SAPM - MODULE I

INTRODUCTION TO INVESTMENT

Investment is the employment of funds on assets with the aim of earning income
or capital appreciation. It has two attributes namely risk and time. The risk is undertaken
with a view to reap some return from the investment.
To the economist investment is the net addition made to nation’s capital stock that
consists of goods and services that are used in the production process.
Financial investment means buying securities or other monetary or paper (financial)
assets in the money markets or capital markets, or in fairly liquid real assets, such as Gold
as an investment, real estate etc. Types of financial investments include shares and other
equity investments and bonds. Equity investments generally refer to the buying and
holding of shares of stock on a stock market by individuals and funds in anticipation of
income from dividends and capital gain as the value of stock rises

SPECULATION
Speculation means taking up the business risk in the hope of getting short term
gain. Speculation essentially involves buying and selling activities with the expectation of
getting profit from the price fluctuations. The speculator is more interested in the market
action and its price movement. The speculators assume greater risk than the investors.

The difference between the investor and the speculator

Investor
 Plan for longer time horizon
 Holding period may be form one year to few year.
 Assume moderate risk
 Moderate rate of return from limited risk
 Evaluate the performance of the company regularly.
  Use ones own funds and avoid borrowed funds
Speculator
 Plan for a very shorter period
 Holding from few days to months
 Willing to undertake high risk
 High returns for high risk
 Consider inside information and market behaviour
 Uses borrowed funds to supplement personal resources.

INVESTMENT OBJECTIVES
The main objectives are increasing the rate of return and reducing the risk. Other
objectives like safety, liquidity, and hedge against inflation can be considered as
subsidiary objectives.
Return
It is the total income the investors receives during the holding period stated as a
percentage of the purchasing price at the beginning of the holding period.

End period value-Beginning period value + Dividend

Return= *100
Beginning period value

Rate of return is stated semi-annually or annually to held comparison among the

different investment alternatives.
Risk
The risk of an investment refers to the variability of the rate of return. To explain
further, it is the deviation of the outcome of an investment from its expected value. An
investor whose rate of return varies widely from period to period is risky than whose
return that does not change much. Every investors like to reduce the risk of his
investment by proper combination different securities.
Liquidity
Marketability of the investment provides liquidity of investment. The liquidity
depends upon the marketing and trading facilities. Stocks are liquid only if they
command good market by providing adequate return through dividends and capital
appreciation.
Hedge against inflation
Since there is inflation in almost all the economy, the rate of return should ensure
a cover against inflation. The rate of return should be higher than the rate of inflation;
otherwise the investor will have loss in real terms. The return thus earned should assure
the safety of the principal amount, regular flow of income and be a hedge against
inflation.
Safety
The selected investment avenue should be under the legal and the regulatory
frame work. If it is not under legal frame work, it is difficult to represent the grievances.
Investment done with the government assure more safety than with the private party.
From the safety point of view investment can be ranked as: bank deposits, government
bonds, UTI units, non-convertible debentures, equity share and deposits with the non-
banking financial companies.

THE INVESTMENT PROCESS

The investment process can be divided into five stages

 Framing of investment policy

 Investment analysis
 Valuation
 Portfolio construction
 Portfolio evaluation
Investment Process

Investment Analysis Valuation Portfolio Portfolio

policy construction evaluation

-Investible -Market -Intrinsic Diversification -Appraisal

fund value
-Industry -Selection & -Revision
-Objectives -Future allocation
-Company value
-Knowledge

INVESTMENT POLICY
The essential ingredients of the policy are the investible funds, objectives and the
knowledge about the investment alternatives and market.
Investible Funds
The entire investment procedure revolves around the availability of investible
funds. The funds may be generated through savings or from borrowings. If the funds are
borrowed, the investor has to be extra careful in the selection of the investment
alternatives. The return should be higher than the investment he pays.
Objectives
The objectives are framed on the premises of the required rate of return, need for
regularity of income, risk perception and the need for liquidity. The risk takers objective
is to earn high rate of return in the form of capital appreciation, whereas the primary
objective of the risk is the safety of the principal.
Knowledge
The knowledge about the investment alternatives and market plays a key role in
the policy formulation. The risk and return Associated with the alternatives differ from
each other. Investment in equity is high yielding but has more risk than the fixed income
securities.
SECURITY ANALYSIS
After formulating the investment policy, the securities to be bought have to be
scrutinized through the market. Industry and company
Market analysis
The growth in gross domestic product and inflation are reflected in the stock
price. The recession in the economy results in a bear market. The stock price may be
fluctuating in the short run but in the long run they may in trends. The investor can fix his
entry and exit points through technical analysis.
Industry analysis
The industries that contribute to the output of the major segment of the economy
vary in their growth rate and their overall contribution to the economic activity. Some
countries grows faster than the GDP and are expected to continue in their growth.
Company analysis
The purpose of the company analysis is to help the investors to make better
decisions. The company’s earnings, profitability, operating efficiency, capital structure
and the management have to be screened. Appreciation of the stock value is a function of
the performance of the company.

VALUATION
The valuation helps the investor to determine the risk and the return expected
from an investment in the common stock.
Intrinsic value
It is measured through the book value of the share and the price earning ratio.
Future value
Future value can be estimated by using a simple statistical technique like trend
analysis. The analysis of the historical behavior of the price enables the investor to
predict the future value.

CONSTRUCTION OF PORTFOLIO
 A portfolio is a combination of securities. The portfolio is constructed in such a
manner to meet the investor’s goal and objectives. The investors should decide how best
to reach the goal with the securities available. The investor tries to attain maximum return
with minimum risk.
Diversification
The main objective of diversification is the reduction of risk in the loss of capital
and income. A diversified portfolio is comparatively risky than holding a single portfolio.
There are several ways to diversify the portfolio.
Debt and equity diversification
Debt instrument provide assured return with limited capital appreciation.
Common stocks provide income and the capital gain but with the flavor of uncertainty.
Industry diversification
Industries growth and their reaction to government policies differ from each other.
Banking industry shares may provide returns but with limited capital appreciation.
Thus, industry diversification is needed and it reduces the risk.
Selection
Based on the diversification level, industry and company analyses can be selected.
Funds are allocated for the selected securities. Selection of the securities and the
allocation of funds seals the construction of portfolio.

EVALUATION
The portfolio has to be managed efficiently. The efficient management calls for
evaluation of portfolio. This process consist of portfolio appraisal and revision.
Appraisal
The risk and return performance of the securities vary from time to time. The
developments in the economy, industry and the relevant companies from which the stock
are bought have to be appraised.
Revision
Revision depends on the result of the appraisal. The low yielding securities with
high risk are replaced with high yielding securities with low risk factor. To keep the
return at a particular level necessitates the investors to revise the components of the
portfolio periodically.

FINANCIAL MARKETS
Financial markets perform crucial function in the savings – investment process as
facilitating organizations. They are not sources of finance but they are a link between the
savers and investors, both individual as well as institutional. Based on the nature of funds
which are their stock –in-trade, the financial markets are classified in to money market
and capital/securities market.

I. Money Market
 Money market is a market for dealing in monetary assets of short- term nature,
generally less than one year. It refers to the segment of the financial market which
enables the raising up of short – term funds for meeting temporary shortages of cash and
obligations and the temporary deployment of excess funds for earning returns. The major
participants in the money market are the RBI and commercial banks. The broad
objectives of the money market are to provide:
i. An equilibrium mechanism for evening out short term surpluses and deficiencies.

ii. A focal point of RBI intervention for influencing liquidity in the economy

iii. A reasonable access to the users of short- term funds to meet their requirements at
realistic/reasonable/price/cost.

Types of Money Market

1. Call money market/Money at Call and short notice

The call money market is a market for short term funds repayable on
demand and with maturity period varying between one-day (call money) to a
fortnight (notice money) i.e, 2 weeks. No collateral security is required to cover
these transactions. Call money is required by banks to meet their CRR
requirements on a reporting Friday. The call market is a pure inter bank market
including PDs. The interest rate paid on call loans is known as the call rate.
2. Commercial Papers (CPs) Market

CP is a short term unsecured negotiable instrument consisting of usance

promissory notes with a fixed maturity. It is generally issued by companies as a
means of raising short term debt, and by process of securitisation, intermediation
of the bank is eliminated. The PDs and all Indian financial institutions can also
issue CPs. A CP can be issued by a company directly to the investor or through
bank/merchant bank (dealers). The maturity period of CP varies from 30 days to 6
months. CP is issued only by high credit rating companies. CP is not popular in
India.
3. Commercial Bills Market

Commercial bill is a short term, negotiable and self- liquidating instrument

with low risk. It is a written instrument containing an unconditional order signed
by the maker, directing to pay a certain amount of money only to a particular
person or the bearer of the instrument. Bills of exchange are drawn by the seller
(drawer) on the buyer(drawee) for the value of goods delivered by him. Such bills
are called trade bills. When trade bills are accepted by commercial banks, they are
called commercial bills. The commercial bill market in India is based on the
suggestions of the Narasimham Study Group in 1970. CB is not popular in India.
4. Certificate of Deposit

CDs are a marketable receipt of funds deposited in a bank for a fixed

period at a specified rate of interest. They are bearer documents/instruments and
are readily negotiable. The maturity period of a CD issued by a bank should be
between 15 days and 1 year. The FIs can issue CDs with a maturity of 1-3 years.
The min. amount of a CD should be Rs. 1 Lakh. The CD can be subscribed by
individuals/corporations/companies/trusts/funds/asscociations and so on.
5. Treasury Bills

A T- Bill is an instrument of short term borrowing by the GOI to bridge

seasonal /temporary gaps between receipts and expenditures. It is issued by the
RBI on the behalf of the govt. The features of T- Bills are negotiability, issued at
discount and redemption at par on maturity, high liquidity, low transaction cost,
absence of default risk, eligibility for SLR and transaction through SGL account.
T- Bills are presently issued in three maturities- 91 days T- bill, 182 days T- bill
and 364 days T- bill.
6. REPOs/ REVERSE REPOs

A repo (repurchase agreement)/ reverse repo /ready forward /repurchase

(buy- back) is a transaction in which two parties agree to sell and repurchase the
same security. The seller sells specified securities, with an agreement to
repurchase the same at a mutually decided future rate and price. Likewise, the
 buyer purchases the security with an agreement to resell the same to the seller, on
an agreed date and at a predetermined price. The same transaction is ’repo’ from
the viewpoint of the seller and ‘reverse repo’ from the angle of the buyer. Reps
have a maturity period of 1-14 days. They are very safe transactions. The repo
rate is the difference between borrowed and paid back cash expressed as a
percentage. Two types of repos are currently in operations in India: bank repos
and RBI repos.

For the buyer, a repo is an opportunity to invest cash for a customized

period of time (other investments typically with limited tenures). It is short-term
and safer as a secured investment since the investor receives collateral. Market
liquidity for repos is good, and rates are competitive for investors. For traders in
trading firms, repos are used to finance long positions, obtain access to cheaper
funding costs of other speculative investments, and cover short positions in
securities.

CAPITAL MARKET INSTRUMENTS

The capital market is the market for securities, where companies and
governments can raise longterm funds. The capital market includes the stock market and
the bond market. Financial regulators, such as the Securities Exchange Board of India,
oversee the capital markets in their designated countries to ensure that investors are
protected against fraud.

A market in which individuals and institutions trade financial securities.

Organizations/institutions in the public and private sectors also often sell securities on the
capital markets in order to raise funds. Thus, this type of market is composed of both
the primary and secondary markets.

The capital markets consist of the primary market and the secondary market. The
primary markets is where new stock and bonds issues are sold (underwritten) to investors.
The secondary markets are where existing securities are sold and bought from one
investor or speculator to another, usually on an exchange (eg.- National Stock Exchange).

Primary Market

The primary is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue. This is typically done through a syndicate
of securities dealers. The process of selling new issues to investors is called underwriting.
In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though it can be found in
the prospectus.

Features of primary markets are:

• This is the market for new long term capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called New
Issue Market (NIM).
• In a primary issue, the securities are issued by the company directly to investors.
• The company receives the money and issues new security certificates to the
investors.
• Primary issues are used by companies for the purpose of setting up new business
or for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital formation
in the economy.
• The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
 issue market may be raising capital for converting private capital into public
capital; this is known as ‘going public’

Secondary Market
The secondary market is the financial market for trading of securities that have
already been issued in an initial private or public offering. Alternatively, secondary
market can refer to the market for any kind of used goods. The market that exists in a
new security just after the new issue, is often referred to as the aftermarket. Once a
newly issued stock is listed on a stock exchange, investors and speculators can easily
trade on the exchange, as market makers provide bids and offers in the new stock.

Fundamentally, secondary markets mesh the investor's preference for liquidity

(i.e., the investor's desire not to tie up his or her money for a long period of time, in case
the investor needs it to deal with unforeseen circumstances) with the capital user's
preference to be able to use the capital for an extended period of time

Capital Market Instruments

• Equity Market
o Equity shares
o Preference shares (hybrid)

• Debt Market
o Government Securities
o Corporate Securities

• Derivatives market
o Options
o Futures

Equity Market
Equity Shares
 Equity shares are commonly referred to common stock or ordinary shares. Even
though the words shares and stocks are interchangeably used, there is a difference
between them. Share capital of a company is divided into a number of small units of
equal value called shares. The term stock is the aggregate of a member’s fully paid up
shares of equal value merged into one fund. It is a set of shares put together in a bundle.
The “stock” is expressed in terms of money and not as many shares. Stock can be divided
into fractions of any amount and such fractions may be transferred like shares.
Rights:-
 Right to vote at the general body meeting of the co.
 Right to control the management of the company.
 Right to share profits.
 Right to claim on the residual on winding up.
 Pre-emptive right.
 Right to receive copy of statutory reports, copies of annual accounts along with
the audited report

Preference Share

Preferred stock, also called preferred shares or preference shares, is typically

a higher ranking stock than voting shares, and its terms are negotiated between the
corporation and the investor.

Preferred stock usually carry no voting rights, but may carry superior priority over
common stock in the payment of dividends and upon liquidation. Preferred stock may
carry a dividend that is paid out prior to any dividends to common stock holders.
Preferred stock may have a convertibility feature into common stock. Preferred
stockholders will be paid out in assets before common stockholders and after debt holders
in bankruptcy. Terms of the preferred stock are stated in a "Certificate of Designation".

Rights:-
 • The core right is that of preference in the payment of dividends and upon
liquidation of the company. Before a dividend can be declared on the common
shares, any dividend obligation to the preferred shares must be satisfied.
• The dividend rights are often cumulative, such that if the dividend is not paid it
accumulates from year to year.
• Preferred stock may or may not have a fixed liquidation value, or par value,
associated with it. This represents the amount of capital that was contributed to
the corporation when the shares were first issued
• Preferred stock has a claim on liquidation proceeds of a stock corporation,
equivalent to its par or liquidation value unless otherwise negotiated. This claim is
senior to that of common stock, which has only a residual claim.
• Almost all preferred shares have a negotiated fixed dividend amount. The
dividend is usually specified as a percentage of the par value or as a fixed amount.
For example Pacific Gas & Electric 6% Series A preferred. Sometimes, dividends
on preferred shares may be negotiated as floating i.e. may change according to a
benchmark interest rate index such as LIBOR.
• Some preferred shares have special voting rights to approve certain extraordinary
events (such as the issuance of new shares or the approval of the acquisition of the
company) or to elect directors, but most preferred shares provide no voting rights
associated with them. Some preferred shares only gain voting rights when the
preferred dividends are in arrears for a substantial time.
• Usually preferred shares contain protective provisions which prevent the issuance
of new preferred shares with a senior claim. Individual series of preferred shares
may have a senior, pari-passu or junior relationship with other series issued by the
same corporation.
• Occasionally companies use preferred shares as means of preventing hostile
takeovers, creating preferred shares with a poison pill or forced
exchange/conversion features that exercise upon a change in control.

Debt Market
Corporate Bonds
 A Corporate Bond is a bond issued by a corporation. The term is usually applied
to longer-term debt instruments, generally with a maturity date falling at least a year after
their issue date. (The term "commercial paper" is sometimes used for instruments with a
shorter maturity.)

Sometimes, the term "corporate bonds" is used to include all bonds except those
issued by governments in their own currencies. Strictly speaking, however, it only applies
to those issued by corporations. The bonds of local authorities and supranational
organizations do not fit in either category.

Corporate bonds are often listed on major exchanges (bonds there are called
"listed" bonds) and ECNs like MarketAxess, and the coupon (i.e. interest payment) is
usually taxable. Sometimes this coupon can be zero with a high redemption value.
However, despite being listed on exchanges, the vast majority of trading volume in
corporate bonds in most developed markets takes place in decentralized, dealer-based,
over-the-counter markets.

Some corporate bonds have an embedded call option that allows the issuer to
redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow
investors to convert the bond into equity.

Government Bonds
A government bond is a bond issued by a national government denominated in
the country's own currency. Bonds issued by national governments in foreign currencies
are normally referred to as sovereign bonds. The first ever government bond was issued
by the British government in 1693 to raise money to fund a war against France. It was in
the form of a tontine

Government bonds are usually referred to as risk-free bonds, because the

government can raise taxes or simply print more money to redeem the bond at maturity.
Some counter examples do exist where a government has defaulted on its domestic
currency debt, such as Russia in 1998 (the "ruble crisis"), though this is very rare.
Debenture
According to companies act of 1956 “Debenture includes debenture stock, bonds
and any other securities of company, whether constituting a charge on the assets of the
company or not”. Debentures are generally issued by the private sector companies as a
long- term promissory note for raising loan capital. The company promises to pay interest
and principal as stipulated. Bond is an alternative form of debenture in India. Public
sector companies and financial institutions issue bonds.

Types
• Secured or unsecured: A secured debenture is secured by a lien on the company’s
specific assets. When debentures are not protected by any security, they are
known as unsecured or naked debentures.
• Fully convertible debenture: This type of debenture is converted into equity
shares of the company on the expiry of specific period. The FCD carries lower
interest rate than other types of debentures because of the attractive feature of
convertibility into equity shares.
• Partly convertible debenture: This debenture consists of two parts namely
convertible and non-convertible. The convertible portion can be converted into
shares after a specific period.
• Non-convertible debenture: Non-convertible debentures do not confer any option
on the holder to convert the debentures into equity shares and are redeemed at the
expiry of the specified period.
Bond
Bond is a long term debt instrument that promises to pay a fixed annual sum
as interest for specified period of time. The basic features of a bond are:
1) Bonds have face value. The face value is called par value. The bond may be
issued at par or at discount.
2) The interest is fixed. Sometimes it may be variable as in case of floating rate
bond. Interest is paid semi annually or annually. The interest rate is known as
coupon rate. The interest is specified in the certificate.
 3) The maturity date of the bond is usually specified at the issue time except in the
case of perpetual bonds.
4) The redemption value is also stated in the bonds. The redemption value may be at
par value or at premium.
5) Bonds are traded in the stock market. When they are traded the market value may
be at par or at premium or at discount. The market value and redemption value
need not be the same.

Types
 Secured bonds & unsecured bonds: The secured bond is secured by the real
assets of the issuer. In the case of the unsecured bond the name and fame of issuer
may not be the only security.
 Perpetual bonds and redeemable bonds: Bonds that do not mature or never
mature are called perpetual bonds. The interest alone would be paid. In the
redeemable bond, the bond is redeemed after a specific period of time. The
redemption value is specified by the issuer.
 Fixed interest rate bonds and floating interest rate bonds: In the fixed interest
rate bonds, the interest rate is fixed at the time of the issue. Whereas in the
floating interest rate bonds, the interest rates change according to the prefixed
norms.
 Zero coupon bonds: These bonds sell at a discount and the face value is repaid at
maturity. The difference between the purchase cost and face value of the bond is
the gain of the investor.
 Deep discount bonds: It is another form of zero coupon bonds. The bonds are
sold at large discount on their nominal value; interest is not paid for them and
they mature at par value. The difference between maturity value and the issue
price serves as an interest return. The deep discount bonds maturity period may
range from 3 years to 25 years or more.
 Capital indexed bond: Here the principal amount of the bond is adjusted for
inflation every year. The reselling of the principal amount is done semi annually
 based on WPI movements. The benefit of the bond is that it gives the investor an
increase in return by taking inflation into account.
Warrants
A warrant is a bearer document of title to buy specified number of equity shares at
a specified price. Usually warrants can be exercised over a number of years. The life
periods of warrants are long. Warrants are generally offered to make the bond or
preferred stock offering more attractive. Bonds may bear low interest rate but the
warrants offered along with them helps the investor to enjoy the equity appreciation
value.
Advantages
1) Warrants make the non-convertible debentures other debentures more attractive
and acceptable.
2) The debentures along with the warrants are able to create their own market and
reduce the company’s dependence on financial institutions and mutual funds.
3) Since the exercise of the warrants tales place at a future date, the cash flow and
the capital structure of the company can be planned accordingly.
4) The cost of debt is reduced if warrants are attached to it. Investors are willing to
accept lower interest rate in the anticipation of enjoying the capital appreciation of
equity value at a later date.
5) Warrants provide high degree of leverage to the investor. He can sell the warrant
in the market or convert it into stocks or allow it to lapse. But if the conversion is
compulsory, even if there is a fall in the price of the shares, the investors have to
shell out money from his pocket.
6) Warrants are liquid and they are traded in the stock exchanges. Hence, the
investor can sell the warrants before exercising them

Derivatives Market

The derivatives markets are the financial markets for derivatives. The market
can be divided into two, that for exchange traded derivatives and that for over-the-counter
derivatives. The legal nature of these products is very different as well as the way they
are traded, though many market participants are active in both.

Options

The derivatives markets are the financial markets for derivatives. The market
can be divided into two, that for exchange traded derivatives and that for over-the-counter
derivatives. The legal nature of these products is very different as well as the way they
are traded, though many market participants are active in both.

For example, buying a call option provides the right to buy a specified quantity of
a security at a set strike price at some time on or before expiration, while buying a put
option provides the right to sell. Upon the option holder's choice to exercise the option,
the party who sold, or wrote, the option must fulfill the terms of the contract

The theoretical value of an option can be evaluated according to several models.

These models, which are developed by quantitative analysts, attempt to predict how the
value of the option will change in response to changing conditions. Hence, the risks
associated with granting, owning, or trading options may be quantified and managed with
a greater degree of precision, perhaps, than with some other investments

Futures

In finance, a futures contract is a standardized contract, traded on a futures

exchange, to buy or sell a standardized quantity of a specified commodity of standardized
quality (which, in many cases, may be such non-traditional "commodities" as foreign
currencies, commercial or government paper [e.g., bonds], or "baskets" of corporate
equity ["stock indices"] or other financial instruments) at a certain date in the future, at a
price (the futures price) determined by the instantaneous equilibrium between the forces
of supply and demand among competing buy and sell orders on the exchange at the time
of the purchase or sale of the contract. The future date is called the delivery date or final
settlement date. The official price of the futures contract at the end of a day's trading
session on the exchange is called the settlement price for that day of business on the
exchange.

A futures contract gives the holder the obligation to make or take delivery under
the terms of the contract, whereas an option grants the buyer the right, but not the
obligation, to establish a position previously held by the seller of the option. In other
words, the owner of an options contract may exercise the contract, but both parties of a
"futures contract" must fulfill the contract on the settlement date.

Stock exchange
1. Bombay Stock exchange

Bombay Stock Exchange is the oldest stock exchange in Asia. BSE was
established as "The Native Share & Stock Brokers' Association" in 1875.BSE is situated
in Dalal Street, Mumbai. BSE is now a corporatized and demutualised entity incorporated
under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization
and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of
India (SEBI). With demutualization, BSE has two of world's best exchanges, Deutsche
Börse and Singapore Exchange, as its strategic partners.BSE is professionally managed
by Board of Directors.
BSE provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in more than 450
cities and towns of India. BSE has always been at par with the international standards.
The systems and processes are designed to safeguard market integrity and enhance
transparency in operations. BSE is the first exchange in India and the second in the world
to obtain an ISO 9001:2000 certifications. The trading is from Monday to Friday. Time-
(9: 55 am to 3 :35 pm)
Services of BSE
1. Investor Services: The Department of Investor Services redresses grievances of
investors. BSE was the first exchange in the country to provide an amount of Rs.1
million towards the investor protection fund; it is an amount higher than that of
 any exchange in the country. BSE launched a nationwide investor awareness
programme- 'Safe Investing in the Stock Market' under which 264 programmes
were held in more than 200 cities.

2. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-
line screen based trading in securities. BOLT is currently operating in 25,000
Trader Workstations located across over 450 cities in India.

3. BSEWEBX.com: In February 2001, BSE introduced the world's first centralized

exchange-based Internet trading system, BSEWEBX.com. This initiative enables
investors anywhere in the world to trade on the BSE platform.

4. Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-

time basis the price movements, volume positions and members' positions and
real-time measurement of default risk, market reconstruction and generation of
cross market alerts.

5. BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers over
40 courses on various aspects of the capital market and financial sector. More
than 20,000 people have attended the BTI programmes.

Securities Traded
The securities traded in the BSE are classified into three groups – A, B1 and B2.
‘A’ group contains the companies with large outstanding shares, good track record and
large volume of business in the secondary market. Carry fwd. transaction of a 90 days are
permitted in A group shares. A group contains 150 companies. Relatively liquid
securities come under the ‘B1’ group and it comprises 746 companies. The remaining
shares are placed under the ‘B’ group. Settlement of all the shares is carried out through
the clearing house. The settlement period is reduced from 14 days to 7 days for all scrips.
BSE Indonext
BSE introduced this segment on January 7, 2005 for small and medium
enterprises(SME). BSE Indonext consists of scrips from B1 and B2 on BSE and
companies exclusively listed on regional stock exchanges having a piad up capital of Rs.
3 crores to Rs. 30 crores. Trading is done through BOLT system.
BSE Index- SENSEX
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
stature, and is tracked worldwide. It is an index of 30 stocks(BSE 30) representing 12
major sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive
to market sentiments and market realities. Apart from the SENSEX, BSE offers 21
indices, including 12 sectoral indices. BSE has entered into an index cooperation
agreement with Deutsche Börse.
The launch of SENSEX in 1986 was later followed up in January 1989 by
introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks
listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and
Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996
and since then, it is being calculated taking into consideration only the prices of stocks
listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22,
2006.
With a view to provide a better representation of the increasing number of listed
companies, larger market capitalization and the new industry sectors, BSE launched on
27th May, 1994 two new index series viz., the 'BSE-200' and the 'DOLLEX-200'.BSE-
500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-
PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECk
Index. Over the years, BSE shifted all its indices to the free-float methodology (except
BSE-PSU index).
The values of all BSE indices are updated every 15 seconds during market hours
and displayed through the BOLT system, BSE website and news wire agencies.
All BSE Indices are reviewed periodically by the BSE Index Committee. This
Committee which comprises eminent independent finance professionals frames the broad
policy guidelines for the development and maintenance of all BSE indices. The BSE
Index Cell carries out the day-to-day maintenance of all indices and conducts research on
development of new indices.
SENSEX- Scrip Selection
 Scrip selection means selecting 30 companies from the total listed companies for
calculating the SENSEX. Various parameters for selection are
1. Listed History: The Company should be listed for atleast 3 months.

2. Trading Frequency: The shares of the company must be actively traded every
day.

3. Final Rank

4. Market Capitalization

5. Industry Representation

6. Track Record

Scrip groups
Group Description
A Shares of highly liquid, good track record and dividend paying
companies
B Actively traded but less liquid compared to A
T Scrips selected on Trade to Trade basis
S Scrips of BSE Indonext
TS Scrips of BSE Indonext and Trade to Trade Basis
Z Listing requirements/investors’ complaints are not met
F Debt Securities
F Government securities

2. National Stock Exchange

The National Stock Exchange (NSE), located in Bombay, is India's first

debt market. It was set up in 1993 to encourage stock exchange reform through
system modernization and competition. It opened for trading in mid-1994. The
instruments traded are, treasury bills, government security and bonds issued by
public sector companies. 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. Membership is
based on factors such as capital adequacy, corporate structure, track record,
education, experience etc. The exchange admits members separately to
Wholesale Debt Market (WDM) segment and capital market segment. Only
corporate members are admitted on the debt market segment whereas individuals
and firms are also eligible on the capital market segment.
IDBI, ICICI, IFCI, LIC, SBI, GIC, Canara Bank and Indian Bank are some of the
promoters of NSE

Organization of NSE

NSCCL( National Securities Clearing

Corporation Ltd.)
The clearing and settlement operations
of the exchange are managed by its
wholly owned subsidary, the NSCCL.
The exchange provides facility for
multiple settlement mechanisms
including account period settlement in
regular market,payment of cash, transfer
of securities etc.
IISL (India Index Service and
Products Ltd.
This department deals with construction
and maintenance of index. IISL is a joint
veenture between CRISIL and NSE.
IISL has a licensing agreement with
S&P(Standard and Poor)

Index of NSE : S&P CNX Nifty

Where S&P - Standard & Poor
 C- CRISIL
NX- National Stock Exchange
Nifty – NSE 50 companies
3. OTCEI(Over the Counter Exchange of India)

OTCEI was started in 1992 with the objective of providing a market for the
smaller companies that could not afford the listing fees of the large exchanges and did not
fulfill the min. capital requirement for listing. Companies listed in OTCEI cannot be
listed on any other stock exchange. Shares traded in NSE and BSE can be traded in
OTCEI. OTCEI is the only exchange that allows listing of companies with paid up
capital< Rs. 3 crores and track record of < 3 yrs. Screen based trading is followed in
OTCEI. Clearing house is NSCCL and depository is NSDL

TRADING SYSTEM

The Bombay stock exchange has introduced screen based trading called BOLT. It
is designed to get the best bids and offers from jobbers’ book as well as the bets buy and
sell orders from the order book. Now BOLT has a nation wide network.

SECURITIES TRADED
The securities traded in the BSE are classified into three groups namely, specified
shares or ‘A’ group and non specified securities. The latter has been sub divided into ‘B1’
and ‘B’ groups. ‘A’ group contains the companies with large outstanding shares, good
track records and large volume of business in the secondary market. In this carry forward
transactions for a period of 90days are permitted. It consists of 150 companies. Liquid
securities come under the ‘B1’group and it comprises 746 companies. The remaining
shares are placed under the ‘B’ group.

SURVEILLANCE SYSTEM
 There are certain surveillance department in the stock exchange. It aims at
providing free and fair market, arresting unsystematic risk from entering into the system
and managing risk.
They are classified into price surveillance and pre-monitoring

Price surveillance
The surveillance department keeps a close watch over the price movement of the
scrips and aims at an early detection of the market manipulation like price rigging. It is
carried out mainly through

1. Circuit filter
2. Margins

Circuit filters
It decides the range within which the trade prices of scrip can vary on a day
compared to the previous day’s closing price. The filter percentage is entered into the
system and this filter percentage for various scrips are changed at the end of the day. If
there is a need it may be changed even when the trade is going on.

Margins
The trading members deposit part of their trade as a margin to the exchange. This
margin amount varies for Type-I member who trade in ‘A’ group shares and Type-II
member who have not opted for carry forward trade. Type –I members pay a daily
margin of 15% on their trades both on delivery and carry forward. For Type –II members,
the margin is computed on the basis of gross exposure or net exposure and the higher of
the margin is charged.

Margin is classified into four

1. Special margin
2. Concentration margin
3. Additional volatility margin
4. Ad-hoc margin

Special margin:-It is levied on the net cumulative purchase of the scrip in which the rise
in price is abnormally high. It ranges from 25% to 100%

Concentration margin:-Apart from daily margin if the member’s trade is concentrated

on limited number of scrips say one or three scrips, concentration margin is levied. If the
purchase position exceeds 50%, 65% and 80% respectively, the member has to pay
concentration margin.

Additional volatility margin:-this margin is imposed on scrips quoting above Rs.40. I f

the price of the scrip changes by 16% or more in one settlement compared to the closing
price at the close of the previous settlement, additional volatility margin is imposed on
the trade.

Ad –hoc margin:-the exchange imposed ad-hoc margin above the daily margin. To have
an effective risk management, it is levied when there is excessive purchase in some
scrips. It is also imposed if the member’s financial position may not appear to be sound
compared to the market exposure.