A PROJECT REPORT ON

"INVESTMENT IN EQUITY VS DEIVATIVES-A COMPARITIVE

ANALYSIS"

SUBMITTED TO

AVANTHI PG COLLEGE

AVANTHI PG COLLEGE, MOOSARAMBAGH

HYDERABAD-500035
(2017 – 2019)

In partial fulfilment of the requirements

For the award of the Degree of

MANAGEMENT OF BUSINESS ADMINISTRSTION

BY

VARKALA UDAY KIRAN

(130517672027)
Under the esteemed guidance of

BHAVANI DEVI NAIR KHUSHBOO AGARWAL

FACULTY GUIDE BRANCH MANAGER
DECLARATION

I hereby declare that this Project Report titled, "INVESTMENT IN EQUITY VS

DEIVATIVES-A COMPARITIVE ANALYSIS "submitted by me to Avanthi PG

College is a bonafide work undertaken by me and it is not submitted to any other University or
Institutions for the award of any degree or diploma/certificate or published any time before.

VARKALA UDAY KIRAN

 ACKNOWLEDGEMENT
With great pleasure, I want to take this opportunity to express my heart full gratitude to all
the people who helped this main project a grand success.

With immense pleasure, I wish to express my deep sense of gratitude to my mentor Devi
Bhavani Nair(Faculty Guide) for his guidance during all stages of this project and for helping me
throughout the project in spite of his busy schedule and also for his ceaseless patience. His
opinions and experiences offered me valuable insights into the study area and enhanced the value
of the project.

I wish to acknowledge my obligation with sincere thanks, deep sense of gratitude to Ms khusboo
Agrawal (manager at karvy abids branch)
I thank the entire employees in the organization for expressing their whole hearted views and
thoughts while collecting the information and for their co-operation during my stay in the
Organization

I would like to thank Dr. Apparao, principal, Avanthi PG College coordinator and
having permitted me to carry out this project work.

Thank you all

VARKALA UDAY KIRAN
 TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

CHAPTER – 1

INTRODUCTION

OVERVIEW OF THE INDIAN SECURITIES MARKET

PRODUCTS AND PARTICIPANTS

OBJECTIVES OF THE STUDY

METHODOLOGY OF THE PROJECT

REVIEW OF LITARATURE

CHAPTER – 2

KARVY STOCK BROKING LIMITED

CHAPTER – 3

ABOUT EQUITY

ABOUT DERIVATIVES

LIMITATIONS OF THE STUDY

CHAPTER – 4

FINDINGS

CHAPTER-5

REFERENCES

BIBLIOGRAPHY
 CHAPTER – I

INTRODUCTION

Indian stock market is one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities.
In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses
took place in Bombay. Though the trading was broad but the brokers were hardly
half dozen during 1840 and 1850.

 An informal group of 22 stockbrokers began trading under a banyan tree

opposite the Town Hall of Bombay from the mid-1850s, each investing a
princely amount of Rupee.
 This informal group of stockbrokers organized themselves as the Native
Share and Stockbrokers Association which, in 1875, was formally organized
as the Bombay Stock Exchange (BSE).

Most of the trading in the Indian stock market takes place on its two stocks National
Stock Exchange(NSE) and Bombay Stock Exchange(BSE). The BSE has been in
existence since 1875. The NSE, on the other hand, was founded in 1992 and started
trading in 1994. However, both exchanges follow the same trading mechanism,
trading hours, settlement process etc. At the last count, the BSE had about 4,700
listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on
the BSE, only about 500 firms constitute more than 90% of its market capitalization,
the rest of the crowd consists of highly illiquid shares. Almost all the significant
firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot
trading, with about 70% of the market share, as of 2009, and almost a complete
monopoly in derivatives trading, with about a 98% share in this market, also as of
2009. Both exchanges compete for the order flow that leads to reduced costs, market
efficiency and innovation.

AN OVERVIEW OF THE INDIAN SECURITIES MARKET

Securities markets provide a channel for allocation of savings and helps to invest in
the best way. The Indian securities market has two interdependent and inseparable
segments:
i) Primary market
ii) Secondary market.

1. PRIMARY MARKET

The primary market is that part of the capital markets that deals with the issue of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through
a syndicate of securities dealers.

 The process of selling new issues to investors is called underwriting. In

the case of a new stock issue, this sale is a public offering. Dealers earn
a commission that is built into the price of the security offering, though
it can be found in the prospectus.

The primary market is that par t of a capital market in which a security is first issued
to investors by companies to raise capital. This is called as an Initial Public
Offering (IPO). It provides an opportunity to the issuer of the securities which may
be government as well as corporate, to raise funds in order to meet the requirements
of an investment or discharge some obligation. Merchant bankers help the
companies raise money from the general public.

In case of primary market, the market issuance is done either through

public or private placement. A public issue does not limit any entity in investing.
While in private placement, the issuance is done to select number of people. In
terms of the Companies Act, 2013, an issue becomes public if it results in allotment
to more than 200 persons. This means an issue resulting in allotment to less than
200 persons is private placement.

Features of primary market:

 This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore, it is
also called the new issue market (NIM).
 In a primary issue, the securities are issued by the company directly to
investors.
 The company receives the money and issues new security certificates to
the investors.
 Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating capital
formation in the economy.
Different kinds of issue:

2. SECONDARY MARKET
 Secondary market refers to a place
where securities are traded in the stock
exchange after being initially offered to
the public in the primary market.

The Secondary market is also called as aftermarket, the financial market in

which previously issued financial instruments such as stock, bonds, options,
and futures are bought and sold. Another frequent usage of "secondary market"
is to refer to loans which are sold by a mortgage bank to investors such
as Fannie Mae and Freddie Mac.

The term "secondary market" is also used to refer to the market for any used
goods or assets, or an alternative use for an existing product or asset where the
customer base is the second market.

After the initial issue, investors can purchase from other investors in the
secondary market.
The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major
stock exchanges are the most visible example of liquid secondary markets - in
this case, for stocks of publicly traded companies.
 For the general investor, secondary market provides an efficient platform
for trading of securities (i.e., provides liquidity to convert their
investments into cash).
  While for the management of the company, the demand for their equity
in the secondary market will show how efficiently the company and its
finances are being managed. Better the performance of the company, the
demand for its shares by investors will also increase, thereby enhancing
the value of the investment.
 In secondary market the role of intermediaries is also important.
 The secondary market operates through two mediums, namely,
 Over The Counter (OTC) market
 Exchange traded market

 KEY STRENGTHS OF THE INDIAN SECURITIES MARKETS

The securities markets in India have made enormous progress in developing

sophisticated instruments and modern market mechanisms. The key strengths of the
Indian capital market include:
 A fully automated trading system on all stock exchanges.
 A wide range of products, an integrated platform for trading in both cash
and derivatives.
 A nationwide network of trading through over 4,618 corporate brokers.

A significant feature of the Indian securities market is the quality of

regulation. The market regulator, Securities and Exchange Board of India
(SEBI) is an independent and effective regulator. It has put in place sound
regulations in respect of intermediaries, trading mechanism, settlement cycles,
risk management, derivative trading and takeover of companies.
 There is a well designed disclosure based regulatory system. Information
technology is extensively used in the securities market. The stock exchanges in
India have the most advanced and scientific risk management systems. The
growing number of market participants, the growth in volume of securities
transactions, the reduction in transaction costs, the significant improvements
in efficiency, transparency and safety, and the level of compliance with
international standards have earned for the Indian securities market a new
respect in the world.

 KEY INDICATORS OF SECURITIES MARKET

 Index:
An Index is used to give information about the price movements of
products in the financial, commodities or any other markets. Stock market
indices are meant to capture the overall behaviour of the equity markets. The
stock market index is created by selecting a group of stocks that are
representative of the whole market or a specified sector or segment of the
market. The blue chip index of NSE is S&P CNX Nifty and for BSE is
Sensex.

 Market Capitalization:
Market capitalization is defined as value of all listed shares on the
country’s exchanges. It is computed on a daily basis. Market capitalization of
a particular company on a particular day can be computed as product of the
number of shares outstanding and the closing price of the share. Here the
number of outstanding shares refers to the issue size of the stock.
 Market capitalization is one of the most important characteristics
that helps the investor determine the returns and the risk in the share. It also
helps the investors choose the stock that can meet their risk and
diversification criterion.

For instance, a company has 20 million outstanding shares and the

current market price of each share is Rs100. Market capitalization of this
company will be
200,00,000 x 100=Rs 200 crores.

PRODUCTS AND PARTICIPANTS

1. PRODUCTS
Financial markets facilitate allocation of savings . Savings are linked to
investments by a variety of intermediaries through a range of complex
financial products called “Securities”.
The securities include:
A. Shares, bonds, scripts, stocks or other marketable securities of
like nature in or of any incorporate company or body corporate
B. Government securities
C. Derivatives of securities
D. Units of collective investment scheme
E. Interest and rights in securities, and security receipt or any other
instruments so declared by the central government.
Broadly, securities can be of three types
  Equities
 Debt securities
 Derivatives.
A). Equities

Generally speaking, equity is the value of an asset less the amount of

all liabilities on that asset. It can be represented with the accounting equation:
Assets -Liabilities = Equity.

The Stock market or Equities market is where listed securities are traded in the
secondary market. Currently more than 1300 securities are available for trading on
the Exchange.

The Equity market also known as the stock market is where the listed securities are
traded in the secondary market. This is one of the most vital areas of a market
economy, as investors have the opportunity to own a slice of ownership in a
company with the potential to realize gains based on its future performance. The
shareholders are the part of owners of the company. The price of shares and other
assets is an important part of the dynamics of economic activity, and can influence
or be an indicator of social mood.

B).Debt securities

Debt security refers to a debt instrument, such as a government

bond, corporate bond, certificate of deposit (CD), municipal bond or preferred stock,
that can be bought or sold between two parties and has basic terms defined, such as
notional amount (amount borrowed), interest rate, and maturity and renewal date. It
also includes collateralized securities, such as collateralized debt obligations
(CDOs), collateralized mortgage obligations (CMOs), mortgage-backed securities
issued by the Government National Mortgage Association (GNMAs) and zero-
coupon securities.

C). Derivatives

Derivative is a financial instrument which derives its value from the

underlying asset, which can be equity, commodity, currency, bonds, or security.
Derivatives are mostly used for hedging the risk which is associated with owning
the underlying asset.
2. PARTICIPANTS

The securities market has essentially three categories of participants

 The investors
 The issuers
 The intermediaries

Investor
An investor is any person who commits capital with the expectation of
financial returns. Investors utilize investments in order to grow their money and/or
provide an income during retirement, such as with an annuity.

A wide variety of investment vehicles exist including (but not limited to) stocks,
bonds, commodities, mutual funds, exchange-traded funds (ETFs), options, futures,
foreign exchange, gold, silver, retirement plans and real estate. Investors typically
perform technical and/or fundamental analysis to determine favorable investment
opportunities, and generally prefer to minimize risk while maximizing returns.
 Issuers

An issuer is a legal entity that develops registers and sells securities

to finance its operations. Issuers may be corporations, investment trusts, or domestic
or foreign governments. Issuers are legally responsible for the obligations of the
issue and for reporting financial conditions, material developments and any other
operational activities as required by the regulations of their jurisdictions.

Intermediaries

Investment in securities that are issued by the companies, government,

corporations cannot be done directly. The term market intermediary is usually
referred to those people or institutions that are in the business of managing
individual portfolios, executing orders, dealing in or distributing securities and
providing information relevant to the trading security.
  MARKET SEGMENTS AND THEIR PRODUCTS

The Exchange provides trading in four different segments as shown in the

figure below
 Market
Segments

Whole sale Capital Futures & Currency

Market
Debt market Options Derivatives

Wholesale Debt Market Segment: This segment at NSE commenced its

operations in June 1994. It provides the trading platform for wide range of debt
securities which includes State and Central Government securities, Treasury Bills,
PSU Bonds, Corporate debentures, Commercial Papers, Certificate of Deposits etc.

Capital Market Segment: It offers a fully automated screen based trading system,
known as the National Exchange for Automated Trading (NEAT) system. Various
types of securities e.g. equity shares, warrants, debentures etc. are traded on this
system.

Futures & Options (F&O) Segment: This segment provides trading in derivatives
instruments like index futures, index options, stock options, and stock futures, and
commenced its operations at NSE in June 2000.

Currency Derivatives Segment (CDS): This segment at NSE commenced its

operations on August 29, 2008, with the launch of currency futures trading in US
Dollar-Indian Rupee (USD-INR). Trading in other currency pairs like Euro-INR,
Pound Sterling-INR and Japanese Yen-INR was further made available for trading
in February 2010. ‘Interest rate futures’ was another product made available for
trading on this segment with effect from August 31, 2009.
 OBJECTIVES OF THE STUDY

Any investor’s vision is a long term investment and short term investment and gets
high returns by bearing high risk. For that objectives need to be climbed
successfully. So the objectives of this project are,

1) To find the RIGHT SCRIPT to buy and sell at the RIGHT TIME.
2) To get good return.

3) To study the role of derivatives and equities in Indian financial market

4) To know how derivatives can be used for hedging.
5) To know the outcome of Equity and Derivative.
6) How to achieve Capital appreciations.
 REVIEW OF LITERATURE
The Indian capital market has changed dramatically over the last few years,
especially since 1990. Changes have also been taking place in government
regulations and technology. The expectations of the investors are also changing.
The only inherent feature of the capital market, which has not changed is the
“Risk” involved in investing in corporate securities. Managing the risk is emerging
as an important function of both large scale and small-scale investors.

The risk taken by the investors can be minimized when the investors
understand the company and does some research about the future performance of
the company. Apart from the research, the investors should understand the current
market scenario i.e. the economy of the country, industry performance etc. and
have a prediction of the same.

Now a days the information about the companies is easily available through
annual reports, but connecting the dots of external environment with the internal
operation of the companies is what is needed. Mr. Narendra Nathan in his article on
“Learn how to pick value stock” in economics times (18th May, 2015) has made
the long researches short to understand the company from different aspects. Mr.
Nathan has carried out 11 steps to pick the best stocks for investment. All the 11
steps are very logical which gives the overall performance of the company and to
understand the companies better. The 11 steps are eliminating steps which
eliminate stocks which doesn’t meet the criteria from an index thus leaving us with
filtered stocks for investment.
Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to
analyze the worthiness of the individual securities needed to be acquired for
portfolio construction. The Fundamental Analysis aims to compare the Intrinsic
Value (I.V) with the prevailing market price and to take decisions whether to buy,
sell or hold the investments. The fundamentals of the economy, industry and
company determine the value of a security. If the Intrinsic Value is greater than the
Market Price (M.P), the stock is underpriced and should be purchased. He observed
that the Fundamental Analysis could never forecast the M.P. of a stock at any
particular point of time.

Technical Analysis removes this weakness. Technical Analysis detects the

most appropriate time to buy or sell the stock. It aims to avoid the pitfalls of wrong
timing in the investment decisions. He also stated that the modern portfolio
literature suggests 'beta' value p as the most acceptable measure of risk of scrip.
The securities having low P should be selected for constructing a portfolio in order
to minimize the risks. The trading of financial derivatives has received extensive
attention, while at the same time it has led to a debate over its impact on the
underlying stock market from various facets by the academicians.

The researchers all over the world have done research on derivative trading
and were able to find out various facts about derivative and its trading. Mr. S.
Dinesh in his study on “Effectiveness of Equity Derivatives in Cash Market
Segment in India” has assessed the impact of derivative market effect in cash
market segment by evaluating different strike price movement of the contract. Mr.
S. Dinesh have also tried to predict the cash market index and underlying index
using Pivot Point method.
 James (1993) studied the impact of price discovery by futures market on the
cash market volatility. The study is conducted using Garbade and Silber model to
estimate the price discovery function of the futures market. The results affirm that
futures market is beneficial with respect to cash market as it offers better
efficiency, liquidity and also lowers the long-term volatility of the spot market.

Darrat et al (1995) examines if futures trading activity has caused stock price
volatility. The study is conducted on S & P 500 index futures for a period of 1982 -
1991. The study also examines the influence of macro-economic variables such as
inflation, term structure rates on the volatility of the S&P 500 stock returns.
Granger causality tests are applied to assess the impact on stock price volatility due
to futures trading and other relevant macro-economic variables.

The results indicate that the futures trading have not caused any jump
volatility (occasional and sudden extreme changes in stock prices). Term structure
rates and OTC index have caused the stock price volatility while, inflation and risk
premium have not influenced the volatility of stock prices. Gregory et al (1996)
examined how volatility of S&P 500 index futures affects the S&P 500 index
volatility. The study also examines the effect of good and bad news on the spot
market volatility. The change in the correlation between the index and futures
before and after October 1987 crash is also examined. Volatility is estimated by E-
GARCH model. It is shown that the bad news increases the volatility than the good
news and the degree of asymmetry is much higher for the futures market. The
correlation between the S&P 500 index future and S&P500 index declines during
the October 1987 crash.
CHAPTER-2
 Introduction to the company
Karvy Mission:

“ To be the leading and preferred service provider to our customers, and we aim
to achieve this leadership position by building an innovative, enterprising, and
technology driven organization which will set the highest standards of service and
business ethics. ”

Karvy Vision:

“Strive to be the leaders and experts through our processes, people and
technology offering the unique blend that delivers superior value by establishing
and maintaining the highest levels of services and professionalism.”

About Karvy Group

Mr. C. Parthasarathy
Chairman & Managing Director
Mr. M. Yugandhar
Managing Director

Mr. M. S. Ramakrishna
Director

Mr. Rajiv R. Singh

Vice President & Business Head - Karvy Stock Broking Limited.

About Karvy:

The Karvy group was formed in 1983 at Hyderabad, India. Karvy ranks among the
top player in almost all the fields it operates. Karvy Computershare Limited is
India’s largest Registrar and Transfer Agent with a client base of nearly 500 blue
chip companies, managing over 70 million accounts.

Karvy Stock Broking Limited, a member of National Stock Exchange

of India and the Bombay Stock Exchange, ranks among the top five stock brokers
in India. With over 6, 00,000 active accounts, it ranks among the top 5 Depository
Participant in India, registered with N.S.D.L and C.D.S.L. Karvy Comtrade,
Member of N.C.D.E.X and M.C.X ranks among the top 3 commodity brokers in
the country.

Karvy Insurance Broking Limited is registered as a Broker with

I.R.D.A and ranks among the top 5 insurance agents in the country. Registered with
A.M.F.I as a corporate Agent, Karvy is also among the top Mutual Fund mobilizer
with over Rs. 5,000 crores under management. Karvy Realty (India) Limited,
which started in 2006, has quickly established itself as a broker who adds value, in
the realty sector. Karvy Global offers niche off shoring services to clients in the
U.S. Karvy has 575 offices over 375 locations across India and overseas at Dubai
and New York.
 Karvy’s orgin:

One fateful evening in the summer of 1982, 5 young men who worked for a
renowned chartered accountancy firm decided that it was time they struck out on
their own to create an enterprise that would someday become an iconic name in
the financial services space.

They came from ordinary middle class backgrounds. They had two assets, one
was their education and the other an unquenchable desire to succeed. They had a
lot stacked against them, the environment was not conducive to entrepreneurship;
technology was not fully supportive, financial markets were largely unregulated,
they were based out of Hyderabad while most key players in the financial world
were in Mumbai or other metros and the wolf was at the door. The odds seemed
insurmountable.

These remarkable young men’s “Never say die” approach held them in good
stead over the years. They stuck to their dreams, burnt the midnight oil, embraced
technology and made it work for them and through sheer dint of determination,
eventually overcame all obstacles.

First came the registry business, followed by broking, and the rest became a
lesson for every young individual to emulate.

Karvy’s financial services business is ranked among the top-5 in the country
across its business segments. The Group services over 70 million individual
investors in various capacities, and provides investor services to over 600 corporate
houses, comprising the best of Corporate India.

The Group offers stock broking, depository participant, distribution of financial

products (including mutual funds, bonds and fixed deposits), commodities
broking, personal finance advisory services, merchant banking & corporate
finance, wealth management, NBFC (loans to individuals, micro and small
businesses), Data management, Forex & currencies, Registrar & Transfer agents,
Data Analytics, Market Research among others.

Karvy prides itself on remaining customer centric as all times through a

combination of leading edge technology, Professional management and a wide
network of offices across India.
 Karvy is committed to its quest as an Equal Opportunity Employer and believes
in the rights for differently-abled persons. Karvy has over 12% employees who are
challenged in some form in one of our prominent businesses.

Organization:

Karvy was started by a group of five chartered accountants in 1979. The

partners decided to offer, other than the audit services, value added services like
corporate advisory services to their clients. The first firm in the group,
Karvy Consultants Limited was incorporated on 23rd July, 1983. In a very short
period, it became the largest Registrar and Transfer Agent in India. This business
was spun off to form a separate joint venture with Computershare of Australia, in
2005. Karvy’s foray into stock broking began with marketing IPOs, in 1993.
Within a few years, Karvy began topping the IPO procurement league tables and
it has consistently maintained its position among the top 5. Karvy was among the
first few members of National Stock Exchange, in 1994 and became a member of
The Stock Exchange, Mumbai in 2001. Dematerialization of shares gathered pace
in mid-90s and Karvy was in the forefront educating investors on the advantages
of dematerializing their shares. Today Karvy is among the top 5 Depository
Participant in India.
Services provided by Karvy Stock Broking
1. Equities and Derivatives:
“It pays well to be informed and stay connected” – a philosophy that drives
the research team at KARVY to produce and deliver in-depth and incisive market
research to you. All of KARVY’s businesses are backed by a dedicated research
unit which strives to keep investors abreast with news, information, events and
conditions of markets.
Penetrative and investigative research techniques unearth a wealth of information
that empowers investors in their investment decisions. The KARVY research team
creates the following reports and publications for consumption by investors in the
Indian equity markets.

2. Commodities:
Commodities market, contrary to the beliefs of many people, has been in
existence in India through the ages. However, the recent attempt by the
Government to permit Multi-Commodity National levels exchanges has indeed
given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange
(MCX) and National Commodity and derivatives Exchange (NCDEX) have come
into being. These exchanges, by virtue of their high-profile promoters and
stakeholders, bundle in themselves, online trading facilities, robust surveillance
measures and a hassle-free settlement system.
futures contracts available on a wide spectrum of commodities like Gold, Silver,
Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Chana etc., provide excellent
opportunities for hedging the risks of the farmers, importers, exporters, traders and
large scale consumers. They or debt market provides tremendous opportunities for
better diversification of risk.

3. Mutual Funds Services:

Investment is the stepping stone to achieving one's financial dreams. Mutual

funds offer an opportune way to long-term wealth creation. However, with more
and more funds flooding the market, the task of selecting the most suitable scheme
gets even more complicated. Mutual Fund Advisory Service at Karvy guides you
through this maze and ensures that client’s investments are backed by our quality
research.
4. Depository Services:
Karvy Stock Broking Limited provides depository services to investors as a
Depository Participant with the National Securities Depository Limited (NSDL)
and Central Depository Services (India) Limited (CDSL). The Depository system
in India links Issuers, National level Depositories, Depository Participants and
Clearing Houses / Clearing Corporation of Stock Exchanges. Karvy’s Demat
services offer you a secure, convenient and paperless way to keep track of client’s
investments in shares and other security instruments over time, without the hassle
of handling paper based transcripts. Karvy provides the following services
Dematerialization of Shares Rematerialization of Shares Transfer of Shares
Pledging of Shares
Electronic Custodial Services
Maintenance of Beneficial Holdings
Electronic Credit against Corporate Actions

5. Insurance Broking Services:

At Karvy Insurance Broking (P) Ltd they provide both life and non-life insurance
products to retail individuals, high net-worth clients and corporates.
With the opening up of the insurance sector and with a large number of
private players in the business, Karvy’s in a position to provide tailor made policies
different segments of customers. Karvy’s journey to emerge as a personal finance
advisor, the company will be better positioned to leverage our relationships with
the product providers and place the requirements of the company’s customers
appropriately with the product providers.
6. Bonds and Deposits:
Fixed Income Securities & Trading (K-FIST) was started in December 2002
with a roll out from 7 dedicated centres of Karvy. The deal sizes vary from Rs.10,
000 to Rs.5 crores. Products - Central Government securities, State Development
Loans, State Guaranteed bonds, Public Sector Undertaking Bonds, Financial
Institution Bonds, and Bank bonds of SLR/Non-SLR category, both taxable and
tax-free. Target clients - Provident Fund Trusts, Educational & Religious trusts,
charitable trusts, and Co-operative banks, Regional Rural Banks, Corporates, and
High Net Worth Individuals Standard Operating Procedures.

7. Realty Services:
Karvy Realty India Limited is promoted by the KARVY Group, a premier
and leading integrated financial services company. KARVY services over 60
million individuals in various capacities, and provides services to over 400
corporates. KARVY has a network of 400+ branches and 500+ franchisees which
enables the Group to have an unmatched reach to ‘stay in touch’ with the
customers as well as to act as a delivery mechanism for its various products. At
Karvy Realty endeavour to be an integrated real estate investment advisory and
management company that aims to service the mass demand for housing needs in
India and to facilitate the Realty sector’s need for structured finance, delivered by a
top-notch team of experienced professionals.

8. Portfolio Management Services:

In today's intricate and volatile market client investment requires constant
monitoring and attention. The demand made on client’s time and energy by other
business may not leave you with capacity to attend to client’s personal portfolio
with the degree of care you deem appropriate. Green Wallet is an endeavor
specially designed by Karvy to enhance the wealth of a niche segment of investors.
This service primarily meant for HNIs (High Net Worth Individuals) offers
customers awide range of schemes. These unique schemes seek to achieve higher
returns through broad based participation in equity markets. This is achieved by
creating a diversified equity portfolio of small, medium and large capitalized
companies.

9. Currency Derivatives:
Karvy Forex & Currency Private Limited (KFCL) is another business enterprise of
the prestigious Karvy group. Having laid a strong foundation in Indian financial
services, it is indeed a pleasure for the Karvy group to venture into the currency
derivatives segment. This enables us to provide extended services to the company’s
esteemed customers, thereby making the group a single window for all financial
services. KFCL offers advisory and brokerage services for the Indian currency
derivative markets. Karvy provides online trading platforms to their clients that
enable them to trade whenever they choose while receiving instant professional
support. With company’s powerful expertise in financial services that exists across
India, along with an enviable technological edge, the company’s all set to bring to
client the opportunity of investing in the rapidly growing currency market. The
currency derivatives
market will be an added advantage to client’s portfolio as it will help their
client to manage their price risks and add to their investment avenues. Today, karvy
have an extensive network throughout the country, with225 branches spread
across 180 cities.
PRODUCTS WHICH ARE OFFERED BY KARVY
 KARVY has a professional management team and ranks among the best in
technology, operations, and more importantly, in research of various
industrial segments.

Institutional services of karvy:

1. Registrar and Transfer Agency:
Karvy began its corporate venture through Karvy Consultants Limited to act
as Registrars and Transfer agents. This business was spun off in 2005 to form a
Joint Venture with Computer Share of Australia. Karvy services include Initial
Public Offers (IPOs) processing, shareholder servicing, effecting corporate actions,
investor information services and host of technology enabled services to facilitate
efficient and effective service delivery.
2. Mutual Fund Registry:
The mutual fund registry services provide services to asset management
companies in India as serves as the back-office to mutual fund companies handling
transactions between AMCs, investors, distributors with regard to new fund offers,
closed ended mutual funds, and open-ended mutual in the Indian market. Mutual
fund registry services provide asset management companies with investor service
centers across the country to enable mutual fund investors to perform any or all of
the following transaction types: purchases, additional purchases, redemptions,
switches etc.
3. Investment Banking and Corporate Finance:
Deepening of the Financial Markets and an ever-increasing sophistication in
corporate transactions, has made the role of Investment Bankers indispensable to
organizations seeking professional expertise and counselling, in raising financial
resources through capital market apart from Capital and Corporate Restructuring,
Mergers & Acquisitions, Project Advisory and the entire gamut of Financial
Market activities.. KISL has built its reputation by capitalizing on its qualified
professionals, who have successfully executed a large number of complex and
unique transactions.
4. Institutional Broking:
The institutional broking arm of KARVY Stock Broking offers corporate
houses and institutions dealing capabilities on India leading stock exchanges (NSE
and BSE) in the cash and derivatives segments. KARVY also supports institutional
traders through their institutional sales and research teams with information and
insightful reports on stocks, sectors and industry verticals. KARVY’s institutional
broking clientele include some major domestic Mutual Funds, Insurance
Companies, Banks and FII’s in India.
5. Debt Market Services:
Karvy’s Retail Debt Market Division provides fixed income products to its
clients. Karvy services are tailored to meet the requirements of Provident Fund
Trusts, Educational & Religious trusts, charitable trusts, and Co-operative banks,
Regional Rural Banks, Corporates, and High Net Worth Individuals.

6. BPO and KPO Services:

Karvy Global Services is a knowledge services company. Karvy provide
specialist resources to extend in house analyst teams in driving clear business
results. Karvy serves investment banks, insurance providers, brokerages, hedge
funds, research agencies, and life settlement providers across the United States,
Middle East, and Europe.
CHAPTER-3
 EQUITY
Equity is the value of an asset less the amount of all the liability on the asset.

Equity=Assets-Liabilities

Total equity capital of a company is divided into equal units of small

denominations, each called a share.
 It is a stock or any other security representing an ownership interest.
 It proves the ownership interest of stock holders in a company.

BENFITS FROM EQUITY:

The benefits distributed by the company to its shareholders can be:
1) Monetary Benefits

2) Non-Monetary Benefits

1. MONETARY BENEFITS:

Dividend:
An equity shareholder has a right on the profits generated by the
company. Profits are distributed in part or in full in the form of dividends.
Dividend is an earning on the investment made in shares, just like interest in case
of bonds or debentures. A company can issue dividend in two forms:
a) Interim Dividend and
b) Final Dividend
While final dividend is distributed only after closing of financial year; companies
at times declare an interim dividend during a financial year.

Capital Appreciation: A shareholder also benefits from capital appreciation.

Simply put, this means an increase in the value of the company usually reflected in
its share price. Companies generally do not distribute all their profits as dividend.
As the companies grow, profits are re-invested in the business. This means an
increase in net worth, which results in appreciation in the value of shares.
Capital appreciation is a increase or appreciation in price of an stock. For
example, let's say that an investor has purchased 1000 shares of Inox leisure at Rs.
200 per share. His investment in equity will be as follows:

PARTICULARS AMOUNT
Date of purchase 1st November 2015
Buying price Rs. 200 per share
Current market price Rs. 280 per share
No. Of shares held 1000
Dividend issued for FY 16-17 Rs. 2.00 per share
Capital appreciation (280 – 200) * 1000 = 80,000 = 40%
Dividend Rs. 2,000 = 1%
Total ROI on investments is 41%
 2. NON-MONETARY BENEFITS:
Apart from dividends and capital appreciation, investments in shares
also fetch some type of non-monetary benefits to a shareholder. Bonuses
and rights issues are two such noticeable benefits.

Bonus:
An issue of bonus shares is the distribution free of cost to the shareholders
usually made when a company capitalizes on profits made over a period of time.
Rather than paying dividends, companies give additional shares in a pre-defined
ratio. Prima facie, it does not affect the wealth of shareholders. However, in
practice, bonuses carry certain latent advantages such as tax benefits, better future
growth potential, and an increase in the floating stock of the company, etc.

 Bonus shares are issued to the existing shareholders out of the profits
available with the company.
 Instead of giving dividend which will result in cash outflow to the company,
the company can issue bonus shares.
 Results in no cash outflow to the company and does not affect the working
capital of the company i.e., capitalization of reserves.
For example: if the company has announced a bonus issue of 1:1, then every
shareholder who holds one share will be eligible to get one more share for free.
But, whenever a bonus share is issued, market price of the stock will undergo a
change.
We had our Earning Per Share (EPS) = Rs. 100. But when a bonus share is issued
then again we need to calculate our EPS = Earnings / No. of shares outstanding
 Rs. 10 Lakh / 20,000 shares = Rs. 5 per share.

Rights Issue: A rights issue involves selling of ordinary shares to the existing
shareholders of the company. A company wishing to increase its subscribed capital
by allotment of further shares should first offer them to its existing shareholders.
The benefit of a rights issue is that existing shareholders maintain control of the
company. Also, this results in an expanded capital base, after which the company is
able to perform better. This gets reflected in the appreciation of share value.
 Right given to existing shareholders of the company to apply for further
shares.
 Results in cash inflow to the company.
 The share issued in rights issue has to be at a discounted price compared to
the current market price of the share.

RISKS IN EQUITY INVESTMENT

Although an equity investment is the most rewarding in terms of returns
generated, certain risks are essential to understand before entering into the world
of equity.

 Market/ Economy Risk:

It is the risk of investment declining in value due to economic
developments or other events that effect the entire market. The
prices or yields of all securities in a particular market rise or fall
due to broad outside influences. This change in price is due to
‘Market Risk’.
 Exchange Rate Risk:
Fluctuations in foreign currency in which an investment is valued
compared to home currency may add risk to the value of a security.
 Inflation Risk:
It is the risk of a loss in your purchasing power because the value
of your investments does not keep up with inflation. This is
sometimes referred to as ‘loss of purchasing power’. Whenever the
rate of inflation exceeds the earnings on your investments, you will
run the risk that you will actually be able to buy less and not more.
 Interest Rate Risk:
0Interest rate movements in the Indian debt markets can be volatile
leading to the possibility of large price movements up or down in
debt and money market securities.
 Industry Risk.
 Management Risk.
 Business Risk.
 Financial Risk.
HOW TO OVERCOME RISKS

Most risks associated with investments in shares can be reduced by using

the tool of diversification. Purchasing shares of different companies and
creating a diversified portfolio has proven to be one of the most reliable tools of
risk reduction.
 All investments carry certain risk, there is no way to eliminate risk
completely, and even investments that seem incredibly safe may have
some degree of risk involved.
 The key to smart investing is to minimize your client’s risk by
diversification wherever possible.
 Diversify your client’s portfolio by investing in different asset classes.
 If an individual asset’s diversification is not possible, then it can be
reduced by ratings about the similar products offered by different
competitors

THE PROCESS OF DIVERSIFICATION

When you hold shares in a single company, you run the risk of a large magnitude.
As your portfolio expands to include shares of more companies, the company
specific risk reduces. The benefits of creating a well-diversified portfolio can be
gauged from the fact that as you add more shares to your portfolio, the weightage
of each company’s share gets reduced. Hence any adverse event related to any one
company would not expose you to immense risk. The same logic can be extended
to a sector or an industry. In fact, diversifying across sectors and industries reaps
the real benefits of diversification. Sector specific risks get minimized when shares
of other sectors are added to the portfolio. This is because a recession or a
downtrend is not seen in all sectors together at the same time.

HOWEVER ALL RISKS CANNOT BE REDUCED

Though it is possible to reduce risk, the process of equity investing
itself comes with certain inherent risks, which cannot be reduced by strategies
such as diversification. These risks are called systematic risk as they arise from
the system, such as interest rate risk and inflation risk. As these risks cannot be
diversified, theoretically, investors are rewarded for taking systematic risks for
equity investment.

SELECTION OF SHARES
When it comes to investing in stocks, it’s important to decide on what
basis the stock selection is being made and the objective for investing in those
stocks. It should be decided whether its intended for long term or for a short period.
Accordingly, the decision is made to look at the business, company profile,
management etc. In case of long term, market behaviour is considered, and in case
of short term, trading pattern is considered.
Based on the above types of investment horizon, stock selection is made on the
following basis.
Proper selection of shares is of two types
1. Fundamental analysis
2. Technical analysis

1. FUNDAMENTAL ANALYSIS

It involves in –depth study and analysis of the prospective company

whose shares we want to buy, the industry it operates in and the overall
market scenario. It can be done by reading and assessing the company’s
annual reports, research reports published by equity research houses,
research analysis published by the media and discussions with the
company’s management or the other experienced investors.

Fundamental analysis involves analyzing the financial statements

which include balance sheet, P&L statement of a business, its competitors
and market condition. It focuses on the overall state of the economy, and
considers factors including interest rates, production, earnings, employment,
GDP, housing, manufacturing and management.

Hence, fundamental analysis is performed on historical financial data,

but with the goal of making financial forecasts.

Objectives of fundamental research

 Make a projection on business performance.

  Evaluate management and decision making skills.
 Evaluating companies credit risk.
 Finding the intrinsic value of the share.

2. TECHNICAL ANALYSIS

It involves studying the prices movement of the stock over an extended

period of time in the past to judge the trend of the future price movement. It
can be done by software programs, which generate stock prices charts
indicating upward. Downward and sideways movements of the stock price
over the stipulated time period.
 Technical analysis is the forecasting of future financial price
movements based on the study of past price movements.
 Technical analysis helps investors to anticipate what is likely to
happen to prices over time. Technical analysis uses a wide variety of
charts that represent the prices of financial instruments over time.
 It can be applied to stocks, indices, commodities, futures or any
tradable instrument. The price of financial instruments is influenced
by the forces of supply and demand.
  The timeframe can be based on intraday (1min, 5min, 10min, 15min,
30min or hourly), daily, weekly or monthly price data.

WHEN TO BUY & SELL SHARES

With high volatility prevailing in the market, major price fluctuations in equities
are not uncommon. Therefore, apart from ascertaining ‘which’ stock to buy or
sell, it becomes equally important to consider ‘when’ to buy or sell. Any investor
should be aware of the fact where all the investor is following i.e., Buy Low. Sell
High. That means we should buy stocks at a low price and sell them at a high
price.
  WHEN TO BUY

These ways by which we can figure that out what it is about this stock that makes it
hot.

1. Earnings per Share (EPS): How well the company is doing

EPS is the total earning or profits made by company (during a given period of time)
calculated on per share basis. It aims to give an exact evaluation of the returns that
the company can deliver.

2. Price earnings ratio (PE ratio): How other investors view this share.
An indicator of how highly a share is valued in the market. It arrived at by
dividing the closing price of a share on a particular day by EPS. The ratio tends to
be high in the case of highly rated shares. The average PE ratio for companies in
an industry group is often given in investment journal. Two stocks may have the
same EPS. But they may have different market prices. That's because, for some
reason, the market places a greater value on that stock. PE ratio is the market
price of the stock divided by its EPS.

PE = market price/ EPS

  When to sell

1. Stock Reaches Fair Value or Target Price

This is the easiest part of selling. We should sell when a stock reaches its fair
value. It is the main reason why we chose to buy it on the first place.

The target price can be computed by assessing the company’s estimated financial
performance over the next 3 to 5 years, computing its EPS and using an
acceptable P/E ratio to compute the future market price. Based on this future
estimated price and our required return on our investment, compute our target
price.

2. When the prices reaches Stop loss

It is advisable to always consider the possibility of a loss before making our

investment. We should decide how much loss we are willing to book in the stock.
The lower price i.e., the price at which we are willing curtail our loss, is called
‘Stop Loss’.

3. Need the money

This generally happens due to improper planning. However, things happen.

Even the most carefully planned strategy may not work. Catastrophic events
may force investors to sell an investment if his household is affected by it.

4. Takeover news
When one of your stock holding is getting bought by other companies, it may be
time to sell. Sure, you might like the acquiring company but you still need to figure
out the fair value of the common stock of the acquiring company. If the acquiring
company is overvalued, then it is best to sell.

5. Other Investment Opportunity

Let us consider we bought stock A and it has risen to 10% below its fair value.
Meanwhile, we noticed that stock B fallen to below 50% of our calculated fair
value. This is an easy decision. We will sell our stock A and buy stock B. Our goal
as an investor is to maximize our investment return. Sacrificing a 10% of return in
order to earn a 50% return is a sensible way to do that.

6. Inaccurate Fair Value Calculation

As investors, we sometimes made errors in our fair value calculation. There are
factors that we might not take into accounts when researching a particular
company. For example, Satyam scandal.

7. Peer Competitors with Better Products

When new competitors sprung up, the company that you hold might have to spend
more money in order to fend off competition. Recent example includes the
emergence of pay-per click advertising by Google. Any advertising business such
as newspapers or cable network, this new product by Google might hurt profit
margins and eventually the fair value of the stock.

8. Not having a valid reason to Buy

When we don't know why we bought a particular stock, we won't know how much
our potential return is or when we should sell it. This is the easiest way of losing
money. When we have no valid reason to buy, we should sell immediately.
 DERIVATIVE MARKET

As Indian securities markets continue to evolve, market participants, investors and

regulators are looking at different ways in which the risk management may be
efficiently met through the introduction of Derivative markets. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking
in asset prices. As instruments of risk management, these generally do not
influence the fluctuations in the underlying asset prices. Derivatives are risk
management instruments, which derive their value form an underlying asset. The
underlying asset can be bullion, index, share, bonds, currency, interest etc. banks,
securities firms, companies and investors to hedge risks, to gain access to cheaper
money and to make profit, uses derivatives. Derivatives are likely to grow even at a
faster rate in future.

“Derivatives are defined as financial instruments whose value derived from the
prices of one or more other assets such as equity securities, fixed-income
securities, foreign currencies, or commodities. Derivative is also a kind of
contract between two counter parties to exchange payments linked to the prices of
underlying assets.”
Derivative is a financial instrument which derives its value from the underlying
asset, which can be equity, commodity, currency, bonds, or security. Derivatives
are mostly used for hedging the risk which is associated with owning the
underlying asset.

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)
A) defines
“Derivative” to include

1. A security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form of
security.
2. A contract which derives its value from the prices, or index or prices, of
underlying asset.

The above definition conveys that Derivatives are financial products and derive its
value from the underlying assets. Derivatives are derived from a matter financial
contract called the underlying.

SIGNIFICANCE OF DERIVATIVE MARKET:

 It helps in price discovery based on actual valuations.

 It helps transfer risk from those who have upside risk to those who have
downside risk.
 Shift of speculative trades from unorganized markets to organized markets.
 It also helps in hedging the portfolio.

The Need for a Derivatives market

The derivatives market performs a number of economic functions:

1) They help in transferring risks from risk adverse people to risk oriented
people.
2) They help in the discovery of future as well as current prices.
3) They catalyze entrepreneurial activity.
 4) They increase the volume traded in markets because of participation of risk
averse people in greater numbers.
5) They increase savings and investment in the long run.

Functions of derivative market

The following are the various functions that are performed by the derivatives
markets.

 Price in an organized derivatives market reflects the perception of market

participations about the futures and let the prices of underlying to the
perceived future level.
 Derivatives market helps to transfer risks from those who have them but may
not like them to those who have an appetite for them.
 Derivative trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase savings and investment in the long run.

The Participants in a Derivatives market

1. Hedgers: They are people who have the risk associated with owning the
underlying asset and use derivative instruments to reduce the risk of owning the
underlying asset. Hedgers use futures or options markets to reduce or eliminate
the risk associated with price of an asset.
 A person keeps a close watch upon the prices discovered in trading
and when the comfortable price is reflected according to his wants, he sells futures
contracts. In this way he gets an assured fixed price of his produce.

In general, hedgers use futures for protection against adverse future

price movements in the underlying cash commodity. Hedgers are often businesses,
or individuals, who at one point or another deal in the underlying cash commodity.

2. Speculators: They try to predict the future movement in the prices of the
underlying asset and take positions in the derivative contracts. Speculators use
futures and options contracts to get extra leverage in betting on future movements
in the price of an asset. They can increase both the potential gains and potential
losses by usage of derivatives in a speculative venture.

Speculators are somewhat like a middle man. They are never interested in
actual owing the commodity. They will just buy from one end and sell it to the
other in anticipation of future price movements. They actually bet on the future
movement in the price of an asset. They are the second major group of futures
players. These participants include independent floor traders and investors. They
handle trades for their personal clients or brokerage firms

Buying a futures contract in anticipation of price increases is known as

‘going long’. Selling a futures contract in anticipation of a price decrease is
known as ‘going short’. Speculative participation in futures trading has
increased with the availability of alternative methods of participation.
Speculators have certain advantages over other investments they are as
follows:

 If the trader’s judgment is good, he can make more money in the futures
market faster because prices tend, on average, to change more quickly
than real estate or stock prices.
 Futures are highly leveraged investments. The trader puts up a small
fraction of the value of the underlying contract as margin, yet he can ride
on the full value of the contract as it moves up and down.
 The money he puts up is not a down payment on the underlying contract,
but a performance bond. The actual value of the contract is only
exchanged on those rare occasions when delivery takes place.

3. Arbitrageurs: In business they take advantage of a price discrepancy i.e.

difference of a product between two different markets. For example, they see the
futures price of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit.

According to dictionary definition, a person who has been officially chosen

to make a decision between two people or groups who do not agree is known as
Arbitrator. In commodity market Arbitrators are the person who takes the
advantage of a discrepancy between prices in two different markets. If he finds
future prices of a commodity edging out with the cash price, he will take
offsetting positions in both the markets to lock in a profit. Moreover the
commodity future investor is not charged interest on the difference between
margin and the full contract value.
Factors driving the growth of financial derivatives

1. Increased volatility in asset prices in financial markets

2. Increased integration of national financial markets with the international
market.
3. Marked improvement in communication facilities and sharp decline in their
costs

Types of derivatives:

Derivatives products are classified into four types

FORWARD CONTRACT:

A forward contract is an agreement to buy or sell an asset on a specified date

for a specified price. One of the parties to the contract assumes a long position and
agrees to buy the underlying asset on a certain specified future date for a certain
specified price. The other party assumes a short position and agrees to sell the
asset on the same date for the same price. Other contract details like delivery date,
price and quantity are negotiated bilaterally by the parties to the contract. The
forward contracts are normally traded outside the exchanges.

 The terms and conditions of the contract size can be privately negotiated.
 The parties to the contract are bound to perform their part of the contractual
obligation.
 These are traded over the contract.

The salient features of forward contracts are:

 They are bilateral contracts and hence exposed to counter-party risk.
 Each contract is custom designed, and hence is unique in terms of contract
size, expiration date.
 The contract price is generally not available in public domain.
 On the expiration date, the contract has to be settled by delivery of the
asset.
Limitations of Forward Contract

Forward markets world-wide are afflicted by several problems:

 Lack of centralization of trading

 Illiquidity
 Counterparty risk
 Liquidity risk

In the first two of these, the basic problem is that of too much flexibility and
generality. The forward market is like a real estate market in that any two
consenting adults can form contracts against each other. This often makes them
design terms of the deal which are very convenient in that specific situation, but
makes the contracts non-tradable.

Counterparty risk arises from the possibility of default by any one party to the
transaction. When one of the two sides to the transaction declares bankruptcy, the
other suffers. Even when forward markets trade standardized contracts, and hence
avoid the problem of illiquidity, still the counterparty risk remains a very serious
issue. Counterparty is an economic loss from the failure of a counter party to fulfil
its contractual obligation.

Liquidity risk is the ability of market participants to convert their position into
cash. In forwards, the contracts are so customized that it would become difficult to
find a person who would be interested in the same contracts which have been tailor
made to suit someone’s specific requirement.
Exchange Traded Derivative" Forward”

\
FUTURES CONTRACT:

Futures markets were designed to solve the problems that exist in forward
markets. A futures contract is an agreement between two parties to buy or sell
an asset at a certain time in the future at a certain price. But unlike forward
contracts, the futures contracts are standardized and exchange traded. To
facilitate liquidity in the futures contracts, the exchange specifies certain
standard features of the contract.

It is a standardized contract with standard underlying instrument, a standard

quantity and quality of the underlying instrument that can be delivered, (or
which can be used for reference purposes in settlement) and a standard timing
of such settlement. A futures contract may be offset prior to maturity by
entering into an equal and opposite transaction. More than 99% of futures
transactions are offset this way.

 Futures are a contractual agreement between two parties to buy/ sell the
underlying asset at a pre-determined price on a pre-determined date.
 The terms and conditions of the contract are standardized and are
determined by the stock exchange.
 The parties to the contract are bound to perform their part of the
contractual obligation.
 The pre-determined date in futures contract is the expiry date before
which the parties to the contract have to fulfil their obligation.
 These are also called as Exchange Traded Forward contracts.

The standardized items in a futures contract are:

  Quantity of the underlying asset.
 The date and the month of delivery
 The units of price quotation
 Minimum price change location of
settlement

FUTURES TERMINOLOGY

 Spot price
 Futures contract price
 Contract cycle
 Expiry date
 Contract value
 Contract size/ lot size
 Margin
 Mark to market

SETTLEMENT OF FUTURES CONTRACT

 The settlement cycle for futures contract is on T + 1 basis.

 The daily settlement price for futures contract will be the closing price of
the futures market price.
 The final settlement price for futures contract will be the closing price of
the underlying asset on expiry.
Distinction between futures and forwards

OPTIONS CONTRACT:

Options are fundamentally different from forward and futures contracts. An

option gives the holder of the option the right to do something. The holder does
not have to exercise this right. In contrast, in a forward or futures contract, the two
parties have committed themselves to doing something. Whereas it costs nothing
(except margin requirements) to enter into a futures contract, the purchase of an
option requires an up-front payment.

 It is a contractual agreement between two parties to buy/ sell the underlying

asset at a pre-determined price on a pre-determined date.

 There are two parties to the contract,

  The buyer has a right but not an obligation to full fill the contract.
 The seller has an obligation to fulfil the contractual.

 The terms and conditions of the contract are standardized and are
determined by the stock exchange.
 Exchange Traded Derivatives
"options"

3500
3000
2500
pes
Ty

2000
1500
1000
500
0
individual interest
stock stock index Currency rate
Options Options Options options
In billions of $
TYPES AND PARTIES TO OPTIONS CONTRACT

call option Put option

Buyer of a call Seller of a call Buyer of a put Seller of a put
Option option Option option

It gives the It is an obligation It gives the buyer It is an obligation

buyer the right to sell the the right to sell an to purchase the
to buy an underlying asset underlying asset at underlying asset at
underlying asset at the strike price. the strike price. the strike price.
at the strike
price.

Call option: A call option gives the holder the right but not the obligation to
buy an asset by a certain date for a certain price.

i) Long call: Person buys the right (a contract) to buy an asset at a certain
price. We feel that the price in the future will exceed the strike price.
This is a bullish position.

ii) Short call: Person sells the right (a contract) to someone that allows them
to buy an asset at a certain price. The writer feels that asset will
devaluate over the time period of the contract. This person is bearish on
that asset.

Put option: A put option gives the holder the right but not the obligation to sell an
asset by a certain date for a certain price.
 i) Long put: Buy the right to sell an asset at a pre-determined price. We
feel that the asset will devalue over the time of the contract. Therefore
we can sell the asset at a higher price than is the current market value.
This is a bearish position.

ii) Short put: Sell the right to someone else. This will allow them to sell the
asset at a specific price. We feel the price will go down and we do not.
This is a bullish position.
Distinction between futures and options

Futures Options

Exchange traded, with novation Same as futures.

Exchange defines the product Same as futures.

Price is zero, strike price moves Strike price is fixed, price moves.

Price is zero Price is always positive.

Linear payoff Nonlinear payoff.

Both long and short at risk Only short at risk.

Types of Futures and Options Margins

Margins on Futures and Options segment comprise of the following:

1) Initial Margin
2) Exposure margin

In addition to these margins, in respect of options contracts the following

additional margins are collected.

1) Premium Margin

2) Assignment Margin
Comparative Analysis
A comparison showing the basic differences between equity and derivatives:

Basis Equity Derivative

Return Capital appreciation Capital gain

Dividend Income Price Fluctuation

Risk Company Specified Market risk

Sector specified Credit risk
Global risk Liquidity risk
General Market Risk Settlement risk

Types of margin VAR Initial margin

Extreme Loss Exposure margin
Mark to market Premium margin

Duration Generally Long term Short term

(more than 1 year) (Max. 3 months)

Participants Long term Investors Speculations

Hedgers Arbitragers
Safe Investors Hedgers

Last Thursday of any

Expiry Date of contract No such things month
A comparison showing the turnover of cash market and
derivative market:
CHAPTER - IV
 SUMMARY

Relation between the conceptual learning’s in the classroom and

observations in the market.
The learning’s of classroom compliments the learning’s from the market. Most
of the things which we learned is theoretically but when it comes to learning
from stock market, it was more fun as well as it enhanced to a great extent. We
learned the various investment techniques and the factors which are considered
before going to investment.

So we have related the risk and return concepts which we learned in the
class and various decisions which are taken before making an investment
decision.

Now I would like to quote a real life example during my internship where
I understood the actual comparison of equity and derivative market.

Example: - There was an investor Mr. Ram. He has Rs100,000/- and he wants
to invest it in share market. Now he has two options either to invest in equity
cash market or equity derivative market (F&O). Now suppose if he invest in
equity cash market and buy shares of Rs1,00,000/- and diversified risk so he
buys different scripts.
 NO. OF
SL NO. COMPANY SHARES RATE TOTAL VALUE

1 TATA MOTORS 25 458.50 11462.50

2 GRANULES INDIA 85 140.50 11942.50

3 CEAT TYRES 35 931.28 32595

4 ICICI BANK 50 244 12200

5 INFOSYS 25 1272 31800

Total 1,00,000

So for investing Rs. 1, 00,000/- in equity cash market he has to pay Rs.
1,00,000/- and gets the delivery of the shares.
Now suppose if he invest in equity derivative market then he will able to
purchase the shares worth Rs. 5,00,000/- though he has capital of Rs. 1,00,000/-
only, because of the margin payment. But he has to purchase the share in a lot
size. So he is able to purchase:

 The 1 lot (100 shares) of Tata Motors at Rs.458.50/-

 1 lot (200 shares) of Granules at 140.50/-
 2 lots (100 shares each) of Ceat Tyres at Rs.931.28/-
 1 lot (150 shares) of ICICI bank at Rs.244/- and
 1 lot (150 shares) of Infosys at Rs1272/- each.
Here Mr. Ram has to pay Rs.1,00,000/- as a margin money and he is able to
purchase a shares worth Rs.5,00,000/- But he has to pay the full amount of
money at T+3 basis. So he has to pay the remaining amount on the 3rd day of
the trading if he wants the delivery.

I. Returns
Mr. Ram gets return on equity by two ways. One is when the share price
of the holding shares will increases in futures, called as capital
appreciation. Second is by getting a dividend income from the holding
shares. Mr. Ram gets return on equity derivative
when the future prices of the shares are increase in short term called as
capital gain
through price fluctuation or through options premium.

II. Risk: There are four types of risk involved in equity cash market.
 Company Specified risk: - If company is not performing well
than process of the shares will declining and vice versa.

 Sector specified risks: - If the sector is not performing well i.e.

power sector, metal sector, oil & gas sector, banking sector then
prices of the shares will go down and vice versa.

 Global risk: - If global cues are positive then prices will increases
but if global cues are not good than prices of shares will go down.

 General market risk: - General market risk is also affect the

equity cash market like inflation, banks interest rates etc.
So Mr. Ram has to consider all these risk factors while dealing in the equity
cash market.
There are three types of risk involved in equity derivative market:

1. Market risk:- In derivative market we have to calculate the market risk or

mark to market risk involved in the stocks or securities, that is the exposure
to potential loss from fluctuations in market prices (as opposed to changes in
credit status). It is calculated on the tradable assets i.e., stocks, currencies
etc.

2. Credit risk:- It may possible in derivative contract that the counterparty

may be fail to perform the contract or say defaulted then it is a risk for us. It
is calculated on non-tradable assets i.e., loans. So generally it is for long
term purpose.

3. Liquidity Risk:- If Mr. Ram will not able to find a price( or a price within a
reasonable tolerance in terms of the deviation from prevailing or expected
prices) for one or more of its financial contracts in the secondary market.
Consider the case of a counterparty who buys a complex option on European
interest rates. He is exposed to liquidity risk because of the possibility that
he cannot find anyone to make him a price in the secondary market.
CHAPTER-5
 CONCLUSION

A well developed, regulated and vibrant securities market provides effective mode
of investment and thereby facilitates economic growth. Over the years India has
become more open to invite capital flows and has experienced various
transformations. Persistent reforms in capital market in order to create enabling
environment can go a long way to support economic growth. The growth of Indian
stock market from 2003 reflected the improving macroeconomic fundamentals and
economy of India. However subprime crisis in United States followed by Euro
Zone crisis has given rise to volatility in capital flows in emerging economies
including India not withstanding their internal economic developments. India is
one of the most successful developing countries in terms of a vibrant market for
exchange-traded derivatives. This reiterates the strength of modern developments
in India’s securities markets, which are based on nationwide market access,
anonymous electronic trading and a predominant retail market. There is an
increasing sense that the equity derivatives market plays a major role in shaping
price discovery. The Indian derivatives market has recorded an impressive CAGR
of 34 per cent, in terms of annual turnover, in the last five years. This study has
empirically provided the information about the equity and equity derivative
market. It has also provided information on selecting stocks for investment through
the 11 steps. While investing it is important to understand the importance of
portfolio management for maximum returns. The result of the study showed the
fact that the strike price reacts to the index price. The analysis presented in this
study has implications to know the terminology and technical analysis of the
market efficiency.

People should learn first and then investor should consult their financial advisor
before investing. If people have adequate knowledge then they can earn good
return in stock market. Intraday trading should not be traded by normal man as
they lose money due to volatility in the market. People should invest in stock
market as a long term investor rather than short term because in short term risks are
many and profits are less.
 REFERENCES

R. Stafford Johnson (2009), Introduction to derivatives: Options, futures and

swaps (1st edition), Oxford University Press Inc., New York
 

Citigroup, “Bringing equity derivative into focus” (2004). Available

from URL: http://www.catleylakeman.co.uk/educational/Educational3.pdf

Narendra Nathan, Sanjay Kumar Singh & Sanket Dhanorkar “Learn how to
pick value stocks” (online) (cited: May 18th, 2015). Available from URL:
http://articles.economictimes.indiatimes.com/2015-05-18/news/62323235_1_value-traps-
value-stocks-book-value

Nenavath Sreenu (2012), “A Study on Technical Analysis of Derivative Stock

Futures and the Role for Debt Market Derivatives in Debt Market Development
in India”, International Journal of Business Economics & Management
Research, Vol.2, Issue 3, ISSN 22498826. Available from URL:
http://zenithresearch.org.in/images/stories/pdf/2012/March/ZIJBEMR/7_ZIJBEMR_MA
RCH12_VOL2_ISSUE3.pdf
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