A study of online trading @ lkp securities ltd. project report

PART I

RESEARCH METHODOLOGY

A Study of Online Trading at LKP Securities Ltd.

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1.1

METHODOLOGY

RESEARCH PLAN

The study has been conducted with the assistance from the data collected through different sources.

This research methodology requires gathering relevant data from the specified documents and

compiling databases in order to analyze the material and arrive at a more complete understanding.

The data collection methods include both primary and secondary data collection methods.

Primary Data Collection Method:

This method includes the data collected from the personal interaction with authorized members

of LKP Securities Ltd.

Through day-to-day interaction with clients during the period of Summer Internship which was

a part of the curriculum.

Engaging with fellow interns in studying various economic, political and social factors

affecting price fluctuations of securities.

Secondary Data Collection Method:

On-the-Job (OJT) classroom training and lectures delivered by the superintendents of

respective departments at LKP Securities Ltd.

The brochures and study material provided by LKP Securities Ltd.

The data collected from the magazines of the National Stock Exchange (NSE), Economic

Times etc.

The data collected from various websites like financial times, editorial columns of newspapers

etc.

Materials from various books relating to investment and capital market.

RESEARCH DESIGN

The proposed research is purely descriptive and explanatory.

The Proposed research is descriptive because it describes the Investment Scenario in India and

explanatory because it explains the evolution of online trading in India- its benefits, limitations,

disadvantages and the various tools for trading.


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1.2

OBJECTIVE AND PURPOSE OF THE STUDY

PURPOSE AND NEED FOR THE STUDY

Designing a research plan calls for outlining the need and purpose of the study. It gives details on the

objectives and effective need for conducting this study.

This present study is conducted with the need to review the process and procedure of online trading

while taking “LKP Securities Ltd.” as a case study after a shift from open outcry trading system to

online trading system, there is a need to assess the capital market performance.

The study also outlines the basics of investment and the regulatory bodies for monitoring investment

for investors as a need is felt to outline their functions and objectives.

OBJECTIVES OF THE STUDY

To understand the investment and economic scenario in India keeping it parallel with the

investment in shares through online trading.

To understand the basic trading tools and instruments like equities, currencies, mutual funds,

bonds etc.

To analyze the changes in trading after the exchange shifted from open outcry trading system

to online trading system.

To know about the latest and future developments in the stock exchange trading system.

SCOPE OF THE STUDY

The study presents adoption of screen based trading system from a traditional system of

trading or ‘outcry system’

The study presents the use and benefits of software for online trading (web and exe).

The study develops a SWOT analysis and comparative analysis between LKP Securities and

other players in the Brokerage Industry.


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LIMITATIONS OF THE STUDY

Despite the best efforts, there are a few limitations listed below:

Facts and figures for presenting data are bound to fluctuate depending on the economy and

market conditions

For outlining the investment scenario in India, statistical figures have been presented which are

subjected to recent changes.

All industry and company information, and financial statements of the company and its

competitors acquired from LKP securities Ltd. itself, and other relevant industry sources are

deemed accurate.

The research, as a result of outlining the advantages of online trading undermines the

significance of advisory services available from brokers.

.


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PART II

INTRODUCTION TO TRADING AND INVESTMENT


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2.1

TRADING AND INVESTMENT

BACKGROUND

Trading and Investment are two closely related concepts carrying the same meaning and purpose but

both varying in behavior and method adopted.

A Trader is person or entity, in finance, who buys and sells financial instruments such as stocks,

bonds, commodities and derivatives, in the capacity of agent, hedger, arbitrageur, or speculator.

Traders are either professionals (institutional) working in a financial institution or a corporation, or

individual (retail). They buy and sell financial instruments traded in the stock markets, derivatives

markets and commodity markets, comprising the stock exchanges, derivatives exchanges and the

commodities exchanges.

An Investor is a person who allocates capital with the expectation of a financial return. The types of

investments include, — gambling and speculation, equity, debt securities, real estate, currency,

commodity, derivatives such as put and call options, etc. This definition makes no distinction between

those in the primary and secondary markets. That is, someone who provides a business with capital

and someone who buys a stock are both investors. Since those in the secondary market are considered

investors, speculators are also investors.

In finance, investment is putting money into an asset with the expectation of capital appreciation,

dividends, and/or interest earnings. This may or may not be backed by research and analysis. Most or

all forms of investment involve some form of risk, such as investment in equities, property, and even

fixed interest securities which are subject, among other things, to inflation risk.

Common Characteristics of Traders:

Traders enter a position to make money.

Traders will hold for a short period of time.

Traders cut losses.

Traders take profits quickly.

Common Characteristics of Investors:


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Investors will buy and hold.

Investors will hold for a long period of time.

Investors are not concerned with short-term losses.

Investors let profits accumulate.

Difference between Investor and Trader

SR.

NO.

INVESTMENT TRADING

1. The goal of investing is to gradually build

wealth over an extended period of time through

the buying and holding of a portfolio of stocks.

Trading, involves the more frequent buying

and selling of stock, commodities, currency

pairs or other instruments.

2. Investors often enhance their profits through

compounding, or reinvesting any profits and

dividends into additional shares of stock.

Traders generate returns that outperform

buy-and-hold investing.

3. Investments are often held for a period of

years, or even decades, taking advantage of

perks like interest, dividends and stock splits

along the way.

Trading is short term and is held only for a

day or two.

4. Investors focus on fundamental analysis. Traders use technical indicators and charts.

The above table tabulates the difference between the buying and selling behaviors of an Investor and a

Trader.

Investors and trader both may or may not fall into the category of speculators. Speculators are

typically sophisticated risk-taking investors with expertise in the market(s) in which they are trading

and will usually use highly leveraged investments.


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INVESTMENT INSTRUMENTS AND TOOLS

Financial Investment tools mainly comprise of Financial Securities.

Securities are investment instruments that are issued by corporations, governments, and other

organizations to give evidence of debt or equity, excluding life insurance policies and fixed annuities.

Some examples of securities are stocks, bonds, treasury notes, interests in profit-sharing agreements,

shares of royalties or leases of mineral and other mining rights, certificates of deposit, and collateral

trust certificates. Each of these instruments has a physical, monetary value that can increase or

decrease depending on market trends and economic indicators.

Before describing the investment tools, let us understand the means for earning profit through these

instruments. An investor/trader builds up a position in the market in two ways:

Long Position (Buy Position): In finance, a long position in a security, such as a stock or a bond, or

equivalently to be long in a security, means the holder of the position owns the security and will profit

if the price of the security goes up. Going long is the more conventional practice of investing and is

contrasted with going short.

Figure: 2.1.1

Investors usually hold long position by buying at a dip or a decrease in price and sell when the price

rises, thereby earning profit as the difference.

BUY @ LOW PRICE

LONG POSITION

SELL @ HIGH PRICE


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Short Position (Sell Position): In finance short selling (also known as shorting or going short) is the

practice of selling securities or other financial instruments that are not currently owned, with the

intention of subsequently repurchasing them ("covering") at a lower price. Speculators may sell short

in the hope of realizing a profit on an instrument which appears to be overvalued, just as long investors

or speculators hope to profit from a rise in the price of an instrument which appears undervalued.

Traders or fund managers may hedge a long position or a portfolio through one or more short

positions.

Figure: 2.1.2

After understanding the two common ways of holding positions in the financial/capital market, let us

understand the various instruments for investment.

They are categorized into two major heads:

I. Financial Assets

II. Physical Assets

Sell @ High Price

SHORT POSITION

Buy back @ Low Price

(Covering)


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I. FINANCIAL ASSETS

A) EQUITIES

In finance, in general, equity is understood as ownership in any asset after all debts associated with

that asset are paid off.

1. A stock or any other security representing an ownership interest.

2. on a company's balance sheet, the amount of the funds contributed by the owners (the stockholders)

plus the retained earnings (or losses). Also referred to as "shareholders' equity".

3. In the context of margin trading, the value of securities in a margin account minus what has been

borrowed from the brokerage.

Stocks are equity because they represent ownership in a company.

An Equity trading is the purchasing and selling of corporate stock shares on public exchanges or in

over-the-counter markets, whether they’re domestic or foreign. Among other factors, equities trading

rates act as economic indicators by which financial analysts gauge the fiscal status of world markets.

Where Does Equity Trading Take Place?

Typically, equity trading is done through the major national stock exchanges, such as the National

Stock Exchange (NSE) or Bombay Stock Exchange

(BSE). Other large international markets are the

London Stock Exchange, which is mainly for the

European market, and the Tokyo Stock Exchange,

which is the main Asian and Oceanic market. Each

stock exchange has its own particular market makers,

which limit volatility (price fluctuations) by

purchasing and selling the shares of particular

companies on behalf of their clients and themselves.

How Does It Work?

Equity trading is done electronically, with buying and selling orders matched by computer, by almost

every exchange worldwide. Owners of the securities can trade equities, or agents, or brokers, may


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handle them for short-term profit or longer-term investment. Agents are paid commissions. Money is

made or lost when the spread, or difference, varies from the original price of the security as

determined by market makers.

B) CURRENCY

Currencies are traded through buying and selling on an exchange or a platform, just like equities.

National Stock Exchange and MCX Stock Exchange are the two exchanges where currencies are

traded in India.

Unlike equities, the exchange rates are relative and are expressed as a comparison of the currencies of

two countries. For examples USD/INR = 67.This means that one $US is equivalent to Rs.67.As,

USD/INR increases from 67 to 70, the value of INR decreases in terms of $US.

Currency trading is similar to stock trading. A stock trader will buy a stock if they think its price will

rise in the future and sell a stock if they think its price will fall in the future. Similarly, a FOREX

trader will buy a currency pair if they expect its exchange rate will rise in the future and sell a currency

pair if they expect its exchange rate will fall in the future.

What is an exchange rate?

It is rare that any two currencies will be identical to one

another in value, and it’s also rare that any two currencies

will maintain the same relative value for more than a short

period of time. In FOREX, the exchange rate between two

currencies constantly changes.

For example, on January 3, 2011, one euro was worth

about $1.33. By May 3, 2011, one euro was worth about

$1.48. The euro increased in value by about 10% relative

to the U.S. dollar during this time.

Why do exchange rates change?

Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods

and services. A currency's value fluctuates as its supply and demand fluctuates, just like anything else.


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An increase in supply or a decrease in demand for a currency can cause the value of that

currency to fall.

A decrease in the supply or an increase in demand for a currency can cause the value of that

currency to rise.

So if you think the Eurozone is going to break apart, you can sell the euro and buy the dollar (sell

EUR/USD).

Factors affecting currency fluctuations:

1. Differentials in Inflation. As a general rule, a country with a consistently lower inflation rate

exhibits a rising currency value, as its purchasing power increases relative to other currencies.

2. Differentials in Interest Rates. Interest rates, inflation and exchange rates are all highly correlated.

By manipulating interest rates, central banks exert influence over both inflation and exchange rates,

and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in

an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign

capital and cause the exchange rate to rise.

3. Current-Account Deficits. . A deficit in the current account shows the country is spending more on

foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the

deficit. In other words, the country requires more foreign currency than it receives through sales of

exports, and it supplies more of its own currency than foreigners demand for its products

4. Political Stability and Economic. Performance Foreign investors inevitably seek out stable

countries with strong economic performance in which to invest their capital. A country with such

positive attributes will draw investment funds away from other countries perceived to have more

political and economic risk.

C) MUTUAL FUNDS

A Mutual Fund is a special type of investment institution which collects or pools the savings of the

community and invests large funds in a variety of blue-chip companies. Some of the mutual fund

providers in India are Unit trust of India (UTI), Morgan Stanley growth Fund.

The flow chart below broadly describes the working of a mutual fund:


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Figure: 2.1.3

Mutual funds are basically a trust which mobilizes savings from the people and invests them in a mix

of corporate and government securities. Mutual funds also pay attractive dividends. The share (units)

of mutual funds may also be traded in Stock Exchanges. Mutual Funds sell their units to public and

redeem them at the current net asset value (NAV) of the units which is computed as below:

NAV= Total market value of all mutual fund holdings - Liabilities

Number of funds outstanding

D) BONDS

In finance, a bond is an instrument of indebtedness of the

bond issuer to the holders. It is a debt security, under which

the issuer owes the holders a debt and, depending on the

terms of the bond, is obliged to pay them interest (the

coupon) and/or to repay the principal at a later date, termed

the maturity. Interest is usually payable at fixed intervals

(semiannual, annual, and sometimes monthly).

MUTUAL FUNDS

INVESOTRS

FUND MANAGERS

SECURITIES

RETURNS


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Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the

bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external

funds to finance long-term investments, or, in the case of government bonds, to finance current

expenditure.

A bond comes under the category of ‘Fixed Income”. Unlike equities and currencies, they are not

subjected to market risks. Bonds and stocks are both securities, but the major difference between the

two is that (capital) stockholders have an equity stake in the company (i.e. they are owners), whereas

bondholders have a creditor stake in the company (i.e. they are lenders). Another difference is that

bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are

typically outstanding indefinitely.

Bonds are among the safest investments in the world. But that hardly means that they’re risk free.

Here’s a look at some of the dangers inherent in fixed-income investing:

1. Interest Rates. Market interest rates are a function of several factors such as the demand for, and

supply of, money in the economy, the inflation rate, the stage that the business cycle is in as well as

the government's monetary and fiscal policies.

Bond prices have an inverse relationship to interest rates. When one rises, the other falls.

2. Inflation Risk. Because of their relative safety, bonds tend not to offer extraordinarily high returns.

That makes them particularly vulnerable when inflation rises.

Imagine, for example, that you buy a Treasury bond that pays interest of 3.32%. That’s about as safe

an investment as you can find. As long as you hold the bond until maturity and the government doesn’t

collapse, nothing can go wrong….unless inflation climbs. If the rate of inflation rises to, say, 4

percent, your investment is not “keeping up with inflation.”

E) PPF/PF

Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India. It also serves as a

retirement-planning tool for many of those who do not have any structured pension plan covering

them. The account can be opened in designated post offices, State Bank of India branches and

branches of some nationalized banks. ICICI Bank was the first private sector bank which was

authorized to open PPF accounts.

A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account and a maximum

deposit of Rs.100000/ can be made in a PPF account in any given financial year. The investments can


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be made in multiples of Rs. 500, either as a whole sum, or in installments (not exceeding 12 in a year,

though more than one deposit can be made in a month). The credit to the PPF account is made on the

date of clearance of the cheque, not on the date of its presentation.

The government of India decides the rate of interest for PPF account. The current interest rate effective

from 1 April 2013 is 8.70% Per Annum (compounded annually).Interest is calculated on the lowest

balance between the close of the fifth day and the last day of every month. Till March 2010, cheque

deposited for clearing, up to 5th of the month were eligible for that month's interest. Since 29 March

2010, only the amounts which are actually cleared on or before the 5th of the month are eligible for

that month's interest.

The minimum tenure of the PPF account is 15 years, which can be further extended in blocks of 5

years each for any number of blocks. The extension can be with or without contribution. An account

holder, continuing with fresh subscription, can withdraw up to 60% of the balance to his credit at the

commencement of each extended period in one or more installments but only once in a year.

F) FIXED DEPOSITS

A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with

a higher rate of interest than a regular savings account, until the given maturity date. It may or may not

require the creation of a separate account. It is known as a term deposit or time deposit in Canada,

Australia, New Zealand, and the US, and as a bond in the United Kingdom. They are considered to be

very safe investments.

The defining criterion for a fixed deposit is that the money cannot be withdrawn for the FD as

compared to a recurring deposit or a demand deposit before maturity. It's important to note that banks

may offer lesser interest rates under uncertain economic conditions. The interest rate varies between 4

and 11 percent. The tenure of an FD can vary from 10, 15 or 45 days to 1.5 years and can be as high as

10 years.


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II. PHYSICAL ASSETS

A) COMMODITIES

Commodities like gold, silver, metals, food grains and crude oil are also extensive sources of

investment since they too are subjected to price fluctuation thereby leading to profit/loss and market

risks.

Commodities in India are traded on the Multi Commodity

Exchange (MCX). Commodity market refers to physical or

virtual transactions of buying and selling involving raw or

primary commodities. A soft commodity generally refers to

commodities harvested as products like coffee, cocoa, sugar,

corn, wheat, soybean, and fruit traded in the commodity

market. Hard commodities usually refer to commodities that

are extracted such as (gold, rubber, oil).

Commodity markets can include direct physical trading and

derivatives trading in the form of spot prices, forwards, futures, and options on futures.

B) REAL ESTATE

Real estate investing involves the purchase, ownership,

management, rental and/or sale of real estate for profit.

Improvement of realty property as part of a real estate investment

strategy is generally considered to be a sub-specialty of real estate

investing called real estate development. Real estate is an asset

form with limited liquidity relative to other investments, it is also

capital intensive (although capital may be gained through

mortgage leverage) and is highly cash flow dependent.


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EXCHANGES AND INDICES

Stock Markets

Stock Market is a market where the trading of company stock, both listed securities and unlisted takes

place. It is different from stock exchange because it includes all the national stock exchanges of the

country.

A) Exchanges

Stock Exchanges are an organized marketplace, either corporation or mutual organization, where

members of the organization gather to trade company stocks or other securities. The members may act

either as agents for their customers, or as principals for their own accounts. Stock exchanges also

facilitates for the issue and redemption of securities and other financial instruments including the

payment of income and dividends. The record keeping is central but trade is linked to such physical

place because modern markets are computerized. The trade on an exchange is only by members and

stock broker do have a seat on the exchange.

There are two leading stock exchanges in India which help us trade are:

i) NATIONAL STOCK EXCHANGE: National Stock Exchange incorporated in the year 1992

provides trading in the equity as well as debt market. Maximum volumes take place on NSE and hence

enjoy leadership position in the country today.

The National Stock Exchange (NSE) is India's leading stock

exchange covering 364 cities and towns across the country. NSE

was set up by leading institutions to provide a modern, fully

automated screen-based trading system with national reach.

Let us understand the meaning of market capitalization:

“Market capitalization (or market cap) is the total value of the issued shares of a publicly traded

company; it is equal to the share price times the number of shares outstanding.”

For Example: A company, XYZ Ltd. has 1000 shares (200 held by promoters and 800 held by the

public) of Rs.120 each. Hence the market capitalization would be as :

Market Cap = Number of shares * Share price

=120 * 1000

=120,000


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Primarily the stocks that are listed in the National Stock Exchange are divided into three different

categories on the basis of the market capitalization – large cap, mid cap and the small cap.

Large Cap Stocks – These are stocks that represent the biggest and most reputed companies among

all the listed companies in the stock exchange. Generally the companies that have a market

capitalization of more than $ 10 billion are considered to have a large market capitalization. The stocks

of these companies are categorized as the large cap stocks. At NSE as well companies with the large

market capital is labeled as the large cap stocks. The large cap companies are mostly the companies

that are in business for years and making significant growth in terms of profit and asset accumulation.

This is primarily the reason that the large cap stocks are considered for including in the Nifty that is

the prime index of the National Stock Exchange.

Mid Cap Stocks – The mid-size businesses with moderate market capitalization are considered to be

mid cap companies. Generally those companies that have a market capital between $ 2 billion and $ 10

billion is considered to be mid cap companies. The stocks of these companies are categorized as the

mid cap stocks. The mid cap stocks have great investment proposition as they have all the sign of

rising in the market and give you good return on your investment.

Small Cap Stocks – Then there are of course the small cap companies that have small capital.

Generally companies with a market capital between $ 200 million and $ 2 billion are said to be small

cap companies and stocks of these companies are considered in the small cap segment. Mostly the

small cap companies are relatively new companies that have got listed at the stock market. Investing in

the small cap stocks are have more risk as these companies take too long to rise in the market. As these

companies are relative new and you hardly have any resources to guess the potential of the company it

is not wise to invest in these companies for long term. But you can invest in these companies and do

some margin trading if you have definite and trustworthy tips.

ii) BOMBAY STOCK EXCHANGE: BSE on the other hand was set up in the year 1875 and is the

oldest stock exchange in Asia. It has evolved in to its present status as the premier stock exchange.

Primarily there are five groups in which the listed stocks are

divided and they are A, B, T, Z, and F. The ‘A’ group

comprises stocks that have fairly good growth rate. These

companies offer dividend to the investors and have good

capital appreciation over the time. The stocks that are listed

with ‘A’ category have the facility to carry forward to the

next settlement cycle. This is an advantage from the margin

and derivative trading point of view. The category ‘B’ is basically a subset of all the listed stocks and

the stocks listed in this category have greater market capitalization that the rest of the stocks. The


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trading of the stocks that are listed in the ‘T’ category needs to be settled on the very trading day and

the deals cannot be carried forward. This is done by BSE to restrict any unwanted movement in these

scripts. The stocks in the ‘Z’ group are marked for not complying with the rules and regulations of the

stock exchange and these stocks are often suspended from trading. The ‘F’ group is reserved for the

stocks listed at the debt market.

B) INDICES

BSE’s “SENSEX” and NSE’s “NIFTY” are the major indices or benchmarks in India and are also

tracked worldwide as the performance of the nation’s economy and growth as an investment

hub/destination.

i) SENSEX

SENSEX is a value based index composed of weighted average of 30 stocks of companies with

highest market capitalization. The 30 stocks that are selected are reviewed from time to time.

ii) NIFTY

NIFTY on the other hand is value based index composed of weighted average of 50 stocks of

companies with highest market capitalization.

UNDERSTANDING HOW SENSEX AND NIFTY IS CALCULATED

Suppose,

1) Market capitalization of a company is 120,000 ( 1000 shares * Rs. 120).

2) Out of these 1000 shares, 200 are owned by promoters and 800 are owned by the public. These 800

shares are called free-floating shares

3) The market capitalization of the 800 free floating shares would be 800 * Rs. 120 = 96000.This is the

free floating market Capitalization.

4) The highest free floating market capitalization of 30 company forms SENSEX and the highest

free floating market capitalization of 50 company forms NIFTY.


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MULTI COMMODITY EXCHANGE AND STOCK EXCHANGE

Multi Commodity Exchange of India Ltd (MCX) (BSE: 534091) is an independent commodity

exchange based in India. It was established in 2003 and is based in Mumbai. The turnover of the

exchange for the fiscal year 2009 was US$ 1.24 trillion, and in terms

of contracts traded, it was in 2009 the world's sixth largest commodity

exchange.

MCX has also set up in joint venture the MCX Stock Exchange MCX

Stock Exchange Limited (MCX-SXAT) is an Indian stock exchange. It commenced operations in the

Currency Derivatives (CD) segment on October 7, 2008 under the regulatory framework of Securities

& Exchange Board of India (SEBI) and Reserve Bank of India (RBI).

SX40 is the flagship Index of MCX-SX. A free float based index

of 40 large caps - liquid stocks representing diversified sectors of

the economy. It is designed to be a performance benchmark and to

provide for efficient investment and risk management instrument.

It would also help in structuring passive investment vehicles.

FACTORS AFFECTING THE INDICES:

1). Internal Developments

Developments that can occur within companies will affect the price of its stock, including mergers and

acquisitions, earnings reports, the suspension of dividends, the development or approval of a new

innovative product.

2). World Events

Company stock prices and the stock market in general can be affected by world events such as war and

civil unrest, natural disasters and terrorism. The social uncertainty and fear generated by the terrorist

attacks on Sept. 11, 2001, affected markets directly as they caused many investors in the United States

to trade less and to focus on stocks and bonds with less risk. An example of an indirect influence on

markets is the announcement of a new military venture by a country in response to the outbreak of

civil unrest or conflict abroad. This announcement likely would cause the price of the stocks of

military equipment and weapons manufacturers to rise due to an expected increase in defense


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contracts, which in turn can raise the value of stocks for companies that supply military equipment

parts and technology

3).Inflation and Interest Rates

One of the more predictable influences of the stock market are periodic adjustments of interest rates by

the U.S. Federal Reserve to combat inflation. When interest rates are raised, many investors sell or

trade their higher risk stocks for government-backed securities such as bonds to take advantage of the

higher interest rates they yield and to ensure that their investments are protected.

4). Hype

Stocks and the stock market also can be affected by hype about a company or the release of new

products or services. Many people and organizations have an interest in promoting particular stocks

and industries to increase the value of their own shares and profits, and positive financial reports and

stock market newsletters, Internet blogs, press releases and news reports can build high expectations

for the performance of companies, which will raise the price of their stocks.


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2.2

INVESTMENT SCENARIO IN INDIA

OVERVIEW

GDP: $1.824 trillion (nominal)

Currency, 1INR: 100 Paise, USD/INR ~65, EUR/INR ~85, GBP/INR ~100

Fiscal year: 1 April – 31 March

Trade organizations: WTO, SAFTA, G-20 and others

Inflation (CPI): CPI: 9.31%, WPI: 4.7% (April 2013)

Exports: $309.1 billion (2012 est.)

Imports: $488.6 billion (2012 est.)

FDI stock: $47 billion (2011–12)

Foreign reserves: $295.29 billion (October 2012)

BACKGROUND

Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the

economic liberalization of 1991. The reforms did away with the License Raj, reduced tariffs and

interest rates and ended many public monopolies, allowing automatic approval of foreign direct

investment in many sectors.

By the turn of the 21st century, India had progressed towards a free-market economy, with a

substantial reduction in state control of the economy and increased financial liberalization. This has

been accompanied by increases in life expectancy, literacy rates and food security, although urban

residents have benefited more than agricultural residents.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to

investment level in 2003 by S&P and Moody's. India enjoyed high growth rates for a period from


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2003-2007 with growth averaging 9% during this period. Growth then moderated due to the global

financial crisis starting in 2008.

Figure: 2.2.1

Starting in 2012, India entered a period of more anemic growth, with growth slowing down to

4.4%. Other economic problems also became apparent: a plunging Indian rupee, a persistent

high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's

decision to taper quantitative easing, foreign investors have been rapidly pulling out money from

India. Some economists believe that an economic crisis is emerging in India.

As a result, the Indian Rupee as been facing new low while going as low as 68.7 against the dollar and

nearly $US 4 Billion being pulled out from the Indian Stock Market by the foreign Institutional

Investors (FII).

Despite the recent investment pullout from the Indian equity market, India still enjoys the status of an

Emerging Market.


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MAJOR EVENTS AFFECTING THE INVESTMENT SCENARIO

1) India recorded a Current Account deficit of 18.10 USD Billion in the first quarter of 2013. Current

Account in India is reported by the Reserve Bank of India. India Current Account averaged a deficit

equivalent to 1.51 USD Billion from 1949 until 2013, reaching the best surplus at 7.36 USD Billion in

March of 2004 and the worst deficit at 32.63 USD Billion in December of 2012.

Figure: 2.2.2

2) Tapering of the US Bond buying Program. The new of tapering of quantitative easing is driving

away the investors from the Indian Equity and Debt market.

3) The Indian rupee hit a record low and is the worst performing currency in Asia. In the debt market,

foreign investors have net sold $4.7 billion over 18 sessions, pressuring the rupee.


25

4) The automobile is the worst hit by the depreciation in the Indian rupee as most of the part are

imported whereas the IT and Pharma companies have an advantage over the fall since they exporting

at higher prices. However costly imports could drive up the inflation rate.

4) Corporates with unhedged forex exposure could suffer increased losses as the rupee inches lower.

This will further weaken investor sentiments.

REFORMS FOR BOOSTING INVESTMENTS

1) Hike in FDI Caps:

Foreign investors in the insurance sector, the government hiked the 26 per cent FDI limit to 49 per

cent under the automatic approval route.

For basic and cellular services in the telecom sector, the government hiked the limit under the

automatic route to 49 per cent and 49 to 100 per cent under the FIPB route.

In petroleum and natural gas refining, commodity exchanges, power exchanges, stock exchanges and

depositories, the cap has gone up to 49 per cent under the automatic route.

In the case of single-brand retail trading, the 49 per cent limit has been brought under the automatic

route and from 49 per cent to 100 per cent under the FIPB route.

2) Curbing Gold Imports.

-- raised the import duty on gold for the third time in eight months to 10 per cent from 8 per cent.

-- It banned imports of gold coins and medallions.

-- All imports of gold now need a license from the foreign trade office and would have to be brought

into a customs-bonded warehouse.

-- Unrefined gold will now be included under an existing rule stipulating that 20 per cent of all imports

must be used for exports, which is usually in the form of jewelry.

3) Oil from Iran

The government is aiming to cut the oil import bill by $1.5 billion this fiscal year. It is also looking for

ways to boost oil imports from Iran, which will result in dollar savings.


26

2.3

REGULATORS IN INDIA

The Financial System in India is regulated and supervised by two government agencies under the

ministry of Finance. They are:

1) Reserve Bank of India (RBI)

2) The Securities Exchange Board of India (SEBI)

1) The Reserve Bank of India

The Reserve Bank of India (RBI) is India's central bank. It formulates

India's monetary policy with regard to the Indian rupee. RBI was

established on 1 April 1935 during the British Raj in accordance with

the provisions of the Reserve Bank of India Act; 1934.The share

capital was divided into shares of 100 each fully paid, which was

entirely owned by private shareholders in the beginning. Following

India's independence in 1947, the RBI was nationalized in the year

1949.

FUCNTIONS:

i) Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of

all denominations. The distribution of one rupee notes and coins and small coins all over the country is

undertaken by the Reserve Bank as agent of the government.

ii) Monetary authority

The Reserve Bank of India is the main monetary authority of the country and beside that.. It

formulates implements and monitors the monetary policy as well as it has to ensure an adequate flow

of credit to productive sectors.


27

iii) Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad

parameters of banking operations within which the country's banking and financial system functions.

iv) Management of foreign exchange

The RBI is in charge of facilitating the achievement of the goals of the Foreign Exchange

Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in India.

v) Banker of banks

RBI also works as a central bank where commercial banks are account holders and can deposit money.

RBI maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty

of the RBI to control the credit through the CRR, bank rate and open market operations.

2) Securities Exchange Board of India (SEBI)

The Securities and Exchange Board of India (frequently abbreviated SEBI)

is the regulator for the securities market in India. It was established in the

year 1988 and given statutory powers on 12 April 1992 through the SEBI

Act, 1992.

SEBI has enjoyed success as a regulator by pushing systematic reforms

aggressively and successively. SEBI is credited for quick movement

towards making the markets electronic and paperless by introducing T+5

rolling cycle from July 2001 and T+3 in April 2002 and further to T+2 in April 2003. The rolling cycle

of T+2 means, Settlement is done in 2 days after Trade date. SEBI has been active in setting up the

regulations as required under law. SEBI did away with physical certificates that were prone to postal

delays, theft and forgery, apart from making the settlement process slow and cumbersome by passing

Depositories Act, 1996.

OBJECTIVES AND FUNCTIONS OF SEBI

To protect the interest of investors in securities.

Regulating the business in stock exchanges and any other securities market.


28

Registering and regulating the working of intermediaries associated with securities market as

well as working of mutual funds.

Promoting and regulating self-regulatory organizations.

Prohibiting insider trading in securities.

Regulating substantial acquisition of shares and takeover of companies.

SEBI GUIDELINES TO SECONDARY MARKETS: (STOCK EXCHANGES):

Capital adequacy norms have been laid down for the members of various stock exchanges

depending upon their turnover of trade and other factors.

All recognized stock exchanges will have to inform about transactions within 24 hrs.


29

PART III

ONLINE TRADING AT LKP SECURITIES LTD.


30

3.1

COMPANY PROFILE (LKP Securities Limited)

ABOUT LKP SECURITIES LIMITED

What started as one of India’s first securities brokerage houses in 1948 is today one of the country’s

largest multi-dimensional financial services group. LKP Finance Limited is a Non-Banking Finance

Company (NBFC) registered with Reserve Bank of India & a listed public limited company having a

net worth of Rs.142 crores as on FY10.

India's first financial group to be awarded the prestigious ISO 9002 certified KPMG Quality

Registrar, USA, for certain businesses.

Since 1948, LKP continues to provide clients with a single source capable of meeting all their needs –

be it Equities markets, Debt markets, Corporate Finance, Investment Banking, Merchant Banking,

Wealth Management or Commodities.

OVERVIEW

LKP Finance (NBFC) is registered with RBI and listed on BSE.

Established in 1948. The company went public in 1986.

Key businesses include Equity broking and Distribution, Fixed Income, Merchant Banking and

Treasury.

Large client base of ~79,600 registered customers in broking.

Total broking turnover of ~ Rs. 604 billion in FY12 and Rs. 435 billion in FY11.

Fixed Income volumes in secondary market of Rs.796 billion in FY09 and Rs.1754 billion in

FY10

Network of 822 outlets in more than 200 cities across India with 800 Sub brokers and 22

branches.

Current staff strength of more than 350 people


31

Figure: 3.1.1

Figure: 3.1.2


32

SALIENT FEATURES

Secured and sophisticated systems, operation processes and clear Risk management policies to

handle high volumes business

850 + outlets across India covering 150 cities in the country, including 7 regional offices at

Delhi, Kolkata, Pune, Ahmedabad, Bangalore, Chennai and Gujarat.

Research covers a wide spectrum from macroeconomics forecasts to penetrating analysis of

companies and sectors; the research is highly rated for its accuracy, clarity and comprehensive

coverage which include Fundamental Analysis, Technical Analysis & daily research reports.

Research also covers Fixed Income Markets, Mutual Fund Schemes & Commodities Markets.

ASSOCIATIONS

Merchant Bankers with SEBI

Membership of BSE & NSE (Capital & Debt Market)

AMFI registered all India Mutual Fund Distributors

Member of Commodity Exchanges MCX, NCDX and DGCX (Dubai)

Member of NSE for Interest Rate Futures

Member of MCX SX and NSE Currency


33

THE COMPANY: STRUCTURE

Figure: 3.1.3 & 3.1.4

ORGANISATION STRUCTURE

LKP FINANCE (PARENT CO.)

COMAPANY STRUCTURE: LKP FINANCE

(NBFC)

LKP Securities

LKP Debt LKP IPO LKP MF ALPHA

COMMODITY


34

A STRONG BALANCE SHEET

PROFITABILITY

Figure: 3.1.5

*Consolidated Balance Sheet and Profit and Loss of LKP Finance Ltd


35

A BROKERAGE FIRM: THE OPPORTUNITY

Total brokerage market: 12,000

cr per annum growing at 20%

per annum with the natural

tailwinds of GDP and greater

domestic and foreign

participation. 800 brokers and

62,000 sub-brokers.

Retail pool 3 times bigger than

the institutional pool.

Industry revenue pool from

equity broking at ~Rs 13,000 cr

for FY11 grew by only 13% as

compared to the 46% growth in

exchange trading volumes. Figure: 3.1.6

15,000 brokers and 37,000 SEBI registered sub-brokers. Among these, there are over 1,200

active brokers on NSE and over

600 on BSE. The industry is

witnessing challenging times with

the top brokers losing market

share with competition from

foreign brokerage houses and

declining volumes in the cash

segment.

Risks: Pro-longed de-rating of

India.

Figure: 3.1.7


36

EQUITIY (RETAIL AND INSTITUTIONAL)

EQUITY RETAIL

LKP offers a wide spectrum of services that includes Equity Broking in Cash and Derivatives, Internet

based trading, Demat services & Research services. When you deal with LKP you are dealing with a

professional broker who has centralized risk management system in place at Mumbai. LKP follows a

hub & spoke model of Branch management where in all the branches & franchise interact with the

hub/regional office & in turn the regional/hub office talks to Head office. This company a great level

of flexibility in managing the risk level of the clients, which in turn benefit the client.

Pan India footprint with 822 outlets

Strong network to facilitate reach

Large customer base of ~79,600 clients

Strong network of 800 Sub-brokers

Figure: 3.1.8 Figure: 3.1.9


37

RETAIL DISTRIBUTION

Figure: 3.1.10


38

EQUITY INSTITUTIONAL

Clientele at the institutional desk include Mutual Funds, Financial Institutions, Foreign and Domestic

Institutional investors, Insurance companies, Banks and Corporates. Some of our esteemed domestic

clients include among others – UTI MF, Birla MF, LIC, HDFC MF, Pru ICICI MF, Reliance MF,

Principal MF, Sundaram MF, Tata MF, Benchmark MF, ILFS, Canara Robecco MF, ABN

Amro MF and FII clients include Morgan Stanley, JP Morgan, Matterhorn and Blackstone

among others.

Clients whom we have been serving for the past twenty-five years include UTI, LIC, IDBI, ICICI,

Tata Group, Birla Group, and Dabur, Jain Irrigation, Emco, Godrej, JB Chemicals, Paper

Products and UB Group of Companies among others.

Established in 1948, taken over by Mr. Mahendra Doshi in 1982

Strong risk management culture, managed 2008 downside with minimal losses. Minimal

proprietary trading activities

Presence in 400+ locations, 75,000 retail and high net worth clients giving nationwide access

More than 50 senior level employees and 504 franchises.

Current Net worth - More than Rs. 150 cr.

Cash and cash equivalents – More than Rs. 40 cr

Figure: 3.1.11


39

FIXED INCOME

LKP understands Debt & Money Market in all its dimensions. Recognized as major dealer of

Fixed Income Securities, we execute deals for Banks, Institutions, FIIs, MFs, Insurance

companies, Primary Dealers, large Corporates, PSUs & PF Trusts

We are leading Merchant Banker for Primary Placement of short term & long term debts and

leading intermediary on Secondary Wholesale Debt Markets

We deal in wide spectrum of debt instruments such as fixed and floating rate Debentures,

Bonds, CDs, CPs, PTCs, Gsec, T-Bills & Oil / Fertiliser / Food Bonds

Fixed Income volumes in secondary market of Rs.796 billion in FY2009 and Rs.1754 billion in

FY2010

Ranked in the top 3 WDM brokers in India.

Supported by a team of 40 personnel.

Member of NSE and BSE WDM segment

Figure: 3.1.12

PRODUCTS AND SERVICES

• Government Securities and Treasury Bill

• Corporate Bonds/PSU Bonds/Bank Bonds

CLIENTELE

• Nationalized, Foreign, Private, Co-operative Banks

• Insurance Companies

• Mutual Fund

• Corporates

• Institutions


40

FIXED INCOME: DEALS AND PLACEMENTS

Ranked No.2 Arranger for CP & Short Term Debts and Prime League Table

Placed Fertilizer bonds worth Rs.55 bn. for various Fertiliser companies in FY09.

Primary placement of

CPs, NCDs and CD’s of

~Rs.480 bn & Rs.980 bn

in FY09 and FY10

respectively. Achieved

turnover of ~Rs. 800 bn

in secondary debt market

in FY09 and Rs 1748 bn

in FY 10

Acted as an Arranger for

private placement of long

term bond issues

aggregating to Rs. 123 bn

in FY09 & of Rs 236 bn during FY10.

Figure: 3.1.13

Figure: 3.1.14


41

CURRENCY

Currency Derivatives

With the launch of currency derivatives, LKP offers its clients yet another segment for trading. Jointly

regulated by SEBI and RBI provides traders with another lucrative trading avenue.

Currency derivatives can be described as a future contract between two parties, to buy or sell the

underlying at a future date, in this case the underlying being a currency.

Why exchange traded currency futures?

Better transparency and real time efficient price discovery.

Elimination of counter party risk with the presence of a Clearing House/Corporation.

Due to fixed lots of $1000, the doors are wide open for all types of market participants, small

or big.

LKP offers currency derivative trading through:-

NSE --- Futures and Options

MCX-SX --- Futures

Who can trade? :-

All resident Indians, banks, corporations, institutions are allowed to trade.

Only NRIs and FIIs are restricted from trading in Currency Derivatives.

Advantages of Currency Futures:-

Hedging of risk - as currency futures act as insurance against unforeseen exchange rate

movements.

Low Margins - Margins required are very low and contract lot sizes are small, allowing market

participation from all types and sizes of traders.

Low Transaction costs - Since there is no STT and no Exchange Transaction Charges, the

overall transaction charges are quite low.

Low Risk- With the presence of a Clearing House / Corporation, counter party risk is totally

eliminated.

Open to all - As compared to the OTC markets, there are standard contract sizes and

participation is open to everyone, not just a limited few.


42

COMMODITY

A sister concern of the renowned and trusted LKP Group, Alpha Commodities offers a complete

bouquet of client- friendly services in the burgeoning Commodity Futures market. Commodities have

always been the foundation of world trade, and as they become an increasingly attractive investment

option, we at Alpha Commodities look to guide and assist you in all the possible ways to help you in

all your endeavors in the Commodity markets.

Alpha Commodities provides a host of facilities to their clients, ranging from dealing, investing or

hedging in Commodity Futures which includes Bullions, Metals, Energy and Agro Commodities.

RETAIL DISTRIBUTION……OTHER PRODUCTS

MUTUAL FUND DISTRIBUTION

• AUM worth ~Rs.1155 cr. with Rs.155cr in Equity and Rs.900cr in Debt

• Supported by a team of 23 personnel.

• Income generated by way of brokerage i.e., upfront and trail

• Mutual Fund Advisory

• Servicing direct clients, Institutions and Sub Brokers

PORTFOLIO MANAGEMENT SERVICES

• In-house team of fundamental and technical research analysts

• Supported by a host of financial databases and information packages like Bloomberg,

CRISINFAC, Capitaline etc.

• Services available to both individuals and corporates.

INSURANCE

• Forayed in the sales of General and Life Insurance products in November 2007

• Tie-up with Bajaj-Allianz for distribution of their insurance products.


43

VALUE ADDED SERVICES

Dial and trade

Online Trading

Online research

Real-time equity and F&O quotes

Intra-day calls & News flash

Intra-day & historical charts with technical tools*

Portfolio tracker

DP services

Electronic Contract

LKP BOSS - E-broking & back-office software

Live Stock SMS Alerts

ADVISORY

Real-time market information with News updates

Investment Advisory services

Dedicated Relationship Managers.

RESEARCH

Wide range of daily, weekly and special Research reports with in-depth analysis on markets.

Wide array of products including Technical, Fundamental, Derivatives, Macroeconomic and

Mutual Fund research undertaken by Expert Sector Analysts with professional industry

experience.


44

RELATIONSHIPS WITH CORPORATES AND INSTITUTIONS

LKP Securities ltd has strong relationship with over 475 corporates and Institutions.

LKP has successfully dealt with

these clients.


45

3.2

ONLINE TRADING/INVESTMENTS

BACKGROUND

The trading(buying and selling of financial securities) on stock exchanges in India used to take place

through an open outcry system without use of information technology for immediate matching or

recording of trades. Before getting into the introduction and evolution of trading through the internet,

let us understand the concept of an open outcry system.

“Open outcry is the name of a method of communication between professionals on a stock exchange

or futures exchange. It involves shouting and the use of hand signals to transfer information primarily

about buy and sell orders.”

Traders usually flash the signals quickly across a room to make a sale or a purchase. An open outcry

system is carried out in the exchange on the “trading floor” and is the most conventional method for

purchase and sale of securities. A "trading floor" is a trading venue. This expression often refers to a

place where traders or stockbrokers meet in order to buy and sell financial securities. Sometimes, the

expression "trading floor" is also used to refer to the "trading room" or "dealing room", i.e. the office

space where market activities are concentrated in investment banks or brokerage houses.

The open outcry system is being replaced by electronic trading systems. The supporters of electronic

trading claim that they are faster, cheaper, more efficient for users, and less prone to manipulation by

market makers and broker/dealers. However, many traders advocate for the open outcry system on the

basis that the physical contact allows traders to speculate as to a buyer/seller's motives or intentions

and adjust their positions accordingly. Today, most stocks and futures contracts are no longer traded

using open outcry due to the lower cost of the aforementioned technological advances.

In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide online fully

automated screen based trading system (SBTS) where a member can punch into the computer

quantities of securities and the prices at which he likes to transact and the transaction is executed as

soon as it finds a matching sale or buy order from a counter party. NSE became the leading stock

exchange in the country, impacting the fortunes of other exchanges and forcing them to adopt SBTS

also.

As of May 1997, there were 17 exchanges with Screen based trading system. NSE was given

recognition as a stock exchange in April 1993 and started operations in June 1994, with trading on the

Wholesale Debt Market Segment. Subsequently, it launched the Capital Market Segment in November


46

1994 as a trading platform for Equities and the Futures and Options segment in June 2000 for various

derivative instruments. So, the floorless automated trading system with nationwide inter-linked

network of broker/dealer members, such like NSE may at one stroke resolve the inter-market

difficulties faced by investors and also reduce the transaction cost for investors.

This led to the introduction of online trading amongst not only the Institutional investors but also the

retail investors for convenient buying and selling of shares, currencies, commodities etc.

‘Picture showing an open outcry system

where shares are traded on the “trading

floor” of a stock exchange.’

ONLINE TRADING

Online Trading, sometimes called e-trading, is a method of trading securities (such as stocks, and

bonds), foreign exchange or financial derivatives electronically. Information technology is used to

bring together buyers and sellers through an electronic trading platform and network to create virtual

market places such as NSE, NASDAQ, and NYSE Arca which are also known as electronic

communication networks (ECNs).

Electronic trading is in contrast to older floor trading and phone trading and has a number of

advantages. Investing online, or self-directed investing, has become the norm for individual investors

and traders over the past decade with many brokers now offering online services with unique trading

platforms.

DEFINITION AND EXPLANATION BY INVESTOPEDIA

The act of placing buy/sell orders for financial securities and/or currencies with the use of a

brokerage's internet-based proprietary trading platforms. The use of online trading increased


47

dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers and

internet connections.

Investopedia explains 'Online Trading'

The use of online trades has increased the number of discount brokerages because internet trading

allows many brokers to further cut costs and part of the savings can be passed on to customers in the

form of lower commissions.

Another benefit of online trading is the improvement

in the speed of which transactions can be executed

and settled, because there is no need for paper-based

documents to be copied, filed and entered into an

electronic format.

‘An Electronic Trading Platform being used.’

HISTORY OF ONLINE TRADING

The first electronic trading platforms were typically associated with stock exchanges and allowed

brokers to place orders remotely using private dedicated networks and dumb terminals. Early systems

would not always provide live streaming prices and instead allowed brokers or clients to place an

order which would be confirmed some time later; these were known as 'request for quote' based

systems.

Trading systems evolved to allow for live streaming prices and near instant execution of orders as well

as using the internet as the underlying network meaning that location became much less relevant.

Some electronic trading platforms have built in scripting tools and even APIs allowing traders to

develop automatic or algorithmic trading systems and robots.

Set up in 1971, NASDAQ was the world's first electronic stock market, though it originally

operated as an electronic bulletin board.

In August 1994, K. Aufhauser & Company, Inc. (later acquired by TD Ameritrade) became the

first brokerage firm to offer online trading via its "WealthWEB".Online investing has experienced


48

significant growth since that time. Investors can now enter orders directly online or even trade with

other investors via electronic communication networks (ECN).

By 2011 investment firms on both the buy side and sell side were increasing their spending on

technology for electronic trading. With the result that many floor traders and brokers were removed

from the trading process. Traders also increasingly started to rely on algorithms to analyze market

conditions and then execute their orders automatically.

The move to electronic trading compared to floor trading continued to increase with many of the major

exchanges around the world moving from floor trading to completely electronic trading.

Trading in the financial markets can broadly be split into two groups:

Business-to-business (B2B) trading, often conducted on exchanges, where large investment banks

and brokers trade directly with one another, transacting large amounts of securities, and

Business-to-consumer (B2C) trading, where retail (e.g. individuals buying and selling relatively

small amounts of stocks and shares) and institutional clients (e.g. hedge funds, fund managers or

insurance companies, trading far larger amounts of securities) buy and sell from brokers or "dealers",

who act as middle-men between the clients and the B2B markets.

While the majority of retail trading in the United States happens over the Internet, retail trading

volumes are dwarfed by institutional, inter-dealer and exchange trading. However, in developing

economies, especially in Asia, retail trading constitutes a significant portion of overall trading volume.

IMPACT

The increase of electronic trading has had some important implications:

Reduced cost of transactions – By automating as much of the process as possible (often

referred to as "straight-through processing" or STP), costs are brought down. The goal is to

reduce the incremental cost of trades as close to zero as possible, so that increased trading

volumes don't lead to significantly increased costs. This has translated to lower costs for

investors.

Greater liquidity – electronic systems make it easier to allow different companies to trade with

one another, no matter where they are located. This leads to greater liquidity (i.e. there are

more buyers and sellers) which increases the efficiency of the markets.


49

Greater competition – While electronic trading hasn't necessarily lowered the cost of entry to

the financial services industry, it has removed barriers within the industry and had a

globalization-style competition effect. For example, a trader can trade futures on Eurex,

Globex or LIFFE at the click of a button – he or she doesn't need to go through a broker or pass

orders to a trader on the exchange floor.

Increased transparency – Electronic trading has meant that the markets are less opaque. It's

easier to find out the price of securities when that information is flowing around the world

electronically.

Tighter spreads – The "spread" on an instrument is the difference between the best buying and

selling prices being quoted; it represents the profit being made by the market makers. The

increased liquidity, competition and transparency means that spreads have tightened, especially

for commoditised, exchange-traded instruments.

For retail investors, financial services on the web offer great benefits. The primary benefit is

the reduced cost of transactions for all concerned as well as the ease and the convenience.

Web-driven financial transactions bypass traditional hurdles such as logistics.


50

UNDERSTANDING THE GROWTH OF ONLINE TRADING (WITH REFERNCE TO THE

INDIAN INVESTMENT MARKET)

Online trading in India is the internet based investment activity that involves no direct involvement of

the broker. There are many leading online trading portals in India along with the online trading

platforms of the biggest stock houses like the National stock exchange and the Bombay stock

exchange. The total portion of online share trading India has been found to have grown from just 3 per

cent of the total turnover in 2003-04 to 16 per cent in 2006-07.

WHY ONLINE TRADE:

Freedom of information

-Latest prices

- Historical data in the form of charts

- Latest market news updates

- Extensive financial research

- Wealth of free commentary

Sense of control over investors’ money

Access to the market

Greater Transparency

Hassle free trading

Instant trade execution

Reduces Settlement risk

Helpdesk

Instant order confirmation


51

GROWTH OF INTERNET USERS IN INDIA

POPULATION v/s INTERNET USERS IN INDIA

Source: World Bank Data

Figure: 3.2.1 & 3.2.2

7.07

16.74 18.65 22.19

27.23 32.46

46.37 52.16

61.84

91.85

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

No of internet users ( Million)

Growth

1.07 1.09 1.11 1.12 1.14 1.16

1.17 1.19 1.21

1.22

0.01 0.02 0.02 0.02 0.03 0.03 0.05 0.05 0.06

0.09

88%

90%

92%

94%

96%

98%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Internet users (Billion) India

Population ( Billion) India


52

METRO V/S NON- METRO INTERNET USERS IN INDIA

Source: World Bank Data

TOTAL NUMBER OF TRADES (IN CRORES)

Source: National Stock Exchange (NSE)

Figure: 3.2.3 & 3.2.4

112

99

24

66.08

0

20

40

60

80

100

120

Total Internet usersNon- metro citiesMetro cities No of internet users ( Mobile)

Total Internet users

Non- metro cities

Metro cities

No of internet users ( Mobile)

10.39

18.21

30.14

37.56

47.91

41.15

36.30

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011

Total No of Trades (Crores)


53

From figure: 3.2.1 and 2, it is evident that there is a significant growth amongst the internet user in

India and the adoption of Internet as a source of reliability for not just online trading, but e- commerce,

net banking and social networking.

Surprisingly, from figure: 3.2.3 it is amazing how the usage of internet users in India is more in non-

metro cities than in metro cities. The last figure i.e. Figure: 3.2.4 shows the growth of trades and

transactions through Online Trading over a period of time. From a period of 2005-2011, the number of

transactions has increased form 10 crores to a high of 48 crores and currently between 35-40 crores.

Apart from this, there is still less knowledge about the use of online trading in many parts of the

country.

SOME OF THE MYTHS THAT STILL PERSISTS IN THE INDIAN MARKET ABOUT

ONLINE TRADING ARE:

Brokerage is high compared to offline

Privacy is less due to hacking

Transactional errors due to technical problems

REQUIREMENTS FOR ONLINE TRADING

For investors:

1. Installation of a computer with required specification

2. Installation of a modem/Telephone connection or Wi-Fi

4. Registration for on-line trading with broker

5. A bank account

6. Depository account with a depositary participant

7. Compliance with SEBI guidelines for net trading


54

For stock brokers:

1. Permission from stock exchange for net trading

2. Net worth of Rs. 50 lac

3. Adequate back-up system

4. Secured and reliable software system

5. Adequate, experienced and trained staff

6. Communication of order (trade confirmation to investor by e-mail)

7. Use of authentication technologies

8. Issue of contract notes within 24 hours of the trade execution

9. Setting up a website.


55

3.3

ONLINE TRADING AT LKP SECURITIES LIMITED

ONLINE TRADING AT LKP SECURITIES LIMITED

“At LKP we help you take the right decisions with our value added products like Daily research notes,

Fundamentals research, Company / Sector coverage and Daily strategies.” – lkpsec.com

Active traders as well as regular investors have a choice of 2 software Packages (each with desktop

and browser).Desktop mode gives the client online charting facility.

Technical research reports provides buy and sell levels.

Digital contracts.

Integrated banking - no hassles of writing cheques.

Integrated DP - no more Demat instructions.

Access to back office data on the Internet. The Internet trading accounts have state-of-the-art

technologies for risk management.

Value-added services:

LKP boss-your Back office reports.

Investment Ideas

Daily Market Updates

LKP Securities Limited: Registered Office and BSE, NSE & MCX-SX Registration:

LKP SECURITIES LTD.

Registered Office: 203, Embassy Centre, Nariman Point, Mumbai - 400021. Tel: +91 22 4002

4785/4002 4786 Fax: +91 22 2287 4787

SEBI REG NO: NSE: INB/INF 230720030 BSE: INB/F 010675433 MCX-SX INE260720030 NSE

INE230720030


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BENEFITS AT LKP SECURITIES LTD.

1) Online Trading – exe software as well as web based application

2) Two level security authentication for all online trading accounts

3) Power Calls

4) Mutual fund tracker through online account.

5) LKP BOSS – Lkp’s Back office access for clients for looking into the margin statements and

financial statements.

LKP BOSS - Back office data on 24x7 basis

This is the comprehensive service for the esteem LKP Clients to

view their back office data on the net any time of the day they

wish. The service is a direct window to the LKP Back office

server, that is to say you see what we see for you on the server.

Depository Services

LKP’s Depository Services offer dematerialization services to individual and corporate investors as a

Depository Participant with the Central Depository Services (India) Limited (CDSL).

With a highly experienced team of professionals, backed with sophisticated technical support, and a

national network of franchisees, we ensure quality and convenience in our service.

LKP’s online depository service offers you a paperless and cost effective way to hold your

investments, not to forget the elimination of handling physical documents


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TRADESMART @ LKP (TRADING SOFTWARES)

Tradesmart @ LKP is an initiative by LKP Securities for providing platforms (software) for online

trading. The clients can invest using new trading platform's that are powerful, user-friendly stock

trading tools designed to provide everything they need for online trading.

TRADESMART @ LKP - "The Smart Way to Trade Online"

TRADESMART PLATFROMS (SOFTWARES)

Figure: 3.3.1

Web Based

BLUE SILVERLIGHT

Developer: Financial technologies ltd.

BLUE+ NEST Developer: Omnesys

Desktop/Exe Based

BLUE * ODINDIET Developer: Financial technologies ltd.

BLUE++ NESTRADER Developer: Omnesys


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TRADESMART @ LKP

POWERED BY FT

POWERED BY

OMNESYS

TRADESMART@LKP

BLUE

An Extra light,

superfast website.

All the features of

a dealer terminal

have been

combined with a

fresh new look

TRADESMART@LKP

BLUE +

Blue+ is ideal for

those who travel

often and hence

cannot access

their own

computer for

trading.

TRADESMART@LKP

BLUE

An EXE based

desktop software

designed for

active traders

who transact

frequently to

capture favorable

short-term price

movements.

TRADESMART@LKP

BLUE + +

A power packed

Trading

platform which

provides you

with Live

streaming quotes

& Research

Calls, integrated

fund transfer

system along

with multiple

watch list

facility.

Figure: 3.3.2


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SEGMENTS OFFERED

Figure: 3.3.4

TradeSmart@LKP

Equities

BSE

NSE

MCX-SX

F&O

BSE NSE

Currency

MCX-SX

NSECDS

Commodities

NCDEX

MCX

NSCL

Exe Mobile Web


60

TRADESMART EXE (Figure: 3.3.5)

TRADESMART WEB (Figure: 3.3.6)


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TRADESMART EXE AND TRADESMART WEB

PARTICULARS TRADESMART

EXE

TRADESMART

WEB

Order Entry Y Y

Pending Order Y Y

Order Modification Y Y

Order Cancellation Y Y

Market By Price Y Y

Market Watch/Touch Line Y Y

Trades Y Y

News & Information Y Y

Technical Analysis Y N*

Supporting Systems Windows & Mac All Browsers

Band-Width Utilization MEDIUM LOW

Products - Margin/delivery Y Y

User Customization Y Y

Integrated Risk Management Y Y

Basic Intraday Charting Y Y

Historical Charting Y N

Help Desk - Phone & Online Y Y


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Bank account Integration Y Y

Call & Trade Y Y

Security Requirements Y Y

Initial Setup Cost N N

LKP Advisory Y Y

Figure: 3.3.7

OPENING AN ACCOUNT WITH LKP SECURITIES LIMITED

1) Request KYC Form

2) Documents needed:

Photo identification proof

Address Proof

One Photograph

Six months Bank account statements (for futures and options)

One cancelled cheque

3) Payment mode:

NEFT/RTGS transactions

Payment by cheque

4) Welcome kit and first trade tip from LKP Advisory service.

BROKERAGE STRUCTURE AT LKP

1) Free account opening

2) Annual Maintenance charge waived off for the first year.

3) Margin Amount Rs.5000 - Rs.10, 000/-


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CASH FUTURES OPTIONS CURRENCY

DELIVARY 30paisa 5paisa Rs.50(per lot) Rs.70 (per lot)

INTRADAY 3paisa 5paisa Rs.50(per lot) Rs.70 (per lot)

Figure: 3.3.8

ADVANCE BROKERAGE SCHEME

Advance Brokerage is a Pre-paid model of charging brokerage.

Terms and Conditions:

1) Brokerage will be charged at the rates as mentioned in the applicable brokerage table herein above

during the validity period.

2) On a fortnightly basis (every 15 days), the client will be reimbursed with the subscription amount to

the extent of the brokerage generated during the term.

3) If the subscription amount is not exhausted up to the end of the validity period & the scheme is not

renewed within 1 month from the end of the validity period, the same shall stand forfeited. The

brokerage thereafter shall be charged at the normal rate.


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3.4

ANALYSIS

SWOT ANALYSIS (STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS)

STRENGTHS:

1. Strong credibility among investors because of its heritage.

2. Excellent reputation among the business society.

3. Capability of providing superior customer service.

4. Quality research team.

5. Easier access to the customer due to largest ground network of 822 outlets

6. Highly sophisticated infrastructure.

WEAKNESSES:

1. Brand awareness is low in the financial market.

2. Promotional activities conducted by the company are not at par with the other firms.

3. Inadequate product awareness among the retail investors.

OPPORTUNITIES:

1. Attractive brokerage rates

2. Scope in non-metro cities still unexplored entirely.

THREATS:

1. Availability of Unit Linked Insurance Policies (ULIP’s) and mutual funds in the market.

2. Threat of entry is high in this industry as the manpower required is less and capital requirement is

medium.


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COMPARATIVE ANALYSIS

THE MAJOR PLAYERS IN ONLINE TRADING

1) SHAREKHAN LTD.

2) KOTAK SECURITIES LTD.

3) INDIABULLS

4) ICICIDIRECT

5) HDFC SECURITIES LTD.


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BROKERS’ PREFERENCE: POLL RESULTS (Figure: 3.4.1)

COMPARATIVE ANALYSIS (Figure: 3.4.2)

LKP

SECURITIES

SHAREKHAN INDIABULLS ICICI DIRECT

Account Type Only one type Variety of

accounts

Variety of

accounts

Only one type

Brokerage Negotiable Non Negotiable

and very High

Negotiable for

HNI clients

Negotiable

Research Qualitative and

free

Qualitative and

free

Charges for

analysis

Free Research

Online Trading

Platforms

Web –free

Exe- chargeable

Web and Exe-Free Web – Free

Exe- chargeable

No Exe

platform. Web-

free

Customer

Service

Focus on retail +

institutional

clients

Negligent due to

wide customer

base

Special focus on

HNI clients

Focus on Retail

clients

LKP SECURITIE

S 17%

SHAREKHAN 42%

HDFC SECURITIES

14%

ICICI DIRECT 22%

OTHERS 5%

MARKET SHARE


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LKP SECURITIES LTD. ONLINE TRADING INTERFACES

The customer can choose the online trading interface that meets their requirement based on his trading

habits and preferences

DIAL-N-TRADE – Toll Free

The DNT is a value added services meant for all customers who want to transact but are not online.

Dedicated Toll – Free number for Order placements

Automatic fund transfer with phone banking*

Simple and secure IVR based system for authentication

After-hours order placement facility

WEBSITE FEATURES

Facility to integrate choice of Banks/DP/Trading Account

Automatic pick-up of shares from linked DP for DP for pay – in

Automatic deposit of shares into linked DP after pay-out

4 Times exposure on Margin Trades

Margin Trading available for entire marker session

Slab wise brokerage structure for delivery and margin trades

Daily Research newsletter (Investor Eye) via e-mail

Access to new IPO without any paperwork

Advanced portfolio monitoring Tools

Integrated DP account with trading account

Cash and Derivatives trading in a single account

E-mail confirmations for all transactions

Choice of electronic/Physical contracts

Instant Order/trade confirmations in the same window

Hot keys similar to a Broker’s Terminal

Cancel All/Square off all Facility

Window for Top Gainers, Top Losers, and Most Active updated Live


68

PART IV

CONCLUSION


69

4.1

FINDINGS AND OBERVATIONS

FINDINGS

1) Fluctuations are more in secondary market than any other market.

2. There are more speculators than investors.

3. Information plays a vital role in the secondary market.

4. Previously rolling settlement is T+5 days, now it changed to T+2 days and further it will be

changing to T+1 day.

5. It was also observed that many broking houses offering internet trading allow clients to use their

conventional system as well just ensure that they do not lose them and this instead of offering e-

broking services they becomes service providers.

6. The number of players is increasing at a steady rate and today there are over a dozen of brokerage

houses who have opted to offer net trading to their customers and prominent among them are LKP

SECURITIES, SHARE KHAN, INDIA BULLS, KOTAKSTREET, ICICI DIRECT AND

GEOJIT.

7) The Bombay stock exchange and the broader index – fluctuate with variations and volatility in the

stock prices of heavyweights like TCS, INFOSYS, HUL, MARUTI, BAJAJ, RIL etc.

8) Lately, due to an upward rate of inflation India, the rupee has been testing new lows. The indices

are sometimes losing 200-700 points in a single trading session due to capital pullout and rising back

in the next session due to reforms and reassurance by the government.


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4.2

CONCLUSION AND RECOMMENDATIONS

CONCLUSION AND RECOMMENDATIONS

1. Things have changed for the better with LKP group going on-line coupled with endeavor to stream

line the whole trading system, things have changed dramatically over the last 3 to 4 years. New and

advanced technologies have breached geographical and cultural barriers, and have brought the

countrywide market to doorstep.

2. In the present scenario to compete with the Broker’s would require sound infrastructure and trading

as per international standards.

3. The introduction of on-line trading would influence the investors resulting in an increase in the

business of the exchange. It has helped the brokers handling a vast amount of transactions and this can

be an efficient trading, delivering, settlement system with adequate protection to investors.

4. Due to invention of online trading there has been greater benefit to the investors as they could sell /

buy shares as and when required and that to with online trading.

5. The broker’s has a greater scope than compared to the earlier times because of invention of online

trading.

6. The concept of business has changed today, this is a service oriented industry hence the survival

would require them to provide the best possible service to the clients.

7. I recommend the exchange authorities to take steps to educate Investors about their rights and

duties. I suggest to the exchange authorities to increase the investors’ confidences. Necessary steps

should be taken by the exchange to deal with the situations arising due to break down in online

trading.

8. I recommend the exchange authorities to be vigilant to curb wide fluctuations of prices.

9. The speculative pressures are responsible for the wide changes in the price, not attracting the

genuine investors to the greater extent towards the market.

10. Genuine investors are not at all interested in the speculative gain as their investment is based on

the future profits, therefore the authorities of the exchange should be more vigilant to curb the

speculation.


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PART V

BIBLIOGRAPHY


72

5.1

BIBLIOGRAPHY

BIBLIOGRAPHY

I. PRIMARY DATA:

Brochures

Lectures

Investment Guides and study notes

II. SECONDARY DATA:

1) WEBSITES:

Lkpsec.com

Investopedia.com

Moneycontrol.com

Nseindia.in

Financewalk.com

2) ARTICLES:

Wall Street Journal

Growth and Performance of Turnover in Capital Market Segment at the National Stock Exchange -

Dr. Gurcharan Singh and Shaminder Kaur.

A study of online trading @ lkp securities ltd. project report

Economy & Finance

study of online trading

online trading system

online trading web

procedure of online

advantages of online

evolution of online

traditional system of

study material