Stock Exchange

• Secondary market

• A centralized market for buying and selling stocks

where the price is determined through supply demand

mechanism

• Screen based trading – where bid price and offer prices are

displayed on the computer screen

• Bid price: price at which investor is willing to buy the security

• Offer price : price at which an investor is willing to sell the

securities

Functions of Stock Exchanges

1) It provides a market place for purchase & sale of securities

2) This helps in mobilizing savings & channels into securities

2) Stock exchange provide liquidity to the investments in

securities

4)The stock exchange help in the valuation of securities

5) Stock exchange is an indicator of health of nations

economy as a whole

6) Safeguard investors through strict enforcement of rules

and regulations

7) Companies enjoy better reputation and their shares are

widely accepted.

Listing of securities:

• Listing is the process of including the securities of a company

in the official list of the stock exchange for the purpose of

trading

• primary objective : providing marketability ,liquidity &

transferability to securities

• At the time of issue , the company needs to apply for listing

the securities in stock exchange

• To be listed on the stock exchange there should be minimum

issued capital and number of share holders.

• Has to submit the application for listing along with document

memorandum of association , articles of association,

prospectus ,directors report, annual accounts, agreement with

underwriters ,information about the companies activity, its

capital structure etc

• If eligible for listing , the company would be required to

execute a listing agreement with the stock exchange.

• Listing agreement : the obligations & restrictions imposed on

the company as a result of listing .

• Pay initial listing fees

• Also required to pay the annual listing fees every year

Type of Orders

1.Market Order

• A market order instructs your broker to buy or sell the stock

immediately at the best prevailing price in the market,

whatever that may be.

• Buy order: lowest price obtainable

• Sell order: highest price obtainable

• Advantage: certain that the order will be executed

• Disadvantage: uncertain about the price until the order is

executed

2.Limit Order

• An order placed with a brokerage to buy or sell a set number of

shares at a specified price or better.

• Limit Buy Order: investor specifies the maximum price that he

is ready to pay for the share. The order should be executed only

at limit price or at a lower price (100 share for RS 120)

• Limit Sell Order : investor specifies the minimum price that he

will accept for the share. The order should be executed only at

limit price or at a higher price .

• Advantage: investors aware about the price limit at which the order will be executed

• Disadvantage: the order may remain unexecuted

3.Stop Orders

• Used by investors to protect a profit or limit a loss

• Investors specify the Stop Price

• Once the price surpasses the stop price, the stop order

becomes a market order.

• sell order: Stop price must be below the market price

prevailing at the time the order is placed

• buy order: Stop price must be above the market price

prevailing at the time the order is placed

• When the market price passes the stop price the stop order will

be executed at the best available price

• Example: How it helps in retaining the profit without

foregoing the opportunity of further growth( Stop Sell Order)

• An investor has 100 shares purchased at Rs 35/share

• Current Market Price: Rs 75

• Profit = 75-35= Rs 40/ share

• May or may not grow

• Stop sell order Rs 70

• If price falls to 70 or below 70 , the stop sell order becomes a

market order and will be executed at the best prevailing price

• Hence will get a profit of around Rs 35 / share

• Disadvantage of stop order• The actual price at which the order is executed

is uncertain

Based on Time limitDay Order: • the order which is valid only for the trading day on which the

order is placed .• otherwise it is treated as cancel

Week order • These orders are valid till the end of the week during which

the orders are placed • They expire at the close of trading session on Friday of the

week unless they are executed

Month order• Orders that are valid till the end of the month during which the

orders are placed. • Expire at the closing of last working day of the month

Open orders• Orders that remain valid till they are executed by the brokers

or cancelled by the investors• Also called Good Till Cancelled (GTC) orders

Fill or Kill orders• Orders meant to be executed immediately. Otherwise they are

treated as cancelled

Online trading

• In order to start share trading in India three types of accounts

are necessary, a trading account with a broker, Demat account

with a Depository Participant and a bank account

• To buy & sell securities the investors has to locate a registered broker

• The account opening form of the broker has four components.

1.The Know Your Client (KYC) Form: your contact details and

your financial worth. This Form is also accompanied with

Proof of your identity, proof of your residence and Permanent

Account Number (PAN) card.

2.separate agreements for share trading on BSE and NSE:

3. certain power of attorneys that are given.

4. Risk Disclosure Document :This document will

explain the different risk involved with your

transaction for which you will be responsible

• Open a Demat account with Depositories

What is Dematerialisation?

• Dematerialisation (“Demat” in short form) signifies

conversion of a share certificate from its physical form to

electronic form

• This is done by a Depository Participant on a request from the

investor

What is Rematerialisation?

• Securities in Demat form or electronic form may again be

converted back to physical form.

• an investor can still hold shares in physical form.

• The investors has to Demat the shares if he / she wishes to sell

the same through the Stock Exchanges.

Depositories

• A Depository is an organisation where the securities

of a shareholder are held in the electronic form at

the request of the shareholder through the medium

of a Depository Participant.

Depositories in India

• There are two depositories in India:

1. National Securities Depository Limited (NSDL)

2. Central Depositories Services Limited (CDSL)

• NSDL : India’s 1st depository ,started functioning on November 6, 1996.

• CDSL: July 15, 1999

Services provided by Depository

• Dematerialisation

• Rematerialisation

• Transfer of securities and Settlement of trades done on

exchange connected to the Depository

How do Depository operate

• Depository interacts with its clients / investors through its

agents, called Depository Participants normally known as DPs.

• A Depository Participant (DP) is described as an agent of the

depository.

• The relationship between the DPs and the depository is

governed by an agreement made between the two under the

Depositories Act.

Demat Account Opening

• Prescribed Account opening forms are available with the DP, needs to be filled in.

• Standard Agreements are to be signed by the Client and the DP, which details the rights and obligations of both parties.

• the client requires to attach Photographs of Account holder, Attested copies of proof of residence and proof of identity

Benefits of Depository System

1. Shares are held in electronic form

2. No need to safe keep share certificates

3. Elimination of all risks associated with physical certificates-

4. No stamp duty on transfer of securities

5. Immediate transfer and registration of securities

6. Faster settlement cycle

7. Reduction in brokerage

8. Reduction in handling of huge volumes of paper

9. periodic status reports to investors on their holdings and

transactions, leading to better controls.

10. Elimination of problems related to change of address of

investor: needs to inform their DP

11. Automatic credit of Dividend / bonus shares

How the system works?

• Each depository has several depository participants affiliated to it

• Registered members of stock exchange open pool account with the depositories

• Investors open a Demat account called beneficiary account with the depository participants

Eg:Investor 1 selling his securities to investor 2 through respective brokers

beneficiary account pool account beneficiary

of investor 1 account of investor 2

beneficiary account of investor 1 to pool account of broker 1 to pool account of clearing house to pool account of broker 2 to beneficiary account of investor 2

Allotting client code

• On submitting the completed set of document the broker will

scrutinize and if found everything in order will allot a code

normally referred to as client code to you. You may need to

furnish this code every time you want to transact.

Clearing house

• A clearing house is a financial institution that provides

clearing and settlement services for securities transactions.

• responsible for settling trading accounts, clearing trades ,

collecting and maintaining money, regulating delivery and

reporting trading data.

• All members are required to clear their trades through the

clearing house at the end of each trading session

• Trading in stock exchange carried out in 2 phases:

• 1st phase: the order is placed with the broker & the execution of

the order by the broker on behalf of the clients in his terminal.

once the matching order is found, the order is executed.

• 2nd phase: settlement of trade.

• buyer now has to handover the money & receive the security

• Seller has to hand over the security & receive money. This is

known as the settlement of trade.

• The settlement process is carried out through clearing house

• The member broker who sells securities have to deliver the securities to the clearing house & will receive cash from the clearing house

securities• member broker of investor 1 Clearing house

Cash

• The member broker who buy securities have to pay cash to the clearing house & will receive securities from the clearing house

Cash

member broker of investor 2 Clearing house

securities

compulsory Rolling system

• Stock exchange follows the settlement process called

compulsory Rolling system (CRS)

• Trades executed on a particular day are settled after a specified

number of business or working days

• T+2 cycle is adopted by stock exchange

• Means that the settlement of transactions done on trade day

( T) has to be done on the second business day after the trade day

• T+1 day:

• the exchange generates the information regarding the

securities to be delivered / received by the member brokers

through the clearing house

• Also a money statement showing the details of payments/

receipts of money by the member broker is also prepared by

the exchange.

• The delivery or receive order and the money statement can be

downloaded by the member brokers.

• T+2 day:

• pay in and pay out

• In this CRS pay in and payout of both funds and securities are

completed on the same day

• The member brokers then make payments to clients for

securities sold & deliver securities purchased by clients within

one working day