The Financial System, Investing and brief overview of different securities

• The financial system of any country consists of

specialized and non-specialized financial
institutions, of organized and unorganized financial
markets, of financial instruments and services
which facilitate transfer of funds.

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 Indian Securities Market
• Financial Market
• Segments of Financial Market
• Types of Financial Market
• Participants in the Financial Market
• Primary Market
• New Issue Market
 Product & Participants
• Need of securities market
– Securities market provides channel for reallocation of savings to
investments and entrepreneurship.
• Categories of Participants
– Issuers of securities
– Investors in securities
– Intermediaries
• Products
– Services of Intermediaries
– Securities
 Types of Financial Markets

Capital Money Forex Derivatives

Market Market Market Market
Agriculture
Equity T-Bills
Spots Produces,
Debt Call Money
Forwards Metals,
ICD, CP,
Financial
CD
futures like
Interest rate,
currency,
Retail
indices etc
Corporate
Banks Banks
Banks
FI Corporate
Corporate Banks, FIs
FIIs FI, FIIs
FI, FIIs Corporate
Structure ofof
Structure Indian Financial
Indian System:
Financial Markets
GOI GOI
Ministry of Finance Dept of Co. Affairs

Registrar of
SEBI RBI
Companies

Stock Clearing Mutual

Depositories Banks Companies
Exchanges Corporations Funds

Registrar &
Broker Merchant Depository Primary
Transfer
Dealers Bankers Participants Dealers
Agents
 What is a stock exchange?

• A market is a meeting place where buyers and sellers

meet and transact the business of buying and selling
goods, commodities etc of any kind some markets
specialize in only certain kinds of goods such as
cotton or steel likewise the Stock Exchange is also a
special kind of market and the commodity bought
and sold are securities and hence it is also known as
the Securities Market.
 

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 Basic Features of a Stock Exchange

·       They operate through members who transact on

behalf of their clients.
·       Members can appoint further intermediaries
such as sub brokers or dealers who transact on the
member's behalf, and act as his agent.
·       No person can deal directly on a stock exchange
but has to go through a broker or his agent.

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·       All exchanges have a settlement period whereby
all trades within a certain period are settled

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• Payment of shares bought is made.
• Shares sold are duly delivered.

    This process of making payment and

receiving delivery is known as the clearing
process.    

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 How are securities traded?

• This is a screen based trading system.

• There is a central server brokers have one or more
trader work stations connected to this central
server .
• Each trader workstation is basically a PC in which
the necessary software to enable screen based
trading is installed.

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• Each work station is connected to the server
by some sort of communication network
such as telephone lines, satellite etc.
• The trader work station can be located
anywhere in India and any where in the
world as long as connectivity can be
established.

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Contd…..
 How are securities traded?

•The BOLT system.

•A broker will key in the following data prior to
execution of a trade
His identity and password,

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•After logging in there are various user-friendly
windows allowing brokers to trade online view
information and receive broadcasts of news and
notifications issued from time to time.

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To trade on line one can go to the order entry
window and key in the following information
•The scrip code for which trading is to be done.
•The quantity of securities which are to be
traded

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• A practical illustration is given below
• At 12:51:50 A enters an offer to sell 1000 share of
XYZ co at Rs 100
• At 12:51:50 B enters an order for Buying 500 Shares
of XYZ co at Rs 100
• At 12:51:52 C enters a bid to buy 1000 shares of XYZ
at Rs101.
• At 12:51:50 B' s bid is matched with A's offer and
500 of A's 1000 shares is sold to B at Rs 100

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• At 12:51:52 the balance 500 Shares are matched
with C's offer and the remaining 500 shares are sold
to C for Rs 101
• The balance of 500 shares remaining of C's bid is in
queue waiting for an offer, which matches C's bid or
betters it.
 

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• We can now immediately see why the system is
transparent and investor friendly.
•       All trades carry the time at which they were
traded along with the quantity and rate hence the
investor knows the exact rate at which the deal is
done and when it is done.
     

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• We see that though A had offered to sell
1000 shares at Rs 100 he could sell 500
shares at Rs 101 without any effort on his
part as the system always gives the best
market price automatically to seller.

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• The TWS also has access to real-time information as
to the
•Best 5 bids and best 5 offers.
•The highest and lowest prices till that point of time
•The rate at which the last trade took place.
•Other Miscellaneous Statistical information, news
and stock exchange notifications.

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• Paperless Trading another important factor.
• Dematerialised shares safer faster and
investor friendly.

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• Like this lakhs of trades are done in a day and
huge volumes can be attained

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Transaction Cycle
 Trading & Settlement
Process

Depository Investor

Clearing
Broker
House

Exchange
 Speculation

•Hedging
•Margin trading
•Short Selling
•Futures and Options

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 What are different types of stock trading?

• Based on duration of stock holding, the

different types of stock trading can be
classified as:
• Day Trading: Both buying and selling of a financial instrument is done on the same day
and all the tradings are closed before the market close for the day. Traders who
participate in day trading are called active traders or day traders. Day trading demands
fast decision and fast action. This type of stock trading is not advisable for a beginner
• Short Term Trading:A trade period of more than one day to a few weeks is considered as
short term trade. A stock is bought and held in position from one day to a few weeks. A
short trade is entered by creating a sell position, which is covered by buying after one day
or in a few weeks.Swing trading and pattern trading are examples of short term tradings.
• Medium Term Trading: A trade period from a few weeks to a few months is considered as
medium term trade. A trend is followed with tailoring stop loss.Swing trading with higher
time period (for example using weekly bars) and Elliot wave trading are the methods
suitable for this type of stock trading.
• Long Term Trading: In this type of stock trading, stock is held for many months to many
years. Investment decision is made by fundamental analysis of a stock. Profit from growth
of the company, dividends and bonuses attracts this type of stock trading.Examples of
long term trading are Value Investing and Buy and hold method of investing.
 Day Trading
• Some of the methods of day trading are:
– Arbitrage
– Arbitrage a kind of hedged investment meant to
capture slight differences in price. When there is a
difference in the price of something on two
different markets the arbitrageur simultaneously
buys at the lower price and sells at the higher
price.
 – Market making
• They are appointed by stock exchanges like The NSE
or BSE to continuously provide ask and bid rates for
the brokers to buy and sell the stock in these
exchanges.
• Their quotations are publicly displayed on the
trading terminals. They are both ready to buy the
stock at the ask price and sell the same stock at the
bid price, providing liquidity to the market. In other
words they make the market.
 Momentum Day trading

• It is a method of stock trading, where in a trade is made, when the

stock is making a trending movement and the trade is closed at the
end of the day.
• Prices are highly sensitive to news and announcements, crisis,
political changes, natural events, opportunities and threats.
• When ever such an event occurs there will be increased momentum,
that is rate of change in price, This keeps happening now and then.
• Taking a trade when the momentum is increasing is high yielding in
terms of time invested.
• Day trading calls for closing of the trade with in the close of the
market for the day. So this momentum trading is an intra day trade
lasting for a few minutes or a few hours.
 Pattern trading

• Chart patterns are formed by up and down

price movements, which tend to form
recognizable recurring designs or figurative
diagrams. Stock trading pattern is shifting from
buy and hold to pattern trading, which
statistically gives us more opportunities to
have consistent profitable trades.
 Scalping

• It is a technique of trading and profiting in stock

market. It is a day trading strategy and focuses on
taking very small profits from hundreds of trades.
• It involves taking quick and small profits, using the
ask and bid differences. When there is bigger
differences, as happens during increased volatility,
such situations are used to chip off small profits.
These trades typically lasts from a few seconds to a
few minutes and minimizes the risk.
 'Algorithmic Trading'

• trading system that utilizes very advanced

mathematical models for making transaction
decisions in the financial markets. The strict rules
built into the model attempt to determine the
optimal time for an order to be placed that will
cause the least amount of impact on a stock's price.
Large blocks of shares are usually purchased by
dividing the large share block into smaller lots and
allowing the complex algorithms to decide when
the smaller blocks are to be purchased.
• Algorithmic trading, also called automated
trading, black-box trading, or algo trading, is the
use of electronic platforms for entering trading
orders with an algorithm which executes pre-
programmed trading instructions whose variables
may include timing, price, or quantity of the order,
or in many cases initiating the order without
human intervention. A special class of algorithmic
trading is "high-frequency trading" (HFT).
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