1. TRADING OF SECURITIES

2. Definition
• Trading is the process of buying and selling
securities.
• The procedure of trading consists of two
processes, i.e.
• Delivery (when securities are sold) and
• Receipt (when securities are purchased).

3. Forms of Trading
• Trading can be of following two types:
• Delivery Based
• Intra-day

4. Delivery-based Trading
• Delivery based trading is normally considered
as a safer approach for trading in shares when
compared to day trading.
• Delivery based trading involves buying shares
on a market day and selling them only after
receiving the delivery of those shares in
demat account.

5. Intra-day Trading
• Day trading refers to the tactic of buying and
selling shares during the same market day,
such that the net position of trader at the end
of the day is unchanged.

6. Example of Intra Day Trading
• 'P' buys 100 shares of XYZ Company Limited
and sells them during the same day, he is said
to be indulging in day trading. The difference
between the purchase and sales prices
determines the gains/losses. Day traders may
make dozens of trades in a market day in a
hope to earn profits arising from small
intraday fluctuations in share prices.

7. • Day trading is considered as a riskier form of
trading, with more than 80% of day traders
loosing considerable amount of money.
• Day traders generally use borrowed money
(known as buying on margin) which amplifies
gains/losses. As a result, substantial amount
of gains/losses occur in just one day.

8. • In the past, day trading was practiced by
financial firms and professionals and some
savvy private investors and speculators.
• But in recent years day trading has become
more popular amongst individual traders who
take advantage of new facilities offered via
the Internet with an intention of making quick
money.

9. What is dematerialisation?
• Dematerialisation is the process by which
physical share certificates of an investor are
converted to an equivalent number of
securities in electronic form and credited into
the investor's account maintained with
his/her depository participant (DP).
• It is like having a bank account where instead
of money, you hold securities in your account.

10. How can one dematerialise securities?
• In order to dematerialise physical securities
held by an investor, he has to fill in a DRF
(Demat Request Form) which is available with
the DP and submit the same along with
physical share certificates one wishes to
dematerialise.
• Separate DRF has to be filled for each ISIN
Number.

11. What is an ISIN?
• ISIN (International Securities Identification
Number) is a unique identification number for
a security. India follows the norms stipulates
by Association of National Numbering Agency
(ANNA) which is the international body for
issue of ISINs.

12. • National Securities Depository Limited (NSDL)
issues ISINs in India and a complete list of ISINs is
available on their website: www.nsdl.co.in.
• Also note that ISIN of a security changes in case
of certain corporate action such as split in share
par value, consolidation of share capital etc.
• Hence you have to quote the correct ISIN at the
time of giving dematerialisation request as well
as at the time of transfer of shares.

13. Do dematerialised shares have
distinctive numbers?
• Unlike physical shares, dematerialised shares
do not have any distinctive numbers. These
shares are fungible, which means that all the
holdings of a particular security will be
identical and interchangeable.

14. What is a Depository
• A depository is an entity which holds
securities of investors in electronic form at the
request of the investors through a registered
Depository participant. It also provides
services related to transactions in securities
based on instructions given by the investors to
depository participant.

15. How many Depositories are registered
with SEBI?
• At present two Depositories viz. National
Securities Depository Limited (NSDL) and
Central Depository Services (I) Limited (CDSL)
are registered with SEBI.

16. Who is a depository participant?
• A depository participant is a person or entity, which is
registered with depositories such as NSDL and/or CDSL
as also with SEBI and who offers services of holding
your shares and effecting transfer (accepting credits in
your account as well transferring shares from your
account to that of some one else based on your
instructions).
• Thus a depository participant acts as a custodian of
your securities held in dematerialized or fungible form
and carries out your instruction to transfer the same.

17. Is it compulsory for every investor to
open a depository account to trade in
the capital market?
• Around 99.9% of the securities settlement
takes place in dematerialized mode.
Therefore, in view of the convenience in
settlement through dematerialized mode, it is
advisable to have a beneficiary owner (BO)
account to trade at the exchanges and to hold
the securities.

18. How are transfers made by DP?
• DPs issue Delivery Instruction Slips (or DIS) to all
account holders.
• These are like cheque leaves.
• Whenever you want to transfer shares from your
account to another account, you are required to
fill the relevant details such as security
identification number, number of shares you
want to transfer, date of transfer, account to
which shares need to be transferred etc. and
submit this slip to your DP.
• The DP would then affect the transfer.

19. What are the services offered by stock
brokers?
• Stock brokers offer services such as buying
and selling on behalf of investors.
• They also provide advisory services.
• Some of the bigger brokers also publish their
own research reports which are available at a
cost for investors.

20. National Stock Exchange of India
• The National Stock Exchange of India was promoted by
leading Financial institutions at the behest of the
Government of India, and was incorporated in
November 1992 as a tax-paying company.
• In April 1993, it was recognized as a stock exchange
under the Securities Contracts (Regulation) Act, 1956.
NSE commenced operations in the Wholesale Debt
Market (WDM) segment in June 1994.
• The Capital Market (Equities) segment of the NSE
commenced operations in November 1994, while
operations in the Derivatives segment commenced in
June 2000.

21. Currently, NSE has the following major
segments of the capital market:
• * Equity
• * Futures and Options
• * Retail Debt Market
• * Wholesale Debt Market
• * Currency futures

22. Brokers and jobbers
• . A broker acts as an agent for his customers; a
jobber, or dealer, transacts business on the floor
of the exchange but does not deal with the
public.
• A customer gives an order to a brokerage house,
which relays it to the floor for execution. The
receiving broker goes to the area where the
security is traded and seeks a jobber stationed in
the vicinity who specializes in the particular issue.

23. • The jobber serves only in the capacity of a principal,
buying and selling for his own account and dealing only
with brokers or other jobbers. The broker asks the
jobber’s current prices without revealing whether he is
interested in buying or selling.
• The broker may seek to narrow the spread between
the bid and ask quotations or he may approach
another jobber handling the same issue and undertake
the same bargaining process. Eventually, when
satisfied that he has obtained the best possible price
for his client, the broker will complete the bargain.

24. • A broker is compensated by the commission
received from the customer. The jobber seeks
to maximize his profitable business by
adjusting his buying and selling prices.
• The trading procedures of other major
exchanges throughout the world employ the
principles that have been described above,
although they vary in their application of
them.

25. Types of corporate securities
• Corporations create two kinds of securities:
bonds, representing debt, and stocks,
representing ownership or equity interest in
their operations.

26. Bonds
• The bond, as a debt instrument, represents
the promise of a corporation to pay a fixed
sum at a specified maturity date, and interest
at regular intervals until then.

27. • The principal type of bond is a mortgage
bond, which represents a claim on specified
real property.

28. Stock
• Those who provide the risk capital for a
corporate venture are given stock,
representing their ownership interest in the
enterprise. The holder of stock has certain
rights that are defined by the charter and
bylaws of the corporation as well as by the
laws of the country or state in which it is
chartered.

29. • Typically these include the right to share in
dividends and other distributions, to vote for
directors and fundamental corporate changes,
and to inspect the books of the corporation
• The stockholder’s interest is divided into units
of participation, called shares.

30. Preferred stock
• Preferred stock has priority with respect to
dividends and, if the corporation is dissolved,
to the division of assets.
• Dividends on preferred stock usually are paid
at a fixed rate and are often cumulated in the
event the corporation finds it necessary to
omit a distribution.

31. Common stock
• Common stock, in some countries called ordinary
shares, represents a residual interest in the
earnings and assets of a corporation.
• Whereas distributions to bonds or preferred
stock are ordinarily fixed, dividends paid on
common stock are set at the time of payment by
the directors and tend to vary with earnings.
• The market price of common stock is likely to
move in a relatively wide range, depending on
investors’ expectations of earnings in the future.

32. Options
• An option contract is an agreement enabling
the holder to buy a security at a fixed price
• One form of option contract is the stock
purchase warrant, which entitles the owner to
buy shares of common stock at designated
prices and according to a prescribed ratio.

33. The development of securities trading
• Organized securities markets and stock exchanges are
a product of economic development. In the early years
of economic growth, most of a country’s industrial
units are small and their capital requirements
relatively modest.
• The rate of saving is low, and institutions for
channelling private savings into investment are
generally lacking.
• As the economy progresses and national income
grows, new institutions enter the financial picture to
direct the mounting volume of savings into productive
outlets.

34. Organization of exchanges
• All stock exchanges perform similar functions
with respect to the listing, trading, and
clearing of securities. They differ in their
administrative machinery for handling these
functions.

35. Over-the-counter
• In the early days of securities trading, stocks and
bonds were often bought at private banking
houses in the same way that commodities might
be purchased over the counter of a general store.
• This was the origin of the term “over-the-
counter.”
• It is used today to mean all securities
transactions that are handled outside the
exchanges.

36. • . Increasingly, this market is being subjected
to regulation.
• The extent and nature of the over-the-counter
market varies throughout the world.

37. • The over-the-counter market is a negotiated
market, as distinguished from the auction
markets for listed securities.
• An investor desiring to trade an over-the-
counter security gives his order to a broker
functioning as a retailer, who ordinarily shops
among various firms to obtain the best
possible price.

38. • in an auction market, securities are sold by
the Dealer to the broker bidding the highest
price and bought from the broker offering the
lowest price.

39. The matching engine
• Imagine there's a company listed on the
NASDAQ exchange -- call it the ABC company.
Inside the matching engine, there's a place to
hold all of the pending trades for ABC. Let's
say three people want to sell their shares of
stock in the ABC company. They place their
orders as follows:

40. • Customer 1: sell 50 shares for $15.40
• Customer 2: sell 200 shares for $15.25
• Customer 3: sell 100 shares for $15.20

41. • Now imagine that there are four people who
want to buy shares of the ABC company. The
list looks like this:
• Customer A: buy 100 shares for $15.15
• Customer B: buy 200 shares for $15.10
• Customer C: buy 150 shares for $15.00
• Customer D: buy 75 shares for $1­4.95

42. • Right now there are no matches. The lowest price
on the sell side is $15.20, and the highest price
on the buy side is $15.15.
• The difference between the lowest selling price
and the highest buying price is called the spread.
• In a widely traded stock, it's usually only a penny
or two. In a low­volume stock, the spread can
grow much larger.
• Because of the spread here, these trades are
going to sit in these lists waiting for a match to
come along.

43. • Now let's imagine that Customer A sends in a new sell
order. He wants to buy 50 shares for $15.25.
• Instead, he'll get the stock for $15.20 from Customer 3,
because that's the lowest price available in the list of
sellers.
• The 100 shares available at the $15.20 sale price will
be split ­­ 50 shares will remain in the list, while the
other 50 will complete the transaction.
• Customer 3 is happy because he got the price he
wanted, and Customer A is happy because he got a
small discount.

44. • Once the match is made, information about
the completed transaction flows out of the
matching engine and goes back to the broker
dealers of the buyer and seller.
• Information also flows to the quote servers so
that anyone who's interested can see what
happened.

45. Electronic Trading
• Steps of your stock trade through the system

46. • Before you can buy, however, you have to
open a brokerage account. There are dozens
of companies that allow you to do electronic
trading,
• These companies are called broker dealers,
and they give you access to the stock
exchanges.
• Without a brokerage account, you can't trade
stocks.

47. • Let's imagine you want to buy 100 shares of
the ABC company.
• You check the price of that stock on the quote
screen and see that it costs $20.40 to buy it at
this moment. You enter in an order to buy 100
shares at $20.40 a share.

48. • Your broker dealer will transmit your order to
a stock exchange. If the ABC company trades
on the NASDAQ stock exchange, the order
goes there.
• Inside the NASDAQ exchange, there's a
computer that's dedicated to handling all the
orders coming from your broker dealer.

49. • Having received your order from your broker
dealer, the exchange will try to match your
buy order up with a sell order from someone
else.
• If it can find a match, you'll have executed a
stock trade. If not, your trade will sit on the
exchange waiting for a matching order.

50. • The broker dealer is keeping track of the
number of shares of stock you own. But that's
not enough. Somewhere, there needs to be a
cen
• The central entity that holds the "who owns
what" information is called the Depository tral
repository that knows who owns what.

51. Questions for Revision
• Write a short note on trading in the Capital
Markets ?