ASSIGNMENT ON

INVESTMENT ANALYSIS AND PORTFOLIO

MANAGEMENT

SUBMITTED BY: ISMAIL MUFASAR

CLASS: 2nd MBA “B” SECTION
ROLL NO: 20134
SUBMITTED TO: SUMATHI MA’AM
DATE:25/01/2022
 TOPIC: STOCK EXCHANGES IN INDIA, MEMBERS
OF THE STOCK EXCHANGE, METHODS OF
TRADING IN A STOCK EXCHANGE, ONLINE
TRADING – DEPOSITORIES – ROLE, MARK TO
MARKET SYSTEM

STOCK EXCHANGES IN INDIA:

Stock exchange, also called stock market or in continental
Europe bourse, organized market for the sale and purchase of securities such
as shares, stocks, and bonds.
In most countries the stock exchange has two important functions. As a
ready market for securities, it ensures their liquidity and thus encourages
people to channel savings into corporate investment. As a pricing mechanism,
it allocates capital among firms by determining prices that reflect the true
investment value of a company’s stock. (Ideally, this price represents the
present value of the stream of expected income per share.)
Membership requirements of stock exchanges vary among countries,
mainly with respect to the number of members, the degree of bank
participation, the rigour of the eligibility requirements, and the level of
government involvement. Trading is done in various ways: it may occur on a
continuous auction basis, involve brokers buying from and selling to dealers in
certain types of stock, or be conducted through specialists in a particular stock.
Technological developments have greatly influenced the nature of trading.
By the 21st century, increased access to the Internet and the proliferation of
electronic communications networks (ECNs) had allowed electronic trading, or
e-trading, to alter the investment world. These computerized ECNs made it
possible to match the orders of buyers and sellers of securities without the
intervention of specialists or market makers. In a traditional full-service or
discount brokerage, a customer places an order with a broker member of a
stock exchange, who in turn passes it on to a specialist on the floor of the
exchange who actually concludes the transaction.
A stock exchange, securities exchange, or bourse is an exchange where
stockbrokers and traders can buy and sell securities, such as shares of stock,
bonds, and other financial instruments. Stock exchanges may also provide
facilities for the issue and redemption of such securities and instruments and
capital events including the payment of income and dividends. Securities
traded on a stock exchange include stock issued by listed companies, unit
trusts, derivatives, pooled investment products
and bonds. Stock exchanges often function as "continuous auction" markets
with buyers and sellers consummating transactions via open outcry at a central
location such as the floor of the exchange or by using an electronic trading
platform.
To be able to trade a security on a certain stock exchange, the security
must be listed there. Usually, there is a central location at least for record
keeping, but trade is increasingly less linked to a physical place, as modern
markets use electronic communication networks, which give them advantages
of increased speed and reduced cost of transactions. Trade on an exchange is
restricted to brokers who are members of the exchange. In recent years, various
other trading venues, such as electronic communication networks, alternative
trading systems and "dark pools" have taken much of the trading activity away
from traditional stock exchanges.
Initial public offerings of stocks and bonds to investors is done in the
primary market and subsequent trading is done in the secondary market. A
stock exchange is often the most important component of a stock market.
Supply and demand in stock markets are driven by various factors that, as in
all free markets, affect the price of stocks (see stock valuation).
There is usually no obligation for stock to be issued through the stock
exchange itself, nor must stock be subsequently traded on an exchange. Such
trading may be off exchange or over-the-counter. This is the usual way that
derivatives and bonds are traded. Increasingly, stock exchanges are part of a
global securities market. Stock exchanges also serve an economic function in
providing liquidity to shareholders in providing an efficient means of disposing
of shares.
 MEMBERS OF THE STOCK EXCHANGE:
Members or brokers of a stock exchange can be classified into floor
brokers, commission brokers, jobbers, tarawaniwalas, odd lot dealers,
badliwalas, arbitrageurs and Sub-Brokers or Remisiers. They are briefly
explained as follows.
1. Floor brokers
They execute orders for members (brokers) and receive a share in the
brokerage commission that a commission broker charges to his client.
2. Commission brokers
They execute orders of their customers by buying and selling securities
on the exchange. They charge a specified commission on the purchase or
sale value. A commission broker does not buy or sell securities in his own
name. They deal with many clients and consequently with many securities.
3. Jobbers
They are professional independent brokers engaged in buying and selling
of specified securities in their own name. Jobbers cannot deal on behalf of
public and are barred from taking commission. They deal with brokers who
in turn transact on behalf of the public. A jobber deals in a limited number
of securities which he tracks regularly.
Jobbers generally quote two prices, one at which he is prepared to purchase
and the other at which he is prepared to sell a security. This two way price
is known as ‘double-barrelled price‘. The difference between the two
prices is known as the ‘Jobbers turn‘. For e.g. a Jobber may quote the
shares of XYZ at Rs.500-501.
This implies that the jobber is prepared to purchase the shares at Rs. 500
each and sell at Rs.501 each. The difference between the two prices is the
jobbers turn.

4. Tarawaniwalas

A tarawaniwala can act both as a broker and jobber. The tarawaniwala

might act against interests of investors by purchasing securities from them
in his own name at a lower price and sell the same securities to them at
higher prices. To prevent this, the Securities Contract (Regulation) Act of
1956 provides that a member of a stock exchange can act as a principal only
for a member of a recognized stock exchange.
5. Odd Lot dealers
They specialize in buying and selling of securities in odd lots. They buy
odd lot units at a lesser price
6. Badliwalas
They are financiers who facilitated the carry over business by financing
carry-over transactions. They earn interest for the amount financed (badla).
7. Arbitrageurs
Arbitrageurs keep a close watch on the prices of shares in different
markets. They buy shares in markets where their price is low and sells them
in markets where their price is high. For e.g. if a share of XYZ is quoted at
Rs.2,000 in Bangalore stock exchange and at Rs.2,100 in Madras Stock
exchange, the arbitrageur will buy shares in the Bangalore stock exchange
and sell them in the Madras Stock Exchange. He would be earning a profit
of Rs. 100 per share. 8. Sub-brokers/Remisiers
Sub-brokers are agents of stock brokers. Since they are not members of a
stock exchange, he cannot directly deal in securities. He helps clients to buy
and sell securities only through the stock broker. In the Bombay Stock
Exchange the sub-brokers are termed as ‘Remisiers‘. They receive a share
in the brokerage commission that a commission broker charges to his client.
Eligibility requirements to become a stock exchange broker
1. Persons desiring to become brokers should clear the written test and
interview conducted by stock exchanges.

2. They should possess the required financial strength to fulfill capital

adequacy norms.

3. They should have the required infrastructure (buildings, computer

systems, connectivity)

4. They should have the required manpower to service investors.

5. They should adhere to the code of conduct and various regulations

prescribed while conducting trade.

6. They should provide regular updates to the stock exchanges regarding

their net worth, information relating to directors, partners etc.

Stock Exchange in India: Governing Body and Membership!

1. Governing Body:
The stock exchanges in India are managed by a governing board or
executive committee or council of management.

The governing board consists of 16 members of the exchange elected on

general election basis by the members of the exchange, three persons
appointed by the Central Government as its representatives, one
representative of the Reserve Bank of India appointed by the Central
Government, three persons nominated as public representatives and a
chairman or executive director.

The executive members alert from among themselves the president or

chairman of the stock exchange. In day-to-day management, the governing
board is assisted by a number of committees such as listing committee,
arbitration committee, defaulters committee, admission committee, etc.
The governing board is empowered to make rules and regulations in
consultation with the Government and the members of the stock exchange.

2. Membership:
The members only enter into trading of stock exchange and carry on
business. A non-member can buy or sell securities through a member.
Every stock exchange has its own rules and regulations for the admission
of members. Member of a stock exchange are allowed to appoint certain
agents to do business on their behalf.

The non-members who can carry on business on the floor of a stock

exchange on behalf of the members are of three types:

(a) Remisiers:
They are agents of full-fledged members of a stock exchange. They are
appointed to secure business for the members. They cannot carry business
on their own name. They are paid commission out of the brokerage
collected by members on the business procured by the remisiers. They also
known as half-commission men or sub-brokers.

(b) Authorised Clerks:

A member of the stock exchange can appoint authorised clerks or
assistants to assist him. The authorised clerks are merely employees of the
members, and cannot do business in their own name.

(c) Brokers and Jobbers:

A broker is a commission agent who buys and sells securities on behalf of
non-members. He executes the order of his clients and earns commission
from them.

A Jobber is an independent dealer in securities who buys and sells

securities in his own name. He cannot enter into contract with
nonmembers. He derives his income from the profit made through
difference in prices.

METHODS OF TRADING IN A STOCK EXCHANGE:

The Trading procedure involves the following steps:
1. Selection of a broker:
The buying and selling of securities can only be done through SEBI
registered brokers who are members of the Stock Exchange. The broker
can be an individual, partnership firms or corporate bodies. So the first
step is to select a broker who will buy/sell securities on behalf of the
investor or speculator.

2. Opening Demat Account with Depository:

Demat (Dematerialized) account refer to an account which an Indian
citizen must open with the depository participant (banks or stock brokers)
to trade in listed securities in electronic form. Second step in trading
procedure is to open a Demat account.

The securities are held in the electronic form by a depository. Depository

is an institution or an organization which holds securities (e.g. Shares,
Debentures, Bonds, Mutual (Funds, etc.) At present in India there are two
depositories: NSDL (National Securities Depository Ltd.) and CDSL
(Central Depository Services Ltd.) There is no direct contact between
depository and investor. Depository interacts with investors through
depository participants only.

Depository participant will maintain securities account balances of

investor and intimate investor about the status of their holdings from time
to time.

3. Placing the Order:

After opening the Demat Account, the investor can place the order. The
order can be placed to the broker either (DP) personally or through phone,
email, etc.

Investor must place the order very clearly specifying the range of price at
which securities can be bought or sold. e.g. “Buy 100 equity shares of
Reliance for not more than Rs 500 per share.”

4. Executing the Order:

As per the Instructions of the investor, the broker executes the order i.e. he
buys or sells the securities. Broker prepares a contract note for the order
executed. The contract note contains the name and the price of securities,
name of parties and brokerage (commission) charged by him. Contract
note is signed by the broker.

5. Settlement:
This means actual transfer of securities. This is the last stage in the trading
of securities done by the broker on behalf of their clients. There can be
two types of settlement.

(a) On the spot settlement:

 It means settlement is done immediately and on spot settlement follows. T
+ 2 rolling settlement. This means any trade taking place on Monday gets
settled by Wednesday.

(b) Forward settlement:

It means settlement will take place on some future date. It can be T + 5 or T
+ 7, etc. All trading in stock exchanges takes place between 9.55 am and
3.30 pm. Monday to Friday.

ONLINE TRADING:
Online trading is a fairly popular method of transacting in financial
products online. Brokers have gone online, with their platforms providing
all kinds of financial instruments like stocks, commodities, bonds, ETFS,
and futures.
• Traditionally, when a buyer wanted to invest money in stocks, he used to
call his brokerage firm and asked for putting in a request to buy stocks of a
given company for a specified amount.
• The broker would then let him know the market price of the stocks and
would confirm the order.
• After the user confirmed his trading account, the broker's fees and the time
period required for the order, the order would get placed on the stock
exchange.

As is obvious, this method had multiple steps and was pretty long drawn.
Not surprisingly, online trading platforms have taken over the entire
trading landscape because of their advantages:
• The users can open, manage and close accounts sitting at their homes,
working on a device with internet.

• Transactions can be made much more easily.

• Multiple financial products, which earlier needed to be bought from

specific places or banks, can now be bought and sold online, which also
reduces the the role of an intermediary and saves time.
• The money used is real and the user gets to analyse and choose from
the various options of stocks and products available. Offline vs Online
Trading

• As online trading increasingly widens its roots into the modern

trading market, retail trading finds its place in local stock exchanges
and offices. The impact of online trading over offline has been
noticeable with the evolution of computers and internet, in the past
two decades. Online trading does provide a lot of advantages which
are difficult to achieve offline.
• The cost of the stocks and various financial products has reduced
significantly. Online platforms provide a far more inexpensive
experience, which attracts a majority of traders and investors. This
has become possible because online trading eliminates the majority of
the middlemen, which in turn, decreases the extra added price of
commissions over these products.
• Online trading is much faster as compared to offline trading. It is also
easier to find the price of securities when the information is flowing
electronically. Receiving updates regarding price changes in the form
of price alerts, makes it easy to transact shares. Thus, reducing the
processing time. It also enables buying products from any location in
the world. Hence, it is not necessary to go to a definite place to trade.
• As online trading platforms are surplus in number, the competition
between them results in a benefit for the trader or investor. These
platforms, for better marketing and gaining greater users, release
offers and discounts which enables the users to buy products at lesser
prices or sell them at higher prices, ultimately, benefitting the users.
This happens, but rarely in offline trading.
DEPOSITORIES:
Depositories are institutions that hold investors' securities (likeshares,
debentures, and mutual funds) in an electronic form in a Demat account.

The role of the Depository is:

 1. To offer Demat accounts to investors.
2. Hold, and maintain a record of securities in Demat accounts for
investors.
3. Make online trading fast & secure.
4. Settlement of trades carried out on the exchange.
5. To reduce the paperwork involved in the transfer of financial
securities.

There are two types of depository services available that are: NSDL
(National Securities Depository Limited) and CDSL (Central
Depository Services Limited). These both depositories are based in
Mumbai. Investors in order to avail the services provided by depository
need to contact the Depository agent. Depository agents are the
intermediary between the depository and the investors.
Depositories interact with their customers through the medium of these
depository agents only. Investors are required to open depository account
which is known as demat account with any of Depository agent to use
depository services. The functioning of both Depository and depository
agent is regulated by SEBI (Securities Exchange Board of India).
Important Roles & functions of Depository are discussed below:

QUICK TRANSFER OF SECURITIES & FUNDS

Depositories involve trading of securities online electronically using
Demat account. Unlike, physical transfer of securities there is no
involvement of physical transfer of certificates of securities. Everything is
done on a paper-less basis fully digitally. This reduces the overall time
involved in the whole process thus enabling the immediate transfer of
ownership of securities. Beneficial owner on transfer of securities from
one account to another immediately transfer the funds.
Elimination Of Fraud Cases And Bad Deliveries
Depositories provide assurance to the investors regarding the securities
genuineness. Investors are relieved of all cases like bad deliveries, fake or
damaged certificates, transferor signature difference, and shares under
litigation. Depositories maintain a complete record of all securities after
complete verification. There is no involvement of any physical documents
for the purpose of trading by investors. Everything is stored & conducted
digitally online thereby reducing chances of different kind of frauds.
Reduces Brokerage Cost
Depositories reduce the overall brokerage cost required for trading of
securities. Investors can avail different benefits when shares are traded in
dematerialised form. Brokers charge less amount for dematerialised shares
as compared to trading of shares using physical documents. Shares when
traded in dematerialised form reduce the cost of handling paper form
thereby bringing down the overall trading cost.
Reduces Risk Of Loss & Damage Of Physical Certificates
Depositories store & safeguard the securities of its investors. It minimises
all chances of theft & damages of share certificates. Investors are not
required to hold the certificates of their securities in physical form. All
physical certificates are damaged and stored in digital form by
depositories. This safeguards the investors & eliminates all chances of
theft & damage of share certificates.

Eliminates Stamp Duty

Securities over the depository system are transferred online without the
involvement of any paperwork. Investors are not required to fill any
physical form and affix stamp for transfer of their securities. Investors are
relieved from paying stamp duty while transferring their shares.
Facilitates Transfer Of Dividends & Other Benefits
Depositories maintain a complete record of ownership of securities in its
accounts. It maintains a full record of securities in electronic form. This
facilitates proper & fast disbursement of interests & dividends to the
different investors. Several non-cash benefits like bonus, right shares are
transferred to the investor account directly.
Avoids Blank Transfers And Benami Transactions
Depositories verify all documents of securities properly before
dematerialising them. It checks the overall genuineness of securities and
performs detailed investigation. All chances of doing blank transfers and
doing trading in Benami names are avoided.
MARK TO MARKET SYSTEM:
Mark to market (MTM) is a method of measuring the fair value of
accounts that can fluctuate over time, such as assets and liabilities. Mark
to market aims to provide a realistic appraisal of an institution's or
company's current financial situation based on current market conditions.

In trading and investing, certain securities, such as futures and mutual

funds, are also marked to market to show the current market value of these
investments.

Understanding Mark to Market (MTM)

Mark to Market in Accounting

Mark to market is an accounting practice that involves adjusting the value

of an asset to reflect its value as determined by current market conditions.
The market value is determined based on what a company would get for
the asset if it was sold at that point in time. At the end of the fiscal year, a
company's balance sheet must reflect the current market value of certain
accounts. Other accounts will maintain their historical cost, which is the
original purchase price of an asset.

Mark to Market in Investing

In securities trading, mark to market involves recording the price or value

of a security, portfolio, or account to reflect the current market value
rather than book value. This is done most often in futures accounts to
ensure that margin requirements are being met. If the current market value
causes the margin account to fall below its required level, the trader will
be faced with a margin call. Mutual funds are also marked to market on a
daily basis at the market close so that investors have a better idea of the
fund's Net Asset Value (NAV).

Examples of Mark to Market

An exchange marks traders' accounts to their market values daily by

settling the gains and losses that result due to changes in the value of the
security. There are two counterparties on either side of a futures
contract—a long trader and a short trader. The trader who holds the long
position in the futures contract is usually bullish, while the trader shorting
the contract is considered bearish.
If at the end of the day, the futures contract entered into goes down in
value, the long margin account will be decreased and the short margin
account increased to reflect the change in the value of the derivative.
Conversely, an increase in value results in an increase to the margin
account holding the long position and a decrease to the short futures
account.

For example, to hedge against falling commodity prices, a wheat farmer

takes a short position in 10 wheat futures contracts on Nov. 21, 2019.
Since each contract represents 5,000 bushels, the farmer is hedging
against a price decline on 50,000 bushels of wheat. If the price of one
contract is $4.50 on Nov. 21, 2019, the wheat farmer's account will be
recorded as $4.50 x 50,000 bushels = $225,000.
Futures Change in Cumulative Account
Day Value Gain/Loss Balance
Price Gain/Loss
1 $4.50 225,000
2 $4.55 +0.05 -2,500 -2,500 222,500
3 $4.53 -0.02 +1,000 -1,500 223,500
4 $4.46 -0.07 +3,500 +2,000 227,000
5 $4.39 -0.07 +3,500 +5,500 230,500

Note that the Account Balance is marked daily using the Gain/Loss
column. The Cumulative Gain/Loss column shows the net change in the
account since day 1.

Because the farmer has a short position in wheat futures, a fall in the
value of the contract will result in an increase in their account. Likewise,
an increase in value will result in a decrease in account value. For
example, on Day 2, wheat futures increased by $4.55 - $4.50 = $0.05,
resulting in a loss for the day of $0.05 x 50,000 bushels = $2,500. While
this amount is subtracted from the farmer's account balance, the exact
amount will be added to the account of the trader on the other end of the
transaction holding a long position on wheat futures.
The daily mark to market settlements will continue until the expiration
date of the futures contract or until the farmer closes out his position by
going long on a contract with the same maturity.