Operation Curriculum

Table of Contents
1.

Overview ................................
............................................................................................................................
............................2
a.

Global Capital Market ................................

................................................................................................
............................................... 2

b.

Market Participants................................
................................................................................................
................................................... 3

c.

Hedge Fund ................................

...............................................................................................................................
............................... 5

d.

Fund of Funds................................
............................................................................................................................
............................ 9

2.

Trade life Cycle ................................

................................................................................................
.................................................. 10
a.

Trade Origination / Order Origination ................................................................

.................................................... 10

b.

Trade Execution & Enrichment ...............................................................................................

............................... 10

c.

Confirmation of Trade ................................

................................................................................................
............................................. 10

d.

Settlement................................
...............................................................................................................................
............................... 12

e.

Reconciliations ................................
................................................................................................
........................................................ 13

3.

Products ................................
...........................................................................................................................
........................... 14
a.

Equities ................................
................................................................................................................................
.................................... 14
i)

Corporate Actions ................................

................................................................................................
.............................................. 15

b.

Fixed Income ................................

...........................................................................................................................
........................... 18

c.

Futures, Options & CFD ................................................................................................

........................................... 22

d.

Foreign Exchange Market ................................................................................................

....................................... 25

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1. Overview
a. Global Capital Market

Capital markets are financial markets for the buying and selling of long-term debt or equitybacked securities. These markets channel the wealth of savers to those who can put it to long-term
productive use, such as companies or governments making long-term investments. Financial
regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange Commission
(SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among
other duties.
Modern capital markets are almost invariably hosted on computer-based electronic trading
systems; most can be accessed only by entities within the financial sector or the treasury
departments of governments and corporations, but some can be accessed directly by the public.
There are many thousands of such systems, most serving only small parts of the overall capital
markets. Entities hosting the systems include stock exchanges, investment banks, and government
departments. Physically the systems are hosted all over the world, though they tend to be
concentrated in financial centres like London, New York, and Hong Kong. Capital markets are
defined as markets in which money is provided for periods longer than a year.
A key division within the capital markets is between the primary markets and secondary
markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism
known as underwriting. The main entities seeking to raise long-term funds on the primary capital
markets are governments (which may be municipal, local or national) and business enterprises
(companies). Governments tend to issue only bonds, whereas companies often issue either equity or
bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds,
sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on
their own behalf. In the secondary markets, existing securities are sold and bought among investors
or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary
markets increases the willingness of investors in primary markets, as they know they are likely to be
able to swiftly cash out their investments if the need arises.
A second important division falls between the stock markets (for equity securities, also known as
shares, where investors acquire ownership of companies) and the bond markets (where investors
become creditors).

Primary Market

The primary markets deal with the trading of newly issued securities. The corporations,
governments and companies issue securities like stocks and bonds when they need to raise capital.
The investors can purchase the stocks or bonds issued by the companies.
Money thus earned from the selling of securities goes directly to the issuing company. The primary
markets are also called New Issue Market (NIM). Initial Public Offering is a typical method of issuing
security in the primary market. The functioning of the primary market is crucial for both the capital
market and economy as it is the place where the capital formation takes place.
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Secondary Market

The secondary market is that part of the capital market that deals with the securities that are
already issued in the primary market.
The investors who purchase the newly issued securities in the primary market sell them in the
secondary market. The secondary market needs to be transparent and highly liquid in nature as it
deals with the already issued securities. In the secondary market, the value of a particular stock also
varies from that of the face value. The resale value of the securities in the secondary market is
dependent on the fluctuating interest rates.

Difference between money markets and capital markets

The money markets are used for the raising of short term finance, sometimes for loans that are
expected to be paid back as early as overnight. Whereas, the capital markets are used for the raising
of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid
back for at least a year.
Funds borrowed from the money markets are typically used for general operating expenses, to
cover brief periods of illiquidity. For example a company may have inbound payments from
customers that have not yet cleared, but may wish to immediately pay out cash for its payroll. When
a company borrows from the primary capital markets, often the purpose is to invest in additional
physical capital goods, which will be used to help increase its income. It can take many months or
years before the investment generates sufficient return to pay back its cost, and hence the finance is
long term.
Together, money markets and capital markets form the financial markets as the term is narrowly
understood. The capital market is concerned with long term finance. In the widest sense, it consist of
a series of channels through which the savings of the community are made available for industrial
and commercial enterprises and public authorities

b. Market Participants

Stock Exchange: A stock exchange is an organized marketplace or facility that brings buyers and
sellers together and facilitates the sale and purchase of stocks.

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Stock Exchange, it makes sure that trading transactions are done in an efficient, orderly, fair, and
transparent manner. It enforces rules and regulations that its publicly listed companies and trading
participants must strictly abide by. In this way, the Stock Exchange fulfills its function as the
guardian of the stock market.

INVESTORS: Investors, also referred to as stockholders or shareholders, are those who own shares
of stock of a publicly listed company. They are accorded certain privileges like the right to fair and
equal treatment, the right to vote and exercise related rights, and the right to receive dividends and
other benefits due to stockholders. They are classified as either retail or institutional, and local or
foreign.

STOCKBROKERS: A stockbroker or trading participant is licensed by the Securities and Exchange

Commission (SEC) and is entitled to trade at the Exchange. They act as an agent between a buyer and
seller of stocks in the market. For their services as stockbrokers, they receive from their clients either
a buying or a selling commission.
There are two (2) types of stockbrokers:
Traditional those who assign a licensed salesman to handle your account and to take your
orders via a written instruction or a phone call
Online those whose main interface is the internet where clients execute their orders and access
market information online

LISTED COMPANIES: A company is said to be listed, quoted or have a listing if its shares can be
traded on a stock exchange. To be more accurate, it is the securities that are listed, not the company. The
phrase listed company is widely used to mean a company that has listed ordinary shares.
It is possible (although not common) for a company to have listed debt securities but not listed shares.
Listing in more than one market is possible through secondary listings, or through the more complex
approach of dual listing.
A group of companies may also have separately listed subsidiaries, associates, and tracking stocks.
CLEARING HOUSE: An agency or separate corporation of a futures exchange responsible for settling
trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and
reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a
buyer to every clearing member seller and a seller to every clearing member buyer.
Each futures exchange has its own clearing house. All members of an exchange are required to clear their
trades through the clearing house at the end of each trading session and to deposit with the clearing
house a sum of money (based on clearinghouse margin requirements) sufficient to cover the member's
debit balance. For example, if a member broker reports to the clearing house at the end of the day total
purchase of 100,000 bushels of May wheat and total sales of 50,000 bushels of May wheat, he would be
net long 50,000 bushels of May wheat. Assuming that this is the broker's only position in futures and that
the clearing house margin is six cents per bushel, this would mean the broker would be required to have
$3,000 on deposit with the clearing house. Because all members are required to clear their trades
through the clearing house and must maintain sufficient funds to cover their debit balances, the clearing
house is responsible to all members for the fulfilment of the contracts.
DEPOSITORY: On the simplest level, depository is used to refer to any place where something is
deposited for storage or security purposes. More specifically, it can refer to a company, bank or an
institution that holds and facilitates the exchange of securities. Or a depository can refer to a depository
institution that is allowed to accept monetary deposits from customers.
Central security depositories allow brokers and other financial companies to deposit securities where
book entry and other services can be performed, like clearance, settlement and securities borrowing and
lending.

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SETTLEMENT BANKS: The settlement banks accept deposits of funds for payment of securities bought,
confirm payments of due clearing obligations to debit buyers cash account and credit sellers cash
account during settlement, and receive and/or return cash collateral put up by clearing members to
cover their daily trade negative exposures.

TRANSFERAGENTS: The stock transfer agent is considered the official keeper of the corporate
shareholder records. The stock transfer agents provide the issuer or the listed company with a list of
holders of its securities. They effect transfer of beneficial ownership and process corporate actions like
stock or cash dividends, stock rights, stock splits, and collation of proxy forms.

c. Hedge Fund

Birth of the Hedge Fund

The boom years of the 1920s brought about, and were to a large extent driven by, the emergence of the
pooled fund as a mainstream method of preserving wealth and providing capital growth for investors.
Although pooled funds had been around for over a century beforehand, the spectacular wealth-generating
properties of the markets after the Great War created an unprecedented demand for more accessible routes
into this money machine. During this decade, a whole host of new investment vehicles came into play, and
among them was the Graham-Newman Partnership, which has since been cited by uber-investor Warren
Buffet as being the earliest example of a hedge fund.
The investment craze of the 1920s saw millions of dollars poured into the markets, creating what we now
refer to as a bubble, and when the overheated capital markets went into a tailspin in 1929, the results were
catastrophic. What followed was the Great Depression, and for a time, faith in the markets all but dissipated
among a disillusioned and heavily-impoverished public. The vast majority of funds and investment banks
shut down under the weight of heavy losses, but a few remained, and many of those that did grew to be
powerhouses in the years following the Second World War.
Alfred Jones Hedge Fund Pioneer

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Although the strategy of hedging had been explored by investors during the 1920s, it wasnt until the late
1940s that it became systematized into an investment product. Alfred Jones, considered by many to be the
father of the modern hedge fund, was born in 1901 in Melbourne, Australia to American parents. His family
moved back to the U.S. while Jones was still a young child, and he later went on to graduate from Harvard in
1923 before going on to serve as a diplomat in Berlin, Germany. He then earned himself a sociology PhD at
Columbia University before joining the editorial staff at Fortune magazine in the early 1940s.
The big turning point in Alfred Jones life occurred in 1948 when he was asked by his employers at
Fortune magazine to write an article about current investment trends. This inspired him to try his hand at
being a money manager in his own right, and with $40,000 of his own money and a further $60,000 solicited
from investors, he launched a fund based on the concept of the long/short equities model, which he dubbed
the hedged fund. In addition to this investment principle, he used leverage the idea of borrowing money at
a lower interest rate than the anticipated rate of return from his investment strategy to enhance the returns
from the fund.
In 1952, he changed the structure of his investment vehicle from a general partnership to a limited
partnership, and gave the managing partner a 20% cut of the profits from the fund as an added incentive. This
made Jones the first money manager to combine the use of leverage, short selling, and shared risk through a
partnership with other investors, as well as a means of compensation based on investment performance. To a
large extent, this investment model remains the template for hedge funds, and this is why Jones is so often
credited as being the true hedge fund pioneer.

The Rise of the Hedge Fund

As is so often the case, it took time for the world to catch up with a truly innovative concept, and it was
more than a decade before Alfred Jones hedge(d) fund idea took off as a major investment vehicle. Again,
Fortune magazine holds a place in the story.
In 1966, it published an article that shone a spotlight on an obscure investment that has somehow
managed to outperform every mutual fund on the market by double-digit figures over the past year. The
investment had also outperformed the mutuals by high double-digits over the last five years. Money
managers and investors sat up and took notice, and for the first time hedge funds became a real industry. Just
two years later, there were 140 hedge funds in operation.
During the boom years of the 1960s, the hedge fund industry underwent a period of frantic expansion,
but the recession of 196970 and the 19731974 stock market crash put the kibosh on this growing trend, in
the same way that previous and subsequent recessions had done to the investment industry in general. It
didnt help that by this time many funds had turned their back on Jones original strategy by engaging in much
riskier strategies based on long-term leverage. As a result, many fund suffered heavy losses during the bear
markets of 1969-70 and 1973-74.
Having had their fingers burned badly by the market downturns of the late 60s/early 70s, hedge funds
found themselves very much out of fashion among investors. However, in an echo of the original hedge fund
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boom, the tide turned in 1986 when an article in Institutional Investor shone the spotlight on the phenomenal
double-digit success of Julian Robertsons Tiger Fund.
In 1980, Julian Robertson started the Tiger fund with $8 million in start-up capital. By the late 90s the
peak of this funds performance the fund was worth over $22 bilion, and in 1993 Robertson was estimated
to have made $300 million personally from the fund. Although his actual methods were a lot more subtle than
his public pronouncements might have indicated, Robertson expressed the basic philosophy behind the fund
as follows: Our mandate is to find the 200 best companies in the world and invest in them, and find the 200
worst companies in the world and go short on them. If the 200 best dont do better than the 200 worst, you
should probably be in another business.
The performance of this high-flying hedge fund inspired a flood of interest among investors in the world
of hedge funds, and by this point the industry had evolved substantially. In their new incarnation, hedge funds
employed a much bigger variety of strategies including derivatives and currency trading.

The Bubble Bursts Once Again

The bull market days of the early 1990s saw a huge outflow of top market talent from the mutual fund
industry into the hedge fund industry, where they enjoyed far greater flexibility and remuneration. The highprofile success of George Soros and Jim Rogers Quantum Fund particularly the trade that forced the exit of
the UK from the European Exchange Rate Mechanism only fanned the flames.
But just as hedge funds suffered hugely during the 70s market crash, a similar fate would befall many
hedge funds when the dot-com bubble burst in the late 1990s and early 2000s.
Several high-profile funds failed in spectacular fashion, including Long Term Capital Management in
1998, the collapse of Robertsons own Tiger Fund in March 2000, and the enforced reorganization of George
Soros and Jim Rogers Quantum Fund into the Quantum Group of Funds just one month later.

The Modern Hedge Fund

Following the dot-com crash of 2000 and the global economic crisis of 2008, regulators have clamped
down on the previously regulation-light world of hedge funds.
For instance, the U.S. Securities and Exchange Commission (SEC) implemented changes that require
hedge fund managers and sponsors to register as investment advisors in 2004. As a result, the number of
requirements placed on hedge funds has increased greatly, such as hiring compliance officers, creating a code
of ethics, and being sure to keep up-to-date performance records. Essentially this was all done with the
intention of protecting investors.

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Today, despite recent troubles, the hedge fund industry continues to flourish once more. Crucial to its
success was the development of the fund of funds, essentially a hedge fund with a diversified portfolio of
numerous underlying single-manager hedge funds.
The introduction of the fund of funds allowed for greater diversification, thereby taking some of the risk
out of hedge funding, but also allowed minimum investment requirements of as low as $25,000. This greatly
opened up the hedge fund investment option to a far greater number of average investors than ever before.

Hedge Funds Today

Todays hedge funds look significantly different to their forerunners of the 1940s, and even the 1980s. A
far greater variety of strategies is used by todays hedge funds, including many that do not involve traditional
hedging techniques at all.
The size of the industry is now absolutely vast. While Albert Jones started the first hedge fund with just
$100, 000,in 2013 the global hedge fund industry recorded a record high of US$2.4 trillion in assets under
management.

Hedge Fund

A hedge fund is an alternative investment vehicle available only to sophisticated investors, such as
institutions and individuals with significant assets.
Like mutual funds, hedge funds are pools of underlying securities. Also like mutual funds, they can invest
in many types of securitiesbut there are a number of differences between these two investment vehicles.
First, hedge funds are not currently regulated by the U.S. Securities and Exchange Commission (SEC), a
financial industry oversight entity, as mutual funds are. However, it appears that regulation for hedge funds
may be coming soon.
Second, as a result of being relatively unregulated, hedge funds can invest in a wider range of securities
than mutual funds can. While many hedge funds do invest in traditional securities, such as stocks, bonds,
commodities and real estate, they are best known for using more sophisticated (and risky) investments and
techniques.
Hedge funds typically use long-short strategies, which invest in some balance of long positions (which
means buying stocks) and short positions (which means selling stocks with borrowed money, then buying
them back later when their price has, ideally, fallen).
Additionally, many hedge funds invest in derivatives, which are contracts to buy or sell another security
at a specified price. You may have heard of futures and options; these are considered derivatives.
Many hedge funds also use an investment technique called leverage, which is essentially investing with
borrowed moneya strategy that could significantly increase return potential, but also creates greater risk of
loss. In fact, the name hedge fund is derived from the fact that hedge funds often seek to increase gains, and
offset losses, by hedging their investments using a variety of sophisticated methods, including leverage.
Third, hedge funds are typically not as liquid as mutual funds, meaning it is more difficult to sell your
shares. Mutual funds have a per-share price (called a net asset value) that is calculated each day, so you could
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sell your shares at any time. Most hedge funds, in contrast, seek to generate returns over a specific period of
time called a lockup period, during which investors cannot sell their shares. (Private equity funds, which are
similar to hedge funds, are even more illiquid; they tend to invest in startup companies, so investors can be
locked in for years.)
Finally, hedge fund managers are typically compensated differently from mutual fund managers. Mutual
fund managers are paid fees regardless of their funds performance. Hedge fund managers, in contrast,
receive a percentage of the returns they earn for investors, in addition to earning a management fee,
typically in the range of 1% to 4% of the net asset value of the fund. That is appealing to investors who are
frustrated when they have to pay fees to a poorly performing mutual fund manager. On the down side, this
compensation structure could lead hedge fund managers to invest aggressively to achieve higher returns
increasing investor risk.
As a result of these factors, hedge funds are typically open only to a limited range of investors.
Specifically, U.S. laws require that hedge fund investors be accredited, which means they must earn a
minimum annual income, have a net worth of more than $1 million, and possess significant investment
knowledge.

d. Fund of Funds
A fund of funds is a pooled investment, such as a mutual fund or a hedge fund, whose underlying
investments are other funds rather than individual securities.
Despite some major differences, what all funds of funds have in common is an emphasis on diversification
for its potential to reduce risk without significantly reducing return.
They're also designed to simplify the investment process by offering one-stop shopping.
Many mutual fund FOFs are asset allocation funds and typically include both stock and bond funds in a
particular combination that the FOF manager has chosen to meet a specific objective. A mutual fund FOF may
select all its funds from a single fund family or it may choose funds offered by different investment
companies.
A hedge fund FOF, which owns stakes in other hedge funds, allows investors to commit substantially less
money to gain exposure to this investment category than it would cost to invest in even one fund.

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2. Trade life Cycle

From the Trade Origination to the Settlement

a. Trade Origination / Order Origination






Orders are received from Clients

Received by Sales Trader
o By Phone or
o Electronically
New Orders are entered into Order Management System (Trading System)
This step is referred as Trade Capture

b. Trade Execution & Enrichment





When both the parties agree to the details of the trade and are willing to enter into the deal, the trade
gets executed
Execution Confirmation Received by IM/Client
o By Phone or
o Electronically
Both buyer and seller now enters in to contract which has legal obligation on all the parties involved
in trade

c. Confirmation of Trade
The next process prior to clearing and settlement is confirmation. This is required because the clients
need to know what brokers have done on their behalf and also to bring out errors if any in trade execution
 Confirmation for retails clients
Retail clients receive paper confirmations in the mail. They match this against the original order which
they had places and see if there are any mismatches which are immediately reported to the broker
 Confirmation for institutional clients
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Institutional clients hold instruments such as equity shares with depository trust company. Hence they
must receive an electronic confirmation for the trades by broker on their behalf. For matching and verifying
the trade details, institutional clients often use automated matching mechanism.
 Basic economic trade details are confirmed with Counter Party
 Notional, Net Amount, Maturity, Rate, Price, Trade/Settlement Date
 The communication of confirmation can be through SWIFT, Telex, Fax, and Phone. , etc
 When the trade is done on the exchange, no further matching is required. This is because
exchange records and reports the event and trade details are automatically captured. Thus
the trade is locked in after completion by two counterparties. Hence no matching is required
Post-Trade Changes
 Amendment/Cancellation/Rebooks
 The trade can be amended by the consent of both the parties
 Can be on account discrepancy in any trade economics
 Erroneous Booking
Clearing and Settlement
 Clearing and settlement are final two processes in trade processing cycle. Before coming to clearing,
all the participants must have agreed to the trade details going through the above mentioned
processes.
 This is a process of exchange of money and securities between brokers using a form of netting. The
clearing system nets all the trades done by all the brokers throughout the day. Thus the street side of
a trade i.e. broker to broker portion of a trade is netted out.
 There are two forms of netting.
o Bilateral netting This means arriving at net obligations(i.e. netting) of securities and funds
between two brokers/parties
o Multilateral Netting: This means arriving at net obligations of securities and funds between
all the brokers. Thus at the end of the day, exchange arrive at a net position in securities or
fund for each broker


Broker also does netting between his different clients. In each stock the net position for the day is
arrived at as follows.
Broker A
Stock 1
Stock 2
Stock 3
Client 1
+400
---+300
Client 2
---+500
-300
Client 3
-200
-800
---Net Position
+200
-300
0

+means purchases of securities and means sale of securities by clients

Thus Broker As net position is + 200 in stock 1 ( he expects to receive 200 shares at time of settlement)
and -300 in stock 2 ( he should deliver 300 shares for settlement) and zero in case of stock 3
For every trade to be processed, there are two sides client side & street side .For a successful
trade
processing. Both the sides have to settle simultaneously.
Client Side: the settlement of trade is through broker for retails clients & for institutional clients, the
trades generally settle through depository trust company

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d. Settlement
This is the last process in the life cycle of a trade. In settlement all the counterparties exchange securities
and money as per their obligations.

Order/Trade Flow in Automated Environment

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e. Reconciliations
Reconciliations are extremely important in trade processing. This is because in securities transactions
there are a number of participants involved, who need to keep records of balances of funds and securities.
These records need to tally with each others; otherwise it may lead to failure of trades i.e. trade will not settle
In Simple words, reconciliation involves comparing two different group of informationsThe kinds of
reconciliation required are
 Cash balances and cash transactions
 Security holdings and security transactions
 Accounting entries
 Special / Other reconciliations
If the records do not tally i.e. reconciliation break exist, then they should be immediately investigated and
corrected. The reconciliation are required between
Manager to Custodian: The securities records kept by investment managers should match with that of the
custodian. If records are not reconciled at regular intervals then it may lead to incorrect positions balance in
the books of one of them. It may give rise to a situation that investment manager may end up selling excess
quantity of stocks because the records as per his books show a higher balance of shares compared to the
custodian records.
Other types of reconciliation done are
 Broker to Manager
 Broker to clearing agency
 Broker to an exchange
 Custodian to depository
A typical settlement cycle
US securities settle on T + 3 basis. This means that the settlement i.e. exchanges of securities and funds
take place within three days of the trade. For trades done on Monday, settlement has to be completed by
Thursday. The actual process follows the step as shown below.
Post Trade processing
For a successful trade completion, a number of post trade functions are required to be performed. These
functions are generally performed by the participants in the securities such as banks,broker,investment
managers and specialized institutions like custodian and depositaries. These participants play an important
role in post trade processing, clearing and settlement which starts with preparation for clearing and
settlement
The systems procedures for clearing and settlement have evolved over a number years as securities
markets have changed .Some factors that have changed drastically over the years as follows
 Automated processing of trade from manual processing
 Very high volume
 Changes in settlement cycles
 Increase in number and variety of securities
 Significant increase in cross border trades

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3. Products

a. Equities
Financial instrument representing a percentage of ownership in a corporation with a share in the
ongoing success of the enterprise.
Stock is a share in the ownership of a company. Stock represents a claim on the companys assets and
earnings. As one acquires more stock, the persons ownership stake in the company becomes greater. Share,
equity or stock all means the same thing. As an owner, the shareholder is entitled to the companys earnings
as well as any voting rights attached to the stock. As the equity capital is not redeemed i.e. not returned back
to the shareholders, it becomes the permanent source of capital for the company.
Various types of equities include:
Common Stock most prevalent form of equity investment; shareholders have voting rights in the
management of the corporation
Preferred Stock equity security with many fixed income characteristics but shareholders are not
entitled to voting rights
Cumulative Preferred Stock stock dividends can be accumulated for later payment
Convertible Preferred Stock investor can convert the preferred stock to common
Rewards associated with equity
Dividends: The importance of being a shareholder is that the shareholders are entitled to a portion of
the companys profit and have a residual claim on assets.
Dividends are of following types
Cash Dividends: Dividends are generally paid out in cash. A part of profits are paid out in the form of cash
dividends
Stock Dividends: Dividends are given inform of shares. This means shareholders are given additional
shares in certain portion to their holdings, free of cost.

Share repurchase: This involves buying back equity shares from shareholders in certain portion.
Thus instead of using cash to pay dividends, cash is utilized by the company to repurchase the shares.
The price at which shares are bought back is generally higher than the current market price resulting
in gain for shareholders.

Capital Gains: Capital gains refer to the increase in prices of shares of a company. In fact this is the
reason why most of the investors hold equity shares. In most of the cases, a large part of total return
which a shareholder gets for investing in equity comes from capital appreciation
Shareholders have the below rights as well
Right to subscribe to new shares
Right to Vote
Right to information

'Share Capital'
Funds raised by issuing shares in return for cash or other considerations. The amount of share capital a
company has can change over time because each time a business sells new shares to the public in exchange
for cash, the amount of share capital will increase. Share capital can be composed of both common and
preferred shares.
The amount of share capital a company reports on its balance sheet only accounts for the initial amount
for which the original shareholders purchased the shares from the issuing company. Any price differences
arising from price appreciation/depreciation as a result of transactions in the secondary market are not
included.

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For example, suppose ABC Inc. raised $2 billion from its initial public offering. Over the next year, the total
value of its shares increases to $5 billion. In this case, the value of the share capital is still only $2 billion
because ABC Inc. had received only $2 billion from the sale of its securities to the investing public.
Types of share capital
Authorized share capital is also referred to, at times, as registered capital. It is the total of the
share capital which a limited company is allowed (authorized) to issue. It presents the upper
boundary for the actually issued share capital.
Shares authorized = Shares issued + Shares unissued

Issued share capital is the total of the share capital issued (allocated) to shareholders. This may
be less or equal to the authorized capital.

Shares outstanding are those issued shares which are not treasury shares. These are all the
shares held by the investors in the company.

Issued capital can be subdivided in another way, examining whether it has been paid for by
investors:

Subscribed capital is the portion of the issued capital, which has been subscribed by all the
investors including the public. This may be less than the issued share capital as there may be
capital for which no applications have been received yet ("unsubscribed capital").

Called up share capital is the total amount of issued capital for which the shareholders are
required to pay. This may be less than the subscribed capital as the company may ask
shareholders to pay by installments.

Paid up share capital is the amount of share capital paid by the shareholders. This may be less
than the called up capital as payments may be in installments ("calls-in-arrears").

i) Corporate Actions
A corporate action is an event initiated by a public company that affects the securities (equity or debt)
issued by the company.
This has a direct or indirect financial impact on the shareholders.
Direct Impact: Cash Dividend
Indirect Impact: Stock Split

Purpose of Corporate Action

Return Profits to Shareholders

Cash dividends and Bonus are classic example where a public company declares dividend or Bonus to be
paid on each outstanding share.
Influence the Share Price:
If the price of a stock is too high or too low, the liquidity of the stock suffers.
Corporate Restructuring:
Corporate re-structure in order to increase their profitability. Spinoffs are an example of a corporate
action where a company breaks itself up in order to focus on its core competencies.

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Corporate Actions
Dividend
Right Offer
Stock Split
Spin Off
Merger / Acquisition
Bonus
Identifier Changes
Reverse Stock Split

Dividend
Distribution of portion of company's earnings to its Shareholders, decided by the board of directors.
Types of Dividend:
o Cash Dividend
o Stock Dividend
o Optional Dividend
Rights Offer
Rights Issues are Shares issued by a company only to its existing shareholders
Investor Exercise the Right.
Investor does not Exercise the Right.
Stock Split & Reverse Stock Split
Increase / Decrease in the number of outstanding shares of a companys stock, such that
proportionate equity of each shareholder remains the same

Effects of Split
Number of share increases/decreases tto the extent of Terms (ratio).
Cost of stock decreases/increases to the extent of Terms (ratio).
Overall value remains the same.
Example

Stock Split

Reverse Stock Split

Original Face Value

10

Original Shares

100

100

Ratio

2:1

1:2

New Face Value

10

New Shares

200

50

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Spin Off

The separation of a subsidiary or division of a corporation from its parent company.

Issuing shares in a new corporate entity.
A large company may require separating a line of business or creating a separate entity.

Merger / Acquisition
Acquisition: - An acquisition is the purchase of one company by another company. An acquisition may be
private or public, depending on whether the acquire or merging company is or isn't listed in public markets.
An acquisition may be friendly or hostile.
Merger: - Two companies merge together to form one single entity.
The shareholders of the company becoming non-existent would receive stock in the merged entity or
cash for their holdings as per agreed terms.

Bonus
Very popular way of rewarding the shareholders as well as increasing the share capital.
Its done by capitalizing the reserves created out of profits.
Shareholders receive additional free shares in proportion to their holding.
1:1 bonus means-One new bonus share for every one share held

Change of Name / Identifier

Change in the Companys Name, Identifier and Ticker from original to new Name, Identifier and Ticker.
This has No Effect on:
Cash or Price
Position
Par Value & Market Value
Types
Bonus
Dividend
Identifier
Changes
Merger /
Acquisition
Reverse Stock
Split
Right offer
Spin Off
Stock Split

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Receive /
Pay Cash

Receive /
Pay Stock

Receive / Pay
Stock & Cash

Receive Stock for

Cash Payment

b. Fixed Income
Fixed income refers to any type of investment under which the borrower/issuer is obliged to make
payments of a fixed amount on a fixed schedule: for example, if the borrower has to pay interest at a fixed rate
once a year, and to repay the principal amount on maturity.
Fixed-income securities can be contrasted with equity securities, often referred to as stocks and shares
that create no obligation to pay dividends or any other form of income. In order for a company to grow its
business, it often must raise money: to finance an acquisition, buy equipment or land or invest in new product
development. The terms on which investors will finance the company will depend on the risk profile of the
company. The company can give up equity by issuing stock, or can promise to pay regular interest and repay
the principal on the loan (bond, bank loan, or preferred stock). Fixed-income securities also trade differently
than equities. Whereas equities, such as common stock, trade on exchanges or other established trading
venues, many fixed-income securities trade over-the-counter on a principal basis.

Types of borrowers
Governments issue government bonds in their own currency and sovereign bonds in foreign currencies.
Local governments issue municipal bonds to finance themselves. Debt issued by government-backed agencies
is called an agency bond. Companies can issue a corporate bond or obtain money from a bank through a
corporate loan.
Some of the terminology used in connection with these investments is:

The issuer is the entity (company or government) who borrows the money by issuing the bond, and
is due to pay interest and repay capital in due course.
The principal of a bond also known as maturity value, face value, par value is the amount that the
issuer borrows which must be repaid to the lender.
The coupon (of a bond) is the annual interest that the issuer must pay, expressed as a percentage of
the principal.
The maturity is the end of the bond, the date that the issuer must return the principal.
The issue is another term for the bond itself.
The indenture, in some cases, is the contract that states all of the terms of the bond.

Investors:
Investors in fixed-income securities are typically looking for a constant and secure return on their
investment. For example, a retired person might like to receive a regular dependable payment to live on, but
not consume principal. This person can buy a bond with their money, and use the coupon payment (the
interest) as that regular dependable payment. When the bond matures or is refinanced, the person will have
their money returned to them. The major investors in fixed-income securities are institutional investors, such
as pension plans, mutual funds, insurance companies and others

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Bonds:
Bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the
principal and interest (coupon) at a later date, termed maturity.
A bond is simply a loan, but in the form of a security,
The issuer = the borrower,
the bond holder = lender,
The coupon = interest.
Bonds are generally issued for a fixed term (the maturity). For example 10 years.
Bonds and stocks are both securities, but the major difference between the two is that (capital)
stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a
creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and
will be repaid before stockholders (who are owners) in the event of bankruptcy. Another difference is that
bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are
typically outstanding indefinitely. An exception is an irredeemable bond, such as Consoles, which is
perpetuity, i.e. a bond with no maturity
Debt versus Equity
Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities.
By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting
rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor
to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim
on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a
shareholder. However, the bondholder does not share in the profits if a company does well - he or she is
entitled only to the principal plus interest.
Measuring Return with Yield
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using
the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the
interest rate. When the price changes, so does the yield.

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Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the
yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to
12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800
($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).
Features of Bond
Issue Price: - the price at which investors buy the bonds when they are first issued.
Maturity date: - the date on which the issuer has to repay the nominal amount.
Coupon: - the interest rate % that the issuer pays to the bond holders.
Coupon dates: - the dates on which the issuer pays the coupon to the bond holders, e.g. quarterly,
semi-annually, annually.
Par Amount/Face Value
Clean Price: Current traded price.
(Price is always calculated on a percent basis)
Accrued Interest: Coupon rate % * No of days from the Prev coupon paid / Day Count Denominator
Dirty Price: Clean price + Accrued Interest
o (Price is always calculated on a percent basis)
Total Cash: Nominal * Dirty price
Bond Basics: Conclusion
Bonds are just like IOUs. Buying a bond means you are lending out your money.
Bonds are also called fixed-income securities because the cash flow from them is fixed.
Stocks are equity; bonds are debt.
The key reason to purchase bonds is to diversify your portfolio.
The issuers of bonds are governments and corporations.
A bond is characterized by its face value, coupon rate, maturity and issuer.
Yield is the rate of return you get on a bond.
When price goes up, yield goes down, and vice versa.
Bills, notes and bonds are all fixed-income securities classified by maturity.
Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower
to default on the debt payments.

Repurchase Agreement - Repo

A form of short-term borrowing for dealers in government securities. The dealer sells the government
securities to investors, usually on an overnight basis, and buys them back the following day.
For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on
the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse
repurchase agreement.
Repos are classified as a money-market instrument. They are usually used to raise short-term capital.
Repo is a money market instrument involving 2 parties. One party sells bonds to the other while
simultaneously agreeing to repurchase them or receive them back at a specified future date.
On maturity date seller receives the Bonds and pays cash to the buyer (includes sale price + interest)
If a security pays a coupon during the term of the repo, the coupon belongs to the seller of the security.

Reverse Repo

Reverse Repo is the same repurchase agreement from the buyers viewpoint.
On maturity date buyer delivers the Bonds to the seller and in turn receives cash (includes sale price interest)
Diagram 1 start
Trade details:
Principal: $10,000,000
Bond price: 100%
Repo principal: $10,000,000
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Repo rate: 5.00% Actual/360

Term: 7 days

Diagram 2 - maturity
Trade details:
Principal: $10,000,000
Bond price: 100%
Repo principal: $10,000,000
Repo rate: 5.00% Actual/360
Repo interest: $9,722.22

Haircuts
Haircuts are the repo market's way of imposing a margin on the collateral seller. Here is a simple
example. Suppose a haircut of 2% is applied to a repo trade where the market value of the collateral is $10m.
The seller only receives $9.8m from the buyer and the repo interest is calculated on $9.8m.
Why do haircuts exist? Because some bonds are more risky than others. The buyer will look to the
collateral for repayment should the seller default. If the collateral has a volatile price history the buyer is at
risk. The collateral may fall in price at the very time it is being relied on. To reduce this risk a haircut is
imposed.

MBS

What Is a Mortgage?
A mortgage represents a loan on a property/house that has to be paid over a specified period of time.
What is securitization?
Securitization is the process by which assets are pooled together into one security. Securitization allows
firms to convert small, illiquid assets, primarily loans, into a large security that can be easily sold into the
capital markets.
Types of Mortgages
MBS( Mortgage Backed Security)
ABS(Asset Backed Security
Mortgage Backed Securities
Mortgage backed securities are created when mortgage loans are packaged, or pooled, by issuers or
servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the
investors receive payments of interest and principal.
Mortgage securities represent an ownership interest in mortgage loans made by financial institutions
(savings and loans, commercial banks or mortgage companies) to finance the borrowers purchase of a home
or other real estate.

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Asset-backed Security - ABS

A financial security backed by a loan, lease or receivables against assets other than real estate and
mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate
debt
An ABS is essentially the same thing as a mortgage-backed security, except that the securities it backs are
assets such as loans, leases, credit card debt and so on, and not mortgage-based securities.
How They Are Formed
MBS are debt obligations purchased from banks, mortgage companies, credit unions and other financial
institutions and then assembled into pools by a governmental, quasi-governmental, or private entity. These
entities then sell the securities to investors. This process is illustrated below:
Real estate buyers borrow from financial institutions.

Financial institutions sell mortgages to MBS entities.

MBS entities form mortgage pools.

Individuals invest in mortgage pools.

c. Futures, Options & CFD

A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to
transact a set of financial instruments or physical commodities for future delivery at a particular price. If you
buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set
price. But participating in the futures market does not necessarily mean that you will be responsible for
receiving or delivering large inventories of physical commodities - remember, buyers and sellers in the
futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange
physical goods (which is the primary activity of the cash/spot market). That is why futures are used as
financial instruments by not only producers and consumers but also speculators.
In the futures market, margin has a definition distinct from its definition in the stock market, where
margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial
deposit of "good faith" made into an account in order to enter into a futures contract. This margin is referred
to as good faith because it is this money that is used to debit any day-to-day losses.
When you open a futures contract, the futures exchange will state a minimum amount of money that you
must deposit into your account. This original deposit of money is called the initial margin. When your
contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur
over the span of the futures contract. In other words, the amount in your margin account changes daily as the
market fluctuates in relation to your futures contract. The minimum-level margin is determined by the
futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin
amounts are continuously under review: at times of high market volatility, initial margin requirements can be
raised.
The initial margin is the minimum amount required to enter into a new futures contract, but the
maintenance margin is the lowest amount an account can reach before needing to be replenished. For
example, if your margin account drops to a certain level because of a series of daily losses, brokers are
required to make a margin call and request that you make an additional deposit into your account to bring the
margin back up to the initial amount.
Let's say that you had to deposit an initial margin of $1,000 on a contract and the maintenance margin
level is $500. A series of losses dropped the value of your account to $400. This would then prompt the
broker to make a margin call to you, requesting a deposit of at least an additional $600 to bring the account
back up to the initial margin level of $1,000.

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Futures Fundamentals: The Players

Hedgers
Farmers, manufacturers, importers and exporters can all be hedgers. A hedger buys or sells in the futures
market to secure the future price of a commodity intended to be sold at a later date in the cash market. This
helps protect against price risks.
The holders of the long position in futures contracts (the buyers of the commodity), are trying to secure
as low a price as possible. The short holders of the contract (the sellers of the commodity) will want to secure
as high a price as possible. The futures contract, however, provides a definite price certainty for both parties,
which reduces the risks associated with price volatility. Hedging by means of futures contracts can also be
used as a means to lock in an acceptable price margin between the cost of the raw material and the retail cost
of the final product sold.
Speculators
Other market participants, however, do not aim to minimize risk but rather to benefit from the inherently
risky nature of the futures market. These are the speculators, and they aim to profit from the very price
change that hedgers are protecting themselves against. Hedgers want to minimize their risk no matter what
they're investing in, while speculators want to increase their risk and therefore maximize their profits.
In the futures market, a speculator buying a contract low in order to sell high in the future would most
likely be buying that contract from a hedger selling a contract low in anticipation of declining prices in the
future.
Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or
she will enter the market seeking profits by offsetting rising and declining prices through the buying and
selling of contracts.

Options

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying
asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a
binding contract with strictly defined terms and properties.
Still confused? The idea behind an option is present in many everyday situations. Say, for example, that
you discover a house that you'd love to purchase. Unfortunately, you won't have the cash to buy it for another
three months. You talk to the owner and negotiate a deal that gives you an option to buy the house in three
months for a price of $200,000. The owner agrees, but for this option, you pay a price of $3,000.
Now, consider two theoretical situations that might arise:
1. Its discovered that the house is actually the true birthplace of Elvis! As a result, the market value of the
house skyrockets to $1 million. Because the owner sold you the option, he is obligated to sell you the house
for $200,000. In the end, you stand to make a profit of $797,000 ($1 million - $200,000 - $3,000).
2. While touring the house, you discover not only that the walls are chock-full of asbestos, but also that
the ghost of Henry VII haunts the master bedroom; furthermore, a family of super-intelligent rats have built a
fortress in the basement. Though you originally thought you had found the house of your dreams, you now
consider it worthless. On the upside, because you bought an option, you are under no obligation to go through
with the sale. Of course, you still lose the $3,000 price of the option.
This example demonstrates two very important points. First, when you buy an option, you have a right
but not an obligation to do something. You can always let the expiration date go by, at which point the option
becomes worthless. If this happens, you lose 100% of your investment, which is the money you used to pay
for the option. Second, an option is merely a contract that deals with an underlying asset. For this reason,
options are called derivatives, which mean an option derives its value from something else. In our example,
the house is the underlying asset. Most of the time, the underlying asset is a stock or an index.

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Calls and Puts

The two types of options are calls and puts:
1. A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls
are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially
before the option expires.
2. A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts
are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall
before the option expires.
Participants in the Options Market
There are four types of participants in options markets depending on the position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options are called writers; furthermore,
buyers are said to have long positions, and sellers are said to have short positions.
Contract for Differences
In finance, a contract for difference (CFD) is a contract between two parties, typically described as
"buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value
of an asset and its value at contract time (If the difference is negative, then the buyer pays instead to the
seller). In effect CFDs are financial derivatives, that allow traders to take advantage of prices moving up (long
positions) or prices moving down (short positions) on underlying financial instruments and are often used to
speculate on those markets.
For example, when applied to equities, such a contract is an equity derivative that allows traders to
speculate on share price movements, without the need for ownership of the underlying shares.
Charges
The contracts are subject to a daily financing charge, usually applied at a previously agreed rate linked to
LIBOR or some other interest rate benchmark e.g. Reserve Bank rate in Australia. The parties to a CFD pay to
finance long positions and may receive funding on short positions in lieu of deferring sale proceeds. The
contracts are settled for the cash differential between the price of the opening and closing trades.
Traditionally, equity based CFDs are subject to a commission that is a percentage of the size of the
position for each trade. Alternatively, a trader can opt to trade with a market maker, foregoing commissions
at the expense of a larger bid/offer spread on the instrument.
Margin
Traders in CFDs are required to maintain a certain amount of margin as defined by the brokerage or
market maker (usually ranging from 0.5% to 30%). One advantage to traders of not having to put up as
collateral the full notional amount of the CFD is that a given quantity of capital can control a larger position,
amplifying the potential for profit or loss. On the other hand, a leveraged position in a volatile CFD can expose
the buyer to a margin call in a downturn, which often leads to losing a substantial part of the assets.

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Futures v/s Options v/s CFDs

d. Foreign Exchange Market

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the
trading of currencies. In terms of volume of trading, it is by far the largest market in the world. The main
participants in this market are the larger international banks. Financial centers around the world function as
anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the
exception of weekends. The foreign exchange market determines the relative values of different currencies.
The market in which currencies are traded. The forex market is the largest, most liquid market in the
world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the
world.
The foreign exchange market assists international trade and investments by enabling currency
conversion. For example, it permits a business in the United States to import goods from the European Union
member states, especially Eurozone members, and pay Euros, even though its income is in United States
dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry
trade, speculation based on the interest rate differential between two currencies.

Financial instruments

Spot
A spot transaction is a two-day delivery transaction. This trade represents a direct exchange between
two currencies, has the shortest time frame, involves cash rather than a contract, and interest is not included
in the agreed-upon transaction. Spot trading is one of the most common types of Forex Trading
Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction,
money does not actually change hands until some agreed upon future date. A buyer and seller agree on an
exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the
market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date
is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.
FX Swap
A foreign exchange swap, forex swap, or FX swap is a simultaneous purchase and sale of identical
amounts of one currency for another with two different value dates.
A foreign exchange swap consists of two legs:
a spot foreign exchange transaction, and
a forward foreign exchange transaction.
These two legs are executed simultaneously for the same quantity, and therefore offset each other.
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