SPECULATIVE TRANSACTIONS

►Option Dealings
►Margin Trading
►Arbitrage
►Wash Sales
►Blank Transfers
►Carry over / Badla Transactions
►Cornering
►Rigging the Market
 OPTION DEALINGS

► Option means “Right”.

► Right to buy or sell
► Certain no.of specified securities
► Predetermined price
► Prescribed time limit.
► Bull speculator exercises Purchase Option.
► Bear speculator exercises Sales Option.
 OPTION DEALINGS

► Option Money :- Amount paid by the speculator as consideration for acquiring the right.
► Option dealings give protection against PRICE FLUCTUATON.
KINDS OF OPTION DEALINGS
► Call option : Option to buy certain securities at fixed price on a future date. (Teji Sauda).
► Put option : Option to sell or not to sell.(Mandi Sauda).
► Call and Put option : Combination of two options , call and put.
Option either to buy or sell securities.
( Teji Mandi or Agali Sauda).
 MARGIN TRADING

► System of purchasing securities with funds borrowed from brokers.

► Most of the speculative purchases are made on the basis of margin
trading.
► Protects the interests of brokers and prevents over- trading.
► CLIENT
► Opens an Account with the broker.
► Deposits certain amount in cash or securities.
► Agrees to maintain the margin at certain level.
 MARGIN TRADING

BROKER
► Debits the Client’s Account with the amount of purchases, brokerage,
commission etc .
► Credits the Client’s Account with the cash deposited and sale proceeds.
If the prices are favourable, the client may instruct the broker to sell the
securities. Generally the price difference is credited as the case may be.
 ARBITRAGE

► Highly specialised and skilled speculative activity.

► Profit is made out of price differences in two different markets.
► Same security is sold at different prices in different markets.
DOMESTIC ARBITRAGE : Arbitrage transactions take place in two markets of the same
country.
FOREIGN ARBITRAGE : Arbitrage transactions take place in two markets of different
countries.
► Since the prices are very sensitive , the speculator has to act very quickly
( Traffic in Securities).
 WASH SALES

►Fictitious transactions.
►Speculator sells his securities and repurchases the same through
broker at a higher price.
►In reality, no transaction takes place here.
►Artificial demand is created which leads to artificial rise in price.
►Prohibited activity which calls for high penalty.
 BLANK TRANSFER

►Method of share transfer without mentioning the name of

the transferee in the transfer deed.
►Shares can be transferred any number of times.
►Saves stamp duty and other fees.
►Irrelevant due to dematerialisation of shares.
 Cornering

► The entire supply of a particular security is held by an individual or

group.
► Speculators buy whole of the securities and will not resell them and
create scarcity.
► Creation of artificial scarcity.
► Bears will be squeezed and will become lame ducks.
 Rigging the Market

►Artificially pushing up the market price of a security.

►Generally carried on by bull speculators.
KERB MARKET & GREY MARKET

Kerb market is a market Grey markets are un official

where transactions take markets where trading on
place outside the stock applied shares are done.
exchange or after the Sellers sell un-allotted shares
official trading time. to prospective buyers.
 INSIDER TRADING

INSIDER
Insider trading is the
INSIDER trading of securities of a
• Any person who is a company by individuals
connected person. who are in some way
OR connected with the
• A person having company and has access to
access to unpublished non-public price sensitive
price sensitive information about the
information. company.
Methods of trading in stock exchange

1. Screen based trading(Offline trading)

► Trading made through a network of computers.
► Broker feeds into the computer the no.of securities and the prices at
which he would like to transact.
► When a match is found, the transaction would be executed.
► Softwares used : ODIN, MULTEX, NEAT.
Methods of trading in stock exchange

2. Internet trading ( Online trading )

► Buying and seling of securities through internet.
► Investor needs Bank A/C, Demat A/C and Trading A/C with the Stock Exchange.
► User id and password will be given.
► Quotes are put by the client.
► When the order is confirmed, cash or securities will be debited or credited from
respective Accounts.
Benefits of online trading

❖ Anywhere availability : Traders can trade anywhere and from any device.
❖ Own trading : Trading can be done without the assistance of a broker.
❖ Quick decision and actions : Decisions can be made quickly which improves the value
of investments.
❖ Low transaction costs : Online trading fees are comparatively low.
Process of trading in stock exchange

1) Selection of a broker
2) Placing an order
3) Making the contract
4) Preparing contract note
5) Settlement of transaction
 1. Selection of a broker

⮚ The buyer or seller may approach his bank or stock broker.

⮚ The client has to sign Member – Client Agreement or Sub-broker Client Agreement.
(contains rights and responsibilities of both the parties).
⮚ The client has to submit ID proof, Address proof, PAN No.,Bank A|C details.
⮚ The broker issues unique client code, user ID and password.
⮚ The broker also assists in opening Demat A|C.
 2. Placing an order

⮚ Order can be placed either in online mode or in offline mode.

⮚ In online mode, the client uses his User ID and password. The broker guides the client
about the type of securities to be purchased.
⮚ In offline mode, based on client’s instructions, the broker performs.
Types of orders

At best order : This order does not specify any price. The order is executed at the best
possible price.
Limit order : This is an order for purchase and sale at fixed price specified by the client.
Stoploss order : This is an order to sell when the price falls up to a certain level and to buy
when the prices are up.
Immediate or cancel order : This is an order which is to be executed immediately or it will
be cancelled.
Types of orders

Discretionary order : Here the client has full faith in the broker and he gives complete
discretion to the broker to do business on his behalf.
Day order : This order is valid only for the day on which it is entered. It will be
cancelled automatically at the end of the day.
Good Till Cancelled (GTC) : This order remains in the system until it is cancelled or
get a match.
Good Till Dates (GTD) : Allows the party to specify the day up to which the order
should stay in the system.
3. Making the Contract or Execution of
Order

⮚ When a matching bid is found, the client’s order gets executed automatically.
⮚ If no match is found, the order will be executed on price cum time priority basis.
⮚ Price priority : The order having the best price gets highest priority.
⮚ Time priority : The order which is entered first, gets highest priority.
4. Preparing the Contract Note

⮚ Contract Note : Confirmation slip of trade done on a particular day.

⮚ Issued in the prescribed format by the broker.
⮚ Documentary evidence which contains the details like name of the company, date
of purchase, date of delivery, brokerage etc.
⮚ Duplicate copy of the same is also kept by the broker.
 5. Settlement

⮚ Settlement means payment or delivery of securities to clients.

⮚ T+2 rolling settlement is followed by all the stock exchanges.(Settlement occurs
on Transaction date plus two days).
⮚ Liquidation in full : Settlement by giving actual delivery of securities on
receiving the price.
⮚ Square – off : It means there is no position at the end of the day – only profit or
loss. It means closing out an open position (buy and sell) before the end of
settlement.
Clearing and Settlement
The core process in Settlement

1. The determination of obligation of trading members by National Securities Clearing

Corporation Ltd.(NSCCL) – presently known as NSE clearing, responsible for clearing
and settlement of all trades executed on NSE .
2. The members make available the required securities or funds in the designated accounts
with the clearing banks or depositories.
3. Settlement is complete upon release of pay out funds and securities to custodian or
members.
Transaction cycle in a stock exchange
 The Depositories

⮚ An intermediary established under the Depositories Act 1996.

⮚ Person or Institution who keeps securities on behalf of the investors.
⮚ Principal function : dematerialization of securities.
⮚ Definition : An institution which transfers the ownership of securities in electronic mode
on behalf of its members.
⮚ Securities are transferred by debiting the transferor’s account and crediting the transferee’s
account.
 The Depositories

Parties involved in depository process

1. The Customer
2. The Depository Participant(DP)- custodian,bank,broker or an individual with a minimum
net worth of ₹ 1 Cr. Agent of the depository who provides various services to investors.
3. The Depository
4. The Share Registrar and Transfer Agent(RTA): maintains records of security owners.
Issues and cancels certificates to reflect changes in ownership of securities.
 Two main Depositories

1)National Securities Depository Ltd. (NSDL) :First electronic securities depository in India.
Provides wide variety of services to investors ,stock brokers, stock exchanges, custodians etc.

2)Central Depository Services Ltd.(CDSL) : Subsidiary of BSE Limited ,offers various

services such as account opening, dematerialisation, rematerialisation,pledging,nomination
etc. for depository participants.
Role or Functions of Depository

❖ Dematerialisation : Process of converting securities held in physical form to electronic

form.
❖ Account Transfer : Depository gives affect to all transactions resulting from the
settlement of trade and other transactions.
❖ Transfer and Registration : The transfer process is accelerated by registering the
ownership of entire issue in the name of Depository.
❖ Corporate Actions : Handled in two ways. One way is by providing information to the
issuer about the persons entitled to get corporate benefits. Other way is by taking the
responsibility of distribution of corporate benefits by the depository itself.
Role or Functions of Depository

❖ Pledge and Hypothecation : Depositories allow the securities placed with them to be
used as collateral to get loans.The securities pledged or hypothecated are transferred to a
collateral account through book entries.
❖ Linkages with the clearing system : Clearing system ascertains the pay-in (sell) or pay-
out(buy) of brokers who have traded on the stock exchange. Actual delivery of securities
from the clearing system to the buying brokers are done by the depository.
Advantages of Depositories

✔ Avoids paper work.

✔ Risk free trading environment.
✔ Avoids the risk of bad delivery, loss of securities, forged share certificates.
✔ Reduced settlement time.
✔ Easy distribution of dividends and interests.
✔ Exempted from stamp duty, hence, cost of transfer is less.
✔ Transparent and highly automated capital market.
✔ Attracts foreign investors.
 Stock Market Indices

⮚ Index : A number which measures change in set of value over a

period of time.
⮚ Stock Index : Represents the change in value of a set of stocks
which constitute the index.
⮚ The base of the index of starting value will be 100 or 1000.
 Index Construction

An index is a barometer for market behaviour.It should represent the market.

Movements of the index should represent the returns obtained by different portfolios.
Factors to be considered in developing a good index :
❖ Base Year – First step in developing an index. Base year must be free from violent
fluctuations in prices. A normal year with price stability is ideal.
❖ Sample size – Should be fairly large. Must be representative of major industries.
 Index Construction

❖ Weightage – Weightage must be given to each scrip. It should be

given in proportion to the total market value of a particular scrip.
❖ Other Adjustments – Necessary adjustments must be made when
there is bonus or rights issue or when merger or consolidation takes
place. In such situations , a new weighting factor must be arrived at.
 Calculation of Index

The index may be calculated by giving weightage to either market capitalization

price of each stock. The two methods of calculating index based on market
capitalization weight are :
1. Full Capitalization Method : Here , the scrip’s weightage in the index is
calculated by multiplying the number of shares outstanding with the market price
of a company’s share.(S&P CNX NIFTY)
2. Free Float Market Capitalization Method : Here, the weight of scrip is based
on free float market capitalization.(BSE SENSEX). Free float is the percentage
of shares that are freely available for purchase in the markets.
 Market Capitalization

• Market Capitalization means the worth of share holdings.

• It is the wealth created by the company for it’s share holders.
• It is calculated as the market value of a share multiplied with the no. of shares issued.
• Example:
Market value of a share = ₹ 50/-
No. of shares issued = 1,00,000
Market Capitalization = 50 x 1,00,000 = ₹ 50,00,000/-
 Significance of Index Numbers

⮚ Barometer for market : An index is a barometer for market behaviour.The ups

and downs in the general economic conditions of a country are reflected in the
rise or fall of index value.
⮚ Benchmark for portfolio : An investor can easily find out the market value of
his portfolio by checking the appropriate index.
⮚ Helps in decision making : An investor can decide whether to buy or sell shares
by studying the index movements.
Nifty and Sensex
 S & P CNX Nifty

▪ Introduced in 1996.
▪ Comprises of 50 stocks.
▪ Stocks are selected on the basis of market capitalization and liquidity.
▪ Stocks have a market capitalization of above ₹ 500 crores.
▪ Base value of the index is 1000.
▪ Impact cost is below 1.5% (cost of executing a transaction on a stock exchange).
 BSE SENSEX(Bombay Stock
Exchange Sensitivity Index)

• Introduced in 1986.
• Base value is 100.
• Sample size consists of 30 scrips .
• Weightage factor is market capitalization.
• Index for a day is the percentage of the aggregate market value of the equity
shares of all companies in that sample to the average market value of the equity
shares of the same companies.
 Stock Split and Reverse Split

Stock Split means reducing the par value of Reverse split means reducing the no.of
the shares by increasing the no.of shares shares by increasing the par value of
proportionately. A share of ₹100 may be split shares. Eg.10 shares of ₹10 may be split
into 10 shares of ₹10 each. into 1 share of ₹100.
 Institutional Investors in Securities
Market

❑ Institutional Investors are organizations / institutions which invest their own

funds in securities market instruments.
❑ Classified into: Domestic Institutional Investors (DIIs )
Foreign Institutional Investors ( FIIs )
❑ DIIs refer to Indian Institutional Investors (private and public )who invest in
financial market instruments in India.
Foreign Institutional Investors

❑ FII means an entity established or incorporated outside India which proposes to

make investment in India and which is registered as FII with SEBI.
❑ Pension Funds, Mutual Funds, Investments Trusts, Asset Management
Companies, Foreign Central Banks, Foreign Governments are included in FIIs.
❑ FIIs have become a major participant in the Indian Securities Market.
 Foreign Institutional Investors

FIIs can make investments in the following :

✔ Securities in primary and secondary markets.
✔ Units of schemes floated by Unit Trust of India.
✔ Units of schemes floated by collective investment scheme.
✔ Derivatives traded on recognized stock exchange.
✔ Commercial papers, Dated Govt Securities.
✔ Indian Depository Receipt.
 Foreign Portfolio Investment (FPI)

❖ FPI means securities and other financial assets held by foreign investors.
❖ FPI includes investment by FIIs in Indian securities including shares, Government bonds,
corporate bonds, convertible securities, infrastructure securities etc.
❖ The investor has no control over the use of capital he has invested.
❖ The investor is only interested in returns.
❖ No participation in the management of enterprise.
 Foreign Portfolio Investors
Foreign Institutional Investors
(FIIs)
Already explained
Qualified Foreign
Investors(QFIs)
⮚ Introduced by Government
of India to infuse more funds
in the Indian capital market
and to reduce market
volatility.
⮚ They are allowed to make
investments by opening a
demat account.
Sub – accounts of FIIs
⮚ Sub – accounts are entities that
include foreign companies,
foreign individuals and
institutions, funds or portfolios
established or incorporated
outside India, on whose behalf
FIIs propose to make
investments in India.
⮚ Both FIIs and their sub –
accounts are required to register
with SEBI.
 Private Equity

⮚ PE refers to investments which are aimed at gaining significant control of unlisted

companies.
⮚ Private Equity firms (PE Funds) make investments in high-growth companies.
⮚ PE fund is generally set up as a limited partnership with a PE firm as a general partner and
the investors as limited partners.
⮚ Investments are usually held for a long period of time.
⮚ PE players largely provide mezzanine (a debt capital that gives the lender the rights to
convert to an ownership or equity interest in the company).