INTRODUCTION

As Indian securities markets continue to evolve, market participants, investors and regulators are looking at different ways in which the risk management may be efficiently met through the introduction of Derivative markets. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. Derivatives are risk management instruments, which derive their value form an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. banks, securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, uses derivatives. Derivatives are likely to grow even at a faster rate in future. However, the advent of modern day derivative contracts is attributed to the need for farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction. The first futures contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like todays futures. The Chicago Board of trade (CBOT), the largest derivative exchange in the world, was established in 1848 where forward contracts on various commodities were standardized around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.

DERIVATIVES:

Derivatives are defined as financial instruments whose value derived from the prices of one or more other assets such as equity securities, fixed-income securities, foreign currencies, or commodities. Derivative is also a kind of contract between two counter parties to exchange payments linked to the prices of underlying assets.

DEFINITION: In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines derivative to include1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other from of security. 2. A contract which derives its value from the prices, or index or prices, of underlying securities The above definition conveys that Derivatives are financial products and derive its value from the underlying assets. Derivatives are derived from a matter financial contract called the underlying.

DIFFERENCE BETWEEN DERIVATIVES AND SHARES: The subtle, but crucial, difference is that while shares are assets, derivatives are usually contracts (the major exception to this are warrants and convertible bonds, which are similar to shares in that they are assets).

INVESTING IN DERIVATIVES :

If one is interested in getting directly involved with futures or options, then the idea to incest is inappropriate they are traded. This implies that one monitors the price more closely, and uses more sophisticated trading techniques (for example, the use if stop orders). There are a number of brokers that specialize in private client futures/options trading; list of these can usually be requested from futures exchanges. USAGE OF DERIVATIVES: Any person who has funds invested, (e.g. an insurance policy or a pension fund), are mostly exposed to derivatives in some or other way. Due to its great flexibility, derivatives are used by many different types of investors. From this stand point, derivatives will allow the modern investor the full range of investment strategy: speculation, hedging, arbitrage and all of the possible combinations thereof. MEASURES OF DERIVATIVES : The value of a derivatives contract equals the difference between the value of the underlying asset and the cost of financing a purchase of the asset, Further the value also depends on the price of the underlying asset and the level of interest rates. PARTICIPANTS OF DERIVATIVES: The following are the three broad categories of participants in the derivative market.

Hedgers:

Hedgers are parties who ate exposed to risk because they have a prior position in the commodity or the financial instrument specified in the futures contract. They use futures or options marked to reduce or eliminate this risk. Since one can take neither a long position nor a short position in the futures contract, there are two basic hedge positions: 1. The short (sell) hedge: A party who has a long cash position, current or potential, may sell (short) the futures. 2. The long (buy) hedge: A party who is not currently in cash but who expects to be in cash in the future may buy a futures contract to eliminate uncertainty about the price.

Speculators: Speculators are those who do not have any position on which they enter in futures and options market. They only have a particular view on the market, stock, commodity etc. In short speculators put their money a risk in the hope of profiting from an anticipated price change. They consider various factors such as demand supply, market positions, open interests, economic fundamentals and other data to take their positions. They play very important role in the proper functioning of futures market. The futures market offers the following attraction to the speculator:

Leverage Ease of transactions Lower transaction costs Arbitraguers:

An arbitrageur is basically risk averse. To earn risk free profits by exploiting market imperfections. Arbitrageurs make profit from price differential existing in to markets by simultaneously operating in the two different markets. There are two main kinds of arbitrage transactions. They are A futures-futures arbitrage: It occurs when a dealer exploit the price differential between two future markets. A cash-futures arbitrage: It occurs when a dealer exploits price misalignment between the cash market and the futures market. FUNCTIONS OF DERICATIVE MARKET: The following are the various functions that are performed by the derivatives markets. They are: Price in an organized derivatives market reflects the perception of market participations about the futures and let the prices of underlying to the perceived future level. Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Derivative trading acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run.

TYPES OF DERIVATIVES:

The following are the most common types of derivatives. They are FORWARDS: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. FUTURES: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. These are one of the most popular and widely used derivative instruments. OPTIONS: Options are of tow types calls and puts.
Calls give the buyer the right but not the obligation to buy a given quantity

of the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of

the underlying asset at a given price on ore before a given date. WARRANTS: Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally treaded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. BASKETS:

Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. SWAPS: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: INTEREST RATE SWAPS: These entail swapping only the interest related cash flows between the parties in the swap currency. CURRENCY SWAPS: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. SWAPTIONS: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

CHRONOLOGY OF DERIVATIVE MARKET IN INDIA:

DATE 14 DEC 1996 18 NOV 1996 7 JULY 1999 24 MAY 2000 25 MAY 2000 9 JUN 2000 22 JUN 2000 JULY 2001 NOV 2001 3 OCT 2003

PARTICULARS NSE asked SEBI for permission to trade Index Futures. Formed L.C.Gupta Committee to design framework for Index Futures. RBI gave permission of OTC Forward Rate Agreements and Interest Rate Swaps. SIMEX chose NIFTY for trading futures and options on India Index. SEBI gave permission to NSE to do Index Futures trading. Trading of BSE Futures. Trading of NSE Futures and Index Options market. Stock Options introduced. Stock Futures. Commodity Futures.

REGULATORY FRAMEWORK : The trading of derivatives is governed by the provisions contained in the SC (R) A, the SEBI Act and the regulations framed there under the rules and byelaws of stock exchanges.

REGULATIONS FOR DERIVATIVES TRADING : SEBI set up a 24 member committed under Chairmanship of Dr. L. C. Gupta develop the appropriate regulatory frame work for derivative trading in India. The committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of Derivatives trading in India beginning with Stock Index Futures. SEBI also approved he Suggestive bye-laws recommended by the committee for regulation and control of trading and settlement of Derivatives contracts. The provision in the SC (R) A governs the trading in the securities. The amendment of the SC(R) A to include DERIVATIVES within the ambit of Securities in the SC (R) A Made trading in Derivatives possible within the frame work of the Act.

1. Eligibility criteria as prescribed in the L.C. Gupta committee report may apply to SEBI for grant of recognition under Section 4 of the SC(R)A 1956 to start Derivatives Trading. The derivatives exchange/segment should have a separate governing council and representation of trading/ clearing members shall be limited to maximum of 40% of the total members of the governing council. The exchange shall regulate the sales practices of its members and will obtain approval of SEBI before start of Trading in any derivative contract. 2. The exchange shall have minimum 50 members. 3. The members of an existing segment of the exchange will not automatically become the members of the derivative segment. The members of the derivative segment need to fulfill the eligibility conditions as lay down by the L. C. Gupta Committee.

4. The clearing and settlement of derivates trades shall be through a SEBI approved Clearing Corporation / Clearing house. Clearing Corporation / Clearing House complying with the eligibility conditions as lay down By the committee have to apply to SEBI for grant of approval. 5. Derivatives broker / dealers and Clearing members are required to seek registration from SEBI. 6. The minimum contract value shall not be less than Rs.2Lakh. Exchanges should also submit details of the futures contract they purpose to introduce. 7. The trading members are required to have qualified approved user and sales person who have passed a certification programme approved by SEBI THE ECONOMIC ROLE OF DERIVATIVES Derivative markets provide three essential economic functions: Risk management Price discovery Transactional efficiency Risk management: The principal benefit of the Derivative market is that it provides the opportunity for risk management through Hedging.

Risks involved in derivatives: Risk can be defined as The possibility or probability of loss. Derivatives are used to separate risks from traditional instruments and transfer these risks. The fundamental risks involved in derivatives business includes following: Credit risk:

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This is the risk of a counterpart to perform its obligations as per the contract. Also known as default or counterpart risk, it differs with different instruments. Market risk: Market risk is a risk of financial loss as a result of adverse movements of prices of the underlying asset. Liquidity risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. Related to liquidity of separate products. Related to the funding of activities of the firm including derivatives. Legal risk: Derivatives cut a cross judicial boundaries therefore the legal aspects Associated with the deal should be looked into carefully. Risk management/Hedging strategies can be broadly grouped into three categories:
1. Inventory hedging to protect the value of existing portfolio of assets.

2. Anticipatory hedging to sell/buy derivatives especially forwards and futures

instead of the anticipated inflows (assets)/ outflows (liabilities). A classic example is that of exporters and importers who sells/buys currency futures/options.
3. Return enhancement hedge using derivatives to create synthetic securities,

which minic cash assets.

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Price discovery: The second major function of derivative market is price discovery. This is a process of providing equilibrium prices that reflect current and prospective demands on current and prospective supplies, and making these prices visible to all. Transactional efficiency: Derivative markets allow institution to transact more efficiently than otherwise. They reduce the direct cost of transacting in cash/financial markets are also provided, through clearing houses, an efficient mechanism to deal with counter party risk. INTRODUCTION TO FUTURES: A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future markets were designed to solve the problems that exist in forward markets. But unlike forward contracts, the futures contracts ate standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. The standardized items in a futures contract are: o Quantity of the underlying o Quality of the underlying o Date and Month of Delivery o The units of Price quotations and Minimum price changes o Location of settlement

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TYPES OF FUTURES: On the basis of the underlying asset they derive, the futures are divided into following types. STOCK FUTURES The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement price of the future is the closing price of the underlying security. INDEX FUTURES Index futures are the futures, which have the underlying asset as an Index. The Index futures are also cash settled. The settlement price of the Index futures shall be the closing value of the underlying index on the expiry date of the contract. COMMODITY FUTURES In this case, the underlying asset is a commodity. It can be an agricultural commodity like wheat corn, or even a precious asset like gold, silver etc. FINANCIAL FUTURES In this case, the underlying assets are financial instruments like money market paper, Treasury Bills, notes, bonds etc. CURRENCY FUTURES Currency futures are those in which the underlying assets are major convertible currencies like the U.S. dollar, the Pound Sterling, the Euro and the Yen etc.

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PARTIES IN THE FUTURES CONTRACT : There are two parties in a future contract, the Buyer and the Seller.

The buyer of the futures contract is one who is LONG on the futures contract

and

The seller of the futures contract is one who is SHORT on the futures

contract. The pay off for the buyer and the seller of the futures contract are as follows.

PAYOFF FOR A BUYER OF FUTURES:

PROFIT

E2
LOSS 14

F L

E1

CASE 1: The buyer bought the future contract at (F); if the futures price goes to E1 then the buyer gets the profit of (FP).

CASE 2: The buyer gets loss when the future price goes less then (F), if the futures price goes to E2 then the Buyer gets the loss of (FL).

PAYOFF FOR A SELLER OF FUTURES:

PROFIT

P E2
LOSS 15

E1

F-FUTURES PRICE E1, E2-SETTLEMENT PRICE CASE 1: The Seller sold the future contract at (f); if the futures price goes to E1 then the Seller gets the profit of (FP).

CASE 2: The Seller gets loss when the future price goes grater than (F), if the futures price goes to E2 then the Seller gets the loss of (FL).

MARGINS: Margins are the deposits, which reduce counter party risk, arise in a futures contract. These margins are collected in order to eliminate the counter party risk. There are three types of margin. INITIAL MARGINS:

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Whenever a futures contract is signed, both buyer and seller are required to post initial margin. Both buyer and seller are required to make security deposits that are intended to guarantee that they will infact be able to fulfill their obligation. These deposits ate Initial margins and they are often referred as performance as performance margins. The amount of margin is roughly 5% to 15% of total purchase price of futures contract.

MARKING OF MARKET MARGIN: The process of adjusting the equity in an investors account in order to reflect the change in the settlement price of futures contract is known as MTM Margin.

MAINTENANCE MARGIS: The investor must keep the futures account equity equal to or grater than certain percentage pf the amount deposited as Initial Margin. If the equity goes less than that percentage of Initial margin, then the investor receives a call for an additional deposit of cash known as Maintenance Margin to bring the equity up to the Initial margin.

PRICING THE FUTURES: The fair value of the futures contract is derived from a model known as the Cost of Carry model. This model gives the fair value of the futures contract. Cost of Carry Model: F=S (1+r-q) t

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Where F Futures Price S Spot price of the Underlying R Cost of Financing q Expected Dividend Yield t Holding Period.

FUTURES TERMINOLOGY: SPOT PRICE: The price at which an asset trades in the spot market. FUTURES PRICE: The price at which the futures contract trades in the futures market.

CONTRACTCYCLES: It is the period over which a contract trades. The index futures contracts on the NSE have near month (one-month), middle month (two-months) and far month (three-months) expiry cycles, which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February.

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On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading. EXAMPLE 1: DEC 31ST JAN 27TH FEB 24TH MAR 31ST

FAR MONTH MIDDLE MONTH NEAR MONTH

EXAMPLE 2: JAN 28TH FEB 24TH MAR 31ST APR 28TH

FAR MONTH

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MIDDLE MONTH NEAR MONTH

EXPIRY DATE: It is the date specified in the futures contract. This is the last day on which the correct will be traded, at the end of which it will cease to exist. CONTRACT SIZE: The amount of asset that has to be delivered less than one contract, For instance, the contract size on NSE s futures market is 200 Niftiest. BASIS: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery reflects that futures prices normally exceed spot prices. COST OF CARRY: The relationship between futures process and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.

OPEN INTEREST: Open Interest means the Total outstanding long or short positions in the market at any specific time. As total long positions for market would be equal to short positions, for calculation of open interest, only one side of the contract is counted. CHOICE OF FUTURES: Choice of futures consists of 3 decisions. They are

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 Which futures commodity Which expiration month Whenever to be long or short

TECHNICAL ANALYSIS: Technical analysis is a process of identifying trend reversals at an earlier stage to formulate the buying and selling strategy with the help of several indicators. The technical analysis mainly focuses the attention on the past history of prices. Generally technical analysts choose to study two basic market data-price and volume. They mainly predict short-term price movement rather than long-term movement. History of Technical Analysis: The technical analysis is based on the doctrine given by Charles H. Dow in 1984, in the Wall Street Journal. He wrote a series of articles in the Wall Street Journal. A. J. Nelson, a close friend of Charles Dow formulised the Dow theory for economic forecasting.

Technical Tools: Generally used technical tools are, Dow theory, volume of trade, short selling, bars and line charts, moving averages and oscillators. Dow Theory: Dow developed his theory to explain the movement of indices of Dow Jones Averages on the basis of certain hypotheses. The first hypothesis is that, no single

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individual or buyer can influence the major trend of the market. theory is not infallible.

His second

hypothesis is that the market discounts everything. His third hypothesis is that the

The theory According to Dow Theory the trend is divided into primary, intermediate and short-term trend. The primary trend may be the broad upward or downward movement that may last for a year or two. The intermediate trends are corrective movements, which may last for three weeks to three months. The shortterm trend refers to the day-to-day price movement. Volume of trade: Dow gave special emphasis on volume. Volume expands along with the bull market and narrows down in the market. If the volume falls with rise in price or vice-versa, it is a matter of concern for the investor and the trend may not persist for a longer time. Short selling: Short selling is a technical indicator known as short interest. Short sales refer to the selling of shares that are not owned. The bears are the short sellers who sell now in the hope of purchasing at a lower price in the future to make profits.

Moving Average: The market indices do not rise or fall in straight line. The upward and downward movements are interrupted by counter moves. The underlying trend can be studied by smoothening of the data. To smooth the data moving average technique is used. If it is five day moving average, on the sixth day the body of the data moves to

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include the sixth day observation eliminating the first days observation. Likewise continues. For this calculation, closing price of the stock is used. Oscillators: Oscillator shows the share price movement across a reference point from one extreme to another. The momentum indicates: Overbought and oversold conditions of the scrip or the market. Signaling the possible trend reversal. Rise or decline in the momentum. Bar Charts: In bar charts, two dots are entered to represent the highest and lowest price at which the stock is traded. A line is drawn to connect both the points a horizontal nub is drawn to mark the closing prices.

CHART PATTERNS: These are used as a supplement to other information and confirmation of signals provided by trend lines. Some of the chart patterns are discussed here. 1. V Formation:

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The name itself indicates that in the V formation there is a long sharp decline and a fast reversal. The V pattern occurs mostly in popular stocks where the market interest changes quickly from hope to fear and vice-versa. In the case of inverted ^ the rise occurs first and declines. These changes are shown in the following diagram.

Price

Days

2. Double Top and Bottom: This type of formation signals the end of one trend and the beginning of another. The double top pattern resembles the letter M. The double top may indicate the onset of the Bear Market.

In a double bottom, the price of the falls to a certain level and increase with diminishing activity. Then it falls again to the same or to lower price and turns up to a higher level. The double bottom resembles the letter W. Technical analysis views this pattern as a sign for Bull Market. These patterns are shown in the following charts.

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Price

Price

Days

Days

3.Head and Shoulders: In the head and shoulder pattern there are three rallies resembling the left shoulder, a head and a right shoulder. A neckline is drawn connecting lows of the tops. When the stock price cuts the neckline from above, it signals the Bear market. 4.Inverted head and shoulders: Here the reverse of the previous pattern holds true. It indicates end of bear market and the beginning of the bull market. These patterns have to be confirmed with the volume and trend of the market. These patterns are shown in the following charts. Neckline
Price Price

Neckline

Days

Days

INDUSTRY PROFILE
STOCK BROKING OPERATIONS AN OVER VIEW

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As capital market operations is a complex activity which require an in depth knowledge of stock market and about the company performance, security analysis of the stock. A full time practicing firm/person is needed to advise for our investment; in fact a broker can also invest his own money to make profit out of stock market operations. A stockbroker invests in the stock market for individuals or corporations so whenever individuals or corporations want to buy or sell stocks they must go through a brokerage house. Stockbrokers often advise and counsel their clients on appropriate investments. Brokers explain the workings of the stock exchange to their clients and gather information from them about their needs and financial ability, and then determine the best investments for them. The broker then sends the order out to the floor of the securities exchange by computer or by phone. When the transaction has been made, the broker supplies the client with the price. The buyer pays for the stock and the broker transfers the title of the stock to the client and performs clearing and settlement procedures. The settlement process is discussed in subsequent pages. The beginning stockbrokers first priority is learning the market. One broker said, First you have to decide whether you have an interest in the stock market. This will determine how well you will do. If you are just interested in making money you wont get very far. Stockbrokers spend their time in a fastpaced office, usually working from nine to five, unless they are just starting out or have to meet with clients. The new broker spends many hours on the phone building up a client base. Sometimes brokers teach financial education classes to expose themselves to potential investors who may then become their clients. Brokerage clerks handle much of the day-to-day operations of brokerages, performing a number of different jobs with a wide range of responsibilities; all involve computing and recording data pertaining to securities transactions.

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Brokerage clerks also may contact customers, take orders, and inform clients of changes to their accounts. Some of these jobs are more clerical. Brokerage clerks, who work in the operations departments of securities firms, on trading floors, and in branch offices, also are called margin clerks, dividend clerks, transfer clerks, and brokers assistants. Brokerage clerks in the operations areas of securities firms perform many duties to facilitate the sale and purchase of stocks, bonds, commodities, and other kinds of investments. These clerks produce the necessary records of all transactions that occur in their area of the business. Job titles for many of them depend upon the type of work that they perform. Purchase-and-sale clerks, for example, match orders to buy with orders to sell. They balance and verify trades of stock by comparing the records of the selling firm with those of the buying firm. Dividend clerks ensure timely payments of stock or cash dividends to clients of a particular brokerage firm. Transfer clerks execute customer requests for changes to security registration and examine stock certificates to make sure that they adhere to banking regulations. Receive-and-deliver clerks facilitate the receipt and delivery of securities among firms and institutions. Margin clerks record and monitor activity in customers accounts to ensure that clients make payments and stay within legal boundaries concerning their purchases of stock. Technology is changing the nature of many of these jobs. A significant and growing number of brokerage clerks use custom-designed software programs to process transactions more quickly. Only a few customized accounts are still handled manually. Furthermore, the rapid expansion of online trading reduces the amount of paperwork because brokerage clerks are able to make trades electronically.

Stockbroker and the investor:

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The stockbroker should provide adequate information regarding the stocks. He should be capable of giving short term and long-term investment suggestions to the investor and able to confirm the purchase and sale of securities quickly. He should have adequate experience in the market to take correct decision. He should have contact with other stock exchanges to execute the orders profitably and also offer incidental service like arranging for financing the clients transaction.

Types of stockbrokers The stock brokers the key players in secondary market. There are various categories of brokers as stated below. Floor Brokers: They are representatives of the brokers, who enter the trading floor and execute orders for their clients of for members. Commission Broker: A commission broker is a broker who buys and sells securities on behalf of his clients for a commission. He does not purchase or sell his own name. A broker act for the large number of his clients, and therefore, he deals in a large variety of securities. Jobbers: A jobber is an independent broker who deals in securities as a owner, keeps them for a very short period and sells them for profit known as the jobbers turn. Thus a jobber does not work for commission but works for profits. A jobber transacts in the market for quick returns. In the London Stock Exchange even member has to act as a broker or as a jobber. In India, there is no such rigid classification.

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 Badla Financiers/Badliwallas: Badliwallas are the intermediaries who finance the forward deals in specified securities in return for interest. This interest is called Badla rate. Arbitragers: They are brokers who buy securities in one market and sell them in another market to take the advantages of the price differences prevailing in different markets for same scripts. Wolves: They are clever speculators. They perceive the changing trends in the market and trade fast and make a fast duck.

Buying and selling of shares:

To buy and sell the script the investor has to locate register broker or a sub broker who render prompt and efficient services to him. The order to buy of sell specified number of scrip of the company of investors choice ate laced with the broker, the order may be of any of the below mentions type after receiving the order the broker tries to execute the order in his computer terminal. Once matching order is found, the order is executed. The broker delivers the contract note. To the investor, it gives the details regarding the name of the company, number of scripts bought, price, brokerage, and the date of delivery of share. In the physical trading form, once the broker gets the script certificate through the clearing houses the stock broker delivers the share certificate along with transfer deed to the investor. The investor has to fill the transfer deed and stamp it. The stamp duty is one of the percentage consideration, the investor should lodge the share certificate and transfer deed to the register or transfer agent of the company if it is bought in the demit form the broker has to give a matching instruction to his depository participant to transfer shares bought to the

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investor account. The investor should be account holder in any of depository participant. In the case of sell of shares on receiving payment from the purchasing broker, the broker effects the payment to the investor

Orders: Buy and sell orders placed with members of the stock exchange by the investor. The broker is responsible for getting the best price for his customer at the time the order is placed.

Online Trading: The Net is used as a medium of trading in Internet trading. Orders are communicated to the stock exchange through website. Internet trading started in India on 1st April 2000 with 79 members seeking permission for online trading. The SEBI committees on Internet based securities trading services trading services has allowed the net to be used as an Order Routing System (ORS) through registered stock brokers on behalf of their clients for execution of transaction. The user should have the user id and password to enter into the electronic ring. He should also have a demat account and bank account. The system permits only a registered client to log in using user ID and password. Order can be placed using place order window of the website.

The client has to enter stock code and other parameters such as quantity and price of the scrip on the place order window. The client can review the order placed by clicking the review option. He can also reset to clear the values

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 Satisfactory orders are sent by clicking the send option. The client receives an order confirmation message with order number and value of the order. If the order is rejected by the broker or stock exchange of r certain reasons such as invalid price limit, a related message appears at the bottom of the screen. The time taken to execute the order is 10 seconds. When the trade is executed, the broker asks for the transfer of funds by the investor to his account. Stocks are credited/debited according to the buy/sell order in the demat accounts.

Regulatory Framework
The securities and Exchange Board of India was constituted in 1998 under a resolution of government of India. It was later made statutory body by the SEBI act 1992. According to this act, the SEBI shall constitute of a chairman and five other members appointed by the central government with the coming into effect of the Securities and Exchange Board of India act, 1992. Some of the power and functions exercised by the central government, in respect of the regulation of stock exchange were transferred to the SEBI.

Objects and functions of SEBI: I. To protect the interest of investors in securities. II. Regulation the business in stock exchange and any other securities market.

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III. Registering and regulation the working of intermediaries associated with securities market as well as working of mutual fund. IV. Promoting and regulating self-regulating organizations. V. Prohibiting insides trading in securities. VI. Regulation substantial acquisition of share and take over of companies. VII. Performing such functions and exercising such powers under the provisions of capital issues (control) act, 1947 and the securities to it by the central government.

Securities and Exchange Board of India (Stock Brokers And Sub-Brokers) Regulations, 1992, In respect of stockbroker and sub-broker, SEBI has made 12 amendments from November 28, 1995 to September 27,2002. SEBI has been setup to ensure that the stock exchanges discharge their selfregulatory role properly. Even since SEBI began to monitor brokers, stock broker. Stock broking is emerging as a professional advisory service, in tune with the requirements of a mature, sophisticated, screen-based, ring less, automated stock exchanges in the country.

New Membership -CM and F&O segment Eligibility

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The following persons are eligible to seek membership of the Exchange as Trading Members (Brokers): a. Individuals b. Partnership Firms registered under the Indian Partnership Act, 1932. c. Corporations, Companies or institutions or subsidiaries of such Corporations, Companies or institutions set up for providing financial services. d. Such other persons or entities as may be permitted from time to time by RBI/SEBI under the securities Contracts (Regulations) Rules, 1957.

General Eligibility Conditions:

Criteria AGE Individuals Minimum age: 21 years 21 Firms Minimum age: years 21 for (applicable directors) Corporate firm registered Indian The under Companies Corporate Minimum age: years for

Maximum age: (applicable partners) 60 years STATUS Indian Citizen Registered partnership under partnership 1932

Act, Act, 1956 (Indian)

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