NCFM

NSE's CERTIFICATION IN FINANCIAL MARKETS

Financial Markets: A Beginners' Module

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

Test Details

Sr. Fees Test Duration No. of Maximum Pass Certificate

Name of Module Marks
No. (Rs.) (in minutes) Questions Marks (%) Validity

1 Financial Markets: A Beginners' Module * 1500 120 60 100 50 5

2 Mutual Funds : A Beginners' Module 1500 120 60 100 50 5
3 Currency Derivatives: A Beginner's Module 1500 120 60 100 50 5
4 Equity Derivatives: A Beginner's Module 1500 120 60 100 50 5
5 Interest Rate Derivatives: A Beginner's Module 1500 120 60 100 50 5
6 Commercial Banking in India: A Beginner's Module 1500 120 60 100 50 5
7 Securities Market (Basic) Module 1500 120 60 100 60 5
8 Capital Market (Dealers) Module * 1500 105 60 100 50 5
9 Derivatives Market (Dealers) Module * 1500 120 60 100 60 3
10 FIMMDA-NSE Debt Market (Basic) Module 1500 120 60 100 60 5
11 Investment Analysis and Portfolio 1500 120 60 100 60 5
Management Module
12 Fundamental Analysis Module 1500 120 60 100 60 5
13 Securities Market (Advanced) Module 1500 120 60 100 60 5
14 Mutual Fund (Advanced) Module 1500 120 60 100 60 5
15 Banking Sector Module 1500 120 60 100 60 5
16 Insurance Module 1500 120 60 100 60 5
17 Macroeconomics for Financial Markets Module 1500 120 60 100 60 5
18 NISM-Series-I: Currency Derivatives Certification 1000 120 100 100 60 3
Examination
19 NISM-Series-II-A: Registrars to an Issue and 1000 120 100 100 50 3
Share Transfer Agents - Corporate
Certification Examination
20 NISM-Series-II-B: Registrars to an Issue and 1000 120 100 100 50 3
Share Transfer Agents - Mutual Fund
Certification Examination
21 NISM-Series-IV: Interest Rate 1000 120 100 100 60 3
Derivatives Certification Examination
22 NISM-Series-V-A: Mutual Fund 1000 120 100 100 50 3
Distributors Certification Examination *
23 NISM-Series-VI: Depository Operations 1000 120 100 100 60 3
Certification Examination
24 NISM Series VII: Securities Operations and 1000 120 100 100 50 3
Risk Management Certification Examination
25 Certified Personal Financial Advisor 4000 120 80 100 60 3
(CPFA) Examination
26 NSDL-Depository Operations Module 1500 75 60 100 60 # 5
27 Commodities Market Module 1800 120 60 100 50 3
28 Surveillance in Stock Exchanges Module 1500 120 50 100 60 5
29 Corporate Governance Module 1500 90 100 100 60 5
30 Compliance Officers (Brokers) Module 1500 120 60 100 60 5
31 Compliance Officers (Corporates) Module 1500 120 60 100 60 5
32 Information Security Auditors Module (Part-1) 2250 120 90 100 60 2
Information Security Auditors Module (Part-2) 2250 120 90 100 60
33 Options Trading Strategies Module 1500 120 60 100 60 5
34 FPSB India Exam 1 to 4** 2000 per 120 75 140 60 NA
exam
35 Examination 5/Advanced Financial Planning ** 5000 240 30 100 50 NA
36 Equity Research Module ## 1500 120 65 100 55 2
37 Issue Management Module ## 1500 120 80 100 55 2
38 Market Risk Module ## 1500 120 50 100 55 2
39 Financial Modeling Module ### 1000 150 50 75 50 NA
* Candidates have the option to take the tests in English, Gujarati or Hindi languages.
# Candidates securing 80% or more marks in NSDL-Depository Operations Module ONLY will be certified as 'Trainers'.
** Following are the modules of Financial Planning Standards Board India (Certified Financial Planner Certification)
FPSB India Exam 1 to 4 i.e. (i) Risk Analysis & Insurance Planning (ii) Retirement Planning & Employee Benefits
(iii) Investment Planning and (iv) Tax Planning & Estate Planning
Examination 5/Advanced Financial Planning ##
Modules of Finitiatives Learning India Pvt. Ltd. (FLIP) ### Module of
IMS Preschool
The curriculum for each of the modules (except Modules of Financial Planning Standards Board India, Finitiatives Learning India Pvt. Ltd. and
IMS Proschool) is available on our website: www.nseindia.com > Education > Certifications.
Preface

The National Stock Exchange of India Ltd. (NSE), set up in the year 1993, is
today the largest stock exchange in India and a preferred exchange for trading in
equity, debt and derivatives instruments by investors. NSE has set up a sophisticated
electronic trading, clearing and settlement platform and its infrastructure serves as a
role model for the securities industry. The standards set by NSE in terms of market
practices; products and technology have become industry benchmarks and are being
replicated by many other market participants. It provides a screen-based automated
trading system with a high degree of transparency and equal access to investors
irrespective of geographical location. The high level of information dissemination
through the on-line system has helped in integrating retail investors across the
nation. The exchange has a network in more than 350 cities and its trading members
are connected to the central servers of the exchange in Mumbai through a
sophisticated telecommunication network comprising of over 2500 VSATs. NSE has
around 850 trading members and provides trading in over 1000 equity shares and
2500 debt securities. Besides this, NSE provides trading in various derivative
products such as index futures, index options, stock futures, stock options and
interest rate futures.

At NSE, it has always been our endeavour to continuously upgrade the skills and
proficiency of the Indian investor. Since, financially literate investors are the
backbone of the securities market, knowledge and awareness about the securities
market is of the foremost concern to us, starting with the most basic of information
being made available as the first step.

This booklet has therefore been prepared for those of you who are keen to acquire
some basic but key information about the stock markets as an initial step towards
becoming a more informed investor. We hope this booklet will act as a means of
satisfying some of your initial queries on the stock markets.
CONTENTS

1. INVESTMENT BASICS. 6
What is Investment? .............................................................................. 6
Why should one invest?.......................................................................... 6
When to start Investing? ........................................................................ 6
What care should one take while investing? .............................................. 7
What is meant by Interest?..................................................................... 7
What factors determine interest rates? ..................................................... 7
What are various options available for investment?.................................... 8
What are various Short-term financial options available for investment?....... 8
What are various Long-term financial options available for investment? ....... 9
What is meant by a Stock Exchange? ....................................................... 10
What is an „Equity'/Share? ...................................................................... 10
What is a „Debt Instrument'? .................................................................. 11
What is a Derivative? ............................................................................. 11
What is a Mutual Fund? .......................................................................... 11
What is an Index? ................................................................................. 12
What is a Depository? ............................................................................ 12
What is Dematerialization? ..................................................................... 12
2. SECURITIES _________________________________________________13
What is meant by „Securities‟? ................................................................ 13
What is the function of Securities Market? ................................................ 13
Which are the securities one can invest in? ............................................... 13
2.1 REGULATOR ........................................................................................... 14
Why does Securities Market need Regulators? ........................................... 14
Who regulates the Securities Market? ....................................................... 14
What is SEBI and what is its role? ............................................................ 14
2.2 PARTICIPANTS ........................................................................................ 15
Who are the participants in the Securities Market? ..................................... 15
Is it necessary to transact through an intermediary? .................................. 15
What are the segments of Securities Market? ............................................ 15
3. PRIMARY MARKET ______________________________________________16
What is the role of the „Primary Market‟?................................................... 16
What is meant by Face Value of a share/debenture? ................................... 16
What do you mean by the term Premium and Discount in a Security Market?.16
3.1 ISSUE OF SHARES ................................................................................... 17
Why do companies need to issue shares to the public? ............................... 17
What are the different kinds of issues? ..................................................... 17
What is meant by Issue price? ................................................................. 18
What is meant by Market Capitalisation? ................................................... 18
What is the difference between public issue and private placement? ............. 19
What is an Initial Public Offer (IPO)? ........................................................ 19

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 Who decides the price of an issue? ........................................................... 19
What does „price discovery through Book Building Process‟ mean? ............... 19
What is the main difference between offer of shares through book building and
offer of shares through normal public issue?.............................................. 20
What is Cut-Off Price? ............................................................................. 20
What is the floor price in case of book building? ......................................... 20
What is a Price Band in a book built IPO? .................................................. 20
Who decides the Price Band? .................................................................... 21
What is minimum number of days for which a bid should remain open during
book building? ....................................................................................... 21
Can open outcry system be used for book building? ................................... 21
Can the individual investor use the book building facility to make an
application?........................................................................................... 21
How does one know if shares are allotted in an IPO/offer for sale? What is the
timeframe for getting refund if shares not allotted? .................................... 21
How long does it take to get the shares listed after issue? .......................... 21
What is the role of a „Registrar‟ to an issue? .............................................. 22
Does NSE provide any facility for IPO? ...................................................... 22
What is a Prospectus? ............................................................................. 22
What does „Draft Offer document‟ mean? .................................................. 23
What is an „Abridged Prospectus‟? ............................................................ 23
Who prepares the „Prospectus Offer Documents‟?....................................... 23
What does one mean by „Lock-in‟? ........................................................... 24
What is meant by „Listing of Securities‟? ................................................... 24
What is a „Listing Agreement‟? ................................................................. 24
What does „Delisting of securities‟ mean? .................................................. 24
What is SEBI's Role in an Issue? .............................................................. 24
Does it mean that SEBI recommends an issue? ......................................... 25
Does SEBI tag make one‟s money safe? .................................................... 25
3.2 FOREIGN CAPITAL ISSUANCE ...................................................................... 25
Can companies in India raise foreign currency resources? ........................... 25
What is an American Depository Receipt? .................................................. 25
What is an ADS?..................................................................................... 26
What is meant by Global Depository Receipts? ........................................... 26
4. SECONDARY MARKET _________________________________________27
4.1 INTRODUCTION ..................................................................................... 27
What is meant by Secondary market? ...................................................... 27
What is the role of the Secondary Market? ................................................ 27
What is the difference between the Primary Market and the Secondary Market?
........................................................................................................... 27
4.1.1 Stock Exchange ............................................................................. 28
What is the role of a Stock Exchange in buying and selling shares? .............. 28
What is Demutualisation of stock exchanges? ............................................ 28
How is a demutualised exchange different from a mutual exchange? ............ 28
4.1.2 Stock Trading .................................................................................. 29
What is Screen Based Trading? ................................................................ 29
What is NEAT? ........................................................................................ 29
How to place orders with the broker? ....................................................... 29

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 How does an investor get access to internet based trading facility? .............. 29
What is a Contract Note? ........................................................................ 30
What details are required to be mentioned on the contract note issued by the
stock broker? ........................................................................................ 30
What is the maximum brokerage that a broker can charge? ........................ 30
Why should one trade on a recognized stock exchange only for buying/selling
shares? ................................................................................................. 31
How to know if the broker or sub broker is registered? ............................... 31
What precautions must one take before investing in the stock markets? ....... 31
What Do‟s and Don‟ts should an investor bear in mind when investing in the
stock markets? ...................................................................................... 32
4.2 PRODUCTS IN THE SECONDARY MARKETS........................................................ 34
What are the products dealt in the Secondary Markets? .............................. 34
4.2.1 Equity Investment. ....................................................................... 36
Why should one invest in equities in particular? ......................................... 36
What has been the average return on Equities in India?.............................. 36
Which are the factors that influence the price of a stock? ............................ 37
What is meant by the terms Growth Stock/ Value Stock? ............................ 37
How can one acquire equity shares? ......................................................... 38
What is Bid and Ask price? ...................................................................... 38
What is a Portfolio? ................................................................................ 39
What is Diversification?........................................................................... 39
What are the advantages of having a diversified portfolio? .......................... 39
4.2.2. Debt Investment ............................................................................. 40
What is a „Debt Instrument‟? ................................................................... 40
What are the features of debt instruments? ............................................... 40
What is meant by „Interest‟ payable by a debenture or a bond? ................... 41
What are the Segments in the Debt Market in India? .................................. 41
Who are the Participants in the Debt Market? ............................................ 41
Are bonds rated for their credit quality? .................................................... 41
How can one acquire securities in the debt market? ................................... 41
5. DERIVATIVES ________________________________________________42
What are Types of Derivatives?................................................................ 42
What is an „Option Premium‟? .................................................................. 42
What is „Commodity Exchange‟? .............................................................. 43
What is meant by „Commodity‟? ............................................................... 43
What is Commodity derivatives market? ................................................... 43
What is the difference between Commodity and Financial derivatives? .......... 43
6. DEPOSITORY _________________________________________________44
How is a depository similar to a bank? ...................................................... 44
Which are the depositories in India? ......................................................... 44
What are the benefits of participation in a depository? ................................ 44
Who is a Depository Participant (DP)?....................................................... 45
Does one need to keep any minimum balance of securities in his account with
his DP? .................................................................................................. 45
What is an ISIN?.................................................................................... 45
What is a Custodian? .............................................................................. 45

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 How can one convert physical holding into electronic holding i.e. how can one
dematerialise securities? ......................................................................... 46
Can odd lot shares be dematerialised? ...................................................... 46
Do dematerialised shares have distinctive numbers? .................................. 46
Can electronic holdings be converted into Physical certificates?.................... 46
Can one dematerialise his debt instruments, mutual fund units, government
securities in his demat account? .............................................................. 46
7. MUTUAL FUNDS ______________________________________________47
What is the Regulatory Body for Mutual Funds? ......................................... 47
What are the benefits of investing in Mutual Funds? ................................... 47
What is NAV? ......................................................................................... 48
Are there any risks involved in investing in Mutual Funds? .......................... 48
What are the different types of Mutual funds? ........................................... 49
What are the different investment plans that Mutual Funds offer? ................ 52
What are the rights that are available to a Mutual Fund holder in India? ....... 52
What is a Fund Offer document? .............................................................. 53
What is Active Fund Management? ........................................................... 53
What is Passive Fund Management? .......................................................... 54
What is an ETF?...................................................................................... 55
8. MISCELLANEOUS ................................................................................. 56
8.1 CORPORATE ACTIONS................................................................................ 56
What are Corporate Actions? ................................................................... 56
What is meant by „Dividend‟ declared by companies? ................................. 56
What is meant by Dividend yield? ............................................................ 57
What is a Stock Split? ............................................................................. 57
Why do companies announce Stock Split? ................................................. 58
What is Buyback of Shares? .................................................................... 59
8.2 INDEX ................................................................................................. 59
What is the Nifty index? .......................................................................... 59
8.3 CLEARING & SETTLEMENT AND REDRESSAL ....................................................... 60
What is a Clearing Corporation? ............................................................... 60
What is Rolling Settlement?..................................................................... 60
What is Pay-in and Pay-out?.................................................................... 60
What is an Auction? ................................................................................ 61
What is a Book-closure/Record date? ....................................................... 61
What is a No-delivery period? .................................................................. 61
What is an Ex-dividend date? .................................................................. 61
What is an Ex-date? ............................................................................... 62
What recourses are available to investor/client for redressing his grievances?62
What is Arbitration? ............................................................................... 62
What is an Investor Protection Fund? ....................................................... 62
9. CONCEPTS & MODES OF ANALYSIS ..................................................... 63
What is Simple Interest? ......................................................................... 63
What is Compound Interest? ................................................................... 64
What is meant by the Time Value of Money? ............................................. 66
How is time value of money computed? .................................................... 69

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 What is Effective Annual return? .............................................................. 71
How to go about systematically analyzing a company? ............................... 72
What is an Annual Report?....................................................................... 73
Which features of an Annual Report should one read carefully? .................... 73
What is a Balance Sheet and a Profit and Loss Account Statement? What is the
difference between Balance Sheet and Profit and Loss Account Statements of a
company? .............................................................................................. 73
What do these sources of funds represent? ............................................... 76
What is the difference between Equity shareholders and Preferential
shareholders?......................................................................................... 77
What is the difference between secured and unsecured loans under Loan
Funds? .................................................................................................. 78
What is meant by application of funds? ..................................................... 78
What do the sub-headings under the Fixed Assets like „Gross block‟
„Depreciation‟, „Net Block‟ and Capital-Work in Progress‟ mean? ................... 79
What are Current Liabilities and Provisions and Net Current Assets in the
balance sheet? ....................................................................................... 80
How is balance sheet summarized? ........................................................... 80
What does a Profit and Loss Account statement consists of? ........................ 81
What should one look for in a Profit and Loss account? ............................... 82
10. RATIO ANALYSIS .............................................................................. 84

5
1. Investment Basics

What is Investment?

The money you earn is partly spent and the rest saved for meeting future
expenses. Instead of keeping the savings idle you may like to use savings in
order to get return on it in the future. This is called Investment.

Why should one invest?

One needs to invest to:

■ earn return on your idle resources

■ generate a specified sum of money for a specific goal in life
■ make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the
cost of Inflation. Inflation is the rate at which the cost of living increases.
The cost of living is simply what it costs to buy the goods and services you
need to live. Inflation causes money to lose value because it will not buy the
same amount of a good or a service in the future as it does now or did in
the past. For example, if there was a 6% inflation rate for the next 20 years,
a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is
important to consider inflation as a factor in any long-term investment
strategy. Remember to look at an investment's „real‟ rate of return, which is
the return after inflation. The aim of investments should be to provide a
return above the inflation rate to ensure that the investment does not
decrease in value. For example, if the annual inflation rate is 6%, then the
investment will need to earn more than 6% to ensure it increases in value.
If the after-tax return on your investment is less than the inflation rate, then
your assets have actually decreased in value; that is, they won‟t buy as
much today as they did last year.

When to start Investing?

The sooner one starts investing the better. By investing early you allow your
investments more time to grow, whereby the concept of compounding (as we
shall see later) increases your income, by accumulating the principal and

6
the interest or dividend earned on it, year after year. The three golden rules
for all investors are:

■ Invest early
■ Invest regularly
■ Invest for long term and not short term

What care should one take while investing?

Before making any investment, one must ensure to:

1. obtain written documents explaining the investment

2. read and understand such documents
3. verify the legitimacy of the investment
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you
have already made
10. deal only through an authorized intermediary
11. seek all clarifications about the intermediary and the investment
12. Explore the options available to you if something were to go wrong,
and then, if satisfied, make the investment.

These are called the Twelve Important Steps to Investing.

What is meant by Interest?

When we borrow money, we are expected to pay for using it - this is known
as Interest. Interest is an amount charged to the borrower for the privilege
of using the lender's money. Interest is usually calculated as a percentage of
the principal balance (the amount of money borrowed). The percentage rate
may be fixed for the life of the loan, or it may be variable, depending on the
terms of the loan.

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates -
rates that banks offer to their depositors, rates that they lend to their
borrowers, the rate at which the Government borrows in the

7
Bond/Government Securities market, rates offered to investors in small
savings schemes like NSC, PPF, rates at which companies issue fixed
deposits etc.

The factors which govern these interest rates are mostly economy related
and are commonly referred to as macroeconomic factors. Some of these
factors are:

■ Demand for money

■ Level of Government borrowings
■ Supply of money
■ Inflation rate
■ The Reserve Bank of India and the Government policies
which determine some of the variables mentioned above

What are various options available for investment?

One may invest in:

 Physical assets like real estate, gold/jewellery, commodities etc.

and/or
 Financial assets such as fixed deposits with banks, small saving
instruments with post offices, insurance/provident/pension fund etc. or
securities market related instruments like shares, bonds, debentures
etc.

What are various Short-term financial options available for

investment?

Broadly speaking, savings bank account, money market/liquid funds and

fixed deposits with banks may be considered as short-term financial
investment options:

Savings Bank Account is often the first banking product people use,
which offers low interest (4%-5% p.a.), making them only marginally
better than fixed deposits.

Money Market or Liquid Funds are a specialized form of mutual

funds that invest in extremely short-term fixed income instruments
and thereby provide easy liquidity. Unlike most mutual funds, money
market funds are primarily oriented towards protecting your capital
and then, aim to maximise returns. Money market funds usually yield

8
 better returns than savings accounts, but lower than bank fixed
deposits.

Fixed Deposits with Banks are also referred to as term deposits and
minimum investment period for bank FDs is 30 days. Fixed Deposits
with banks are for investors with low risk appetite, and may be
considered for 6-12 months investment period as normally interest on
less than 6 months bank FDs is likely to be lower than money market
fund returns.

What are various Long-term financial options available for

investment?

Post Office Savings Schemes, Public Provident Fund, Company

Fixed Deposits, Bonds and Debentures, Mutual Funds etc.

Post Office Savings: Post Office Monthly Income Scheme is a low risk
saving instrument, which can be availed through any post office. It
provides an interest rate of 8% per annum, which is paid monthly.
Minimum amount, which can be invested, is Rs. 1,000/- and additional
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/-
(if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a
maturity period of 6 years. A bonus of 10% is paid at the time of
maturity. Premature withdrawal is permitted if deposit is more than
one year old. A deduction of 5% is levied from the principal amount if
withdrawn prematurely; the 10% bonus is also denied.

Public Provident Fund: A long term savings instrument with a

maturity of 15 years and interest payable at 8% per annum
compounded annually. A PPF account can be opened through a
nationalized bank at anytime during the year and is open all through
the year for depositing money. Tax benefits can be availed for the
amount invested and interest accrued is tax-free. A withdrawal is
permissible every year from the seventh financial year of the date of
opening of the account and the amount of withdrawal will be limited to
50% of the balance at credit at the end of the 4th year immediately
preceding the year in which the amount is withdrawn or at the end of
the preceding year whichever is lower the amount of loan if any.

Company Fixed Deposits: These are short-term (six months) to

medium-term (three to five years) borrowings by companies at a
fixed rate of interest which is payable monthly, quarterly, semi-

9
 annually or annually. They can also be cumulative fixed deposits where
the entire principal alongwith the interest is paid at the end of the loan
period. The rate of interest varies between 6-9% per annum for
company FDs. The interest received is after deduction of taxes.

Bonds: It is a fixed income (debt) instrument issued for a period of

more than one year with the purpose of raising capital. The central or
state government, corporations and similar institutions sell bonds. A
bond is generally a promise to repay the principal along with a fixed
rate of interest on a specified date, called the Maturity Date.

Mutual Funds: These are funds operated by an investment company

which raises money from the public and invests in a group of assets
(shares, debentures etc.), in accordance with a stated set of
objectives. It is a substitute for those who are unable to invest directly
in equities or debt because of resource, time or knowledge constraints.
Benefits include professional money management, buying in small
amounts and diversification. Mutual fund units are issued and
redeemed by the Fund Management Company based on the fund's net
asset value (NAV), which is determined at the end of each trading
session. NAV is calculated as the value of all the shares held by the
fund, minus expenses, divided by the number of units issued. Mutual
Funds are usually long term investment vehicle though there some
categories of mutual funds, such as money market mutual funds which
are short term instruments.

What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines „Stock

Exchange‟ as any body of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the business
of buying, selling or dealing in securities. Stock exchange could be a regional
stock exchange whose area of operation/jurisdiction is specified at the time
of its recognition or national exchanges, which are permitted to have
nationwide trading since inception. NSE was incorporated as a national stock
exchange.

What is an ‘Equity’/Share?

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

denominations, each called a share. For example, in a company the total
equity capital of Rs 300,00,000 is divided into 20,00,000 units of Rs 10
each. Each such unit of Rs 10 is called a Share. Thus, the company then is

10
said to have 20,00,000 equity shares of Rs 10 each. The holders of such
shares are members of the company and have voting rights.

What is a ‘Debt Instrument’?

Debt instrument represents a contract whereby one party lends money to

another on pre-determined terms with regards to rate and periodicity of
interest, repayment of principal amount by the borrower to the lender.

In the Indian securities markets, the term ‘bond' is used for debt instruments
issued by the Central and State governments and public sector organizations
and the term debenture' is used for instruments issued by private corporate
sector.

What is a Derivative?

Derivative is a product whose value is derived from the value of one or more
basic variables, called underlying. The underlying asset can be equity, index,
foreign exchange (forex), commodity or any other asset.

Derivative products initially emerged as hedging devices against fluctuations

in commodity prices and commodity-linked derivatives remained the sole
form of such products for almost three hundred years. The financial
derivatives came into spotlight in post-1970 period due to growing instability
in the financial markets. However, since their emergence, these products
have become very popular and by 1990s, they accounted for about two-
thirds of total transactions in derivative products.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange

Board of India) that pools money from individuals/corporate investors and
invests the same in a variety of different financial instruments or securities
such as equity shares, Government securities, Bonds, debentures etc. Mutual
funds can thus be considered as financial intermediaries in the investment
business that collect funds from the public and invest on behalf of the
investors. Mutual funds issue units to the investors. The appreciation of the
portfolio or securities in which the mutual fund has invested the money leads
to an appreciation in the value of the units held by investors. The investment
objectives outlined by a Mutual Fund in its prospectus are binding on the
Mutual Fund scheme. The investment objectives specify the class of
securities a Mutual Fund can invest in. Mutual Funds invest in

11
various asset classes like equity, bonds, debentures, commercial paper and
government securities. The schemes offered by mutual funds vary from fund
to fund. Some are pure equity schemes; others are a mix of equity and
bonds. Investors are also given the option of getting dividends, which are
declared periodically by the mutual fund, or to participate only in the capital
appreciation of the scheme.

What is an Index?

An Index shows how a specified portfolio of share prices are moving in order
to give an indication of market trends. It is a basket of securities and the
average price movement of the basket of securities indicates the index
movement, whether upwards or downwards.

What is a Depository?

A depository is like a bank wherein the deposits are securities (viz. shares,
debentures, bonds, government securities, units etc.) in electronic form.

What is Dematerialization?

Dematerialization is the process by which physical certificates of an investor

are converted to an equivalent number of securities in electronic form and
credited to the investor's account with his Depository Participant (DP).

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2. SECURITIES

What is meant by ‘Securities’?

The definition of „Securities‟ as per the Securities Contracts Regulation Act

(SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or
other marketable securities of similar nature in or of any incorporate
company or body corporate, government securities, derivatives of securities,
units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the Central
Government.

What is the function of Securities Market?

Securities Markets is a place where buyers and sellers of securities can enter
into transactions to purchase and sell shares, bonds, debentures etc. Further,
it performs an important role of enabling corporates, entrepreneurs to raise
resources for their companies and business ventures through public issues.
Transfer of resources from those having idle resources (investors) to others
who have a need for them (corporates) is most efficiently achieved through
the securities market. Stated formally, securities markets provide channels
for reallocation of savings to investments and entrepreneurship. Savings are
linked to investments by a variety of intermediaries, through a range of
financial products, called „Securities‟.

Which are the securities one can invest in?

■ Shares
■ Government Securities
■ Derivative products
■ Units of Mutual Funds etc., are some of the securities investors in the
securities market can invest in.

13
2.1 Regulator

Why does Securities Market need Regulators?

The absence of conditions of perfect competition in the securities market

makes the role of the Regulator extremely important. The regulator ensures
that the market participants behave in a desired manner so that securities
market continues to be a major source of finance for corporate and
government and the interest of investors are protected.

Who regulates the Securities Market?

The responsibility for regulating the securities market is shared by

Department of Economic Affairs (DEA), Department of Company Affairs
(DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of
India (SEBI).

What is SEBI and what is its role?

The Securities and Exchange Board of India (SEBI) is the regulatory authority
in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992
provides for establishment of Securities and Exchange Board of India (SEBI)
with statutory powers for (a) protecting the interests of investors in
securities (b) promoting the development of the securities market and (c)
regulating the securities market. Its regulatory jurisdiction extends over
corporates in the issuance of capital and transfer of securities, in addition to
all intermediaries and persons associated with securities market. SEBI has
been obligated to perform the aforesaid functions by such measures as it
thinks fit. In particular, it has powers for:

■ Regulating the business in stock exchanges and any other securities

markets
■ Registering and regulating the working of stock brokers, sub-brokers
etc.
■ Promoting and regulating self-regulatory organizations
■ Prohibiting fraudulent and unfair trade practices
■ Calling for information from, undertaking inspection, conducting
inquiries and audits of the stock exchanges, intermediaries, self-
regulatory organizations, mutual funds and other persons associated
with the securities market.

14
2.2 Participants

Who are the participants in the Securities Market?

The securities market essentially has three categories of participants,

namely, the issuers of securities, investors in securities and the
intermediaries, such as merchant bankers, brokers etc. While the corporates
and government raise resources from the securities market to meet their
obligations, it is households that invest their savings in the securities market.

Is it necessary to transact through an intermediary?

It is advisable to conduct transactions through an intermediary. For example

you need to transact through a trading member of a stock exchange if you
intend to buy or sell any security on stock exchanges. You need to maintain
an account with a depository if you intend to hold securities in demat form.
You need to deposit money with a banker to an issue if you are subscribing
to public issues. You get guidance if you are transacting through an
intermediary. Chose a SEBI registered intermediary, as he is accountable for
its activities. The list of registered intermediaries is available with exchanges,
industry associations etc.

What are the segments of Securities Market?

The securities market has two interdependent segments: the primary (new
issues) market and the secondary market. The primary market provides the
channel for sale of new securities while the secondary market deals in
securities previously issued.

15
3. PRIMARY MARKET

What is the role of the ‘Primary Market’?

The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; Government as well as
corporates, to raise resources to meet their requirements of investment
and/or discharge some obligation.

They may issue the securities at face value, or at a discount/premium and

these securities may take a variety of forms such as equity, debt etc. They
may issue the securities in domestic market and/or international market.

What is meant by Face Value of a share/debenture?

The nominal or stated amount (in Rs.) assigned to a security by the issuer.
For shares, it is the original cost of the stock shown on the certificate; for
bonds, it is the amount paid to the holder at maturity. Also known as par
value or simply par. For an equity share, the face value is usually a very
small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of
the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or
any other price. For a debt security, face value is the amount repaid to the
investor when the bond matures (usually, Government securities and
corporate bonds have a face value of Rs. 100). The price at which the
security trades depends on the fluctuations in the interest rates in the
economy.

What do you mean by the term Premium and Discount in a

Security Market?

Securities are generally issued in denominations of 5, 10 or 100. This is

known as the Face Value or Par Value of the security as discussed earlier.
When a security is sold above its face value, it is said to be issued at a
Premium and if it is sold at less than its face value, then it is said to be
issued at a Discount.

16
3.1 Issue of Shares

Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However,

the promoters' capital and the borrowings from banks and financial
institutions may not be sufficient for setting up or running the business over
a long term. So companies invite the public to contribute towards the equity
and issue shares to individual investors. The way to invite share capital from
the public is through a ‘Public Issue’. Simply stated, a public issue is an offer
to the public to subscribe to the share capital of a company. Once this is
done, the company allots shares to the applicants as per the prescribed rules
and regulations laid down by SEBI.

What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or Preferential issues

(also known as private placements). While public and rights issues involve a
detailed procedure, private placements or preferential issues are relatively
simpler. The classification of issues is illustrated below:

Initial Public Offering (IPO) is when an unlisted company makes either a

fresh issue of securities or an offer for sale of its existing securities or both
for the first time to the public. This paves way for listing and trading of the
issuer's securities.

A follow on public offering (Further Issue) is when an already listed

company makes either a fresh issue of securities to the public or an offer for
sale to the public, through an offer document.

Rights Issue is when a listed company which proposes to issue fresh

securities to its existing shareholders as on a record date. The rights are
normally offered in a particular ratio to the number of securities held prior to
the issue. This route is best suited for companies who would like to raise
capital without diluting stake of its existing shareholders.

A Preferential issue is an issue of shares or of convertible securities by

listed companies to a select group of persons under Section 81 of the
Companies Act, 1956 which is neither a rights issue nor a public issue. This is
a faster way for a company to raise equity capital. The issuer company has
to comply with the Companies Act and the requirements contained in

17
the Chapter pertaining to preferential allotment in SEBI guidelines which
inter-alia include pricing, disclosures in notice etc.

Classification of Issues

What is meant by Issue price?

The price at which a company‟s shares are offered initially in the primary
market is called as the Issue price. When they begin to be traded, the
market price may be above or below the issue price.

What is meant by Market Capitalisation?

The market value of a quoted company, which is calculated by

multiplying its current share price (market price) by the number of
shares in issue is called as market capitalization. E.g. Company A has
120 million shares in issue. The current market price is Rs. 100. The
market capitalisation of company A is Rs. 12000 million.

18
What is the difference between public issue and private
placement?

When an issue is not made to only a select set of people but is open to the
general public and any other investor at large, it is a public issue. But if the
issue is made to a select set of people, it is called private placement. As per
Companies Act, 1956, an issue becomes public if it results in allotment to 50
persons or more. This means an issue can be privately placed where an
allotment is made to less than 50 persons.

What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the
primary market. It is when an unlisted company makes either a fresh issue
of securities or an offer for sale of its existing securities or both for the first
time to the public. This paves way for listing and trading of the issuer‟s
securities. The sale of securities can be either through book building or
through normal public issue.

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following

this, the guidelines have provided that the issuer in consultation with
Merchant Banker shall decide the price. There is no price formula stipulated
by SEBI. SEBI does not play any role in price fixation. The company and
merchant banker are however required to give full disclosures of the
parameters which they had considered while deciding the issue price. There
are two types of issues, one where company and Lead Merchant Banker fix a
price (called fixed price) and other, where the company and the Lead
Manager (LM) stipulate a floor price or a price band and leave it to market
forces to determine the final price (price discovery through book building
process).

What does ‘price discovery through Book Building Process’

mean?

Book Building is basically a process used in IPOs for efficient price discovery.
It is a mechanism where, during the period for which the IPO is open, bids
are collected from investors at various prices, which are above or equal to
the floor price. The offer price is determined after the bid closing date.

19
What is the main difference between offer of shares through
book building and offer of shares through normal public issue?

Price at which securities will be allotted is not known in case of offer of

shares through Book Building while in case of offer of shares through normal
public issue, price is known in advance to investor. Under Book Building,
investors bid for shares at the floor price or above and after the closure of
the book building process the price is determined for allotment of shares.

In case of Book Building, the demand can be known everyday as the book
is being built. But in case of the public issue the demand is known at the
close of the issue.

What is Cut-Off Price?

In a Book building issue, the issuer is required to indicate either the price
band or a floor price in the prospectus. The actual discovered issue price can
be any price in the price band or any price above the floor price. This issue
price is called “Cut-Off Price”. The issuer and lead manager decides this after
considering the book and the investors' appetite for the stock

What is the floor price in case of book building?

Floor price is the minimum price at which bids can be made.

What is a Price Band in a book built IPO?

The prospectus may contain either the floor price for the securities or a price
band within which the investors can bid. The spread between the floor and
the cap of the price band shall not be more than 20%. In other words, it
means that the cap should not be more than 120% of the floor price. The
price band can have a revision and such a revision in the price band shall be
widely disseminated by informing the stock exchanges, by issuing a press
release and also indicating the change on the relevant website and the
terminals of the trading members participating in the book building process.
In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding
ten days.

20
Who decides the Price Band?

It may be understood that the regulatory mechanism does not play a role in
setting the price for issues. It is up to the company to decide on the price or
the price band, in consultation with Merchant Bankers.

What is minimum number of days for which a bid should

remain open during book building?

The Book should remain open for a minimum of 3 days.

Can open outcry system be used for book building?

No. As per SEBI, only electronically linked transparent facility is allowed to

be used in case of book building.

Can the individual investor use the book building facility to

make an application?

Yes.

How does one know if shares are allotted in an IPO/offer for

sale? What is the timeframe for getting refund if shares not
allotted?

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009 the Basis of Allotment should be completed with 8 days from the issue
close date. As soon as the basis of allotment is completed, within 2 working
days the details of credit to demat account / allotment advice and despatch
of refund order needs to be completed. So an investor should know in about
11 days time from the closure of issue, whether shares are allotted to him or
not.

How long does it take to get the shares listed after issue?

It takes 12 working days after the closure of the book built issue.

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What is the role of a ‘Registrar’ to an issue?

The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to
the demat accounts of the applicants is done and the dispatch of refund
orders to those applicable are sent. The Lead Manager coordinates with the
Registrar to ensure follow up so that that the flow of applications from
collecting bank branches, processing of the applications and other matters till
the basis of allotment is finalized, dispatch security certificates and refund
orders completed and securities listed.

Does NSE provide any facility for IPO?

Yes. NSE's electronic trading network spans across the country providing
access to investors in remote areas. NSE decided to offer this infrastructure
for conducting online IPOs through the Book Building process. NSE operates
a fully automated screen based bidding system called NEAT IPO that enables
trading members to enter bids directly from their offices through a
sophisticated telecommunication network.

Book Building through the NSE system offers several advantages:

 The NSE system offers a nationwide bidding facility in securities

 It provide a fair, efficient & transparent method for collecting bids

using the latest electronic trading systems

 Costs involved in the issue are far less than those in a normal IPO

 The system reduces the time taken for completion of the issue
process

The IPO market timings are from 10.00 a.m. to 5.00 p.m.

What is a Prospectus?

A large number of new companies float public issues. While a large number
of these companies are genuine, quite a few may want to exploit the
investors. Therefore, it is very important that an investor before applying for
any issue identifies future potential of a company. A part of the guidelines
issued by SEBI (Securities and Exchange Board of India) is the disclosure of

22
information to the public. This disclosure includes information like the reason
for raising the money, the way money is proposed to be spent, the return
expected on the money etc. This information is in the form of ‘Prospectus‟
which also includes information regarding the size of the issue, the current
status of the company, its equity capital, its current and past performance,
the promoters, the project, cost of the project, means of financing, product
and capacity etc. It also contains lot of mandatory information regarding
underwriting and statutory compliances. This helps investors to evaluate
short term and long term prospects of the company.

What does ‘Draft Offer document’ mean?

„Offer document‟ means Prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a rights issue which is filed with the Registrar
of Companies (ROC) and Stock Exchanges (SEs). An offer document covers
all the relevant information to help an investor to make his/her investment
decision.

„Draft Offer document‟ means the offer document in draft stage. The draft
offer documents are filed with SEBI, atleast 30 days prior to the registration
of red herring prospectus or prospectus with ROC. SEBI may specify
changes, if any, in the draft Offer Document and the issuer or the lead
merchant banker shall carry out such changes in the draft offer document
before filing the Offer Document with ROC. The Draft Offer Document is
available on the SEBI website for public comments for a period of 21 days
from the filing of the Draft Offer Document with SEBI.

What is an ‘Abridged Prospectus’?

„Abridged Prospectus‟ is a shorter version of the Prospectus and contains all

the salient features of a Prospectus. It accompanies the application form of
public issues.

Who prepares the ‘Prospectus’/ ‘Offer Documents’?

Generally, the public issues of companies are handled by ‘Merchant Bankers’

who are responsible for getting the project appraised, finalizing the cost of
the project, profitability estimates and for preparing of „Prospectus‟. The
„Prospectus‟ is submitted to SEBI for its approval.

23
What does one mean by ‘Lock-in’?

„Lock-in‟ indicates a freeze on the sale of shares for a certain period of time.
SEBI guidelines have stipulated lock-in requirements on shares of promoters
mainly to ensure that the promoters or main persons, who are controlling
the company, shall continue to hold some minimum percentage in the
company after the public issue.

What is meant by ‘Listing of Securities’?

Listing means admission of securities of an issuer to trading privileges

(dealings) on a stock exchange through a formal agreement. The prime
objective of admission to dealings on the exchange is to provide liquidity and
marketability to securities, as also to provide a mechanism for effective
control and supervision of trading.

What is a ‘Listing Agreement’?

At the time of listing securities of a company on a stock exchange, the

company is required to enter into a listing agreement with the exchange. The
listing agreement specifies the terms and conditions of listing and the
disclosures that shall be made by a company on a continuous basis to the
exchange.

What does ‘Delisting of securities’ mean?

The term „Delisting of securities‟ means permanent removal of securities of a

listed company from a stock exchange. As a consequence of delisting, the
securities of that company would no longer be traded at that stock exchange.

What is SEBI’s Role in an Issue?

Any company making a public issue or a listed company making a rights

issue of value of more than Rs 50 lakh is required to file a draft offer
document with SEBI for its observations. The company can proceed further
on the issue only after getting observations from SEBI. The validity period of
SEBI's observation letter is three months only i.e. the company has to open
its issue within three months period.

24
Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility either
for the financial soundness of any scheme or the project for which the issue
is proposed to be made or for the correctness of the statements made or
opinions expressed in the offer document. SEBI mainly scrutinizes the issue
for seeing that adequate disclosures are made by the issuing company in the
prospectus or offer document.

Does SEBI tag make one's money safe?

The investors should make an informed decision purely by themselves based

on the contents disclosed in the offer documents. SEBI does not associate
itself with any issue/issuer and should in no way be construed as a
guarantee for the funds that the investor proposes to invest through the
issue. However, the investors are generally advised to study all the material
facts pertaining to the issue including the risk factors before considering any
investment. They are strongly warned against relying on any „tips‟ or news
through unofficial means.

3.2 Foreign Capital Issuance

Can companies in India raise foreign currency resources?

Yes. Indian companies are permitted to raise foreign currency resources

through two main sources: a) issue of foreign currency convertible bonds
more commonly known as „Euro‟ issues and b) issue of ordinary shares
through depository receipts namely „Global Depository Receipts
(GDRs)/American Depository Receipts (ADRs)‟ to foreign investors i.e. to the
institutional investors or individual investors.

What is an American Depository Receipt?

An American Depositary Receipt ("ADR") is a physical certificate evidencing

ownership of American Depositary Shares ("ADSs"). The term is often used
to refer to the ADSs themselves.

25
What is an ADS?

An American Depositary Share ("ADS") is a U.S. dollar denominated form of

equity ownership in a non-U.S. company. It represents the foreign shares of
the company held on deposit by a custodian bank in the company's home
country and carries the corporate and economic rights of the foreign shares,
subject to the terms specified on the ADR certificate.

One or several ADSs can be represented by a physical ADR certificate. The

terms ADR and ADS are often used interchangeably.

ADSs provide U.S. investors with a convenient way to invest in overseas

securities and to trade non-U.S. securities in the U.S. ADSs are issued by a
depository bank, such as JPMorgan Chase Bank. They are traded in the same
manner as shares in U.S. companies, on the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ
and the over-the-counter (OTC) market.

Although ADSs are U.S. dollar denominated securities and pay dividends in
U.S. dollars, they do not eliminate the currency risk associated with an
investment in a non-U.S. company.

What is meant by Global Depository Receipts?

Global Depository Receipts (GDRs) may be defined as a global finance vehicle

that allows an issuer to raise capital simultaneously in two or markets
through a global offering. GDRs may be used in public or private markets
inside or outside US. GDR, a negotiable certificate usually represents
company's traded equity/debt. The underlying shares correspond to the
GDRs in a fixed ratio say 1 GDR=10 shares.

26
4. SECONDARY MARKET

4.1 Introduction

What is meant by Secondary market?

Secondary market refers to a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the Stock
Exchange. Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the debt markets.

What is the role of the Secondary Market?

For the general investor, the secondary market provides an efficient platform
for trading of his securities. For the management of the company, Secondary
equity markets serve as a monitoring and control conduit—by facilitating
value-enhancing control activities, enabling implementation of incentive-
based management contracts, and aggregating information (via price
discovery) that guides management decisions.

What is the difference between the Primary Market and the

Secondary Market?

In the primary market, securities are offered to public for subscription for the
purpose of raising capital or fund. Secondary market is an equity trading
venue in which already existing/pre-issued securities are traded among
investors. Secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is
a part of the dealer market.

27
4.1.1 Stock Exchange

What is the role of a Stock Exchange in buying and selling

shares?

The stock exchanges in India, under the overall supervision of the regulatory
authority, the Securities and Exchange Board of India (SEBI), provide a
trading platform, where buyers and sellers can meet to transact in securities.
The trading platform provided by NSE is an electronic one and there is no
need for buyers and sellers to meet at a physical location to trade. They can
trade through the computerized trading screens available with the NSE
trading members or the internet based trading facility provided by the
trading members of NSE.

What is Demutualisation of stock exchanges?

Demutualisation refers to the legal structure of an exchange whereby the

ownership, the management and the trading rights at the exchange are
segregated from one another.

How is a demutualised exchange different from a mutual

exchange?

In a mutual exchange, the three functions of ownership, management and

trading are concentrated into a single Group. Here, the broker members of
the exchange are both the owners and the traders on the exchange and they
further manage the exchange as well. This at times can lead to conflicts of
interest in decision making. A demutualised exchange, on the other hand,
has all these three functions clearly segregated, i.e. the ownership,
management and trading are in separate hands.

28
4.1.2 Stock Trading

What is Screen Based Trading?

The trading on stock exchanges in India used to take place through open
outcry without use of information technology for immediate matching or
recording of trades. This was time consuming and inefficient. This imposed
limits on trading volumes and efficiency. In order to provide efficiency,
liquidity and transparency, NSE introduced a nationwide, on-line, fully-
automated screen based trading system (SBTS) where a member can punch
into the computer the quantities of a security and the price at which he
would like to transact, and the transaction is executed as soon as a matching
sale or buy order from a counter party is found.

What is NEAT?

NSE is the first exchange in the world to use satellite communication

technology for trading. Its trading system, called National Exchange for
Automated Trading (NEAT), is a state of-the-art client server based
application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system
availability for users. It has uptime record of 99.7%. For all trades entered
into NEAT system, there is uniform response time of less than one second.

How to place orders with the broker?

You may go to the broker's office or place an order on the phone/internet or

as defined in the Model Agreement, which every client needs to enter into
with his or her broker.

How does an investor get access to internet based trading

facility?

There are many brokers of the NSE who provide internet based trading
facility to their clients. Internet based trading enables an investor to buy/sell
securities through internet which can be accessed from a computer at the
investor's residence or anywhere else where the client can access the
internet. Investors need to get in touch with an NSE broker providing this
service to avail of internet based trading facility.

29
What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf

of the client by a trading member. It imposes a legally enforceable
relationship between the client and the trading member with respect to
purchase/sale and settlement of trades. It also helps to settle
disputes/claims between the investor and the trading member. It is a
prerequisite for filing a complaint or arbitration proceeding against the
trading member in case of a dispute. A valid contract note should be in the
prescribed form, contain the details of trades, stamped with requisite value
and duly signed by the authorized signatory. Contract notes are kept in
duplicate, the trading member and the client should keep one copy each.
After verifying the details contained therein, the client keeps one copy and
returns the second copy to the trading member duly acknowledged by him.

What details are required to be mentioned on the contract

note issued by the stock broker?

A broker has to issue a contract note to clients for all transactions in the
form specified by the stock exchange. The contract note inter-alia should
have following:

■ Name, address and SEBI Registration number of the Member broker.

■ Name of partner/proprietor/Authorised Signatory.
■ Dealing Office Address/Tel. No./Fax no., Code number of the member
given by the Exchange.
■ Contract number, date of issue of contract note, settlement number
and time period for settlement.
■ Constituent (Client) name/Code Number.
■ Order number and order time corresponding to the trades.
■ Trade number and Trade time.
■ Quantity and kind of Security bought/sold by the client.
■ Brokerage and Purchase/Sale rate.
■ Service tax rates, Securities Transaction Tax and any other charges
levied by the broker.
■ Appropriate stamps have to be affixed on the contract note or it is
mentioned that the consolidated stamp duty is paid.
■ Signature of the Stock broker/Authorized Signatory.

What is the maximum brokerage that a broker can charge?

The maximum brokerage that can be charged by a broker from his clients as
commission cannot be more than 2.5% of the value mentioned in the
respective purchase or sale note.

30
Why should one trade on a recognized stock exchange only for
buying/selling shares?

An investor does not get any protection if he trades outside a stock

exchange. Trading at the exchange offers investors the best prices prevailing
at the time in the market, lack of any counter-party risk which is assumed by
the clearing corporation, access to investor grievance and redressal
mechanism of stock exchanges, protection upto a prescribed limit, from the
Investor Protection Fund etc.

How to know if the broker or sub broker is registered?

One can confirm it by verifying the registration certificate issued by SEBI. A

broker's registration number begins with the letters 'INB' and that of a sub
broker with the letters 'INS'.

What precautions must one take before investing in the stock

markets?

Here are some useful pointers to bear in mind before you invest in the
markets:

■ Make sure your broker is registered with SEBI and the exchanges and
do not deal with unregistered intermediaries.

■ Ensure that you receive contract notes for all your transactions from
your broker within one working day of execution of the trades.

■ All investments carry risk of some kind. Investors should always know
the risk that they are taking and invest in a manner that matches their
risk tolerance.

■ Do not be misled by market rumours, during advertisement or 'hot

tips' of the day.

■ Take informed decisions by studying the fundamentals of the

company. Find out the business the company is into, its future
prospects, quality of management, past track record etc Sources of
knowing about a company are through annual reports, economic
magazines, databases available with vendors or your financial advisor.

31
 ■ If your financial advisor or broker advises you to invest in a company
you have never heard of, be cautious. Spend some time checking out
about the company before investing.

■ Do not be attracted by announcements of fantastic results/news

reports, about a company. Do your own research before investing in
any stock.
■ Do not be attracted to stocks based on what an internet website
promotes, unless you have done adequate study of the company.

■ Investing in very low priced stocks or what are known as penny stocks
does not guarantee high returns.

■ Be cautious about stocks which show a sudden spurt in price or trading

activity.

■ Any advise or tip that claims that there are huge returns expected,
especially for acting quickly, may be risky and may to lead to losing
some, most, or all of your money.

What Do's and Don'ts should an investor bear in mind when

investing in the stock markets?

■ Ensure that the intermediary (broker/sub-broker) has a valid SEBI

registration certificate.
■ Enter into an agreement with your broker/sub-broker setting out
terms and conditions clearly.
■ Ensure that you give all your details in the 'Know Your Client' form.
■ Ensure that you read carefully and understand the contents of the
'Risk Disclosure Document' and then acknowledge it.
■ Insist on a contract note issued by your broker only, for trades done
each day.
■ Ensure that you receive the contract note from your broker within 24
hours of the transaction.
■ Ensure that the contract note contains details such as the broker's
name, trade time and number, transaction price, brokerage, service
tax, securities transaction tax etc. and is signed by the Authorised
Signatory of the broker.
■ To cross check genuineness of the transactions, log in to the NSE
website (www.nseindia.com) and go to the 'trade verification' facility
extended by NSE. Issue account payee cheques/demand drafts in the
name of your broker only, as it appears on the contract note/SEBI
registration certificate of the broker.

32
■ While delivering shares to your broker to meet your obligations, ensure
that the delivery instructions are made only to the designated account of
your broker only.
■ Insist on periodical statement of accounts of funds and securities from
your broker. Cross check and reconcile your accounts promptly and in
case of any discrepancies bring it to the attention of your broker
immediately.
Please ensure that you receive payments/deliveries from your broker, for
the transactions entered by you, within one working day of the payout
date.
■ Ensure that you do not undertake deals on behalf of others or trade on
your own name and then issue cheques from a family members'/ friends'
bank accounts.
■ Similarly, the Demat delivery instruction slip should be from your own
Demat account, not from any other family members'/friends' accounts.
■ Do not sign blank delivery instruction slip(s) while meeting security payin
obligation.
■ No intermediary in the market can accept deposit assuring fixed returns.
Hence do not give your money as deposit against assurances of returns.
■ "Portfolio Management Services' could be offered only by intermediaries
having specific approval of SEBI for PMS. Hence, do not part your funds to
unauthorized persons for Portfolio Management.
■ Delivery Instruction Slip is a very valuable document. Do not leave signed
blank delivery instruction slip with anyone. While meeting pay in
obligation make sure that correct ID of authorised intermediary is filled in
the Delivery Instruction Form.
■ Be cautious while taking funding form authorised intermediaries as these
transactions are not covered under Settlement Guarantee mechanisms of
the exchange.
■ Insist on execution of all orders under unique client code allotted to you.
Do not accept trades executed under some other client code to your
account.
■ When you are authorising someone through 'Power of Attorney' for
operation of your DP account, make sure that:

■ your authorization is in favour of registered intermediary

only.
■ authorisation is only for limited purpose of debits and credits
arising out of valid transactions executed through that
intermediary only.

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 ■ you verify DP statement periodically say every month/
fortnight to ensure that no unauthorised transactions
have taken place in your account.
■ authorization given by you has been properly used for
the purpose for which authorization has been given.
■ in case you find wrong entries please report in writing
to the authorized intermediary.
■ Don't accept unsigned/duplicate contract note.
■ Don't accept contract note signed by any unauthorised person.
■ Don't delay payment/deliveries of securities to broker.
■ In the event of any discrepancies/disputes, please bring them to the
notice of the broker immediately in writing (acknowledged by the
broker) and ensure their prompt rectification.
■ In case of sub-broker disputes, inform the main broker in writing
about the dispute at the earliest. If your broker/sub-broker does not
resolve your complaints within a reasonable period please bring it to
the attention of the 'Investor Services Cell' of the NSE.
■ While lodging a complaint with the 'Investor Grievances Cell' of the
NSE, it is very important that you submit copies of all relevant
documents like contract notes, proof of payments/delivery of shares
etc. alongwith the complaint. Remember, in the absence of sufficient
documents, resolution of complaints becomes difficult.
■ Familiarise yourself with the rules, regulations and circulars issued
by stock exchanges/SEBI before carrying out any transaction.

4.2 Products in the Secondary Markets

What are the products dealt in the Secondary Markets?

Following are the main financial products/instruments dealt in the

Secondary market which may be divided broadly into Shares and Bonds:

Shares:

Equity Shares: An equity share, commonly referred to as ordinary

share, represents the form of fractional ownership in a business
venture.

Rights Issue/ Rights Shares: The issue of new securities to existing

shareholders at a ratio to those already held, at a price. For e.g. a

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 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2
shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders

free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a

fixed dividend or dividend calculated at a fixed rate to be paid
regularly before dividend can be paid in respect of equity share. They
also enjoy priority over the equity shareholders in payment of surplus.
But in the event of liquidation, their claims rank below the claims of
the company's creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which

dividend accumulates if remained unpaid. All arrears of preference
dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference

shares where the dividend payable on the same accumulates, if not
paid. After a specified date, these shares will be converted into equity
capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally

unsecured. A debt security is generally issued by a company, municipality or
government agency. A bond investor lends money to the issuer and in
exchange, the issuer promises to repay the loan amount on a specified
maturity date. The issuer usually pays the bond holder periodic interest
payments over the life of the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face

value. No periodic interest is paid. The difference between the issue
price and redemption price represents the return to the holder. The
buyer of these bonds receives only one payment, at the maturity of
the bond.

Convertible Bond: A bond giving the investor the option to convert the
bond into equity at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security

issued by government as a means of financing their cash
requirements.

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4.2.1 Equity Investment

Why should one invest in equities in particular?

When you buy a share of a company you become a shareholder in that

company. Shares are also known as Equities. Equities have the potential to
increase in value over time. Research studies have proved that the equity
returns have outperformed the returns of most other forms of investments in
the long term. Investors buy equity shares or equity based mutual funds
because:-

■ Equities are considered the most rewarding, when compared to other

investment options if held over a long duration.
■ Research studies have proved that investments in some shares with a
longer tenure of investment have yielded far superior returns than any
other investment. The average annual return of the stock market over
the period of last fifteen years, if one takes the Nifty index as the
benchmark to compute the returns, has been around 16%.

However, this does not mean all equity investments would guarantee similar
high returns. Equities are high risk investments. Though higher the risk,
higher the potential returns, high risk also indicates that the investor stands
to lose some or all his investment amount if prices move unfavorably. One
needs to study equity markets and stocks in which investments are being
made carefully, before investing.

What has been the average return on Equities in India?

If we take the Nifty index returns for the past fifteen years, Indian stock
market has returned about 16% to investors on an average in terms of
increase in share prices or capital appreciation annually. Besides that on
average stocks have paid 1.5% dividend annually. Dividend is a percentage of
the face value of a share that a company returns to its shareholders from its
annual profits. Compared to most other forms of investments, investing in
equity shares offers the highest rate of return, if invested over a longer
duration.

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