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					Stock Market
A stock represents partial ownership of a company – the smallest share possible. Company's issues stocks to raise capital and investors who buy stock are actually buying a portion of the company. Ownership, even a small share, gives investors rights to a say in how the company is run and a share in the profits and losses. Stock trading is done on stock markets like the New York Stock Exchange (NYSE) or Bombay Stock Exchange (BSE) .This means that only companies listed on a public exchange have shares that can be bought and sold on the open market. Because stocks must be bought and sold on a stock market, an individual investor needs a broker to make transactions for him. Brokers take orders to buy or sell a certain stock.

Dematerialization is the process by which physical share certificates are Cancelled and credited in electronic form in the client's account on a Highly secure system at the depository.

A depository is similar to a bank. It holds securities like shares, Debentures, bonds, Government Securities, Commercial Papers, units etc. of Investors in electronic form and provides services related to transactions In securities. Depository is the one, where all the securities are kept in Demat form of all the clients having their demat account.

SEBI (Securities and Exchange Board of India)
The regulatory body for all participants in the securities and derivatives markets in India.

Issues prior to trading on the NSE
Dealing through NSE trading member/SEBI registered sub-broker To buy or sell securities approach should be made to either: 1. SEBI registered trading member of the NSE, or 2. SEBI registered sub-broker of a trading member of the NSE

Formalities for registering as a client
All investors should register themselves with registered trading members/sub-brokers by: 1. Filling a Client Registration Form, and 2. Signing a Member-Constituent Agreement (copy available with all NSE trading members) The Member-Constituent Agreement contains the terms and conditions including order/trade confirmation, brokerage charged by a trading member, delivery of securities and funds and therefore helps reduce the chances of disputes in respect of the same. This Agreement is mandatory for all persons registering as a new client of a NSE trading member/SEBI registered sub-broker.

Brokerage and other charges
As stipulated by SEBI, the maximum brokerage that can be charged is 2.5% of the trade value. This maximum brokerage is inclusive of the brokerage charged by the sub-broker (sub-brokerage cannot exceed 1.5% of the trade value).

Additional charges other than brokerage The trading member can charge:
1. Service tax @ 5% of the brokerage 2. Transaction charges levied by NSE 3. Penalties arising on behalf of client (investor) The brokerage and service tax is indicated separately in the contract note.

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount

each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Bonus shares
They are additional shares issues given without any cost to existing shareholders. These shares are issued in a certain proportion to the existing holding. So, a 2 for 1 bonus would mean you get two additional shares -- free of cost -- for the one share you hold in the company If you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you

Preference shares
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders

Face value:
The nominal value of a security stated by the issuer, it is the original cost of the stock shown on the certificate. Also known as "par value" or simply "par".

Market value:
The market value of a company is determined by multiplying the number of equity shares that it has issued by their market price. This market value is further multiplied by the freefloat factor to determine the free-float market value.

The Sensex is an index that is composed of only 30 stocks. This means that the level of index at any point of time (say 14,152 points as on August 17) reflects the market value of its component stocks relative to a base period

Sensex value = Current free-float market value of constituents stocks/Index Divisor

Hypothetical Example Step 1 The Base Period Day 1

Share Price (Rs.)
20.00 30.00 40.00

No. of Shares
50,000,000 100,000,000 150,000,000

Market Value (Rs.)
1,000,000,000.00 3,000,000,000.00 6,000,000,000.00 10,000,000,000.00

Total Market Capi talization

Note: Base Period Value / Base Divisor = Rs.10,000,000,000.00 = 100.00

Step 2 Index Value as on Day 2

Share Price (Rs.)
22.00 33.00 44.00

No. of Shares
50,000,000 100,000,000 150,000,000

Market Value (Rs.)
1,100,000,000.00 3,300,000,000.00 6,600,000,000.00 11,000,000,000.00

Total Market Capitalization

11,000,000,000.00 Index = -------------------------- = 1.10 * 100 = 110 10,000,000,000.00

What should a stock market index be?
A stock market index should capture the behavior of the overall equity market. Movements of the index should represent the returns obtained by "typical" portfolios in the country.

Kind of averaging:
For technical reasons, it turns out that the correct method of averaging is to take a weighted average, and give each stock a weight proportional to its market capitalization. Suppose an index contains two stocks A and B. A has a market capitalization of Rs.1000 crore and B has a market capitalization of Rs.3000 crore. Then we attach a weight of 1/4 to movements in A and 3/4 to movements in B.

Initial public offering
An Initial Public Offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

Settlement related Issues
Account Period Settlement:
An account period settlement is a settlement where the trades pertaining to a period stretching over more than one day are settled. For example, trades for the period Monday to

Friday. The obligations for the account period are settled on a net basis. Account period settlement has been discontinued since January 1, 2002, pursuant to SEBI directives.

Rolling Settlement:
In a Rolling Settlement trades executed during the day are settled based on the net obligations for the day. In NSE, the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 day.

A measure of responsiveness of a security or portfolio to move in the stock market as a whole. It Measures systematic risk.

Day trades
Trades that are opened and closed on the same day.

The securities are put up for auction by the Exchange on account of non-delivery of securities by the selling trading member to ensure that the buying trading member receives the securities due to him. The non-delivery by the trading member could arise on account of short delivery, bad deliveries not rectified and company objections not rectified by them.

1. A recommendation to purchase a specific security. 2. To acquire an asset in exchange for currency.

1. A recommendation to sell a particular security. 2. The process of liquidating an asset in exchange for money.

Price-time priority

The system arranges all orders in the priority of price and within price by time. You have, let us say, placed a buy order for 100 shares of company A at Rs. 285 and another investor has placed a buy order at Rs.290. So, anyone who places a sell order in company A will be first matched with the buy order of second investor as he has given a better price. This is price priority. Let us say both of you have quoted Rs. 285 as the price at which you want to buy shares of company A, then sell order which comes into the system at this price will be matched against the order which was placed first

Stop-Loss Order
An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position.

Short Position)
The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.

Short Covering
The act of purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price. Also referred to as buy to cover or buy back. Bear market A market in which prices are declining

Bear market
A market in which prices are falling.

Bull market
A market in which prices are rising

Inside information
Private and confidential information, usually acquired through a position of trust that is likely to have an impact on security prices when made public.

Insider trading
Dealing on the basis of inside information

CIRCUIT BREAKERS Circuit breaker means trading is halted for a specified period in stocks or / and stock index futures, if the market price moves out of a pre-specified band. Circuit filters do not result in trading halt but no order is permitted if it falls out of the specified price range

Derivatives are financial contracts, which derive their value off a spot price time-series, which is called "the underlying". The underlying asset can be equity, index, commodity or any other asset. Some common examples of derivatives are Forwards, Futures, Options and Swaps. Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed independently. From a market-oriented perspective, derivatives offer the free trading of financial risks. Importance of derivatives There are several risks inherent in financial transactions. Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. The fundamental risks involved in derivative business include:

Futures & Options market
Futures Market:
The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value.

Most investors in the futures market are not interested in the actual goods - only in the profit that can be realized in trading the contracts. Long/ short positions: In simple terms, long and short positions indicate whether you have a net over-bought position (long) or over-sold position (short).

The standard unit of trading for futures markets.

Contract month:
The month in which futures contracts may be satisfied by making or accepting delivery.

Options Market:
The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.

Call Options:
A contract to buy is called a 'call option'. The buyer of a call option hopes the price of the underlying stock will rise, allowing him to buy it at less than market value. The seller of the call option expects that the price of the stock will not rise, or at least is willing to accept a partial loss of profits made from selling the call option.

Put Options:
An option to sell a stock is called a 'put option'. This gives the holder the right (but not the obligation) to sell a particular stock within a certain time period at a certain price. In this situation the buyer is expecting the price of the stock to fall but does not want to sell outright in case the price rebounds. The seller feels that the price is stable or is willing to acquire the stock at the low price.

Strike Price/ Exercise Price:
The Price at which the option has to be exercised. That is the stated price per share for which the underlying security may be purchased in the case of a call, or sold in the case of a put, by the option holder upon exercise of the option contract.

Expiration Date:
Date on which the option expires.

Exercise Date:
Date on which the option gets exercised by the option holder/buyer.

Option Premium: - The price paid by the option buyer to the option seller for granting
the option.

Intrinsic Value of an option:
The intrinsic value of an option is defined as the amount by which an option is in-the-money or the immediate exercise value of the option when the underlying position is marked-tomarket. For a call option: Intrinsic Value = Spot Price - Strike Price For a put option: Intrinsic Value = Strike Price - Spot Price The intrinsic value of an option must be a positive number or 0. It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. For a put option, the strike price must be greater than the underlying asset price for it to have intrinsic value.

Time value:
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value. This is often referred to as premium Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security At-The-Money:

An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

Trading cycle: The options contract will have a maximum of three months trading cycle- the near month (one), the next month (two) and the far month (three). New contract will be introduced on the next trading day following the expiry of the near month contract

Expiry day:
The last Thursday of the expiry month or the previous trading day if the last Thursday is a trading holiday.

Roll over:
Liquidation for a futures position, and the establishment of a similar position in a more distant delivery month. This is also called a switch. When a hedger switches their futures position to a more distant delivery month this can be called ‘rolling the hedge forwards’

Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are widely used for hedging. A Hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk.

Hedge funds:
A hedge fund is a term commonly used to describe any fund that isn’t a conventional investment fund, i.e., it uses strategies other than investing long. For example Short selling, Using arbitrage, Trading derivatives.

Impact of the U.S. mortgage crisis and fed rate cut on Sensex:
The word ‘sub-prime’ rocked stock markets the world over in August. Investor confidence was shaken badly from Wall Street to Dalal Street, from problems in US sub prime mortgages. The Sensex crashed from 15870(24 July) to 13780(17 august)about 2100 points.

The sub-prime mayhem resulted in the withdrawal of over Rs 7,500 crore of investments from the Indian markets by foreign institutional investors (FIIs). Fed rate: The BSE Sensex was up by 248 points on 20th august just on the next trading session after fed rate cut. and another cut in fed rate and the Discount rate on the 18th of September by 50bps to 4.75% and 5.25% respectively caused markets globally to move up sharply and sensex moved up sharply by 654 point on 19th september. FII interest reverted to India as early as the last week of August when they brought equity worth around Rs 1,000 crore in a single day (27 August). They bought equity worth another Rs 1,000 crore in the first few days of September

* S&P CNX NIFTY (5,941, 6,027, 5,920, 5,955)

5050 5000 4950 4900 4850 4800 4750 4700 4650 4600 4550 4500 4450 4400 4350 4300 4250 4200 4150 4100 4050 4000 3950 3900 3850

2 July




30 August





3 September





An expected Rs.13, 500 Crores is expected to be soaked up from the financial system with the RBI's 50 basis points CRR hike starting December 23, 2006. With a tight liquidity situation, experts indicate that it could be only a short while before banks tweak upwards lending rates.

With rising real estate prices and potentially higher interest rates on the horizon, the prospective home buyer is in for a tough time. It remains to be seen what impact any rate increase may have on the real estate market. Past rate increases have not led to a significant slow-down in Indian real estate The dizzy rise in stock markets paused following the Reserve Bank of India's rate hike in the cash reserve ratio (CRR) for banks.

Intra-day dip
Banking stocks led the downfall with the BSE-30 Sensex losing 400.06 points or 2.99 per cent to end the day on Monday at 13,399.43. S&P CNX Nifty lost 2.84 per closing at 3,849.50. BSE Bankex was the worst hit among sectoral indices losing 6.43 per cent or 463.96 points at 6,749.78 points. Bank Nifty lost 7.12 per cent at 5,790.60 points FIIs had taken short positions in the market last week, which got reflected in today's slide. " FIIs were reportedly net sellers of about Rs 106 crore in individual stock futures on Frdiay.

* BSE - SENSEX (20,018, 20,064, 19,717, 19,796)

14200 14100 14000 13900 13800 13700 13600 13500 13400 13300 13200 13100 13000 12900 12800 12700 12600 12500 12400 12300 12200 12100 12000 11900 11800 11700 11600 11500 11400 11300



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2 3 2007





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