
unlimited
loss
For example,
SBI 2000 CE
and premium
= 50

50
Profit
(limited)
X
2000

2050

Unlimited Loss

Here we
stand to earn
only limited
profit.

Suppose if
the Spot
price is 1800
then we stand
to earn a
profit of 50
and if our
spot price is
2150 we
incur a loss
of 100 since
2050 is our
break even
point.

Long Put
A put
option is a
security that
you buy
through
your stock
and option
broker when
you think the
price of a
stock or
index is
going to go
down.
A put option

is the right to
sell shares of
a stock or an
index at a
certain price
by a certain
date. That
"certain
price" is
known as the
strike price,
and that
"certain date"
is known as
the expiry or
expiration
date.
A put
becomes
more

valuable as
the price of
the
underlying
stock
depreciates
relative to the
strike price.
Relaince,
Buy 1200 PE
at premium
100

Profit

1200
X
1100
Limited Loss

Here,
Suppose our
spot price is
950, then we
earn a profit
of 150 and if
the spot price
is 1300 then
we incur a
loss of 100

since the
market is at
high and the
put wont get
excecuted
and thus
limited loss
above 1200.

Short put
A short put is
simply
the
sale of a put
option.
Maximum

Loss:
Unlimited in
a
falling
market.
Maximum
Gain:
Limited
to
the premium
received for
selling
the
put option.
We can use
short
put
option when
the
market
direction is
bullish and
bearish
on
market

volatility.
Example
TCS, Strike
Price= 2500,
Premium= 60

Profit
0
2440

2500
Loss

Here,
Suppose the
spot price is

2200 then we
incur loss of
240 and if the
spot price is
2600 we earn
a profit of 60
since the put
will get
executed
when the
market is
down as
seller
receives
premium.

Long
Straddle
A strategy of
trading
Options
whereby the
trader will
purchase a
long call and
a long put
with the
same
underlying
asset,
expiration
date and
strike price.

 The strike
price will
usually be at
the money
market price
of the
underlying
security.
Long straddle
options are
unlimited
profit,
limited risk
options
trading
strategies that
are used
when the
options trader
thinks that

the
underlying
securities
will
experience
significant
volatility in
the near term.
By having
long
positions in
both call and
put options,
straddles can
achieve large
profits no
matter which
way the
underlying
stock price

heads,
provided the
move is
strong
enough.
Payoff
Table: SBI Strike
price 3000
Buy 1 CALL
@ 110
Buy 1 PUT
@ 90
STRIKE
PRICE

+ CE

+PE

PREMIUM

TOTAL
PROFIT

S<3000

----

3000-S

-200

2800-S

S=3000

-200

-200

S>3000

S-3000

----

-200

S-3200

Break Even Points2800-S = 0, S3200=0, So two

break even points are
2800, 3200.
Therefore Spot
between 2800 to
3200 will not give
any profit, only
below 2800 and
above 3200 will give
profits.

PROFIT
PROFIT
0
2800
2910 3000
3110 3200
X
-90
-110
Loss
If Spot is at 2900,
then there would be
a loss of rs. 100. If
spot is at 2500 or
3500, then profit

would be 300.

Short
Straddle
The short
straddle is a
neutral
options
strategy that
involve the
simultaneous
selling of
a put and
a call of the
same
underlying
stock, strikin
g

price and exp

iration date.
In short
straddle we
sell 1 ATM
call and sell 1
ATM put.
Short
straddles are
limited
profit,
unlimited
risk options.
Maximum
profit for the
short straddle
is achieved
when the
underlying
stock price

on expiration
date is
trading at the
strike price
of the options
sold.
Large losses
for the short
straddle can
be incurred
when the
underlying
stock price
makes a
strong move
either
upwards or
downwards
at expiration,
causing the

short call or
the short put
to expire
deep in the
money.
Payoff
Table: SBI Strike
Price 3000
Sell 1 CALL
@ 90
Sell 1 PUT
@ 110
STRIKE
PRICE

-CE

-PE

PREMIUM

TOTAL
PROFIT

S<3000

---

-(3000-S)

200

-2800+S

S=3000

200

200

S>3000

-(S-3000)

---------

200

-S+3200

PROFIT
110
90
0
2890
3090

2800
3000

LOSS
LOSS

3200

If Spot is at 3100,
there would be a
profit of Rs. 100,{(3100-3000)+200}
If Spot is at 3400,
Then there will a
loss of Rs. 200, {(3400-3000)+200}

Long Strangle
The long
strangle is a
neutral
strategy in
options
trading that
involve the
simultaneous
buying of a
slightly outof-the-money
put and a
slightly outof-the-money
call of the
same underly
ing
stock and exp

iration date.
The long
options
strangle is an
unlimited
profit,
limited risk
strategy.
Large gains
for the long
strangle
option
strategy is
attainable
when the
underlying
stock price
makes a very
strong move
either

upwards or
downwards
at expiration.
Maximum
loss for the
long strangle
options
strategy is hit
when the
underlying
stock price
on expiration
date is
trading
between the
strike prices
of the options
bought. At
this price,
both options

expire
worthless and
the options
trader loses
the entire
initial debit
taken to enter
the trade.
Usually this
strategy is
used when
there is a
huge
volatility in
market,
rather change
in series
helps earning
a clients
strategy.

Payoff
Table:ExampleTech
Mahindra
Spot at 2100
Buy 1 PUT
NIFTY 2000
@ 50
Buy 1 CALL
NIFTY 2200
@ 60
STRIKE
PRICE

+ CE(2200)

+PE(2000)

S-X

X-S

S<2000

----

2000-S

PREMIUM

TOTAL
PROFIT

-110

1890-S

S=2000

-----

------

-110

-110

2000<S<2200

-----

-------

-110

-110

S=2200

----

-------

-110

-110

S>2200

S-2200

----

-110

S-2310

Break Even Points =

1890 Lower Side,
2310 Upper SideAt
2000, 2100 and
2200, there would be
a loss of Rs. 1100.
Below 2000 and
beyond 2200 there
would be unlimited
profit.

PROFIT
PROFIT

0
1950
2200
-50
-60

2000
2260

LOSS
-110
Short Strangle
The short
strangle, also
known as sell

strangle, is a
neutral
strategy in
options
trading that
involve the
simultaneous
selling of a
slightly and a
slightly outof-the-money
call of the
same
underlying
stock and exp
iration date.
The short
strangle
option
strategy is a

limited
profit,
unlimited
risk options.
Maximum
profit for the
short strangle
occurs when
the
underlying
stock price
on expiration
date is
trading
between the
strike prices
of the options
sold.
At this price,
both options

expire
worthless and
the options
trader gets to
keep the
entire initial
credit taken
as profit.
Large losses
for the short
strangle can
be
experienced
when the
underlying
stock price
makes a
strong move
either
upwards or

downwards
at expiration.
Payoff Table:Example
Infosys Spot at 2500.
Sell 1 CALL
NIFTY 2700
@ 80
Sell 1 PUT
NIFTY 2300
@ 40
STRIKE
PRICE

-CE

-PE

PREMIUM

TOTAL
PROFIT

S<2300

----

-(2300-S)

120

-2180+S

2300<S<2700

120

120

S>2700

-(S-2700)

----

120

-S+2820

Breakeven Points,
2180 and 2820, If
Spot is between this
range then there
would be a change a
profit of
120(limited) and
beyond 2820 and
below 2180 there
would be unlimited
loss.
120

PROFIT
80
40
0
2260
2700
2820

2180
2300
2780
LOSS

LOSS

At Spot 2200, His

Profit/Loss would be
{-(2300-2200)+120}
= profit 20

Bull Call
Spread
The bull call
spread option
trading
strategy
is
employed
when
the
options trader
thinks
that
the price of
the
underlying
asset will go
up
moderately in
the near term.

 Bull
call
spreads can
be
implemented
by
buying
an at-themoney call
option while
simultaneous
ly writing a
higher
striking outof-the-money
call option of
the
same
underlying
security and
the
same expirati
on month.

Payoff
Table: Spot Price
OF TCS
2100
Buy 1 CALL
OF 2000 @
150 (ITM)
Sell 1 CALL
OF 2200 @
70 (OTM)
STRIKE PRICE + CE 2000

-CE 2200

PREMIUM

TOTAL
PROFIT

S<2000

----

----

-80

-80

S=2000

-80

-80

2000<S<2200

S-2000

----

-80

S-2080

S=2200

200

-80

120

S>2200

S-2000

-S-2200

-80

120

Limited Profit(120)

2000 2080 2150

2200
2270

Limited Loss
(80)

Spot at 2000
and below 2000 will
give a limited loss of
80 and spot at 2200
and beyond 220
there would be
limited profit of 120.
Breakeven point is at
2080.

Bull Put
Spread
The bull put
spread option
trading
strategy is
employed
when the
options trader
thinks that
the price of
the
underlying
asset will go
up
moderately in
the near term.
Bull put
spreads can

be
implemented
by selling a
higher
striking inthe-money
put
option and
buying a
lower
striking outof-the-money
put option on
the same
underlying
stock with
the
same expirati
on date.
If the stock

price closes
above the
higher strike
price on
expiration
date, both
options
expire
worthless and
the bull put
spread option
strategy earns
the maximum
profit which
is equal to
the credit
taken in
when
entering the
position.

 If the stock
price drops
below the
lower strike
price on
expiration
date, then the
bull put
spread
strategy
incurs a
maximum
loss equal to
the difference
between the
strike prices
of the two
puts minus
the net credit
received

when putting
on the trade.
Payoff
Table: Spot Price =
TCS 2100
Buy 1 PUT
2000 @ 80
Sell 1 PUT
2200 @ 150
STRIKE
PRICE

+ PE 2000

-PE 2200

PREMIUM

TOTAL
PROFIT

S<2000

2000-S

-(2200-S)

70

-130

S=2000

-(2200-2000)

70

-130

2000<S<2200

-(2200-S)

70

S-2130

S=2200

70

70

70

70

S>2200

PROFIT
0
1920 2000 2050
2200
80
2130

LOSS

Strap
The strap is a
modified,
more bullish
version of the
common stra
ddle. It
involves
buying a
number of atthe-money
puts and
twice the

number of
calls of the
same
underlying
stock, strikin
g
price and exp
iration date.
Straps are
unlimited
profit,
limited risk
options
trading
strategies that
are used
when the
options trader
thinks that
the

underlying
stock price
will
experience
significant
volatility in
the near term.
Large profit
is attainable
with the strap
strategy
when the
underlying
stock price
makes a
strong move
either
upwards or
downwards
at expiration,

with greater
gains to be
made with an
upward
move.
Maximum
loss for the
strap occurs
when the
underlying
stock price
on expiration
date is
trading at the
strike price
of the call
and put
options
purchased.

Payoff
Table:TCS
STRIKE
PRICE 2000
Buy 2 CALL
@ premium
50
BUY 1 PUT
@ premium
40
STRIKE
PRICE

+2 CE

+PE

PREMIUM

TOTAL
PROFIT

S<2000

----

2000-S

-140

1860-S

S=2000

-140

-140

S>2000

2(S-2000)

PROFIT
PROFIT
0
1860
2000

LOSS

1960
2050 2070

----

-140

S-2070

-140

Strip
The strip is a
modified,
more bearish
version of the
common stra
ddle. It
involves
buying a
number of atthe-money
calls and

twice the
number of
puts of the
sameunderlyi
ng
stock, strikin
g
price and exp
iration date.
Strips are
unlimited
profit,
limited risk
options
trading
strategies.
Large profit
is attainable
with the strip
strategy

when the
underlying
stock price
makes a
strong move
either
upwards or
downwards
at expiration,
with greater
gains to be
made with a
downward
move.
Maximum
loss for the
strip occurs
when the
underlying
stock price

on expiration
date is
trading at the
strike price
of the call
and put
options
purchased. At
this price, all
the options
expire
worthless and
the options
trader loses
the entire
initial debit
taken to enter
the trade.
Payoff Table:-

 TATA STEEL
Strike price
600
Buy 2 PE @
40 premium
Buy 1 CALL
@ 60
premium
STRIKE
+ 1CE
PRICE

+2PE

PREMIUM

TOTAL
PROFIT

S<600

----

2(600-S)

-140

530-S

S=600

-140

-140

S>600

S-600

----

-140

S-740

Breakeven Points are

530 Lower side and
740 upper side. At

600. Loss of 140.

Profit
Profit

0
530 560 600
740
LOSS

660

Spot at 500, profit

will be 60 {2(600500)-140}
Spot at 800 profit
will be 60 {(800600)-140}

BUTTERFLY
CONDITION
:Premium (X1+X3
>= 2X2)
Long Butterfly

 Long
butterfly
spreads are
entered when
the investor
thinks that
the underlyin
g stock will
not rise or
fall much by
expiration.
Using calls,
the long
butterfly can
be
constructed
by buying
one lower
striking inthe-money

call, two atthe-money ca

lls and
buying one
higher
striking outof-the-money
call.
Maximum
profit for the
long butterfly
spread is
attained
when the
underlying
stock price
remains
unchanged at
expiration. At
this price,

only the
lower
striking call
expires in the
money.
Maximum
loss for the
long butterfly
spread is
limited to the
initial debit
taken to enter
the trade plus
commissions.

Payoff Table:-

X1

X2

X3

ITM

ATM

OTM

1800

2000

2200

1 CE Buy

2 CE Sell

1 CE Buy

200(Premium)

150(Premium)

120(Premium)

CONDITION

+1CE
1800

-2CE 2000 +1CE

2200

PREMIUM

PROFIT/L

S<1800

-20

-20

S=1800

-20

-20

1800<S<200
0

S-1800

-20

S-1820

S=2000

200

-20

180

2000<S<220
0

S-1800

-2(S-2000) -

-20

-S+2180

S=2200

400

-400

-20

-20

S>2200

S-1800

-2(S-2000) S-2200

-20

-20

180

PROFIT
-20
1820

2000 2180

-150
-200

Breakeven Points are

1820 and 2180,
Below 1820 and
above 2180 there
would be a limited
loss of 20. At 2000,
Profit will be 180.
When Spot is at

1950, profit would

be 130.

Short Butterfly
The
short
butterfly is a
neutral
strategy and
bullish
on
volatility.
Using calls,
the
short
butterfly can
be
constructed
by
selling
one
lower
strike price

in-the-money
call, buying
two at-themoney calls
and selling
one
higher
strike price
out-of-themoney call,
giving
the
trader a net
credit
to
enter
the
position.
Maximum
profit for the
short
butterfly is
obtained
when the

underlying
stock price
rally pass the
higher strike
price or
drops below
the lower
strike price at
expiration.
If the stock
ends up at the
lower
striking
price, all the
options
expire
worthless and
the short
butterfly
trader keeps

the initial
credit taken
when
entering the
position.
However, if
the stock
price at
expiry is
equal to the
higher strike
price, the
higher
striking call
expires
worthless
while the
"profits" of
the two long
calls owned

is canceled
out by the
"loss"
incurred from
shorting the
lower
striking call.
Hence, the
maximum
profit is still
only the
initial credit
taken.
Maximum
loss for the
short
butterfly is
incurred
when the
stock price of

the
underlying
stock remains
unchanged at
expiration. At
this price,
only the
lower
striking call
which was
shorted
expires inthe-money.
The trader
will have to
buy back the
call at its
intrinsic
value.

Example- Mahindra
& Mahindra
Payoff Table:X1

X2

X3

ITM

ATM

OTM

2200

2500

2800

1 CE Sell

2 CE Buy

1 CE Sell

250(Premium)

150(Premium)

100(Premium)

CONDITION

-1CE 2200 2CE 2500

-1CE 2800 PREMIUM

PROFIT/L

S<2000

50

50

S=2000

50

50

2200<S<250
0

-(S-2200)

50

-S+2250

S=2500

-300

50

-250

2500<S<280
0

-(S-2200)

2(S-2500)

50

S-2750

S=2800

-600

600

50

50

S>2800

-(S-2200)

2(S-2500)

-(S-2800)

50

50

PROFIT
2250
2750
0
2200
2800
LOSS

PROFIT
2500

OPTION GREEKS
DELTA
Delta is the amount
an option price is
expected to move
based on a Rupee 1
change in the
underlying stock.
As a general rule,
in-the-money
options will move
more than out-ofthe-money options,
and short-term
options will react

more than longerterm options to the

same price change
in the stock.
As an option gets
further in-themoney, the
probability it will
be in-the-money at
expiration increases
as well. So the
options delta will
increase. As an
option gets further
out-of-the-money,
the probability it will
be in-the-money at

expiration decreases.
So the options delta
will decrease.
GAMMA
Gamma is the rate
that delta will
change based on a 1
rupee change in the
stock price. So if
delta is the speed
at which option
prices change, you
can think of gamma
as the
acceleration.

Options with the

highest gamma are
the most responsive
to changes in the
price of the
underlying stock.
If youre an option
buyer, high gamma
is good as long as
your forecast is
correct and if
youre an option
seller and your
forecast is
incorrect, high
gamma is the
enemy.

THETA
Theta is the amount
the price of calls and
puts will decrease (at
least in theory) for a
one-day change in
the time to
expiration

VEGA.
Vega is the amount

call and put prices

will change, in
theory, for a
corresponding onepoint change in
implied volatility.
Vega does not have
any effect on the
intrinsic value of
options; it only
affects the time
value of an options
price. Typically, as
implied volatility
increases, the value
of options will
increase. Thats

because an increase
in implied volatility
suggests an
increased range of
potential movement
for the stock.
RHO
The amount an
option value will
change in theory
based on a one
percentage-point
change in interest
rates.

PRODUCTS
UNDER
PORTFOLIO
CREATION

STOCK

REAL
ESTATE

DEBT

GOLD

STOCK
Equity, Mutual
Funds, Portfolio
Management, GOLD
ETF, ULIP

DEBT FUND
Treasury Bills
Bonds
NCDs
Fixed Deposits

GOLD
Invest in
commodities, gold is
the best instrument
to invest for long
term.

REAL ESTATE

PORTFOLIO
MANAGEM
ENT

The art and science

of making decisions
about investment
mix and policy,
matching
investments to
objectives, asset
allocation for
individuals and
institutions, and

balancing risk
against performance.
Portfolio
management is all
about strengths,
weaknesses,
opportunities and
threats in the choice
of debt vs. equity,
domestic vs.
international, growth
vs. safety, and many
other tradeoffs
encountered in the
attempt to maximize

return at a given
appetite for risk.

PORTFOLIO
MANAGEMENT
SERVICE
Portfolio
Management Service
is a tailor made
professional service
offered to cater the
investments
objective of different
investor classes. The
Investment solutions
provided by PMS
cater to a niche

segment of clients.
The clients can be
Individuals or
Institutions entities
with high net worth.
In simple words, a
portfolio
management service
provides
professional
management of your
investments to create
wealth.

Customer
Interaction During
PMS

Why are we there

for.
Since we are
professionals in
PMS, therefore it
would be a risk if
client creates his
portfolio.
Ask his source of
income
Goals
Liability
Expenses

PORTFOLIO

CREATION
After interacting
with the client about
his goals , liability
and expenses, our
job is to make them
aware all the future
risks they can
potentially face in
future. Moreover,
after analyzing their
future requirements
and liablitilies,
portfolio must be
created. Portfolio
must cover all the
risk of a person in
present as well as for
future.

If a clients age is
35, it is better to
invest 100-35 i.e
65% in equity out of
total money
(delivery-for long
term), 10% in debt
instruments
especially in
government bonds
on infrastructure, for
meeting family
requirements it is
better to invest 10%
in buying a land or
house because real
estate value always
appreciates and 5%
in gold. Rest should
be saved for day to

day expenses. For

more better futures it
is advisable to invest
small proportion of
savings in Public
Providend Fund
which is for 15 years
and gives handsome
returns.

RISK AND
MANAGEMENT
SERVICE
Average
Exist
Hold

Better your portfolio

(new portfolio
creation)
Before investing and
creating portfolio, it
is very important to
know the risk ability
of a client.

TRANSMISSION
AND
TRANSPOSITION
OF SHARE
CERTIFICATE.
Physical Certificate
Earlier when there

were no such demat

accounts, shares
were in the form of
certificate. So for
any rectification and
errors or for change
in it takes a lot of
time.
Transmission of
shares mean transfer
of shares to the
beneficiary of a
deceased person who
is holding
certificates in his/her
name. If the
deceased person has
a nominee or second
holder, the shares

will directly transfer

to their names after
they follow the
process. If there is
no beneficiary, then
the court will put a
notice for 6 months
period and if any
person claims it with
proper documents
showing relative to
the deceased person
then it will be
transferred to them.
If None, then
amount will be
transferred to
governments
education fund.

Documents
Required for
Transmission of
Shares
Letter to the transfer
agent(company)
Notary Death
Certificate
Original share
certificate
Succession
certificate
Transfer Deed
Physical Transfer of
shares, Green in

colour, valid for one

year and charges @ .
25% of marker
capital.
For transfer of shares
in demat form, one
needs a DELIVERY
INSTRUCTION
SLIP

Transposition
Arrangement of
shares in logical
form. Suppose there
are three accounts
ABC, CAB and
BCA, these three can

be made into one

single account in
demat form as ABC.

TERMINAL
GOTX of KARVY
STOCK
BROKING
LIMITED
Main Headings in
terminal are as
follows
Script
Exchange
LTP (last trade price)
Buy Price

Price Change
% Change
Opening Price
High Price

Buy Quantity
Selling Price
Selling quantity
LTQ (last traded
quantity)

Low Price
Volume
52 Week High
52 Week Low

Main Shortcut keys

for trading
F1
F2
F3
F4
F5
F6
F7
F8

Buy Order
Sell Order
Order Book
Add Scrip
Save
Market Depth
Trade Position
Trade Book
(executed)

F9
F11
ESC

Market Statistics
Calculator
Cancel

LEARNINGS
FROM KARVY
STOCK

BROKING LTD

Trading
in
Equity
market and
Derivatives
market
should
be
done
carefully.
Intraday
Trading
in
Equity
market can
help
the
trader to gain
maximum

profit but it is
very risky as
the trader has
to
be
continuously
updated
about
the
current price
of that stock
in
the
market .i.e.
the trader has
to be very
active if he
wants
to
trade
in
Intraday. By
investing a
small amount
of money, a

person can
gain
a
satisfying
amount
of
profit if he
knows all the
tactics of the
Intraday
Trading.
Intraday
Trading
attracts
majority of
customers as
the brokerage
charged
in
this is very
less
as
compared to

Delivery
Trading. And
also as the
Profit
that
can be gained
is more as
compared to
the
initial
investment.
Delivery
Trading on
the
other
hand is very
useful
for
profit making
mostly in the
long run.

 The
most
important
thing
required to
trade
in
Delivery is
Patience.
The Investor
need to be
very patient
while dealing
in this type of
trading as he
has no time
limitation
and he can
recover his
loss or gain
profit in the
long run.

 If the price of
a particular
stock
fluctuates to
a very great
extent in a
day,
SEBI
puts circuit
on
that
particular
stock to stop
its trading in
the
market
for
some
time. This is
the
main
advantage of
trading
in

Equity
market,
where
the
profits
as
well as the
losses
are
restricted or
limited.
Derivatives
market can
make
a
person rich in
a day and
also
can
affect him a
lot with the
losses
incurred due
to it. There is

no
circuit
system
in
Derivatives
market.
Option
Premium
Decreases
with time due
to
time
decency.
So the value
of the stock
can become
from
Rs.1,00,000
to
Rs.100.
This shows
that the profit

as well as the
loss
is
unlimited in
Derivative
market.
If the
movements
of stocks are
studied
thoroughly,
investing in
stock market
is actually a
very
profitable as
well risky
investment.
But as a

safety
measure,
only the
people
having
sufficient
savings i.e.
people who
are willing to
take more
risk, should
invest in this
market
according to
me.
Trading in
Derivatives
market is a
very risky as

well as
profitable
thing to do,
but the
earning profit
in this market
requires a lot
of study and
experience
and hence
people with
low risk
appetite
should
strictly avoid
trading in
this market.
Work
Culture-

Dont over
commit and
dependency
on others.
Customer
Interaction is
essential in
any field of
work.
Understandin
g Customers
Need and
requirements
before
making
decision.

 First Learn
and then earn
in stock
market.

SUGGESTIONS

Return on Investment is must but the

risk also should be minimizing at the

same time.
No one loves to lose his hard earned
money therefore it should be invested
in safer place.
Services are must for them and
therefore the company must also
concentrate on this aspect.
Good advisory services, secrecy of the
data given to the company as well as
every people must treated as they all
are equal i.e. no biasness.
Charges of the services provided to
them should be reasonable and viable.

CONCLUSIONS

Karvy has enough number of branches

all over India and therefore it is agreat
advantage for the company and the
company also planning toexpand its
network.
Karvy also provides the facility of
trading in almost all the exchangesand
therefore whatever the customer
demands the company has in
itspackage.
The company also has a very good research
team at its Head Office and this is meant
for the better working as well as for
the customer of Karvyonly.
The company also has the advantage
of the existing customers where their

level of faith and their view about the

company to the outside world will be a
helping hand for the company to
expand its business.

BIBLIOGRAPHY
Books

Derivatives and Risk Management by

Rajiv Shrivastav

Websites
www.calloptionputoption.com
www.nseindia.com
www.slideshare.net
www.investopedia.com

www.optionsguide.com

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Economic Times