TRADING IN STOCK MARKET - STOCK AND COMMODITY MARKET

Notes 12 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:STOCK AND COMMODITY MARKET

UNIT-3
TRADING IN STOCK MARKET

Trading Procedure on a Stock Exchange:

The Trading procedure involves the following steps:

1.

Selection of a broker:

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

2.

Opening Demat Account with Depository:

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

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

Depository participant will maintain securities account balances of investor and intimate
investor about the status of their holdings from time to time.

3.

Placing the Order:

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

4.

Executing the Order:

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

5.

Settlement:

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

(a)

On the spot settlement:

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

(b)

Forward settlement:

It means settlement will take place on some future date. It can be T + 5 or T + 7, etc.
All trading in stock exchanges takes place between 9.55 am and 3.30 pm. Monday to Friday.
Entities Involved In The Trading And Settlement Cycle Clearing Corporation

An organization associated with an exchange to handle the confirmation, settlement and
delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a
prompt and efficient manner. They are also referred to as "clearing firms" or "clearing
houses". The first clearing corporation in India is National Securities Clearing Corporation
Ltd (NSCCL), a wholly owned subsidiary of NSE.

Clearing Members

An exchange member that is permitted to clear trades directly with the clearinghouse, and
which can accept trades for other clearing members and non-clearing member.The clearing
member is responsible for matching the buy orders with the sell orders to make sure that the
transactions are settled in return of commission.
Custodians

They are the clearing members and not trading members. They settle trades on behalf of
trading members, when particular trade is assigned to them for settlement. The custodian is
required to confirm whether he is going to settle that trade or not. If they confirm to settle that
trade, then the clearing corporation assigns that particular obligation to them.
Clearing Banks

Clearing banks are a key link between the clearing members and the clearing corporation in
the settlement of funds. Every clearing member is required to open a dedicated
clearing account with one of the designated clearing banks. Based on the clearing member’s
obligation as determined through clearing, the clearing member makes funds available in the
clearing account for the pay-in, and receives funds in the case of a pay- out
Depositories

A depository holds the securities in a dematerialized form for the investors in their
beneficiary accounts.
Each clearing member is required to maintain a clearing pool account with the depositories.
They are required to make available the required securities in the designated account on
settlement day. The depository runs an electronic file to transfer the securities from the
accounts of the custodians/clearing member to that of the NSCCL (and vice versa) as per the
schedule of allocation of the securities

. The two depositories in India are the
National Securities Depository Ltd. (NSDL)
Central Depository Services (India) Ltd. (CDSL).
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Advantages of depositories

1.

Bad deliveries are almost eliminated.
2.

The risks associated with physical certificates such as loss, theft, mutilation of certificate etc.
are eliminated.
3.

It eliminates handling of huge volumes of paper work involved in filling in transfer deeds and
lodging the transfer documents & Share Certificates with the Company.
4.

There will be immediate transfer and registration of your shares (at the end of every
settlement cycle, which is 4 working days i.e. T+3) and you need not have to suffer delays on
account of processing time.
5.

It leads to faster settlement cycle and faster realisation of sale proceeds.
6.

There will be a faster disbursement of corporate benefits like Rights, Bonus etc.
7.

The stamp duty on transfer of securities, which is 0.25% of the consideration on transfer of
shares in physical form is not applicable and you may incur expenditure towards service
charges of the Depository Participant.
8.

There could be a reduction in rates of interest on loans granted against pledge of
dematerialised securities by various banks.
9.

There could be reduction in brokerage for trading in dematerialised securities.
10.

There could be reduction in transaction costs in dematerialised securities as compared to
physical securities.
11.

Availability of periodical status report to investors on their holding and transactions.

NATIONAL SECURITY DEPOSITORY LIMITED (NSDL)

NSDL, the first and largest depository in India, established in August 1996 and promoted by
institutions of national stature responsible for economic development of the country has since
established a national infrastructure of international standards that handles most of the
securities held and settled in dematerialised form in the Indian capital market.
In the depository system, the ownership and transfer of securities takes place by means of
electronic book entries. At the outset, this system rids the capital market of the dangers
related to handling of paper
Elimination of all risks associated with physical certificates - Dealing in physical
securities have associated security risks of theft of stocks, mutilation of certificates, loss of
certificates during movements through and from the registrars, thus exposing the investor to
the cost of obtaining duplicate certificates etc. This problem does not arise in the depository
environment.
No stamp duty for transfer of any kind of securities in the depository. This waiver
extends to equity shares, debt instruments and units of mutual funds.
Immediate transfer and registration of securities - In the depository environment,
once the securities are credited to the investors account on pay out, he becomes the legal
owner of the securities. There is no further need to send it to the company's registrar for
registration. Having purchased securities in the physical environment, the investor has to send
it to the company's registrar so that the change of ownership can be registered. This process
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usually takes around three to four months and is rarely completed within the statutory
framework of two months thus exposing the investor to opportunity cost of delay in transfer
and to risk of loss in transit. To overcome this, the normally accepted practice is to hold the
securities in street names i.e. not to register the change of ownership. However, if the
investors miss a book closure the securities are not good for delivery and the investor would
also stand to loose his corporate entitlements.
Faster settlement cycle - The settlement cycle follow rolling settlement on T+2 basis i.e. the
settlement of trades will be on the 2nd working day from the trade day. This will enable faster
turnover of stock and more liquidity with the investor.
Faster disbursement of non-cash corporate benefits like rights, bonus, etc. - NSDL
provides for direct credit of non-cash corporate entitlements to an investors account, thereby
ensuring faster disbursement and avoiding risk of loss of certificates in transit.
Reduction in brokerage by many brokers for trading in dematerialised securities -
Brokers provide this benefit to investors as dealing in dematerialised securities reduces their
back office cost of handling paper and also eliminates the risk of being the introducing
broker.
Reduction in handling of huge volumes of paper
Periodic status reports to investors on
their holdings and transactions, leading to better controls.
Elimination of problems related to change of address of investor - In case of change
of address, investors are saved from undergoing the entire change procedure with each
company or registrar. Investors have to only inform their DP with all relevant documents and
the required changes are effected in the database of all the companies, where the investor is a
registered holder of securities.
Elimination of problems related to transmission of demat shares - In case of
dematerialised holdings, the process of transmission is more convenient as the transmission
formalities for all securities held in a demat account can be completed by submitting
documents to the DP whereas, in case of physical securities the surviving joint holder(s)/legal
heirs/nominee has to correspond independently with each company in which shares are held.
Elimination of problems related to selling securities on behalf of a minor -
A natural
guardian is not required to take court approval for selling demat securities on behalf of a
minor.

Ease in portfolio monitoring since statement of account gives a consolidated position of
investments in all instruments.

CENTRAL DEPOSITORY SERVICES LIMITED

CSDL is the second largest Indian depository based in Mumbai.CDSL was promoted by BSE
Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda,
HDFC Bank, Standard Chartered Bank and Union Bank of India.

CDSL was set up with the objective of providing convenient, dependable and secure
depository services at affordable cost to all market participants. Some of the important
milestones of CDSL system are:
CDSL received the certificate of commencement of business from SEBI in February, 1999.
Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of
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CDSL on July 15, 1999.
Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing
house of BSE Ltd., started in July 1999.
All leading stock exchanges like the BSE Ltd. (formerly known as Bombay Stock Exchange
Ltd.), National Stock Exchange and MCX Stock Exchange Limited have established
connectivity with CDSL.

Function of Depository:

One of the main function of the Depository is to transfer the ownership of shares from one
investor`s account to another investor`s account whenever the trade takes place. It helps in
reducing the paper work involved in trade, expedites the transfer and reduces the risk
associated with physical shares such as damaged, theft, interceptions and subsequent misuse
of the certificates or fake securities.

Another important function of depository is that it eliminate the risk associated with holding
the securities in a physical form like loss,damage,theft or delay in deliveries etc.

Depositories in India:

We have 2 depositories in India which are well known as NSDL (National securities
depository limited) and CSDL (Central Depository Services (India) Limited). They interface
with the investors through their agents called Depository participants (DPs). DPs could be the
banks (private, public and foreign), financial institutions and Sebi- registered trading
members.
Depository Participants (DP)

Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs
and the depository is governed by an agreement made between the two under the
Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with
SEBI under the sub section 1A of Section 12 of the SEBI Act. As per the provisions of this
Act, a DP can offer depository- related services only after obtaining a certificate of
registration from SEBI. As of 2012, there were 288 DPs of NSDL and 563 DPs of CSDL
registered with SEBI.

Role of Depository participants

Similar to brokers, who act on behalf of a client in the stock market, a Depository Participant
is your representative in the depository system. Financial Institutions / Banks / Custodian /
Stock Brokers etc. can become DPs provided they meet the necessary requirements and
guidelines prescribed by SEBI. DP serves as a link between the investor and the Company
through NSDL / CDSL for dematerialisation of shares and other electronic transactions. DP
provides various services with regard to your holdings such as
 Maintaining the securities account balances
 Enabling surrender (dematerialisation) and withdrawal (rematerialisation) of your
securities to and from the depository.
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52
 Delivering and receiving shares in your account on your instructions. Hence, shares
bought by you on a stock exchange can be received directly in your account and similarly
those sold by you can be delivered on your instructions.
 Keeping you updated with regard to status of your holdings periodically.

Parties involved in Depository System:

 Depository: facilitates the smooth flow of trading and ensure the investor`s about their
investment in securities
 Depository Participant(DP): provides the service of opening a demat account to the
investor.
 Investor: individual invested in securities.

Clearing and Settlement

1. Settlement Agencies:•NSCCL: The National Securities Clearing Corporation
Limited is responsible for post-trade activities of a stock exchange. Clearing and
settlement of trades and risk management are its central functions.
2. Clearing Members: They are responsible for settling their obligations as determined
by the NSCCL.
3. Custodians: Custodian is a clearing member but not a trading member. He settles
trades assigned to him by trading members.
4. Clearing Banks: Clearing banks are a key link between the clearing members and
NSCCL for funds settlement.
5. Depositories: The depository runs an electronic file to transfer the securities from
accounts of the custodians/clearing member to that of NSCCL. As per the schedule of
allocation of securities determined by the NSCCL, the depositories transfer the
securities on the pay-out day from the account of the NSCCL to those of
members/custodians.
6. Professional Clearing Member: NSCCL admits special category of members
namely, professional clearing members. Professional Clearing Member (PCM) may
clear and settle trades executed for their clients (individuals, institutions etc.). A PCM
has no trading rights but has only clearing rights, i.e. he just clears the trades of his
associate trading members and institutional clients.

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Step1.Trade details from Exchange to NSCCL (real-time and end of day trade file).

Step 2.NSCCL notifies the consummated trade details to CMs/custodians who affirm back.
Based on the affirmation, NSCCL applies multilateral netting and determines obligations.
Step 3.Download of obligation and pay-in advice of funds/securities.

Step 4.Instructions to clearing banks to make funds available by pay-in time. Step
5.Instructions to depositories to make securities available by pay-in-time.
Step 6.Pay-in of securities (NSCCL advises depository to debit pool account of
custodians/CMs and credit its account and depository does it).

Step 7.Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs
and credit its account and clearing bank does it).

Step 8.Pay-out of securities (NSCCL advises depository to credit pool account of custodians/
CMs and debit its account and depository does it).

Step 9.Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs
and debit its account and clearing bank does it).

Step 10.Depository informs custodians/CMs through DPs. Step 11.Clearing Banks inform
custodians/CMs
Process of TRADING/CLEARING AND SETTLEMENT .

The core processes involved in clearing and settlement include:
Trade Recording: The key details about the trades are recorded to provide the basis for
settlement. These details are automatically recorded in the electronic trading system of the
exchanges.
Trade Confirmation: Trades that are meant for settlement by the custodians are indicated
with a custodian participant code, and the same is subject to confirmation by the respective
custodian. The custodian is required to confirm the settlement of these trades on T+1 day by
the cut-off time of 1:00 pm.
Determination of Obligation: The next step is the determination of what the counterparties
owe, and what the counterparties are due to receive on the settlement date. The NSCCL
interposes itself as a central counterparty between the counter-parties to trade and net the
positions so that a member has a security-wise net obligation to receive or deliver a security,
and has to either pay or receive funds.
The settlement process begins as soon as the members’ obligations are determined through
the clearing process. The settlement process is carried out by the clearing corporation with
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the help of clearing banks and depositories. The clearing corporation provides a major link
between the clearing banks and the depositories. This link ensures
The actual movement of funds as well as securities on the prescribed pay-in and pay-out day.
Pay-in of Funds and Securities: This requires the members to bring in their funds/securities
to the clearing corporation. The CMs make the securities available in the designated accounts
with the two depositories (the CM pool account in the case of the NSDL, and the designated
settlement accounts in the case of CDSL). The depositories move the securities available in
the pool accounts to the pool account of the clearing corporation. Likewise, the CMs with
funds obligations make the funds available in the designated accounts with the clearing
banks. The clearing corporation sends electronic instructions to the clearing banks to debit the
designated CMs’ accounts to the extent of the payment obligations. The banks process these
instructions, debit the accounts of the CMs, and credit the accounts of the clearing
corporation. This constitutes the pay-in of funds and securities.
Pay-out of Funds and Securities: After processing for shortages of funds/securities and
arranging for the movement of funds from surplus banks to deficit banks through RBI
clearing, the clearing corporation sends electronic instructions to the depositories/clearing
banks to release the pay-out of securities/funds. The depositories and clearing banks debit the
accounts of the clearing corporation and credit the accounts of CMs. This constitutes the pay-
out of funds and securities.
Rolling settlement is a system to settle share transactions in predefined number or days. It is
a mechanism of settling trades done on a stock exchange on the Day Day of Trade (T) plus
"X" trading days. "X" trading days could be any number of days like 1,2,3,4 or 5 days. So, if
we say the rolling settlement for a transaction is T+2 then it means that the transaction will be
settled in TODAY + Next 2 Days. In other words, in T+2 environment, a trade done on T day
is settled on the 3rd working day excluding the T day.
INVESTORS AND SPECULATORS

The main function of the stock exchange is to provide facilities to its members i.e the buyers
and sellers to transact their business and to settle the transactions. The buyers and sellers
are classified into two categories.
Investors and speculators
Investors:

The investors buy the securities with a view to invest their savings in profitable income
earning securities. They generally retain the securities for a considerable length of time. They
are assured of a profit in cash. They are also called genuine investors.

Speculators:

The speculators buy securities with a hope to sell them at a profit, in future. They do not
retain their holdings for a longer period. They buy the securities with the object of selling
them and not to retain them. They are interested only in price differentials. They are not
genuine investors.

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DIFFERENCE BETWEEN SPECULATION AND INVESTMENT

INVESTMENT
SPECULATION
Investment is rationally
based
on
the knowledge of past share price
behavior.
Speculation is purely based on the HOPE that
the future price will be higher rather than on

anything tangible
requires careful evaluation and
study for decisions regarding buying
and selling
based on wild rumors and unsubstantiated
hearsays or own intuition which cannot be
checked for accuracy.
made for the long term
for the short run
Expected return is consistent
Anticipate higher and disproportionate return
Normally use their own fund
May borrow to do trading
Volume of trade is less
Larger volume of trade
Less risk
Higher risk
Stable income
Volatile profit and loss
In reality, there is no pure speculator or an investor. Each investor is speculator to some
extent. Similarly, every speculator is an investor, to certain extent. Hence, the difference
between the two is a matter of degree only.

OPERATORS AT STOCK EXCHANGE

Members of stock exchange

Jobbers

Jobbers are security merchants dealing in shares, debentures as independent operators. They
buy and sell securities on their own behalf and try to earn through price changes. Jobbers
cannot deal on behalf of public and are barred from taking commission. In India, they are
called Taraniwalas.
Brokers

Brokers are commission agents, who act as intermediaries between buyers and sellers of
securities. They do not purchase or sell securities on their behalf. They bring together the
buyers and sellers and help them in making a deal. Brokers charge a commission from both
the parties for their service. Brokers are experts in estimating trends of price and can
effectively advice their clients in getting a fruitful gain. Brokers get orders from investing
public and execute the orders through Jobbers and they are entitled to a prescribed sale of
brokerage.

SPECULATION

Speculation refers to the buying and selling of securities in the hope of making a profit from
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expected change in the price of securities. Those who engage in such activity are
known as ‘speculators’. The motive is to take maximum advantage from fluctuations in the
market.
A speculator may buy securities in expectation of rise in price. If his expectation comes true,
he sells the securities for a higher price and makes a profit. Similarly a speculator may expect
a price to fall and sell securities at the current high price to buy again when prices decline. He
will make a profit if prices decline as expected.
The benefits of speculation are:
(i)

It leads to smooth change and prevents wide fluctuations in security prices at different times
and places.
(ii)

Speculative activity and the resulting effect in the prices of securities provided a guidance to
the public about the market situation.

KINDS OF SPECULATORS

There are four types of speculators who are active on the stock exchanges in India.
Traders engaged in speculative activity in the stock market are identified by different names
based on the type of activity they in general employ in. The eminent among them are bears,
bulls, lame duck and stag.

1.

Bull (Tejiwala):

A trader who awaits a rise in price of securities is referred as a bull.in
anticipation of rise in price he make purchases with intention of selling them in future. The
bulls will be able to make profit only if the prices rise as predicted, otherwise they suffer loss.

2.

Bear( Mandiwala)

A bear is a skeptic who expects a decline of securities. He will sell the shares in expectation
of fall in price , to buy them in future in cheaper price. the bear speculator tends to force
down the prices of securities. A bear is a pessimistic speculator
3.

Lame Duck

A lame duck is a bear who is involved in a short sale but is not able to meet his commitment
to deliver the securities sold by him due to hike in prices of securities subsequent to the short
sale. When a bear has made contracts to sell and find s it difficult to meet his commitment
due to non availability of securities , he is called as lame duck.
4.

Stag

A stag is a trader who applies for shares in the new issues market just like a genuine investor.
A stag is an optimist like the bull. He expects a hike in the prices of securities that he has
applied for. He predicts that when the new shares are listed in the stock exchange for trading,
they would be quoted at a premium, above their issue price. A stag is a cautious speculator in
the stock exchange He is also called a premium hunter.

WHO IS STOCK BROKER?
A stockbroker is a regulated professional individual, usually associated with a brokerage
firm or broker-dealer, who buys and sells stocks and other securities for
both retail and institutional clients, through a stock exchange or over the counter, in return for
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TRADING IN STOCK MARKET - STOCK AND COMMODITY MARKET

TRADING IN STOCK MARKET - STOCK AND COMMODITY MARKET

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