Final Project

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ABOUT INDUSTRY

HISTORY OF THE STOCK BROKING INDUSTRY

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years

ago. The earliest records of security dealings in India are meager and obscure.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in

Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers

recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid

development of commercial enterprise and brokerage business attracted many men into the

field and by 1860 the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of Europe

was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about

200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began

(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs.

87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business.

In 1887, they formally established in Bombay, the "Native Share and Stock Brokers'

Association" (which is alternatively known as "The Stock Exchange"). In 1895, the Stock

Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the

Stock Exchange at Bombay was consolidated.

Thus in the same way, gradually with the passage of time number of exchanges were increased

and at currently it reached to the figure of 24 stock exchanges.

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TRANSACTION CYCLE:

A person holding assets (Securities/Funds), either to meet his liquidity needs or to reshuffle his

holdings in response to changes in his perception about risk and return of the assets, decides to

buy or sell the securities. He selects a broker and instructs him to place buy/sell order on an

exchange. The order is converted to a trade as soon as it finds a matching sell/buy order. At

the end of the trade cycle, the trades are netted to determine the obligations of the trading

member’s securities/funds as per settlement cycle. Buyer/seller delivers funds/ securities and

receives securities/funds and acquires ownership of the securities.

A securities transaction cycle is presented above. Just because of this Transaction cycle, the

whole business of Securities and Stock Broking has emerged. And as an extension of stock

broking, the business of Online Stock broking/ Online Trading/ E-Broking has emerged.

Placing Order

Settlement of trades

Decision to trade

Trade Execution

Clearing of Trades

Funds or Securities Transaction

CycleTransaction

Cycle

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HISTORY OF ONLINE TRADING:

Online stock trading is very old concept for big institutions who trade

thru private networks owned by Reuter's "Instinet" and a system called

"Posit" since 1969. But it becomes internet based for lay men only in late 90s.

Funny, that actually idea was first time used by a company making Beer

called "WIT beer" to help its shareholders trade its shares. That’s how "WIT

Capital" was born which is considered pioneer of this concept. It was made

mainstream and household name by an offshoot of Charles Schwab & Co called

eSchwab which is used by millions of people in USA. Lots of NRI's play

in US stock market even when they come to India for holidays, via website

of eSchwabe.

There are other serious players like E*trade, DATEK online etc. All this

companies ask you to start account with US $5000 and you can buy and sell

stock using these funds. They also issue you a check book which you can use

to make payments from this account. Or use their ATM card to withdraw cash

from your stock trading account.

Today practically every big name brokerage firm offers online stock trading

as it reduces their costs. Earlier they had army of brokers on phone with

clients executing trade, which is done by computers accepting orders from

clients directly. This firm now offers human access to high net worth accounts, and to rest at

charge per trade.

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E- BROKING - A SMALL BEGINNING:

You have some money to dabble with. Trading shares on BSE/NSE has always been your

dream. When will you ever find the time? And besides, the hassle of finding a broker is not

easy. Realizing there is untapped market of investors who want to be able to execute their own

trades when it suits them, brokers have taken their trading rooms to the Internet. Known as

online brokers, they allow you to buy and sell shares via Internet. There are 2 types of online

trading service:

1. Discount brokers and

2. Full service online broker.

Discount online brokers allow you to trade via Internet at reduced rates. Some provide quality

research, other don’t. Full service online brokerage is linked to existing brokerages. These

brokers allow their clients to place online orders with the option of talking/ chatting to brokers

if advice is needed. Brokerage rates here are higher. 5Paisa.com, ICICIDirect.com,

IndiaBulls.com, Sharekhan.com, Geojit securities.com, HDFCsec.com, Tatatdw.com,

Kotakstreet.com are some of the online broking sites in India. With Net trading in securities

and rapid consolidation between multiple stock exchanges, the international securities

marketplace is fast becoming a "global village" through the creation of a universal virtual

equity market.

Compared to the Western countries, online trading is still in its infancy in India. With

trading turnover at around Rs. 10 crores per day from online trading compared to a combined

gross turnover of around Rs. 9000-10,000 crores handled by the BSE and NSE together, online

trading has a long way to go.

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INTERNET TRADING IN INDIA:

In the past, investors had no option but to contact their broker to get real time access to market

data. The Net brings data to the investor on line and net broking enables him to trade on a

click. Now information has become easily accessible to both retail as well as big investors.

The development of broking in India can be categorized in 3 phases:

1. Stock brokers offering on their sites features such as live portfolio manager, live

quotes, market research and news to attract more investors.

2. Brokers offering on line broking and relationship management by providing and

offering analysis and information to investors during broking and non-broking hours

based on their profile and needs, that is, customized services.

3. Brokers (now e-brokers) will offer value management or services such as initial public

offerings on line, asset allocation, portfolio management, financial planning, tax

planning, insurance services and enable the investors to take better and well-considered

decisions.

In the US, 82 per cent of the deals are done on line. The European on line broking market is

expected to be of $8 billions and is likely to raise five fold by 2002. In India, presently Internet

trading can take place through the order routing system, which will route client orders to

exchanges trading systems for execution of trades on stock exchanges (NSE and BSE). This

will also require interface with banks to facilitate instant cash debit or credit and the depository

system for debit or credit of securities.

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OBJECTIVES OF INTERNET TRADING:

Increase transparency in the markets.

Enhance market quality through improved liquidity, by increasing quote continuity and

market depth.

Reduce settlement risks due to open trades, by elimination of mismatches.

Provide management information system (MIS).

Introduce flexibility in system, to handle growing volumes easily and to support

nationwide expansion of market activity.

Besides, through Internet trading three fundamental objectives of securities regulation

can be easily achieved, these are: Investor protection, creation of a fair and efficient

market and, reduction of the systematic risks.

PROCEDURE FOR INTERNET TRADING:

Step-1: Those investors interested in doing the trading over internet system, that is,

NEAT-ISX, should approach the brokers and register with the Stock Broker.

Step-2: After registration, the broker will provide to them a login name, password and a

personal identification number (PIN).

Step-3: Actual placement of an order. An order can then be placed by using the place

order window as under:

o First by entering the symbol and series of stock and other parameters such as

quantity and price of the scrip on the place order window.

o Second, fill in the symbol, series and the default quantity.

Step-4: It is the process of review. Thus, the investor has to review the order placed by

clicking the review option. He may also re-set to clear the values.

Step-5: After the review has been satisfactory; the order has to be sent by clicking on

the send option.

Step-6: The investor will receive an ``Order Confirmation'' message along with the

order number and the value of the order.

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Step-7: In case the order is rejected by the Broker or the Stock Exchange for certain

reasons such as invalid price limit, an appropriate message will appear at the bottom of

the screen. At present, a time lag of about ten seconds is there in executing the trade.

Step-8: It is regarding charging payment, for which there are different modes. Some

brokers will take some advance payment from the investors and will fix their trading

limits. When the trade is executed, the broker will ask the investor for transfer of funds

by the investor to his account.

The above figure shows how the internet trading procedure.

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FACTORS TO KEEP IN MIND WHILE SELECTING ONLINE

BROKERS:

Brokerage cost: It is important to weigh up the subscription and trading costs charged by an

online broker against benefits offered by the site. All online brokers display their charges on

their sites. Some make sure you find the charges easily, while with others you will have to

search a bit.

Safety: Please make sure site has 128-bit encryption to ensure safety of transaction online.

ICICIDirect.com, 5paisa.com are few sites with 128-bit encryption. You normally get a

secured Login id and password. It is always advisable to frequently change trading password.

Ideally online trading site should be fully integrated. The greater the backward integration, the

better it is for the customer. Ideally broking account, demat account and bank account should

be linked electronically.

Rate refresh: Rate refresh has to be real-time with no time lag. The speed and reliability

comes with huge investment in technology. It is always advisable to check rates of online

broking sites with BSE/ NSE terminal rates.

Speed of execution: System has to be fast and reliable that does just one job- executes your

trades. The last thing you need is a site that is heavily congested with the users who are

downloading heavy jpeg graphs or pulling the latest story why market is moving. The site

should be one click wonder where squaring off all your positions or canceling all your pending

orders takes one click and a confirmation of action.

Trading limit: For trading, all sites provide 4 times buy and sell limit against margin money

put in by customer. For delivery of shares, buying limit is equal to margin money put in by

customer. Couple of sites also provides margin funding for buying of shares.

Free trial period: Site should allow users free trial period to familiarize yourself with system

before you decide to become trading member of the site.

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SUCCESS FACTORS FOR E-BROKING:

There are three key success factors for e-broking,

(I) Scalability and robustness of the trading system:

The fundamental difference between the Internet as a transaction medium and the conventional

closed user group network is that the Net is a universal platform providing concurrent access to

infinite users at any given point in time.

Consequently, it becomes imperative for any Net-based application to have a proven capability

for scalability and robustness which ensures the ability to handle and process requests from

multiple users at any given point in time.

(ii) Bandwidth optimization:

In the Indian context where availability of a sufficient bandwidth is limited, the application

software should demonstrate intelligence in optimizing the available bandwidth by deploying

advanced technologies such as streaming.

(iii) Integration with third party systems:

On the Net, with information feeds available from multiple points, it is prudent to deploy

applications that are built on open architecture methodology for interfacing with third party

systems in the new Net age.

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CHALLENGES IN INTERNET TRADING:

For Internet trading to succeed, it is imperative to have both –

1. A robust business model and

2. Comprehensive technology strategy.

Some of the challenges are discussed: Transaction fulfillment--In the Net-based economy, it is

both prudent and essential for a broker/intermediary to offer total solution to the clients at a

single point. Total solutions would essentially mean offering interfaces with banks,

depositories, information feeds, etc. for efficiency in trade completion and reducing duplication

of client information. The service providers will have to go beyond the stage of mere order

execution and emerge as "informediaries" rather than "intermediaries". This will not only

ensure lower trading costs in terms of offering cross services but will also help in maximizing

RoIs.

A true Internet trading system should deliver cost effective transaction fulfillment at a single

point.

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FUTURE OF INTERNET TRADING:

International marketplaces are already witnessing re-alignments and changes with the

emergence of electronic communication networks (ECNs) such as INSTINET and ISLAND,

which are already contributing substantial business volumes to mainline exchanges such as

NASDAQ and the NYSE. Concurrently, exchanges worldwide are looking at striking strategic

alliances such as the Global Equity Market (GEM). With Net trading in securities and rapid

consolidation between multiple stock exchanges, the international securities marketplace is fast

becoming a "global village" through the creation of a universal virtual equity market.

Therefore the challenge for the technology providers is to develop and deploy advanced e-

trading tools and applications using electronic straight through processing technologies.

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MAJOR PLAYERS OF THE INDUSTRY

S. S. Kantilal Ishwarlal Securities Pvt. Ltd. (sharekhan.com):

Sharekhan, India’s leading stock broker is the retail arm of SSKI, and offers you depository

services and trade execution facilities for equities, derivatives and commodities backed with

investment advice tempered by decades of broking experience. A research and analysis team is

constantly working to track performance and trends. That’s why Sharekhan has the trading

products, which are having one of the highest success rates in the industry. Sharekhan is

having 240 share shops in 110 cities; the largest chain of retail share shops in India is of

Sharekhan.

In future, Sharekhan is planning to enter in Mutual funds, Insurance sector and banking sector

to expand beyond the market currently covered by it. And it has started MF (Mutual Funds) on

priority basis but wants to grow in it.

ICICI WEB TRADE LTD. (ICICIdirect.com):

ICICIdirect.com was the first entrant into e-broking. ICICdirect.com provides the 3-in-1 to

the users which ties in their saving bank account and their Demat account to their brokerage

account electronically. This integration ensures that money is transferred to/from their bank

account and the shares are transferred from/to their Demat account automatically without

writing any cheques or transfer instructions while carrying out their trades in shares.

ICICIdirect.com has the option of trading in shares in cash, margin or spot segments. An

investor can also invest in 14 Mutual Funds (Prudential ICICI MF, Franklin Templeton India

MF, Alliance Capital MF, JM MF, Birla Sun Life MF, Sundaram MF, IL&FS MF, Principal

MF, HDFC MF, Standard Chartered MF, Reliance Capital MF, Kotak Mahindra MF, TATA

MF and DSP MERRILL LYNCH MF) through their trading account.

ICICIdirect.com doesn’t provide the facility of trading in a traditional way.

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5Paisa.com:

5paisa is the trade name of India Infoline Securities Private Limited (5paisa), member of

National Stock Exchange and The Stock Exchange, Mumbai. 5paisa is a wholly owned

subsidiary of India Infoline Ltd, India’s leading and most popular finance and investment

portal. 5paisa has emerged as one of leading players in e-broking space in India.

The company’s brokerage is one of the lowest in the industry. It also provides the research on

commodities. Investors can benefit from its analysis and advice available at the click of the

mouse. For those who prefer to trade the traditional way, India Infoline investor points are

available across the country.

India Infoline was founded by a group of professionals in 1995. Its institutional investors

include Intel Capital, one of the leading technology companies in the world promoted by the

UK government, ICICI, TDA and Reeshanar. The company offers a slew of products such as

stock and derivatives broking, commodities broking and mutual funds.

KOTAK SECURITIES LIMITED (kotakstreet.com):

Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and Goldman

Sachs (holding 25% - one of the world’s leading investment banks and brokerage firms) is

India’s leading stock broking house with a market share of 5 - 6 %. Kotak Securities Ltd. has

been the largest in IPO distribution - It was ranked number One in 2003-04 as Book Running

Lead Managers in public equity offerings by PRIME Database. It has also won the Best Equity

House Award from Finance Asia - April 2004.

Kotak Securities Ltd is also a depository participant with National Securities Depository

Limited (NSDL) and Central Depository Services Limited (CDSL) providing dual benefit

services wherein the investors can use the brokerage services of the company for executing the

transactions and the depository services for settling them. The company has 42 branches

servicing around 1, 00,000 customers. Kotakstreet.com the online division of Kotak Securities

Limited offers Internet Broking services and also online IPO and Mutual Fund Investments.

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Kotak Securities Limited manages assets over 1700 crores under Portfolio Management

Services (PMS) which is mainly to the high end of the market. Kotak Securities Limited has

newly launched “Kotak Infinity” as a distinct discretionary Portfolio Management Service

which looks into the middle end of the market.

India Bulls:

Indiabulls is India's leading retail financial services company with 77 locations spread across

64 cities. Its size and strong balance sheet allows providing varied products and services at

very attractive prices, our over 750 Client Relationship Managers are dedicated to serving your

unique needs.

Indiabulls is lead by a highly regarded management team that has invested crores of rupees

into a world class Infrastructure that provides real-time service & 24/7 access to all information

and products. The Indiabulls Professional Network offers real-time prices, detailed data and

news, intelligent analytics, and electronic trading capabilities, right at your finger-tips. This

powerful technology is complemented by our knowledgeable and customer focused

Relationship Managers.

Indiabulls offers a full range of financial services and products ranging from Equities,

Derivatives, Demat services and Insurance to enhance wealth and to achieve the financial

goals.

MOTILAL OSWAL SECURITIES LTD. (MOSt):

One of the top-3 stock-broking houses in India, with a dominant position in both institutional

and retail broking, MOSt is amongst the best-capitalized firms in the broking industry in terms

of net worth. MOSt was founded in 1987 as a small sub-broking unit, with just two people

running the show. Focus on customer-first-attitude, ethical and transparent business

practices, respect for professionalism, research-based value investing and implementation of

cutting-edge technology have enabled it to blossom into a thousand-member team.

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The institutional business unit has relationships with several leading foreign institutional

investors (FIIs) in the US, UK, Hong Kong and Singapore. In a recent media report MOSt was

rated as one of the top-10 brokers in terms of business transacted for FIIs.

The retail business unit provides equity investment solutions to more than 50,000 investors

through 270 outlets spanning 150 cities and 22 states. MOSt provides Advice-Based Broking,

Portfolio Management Services (PMS), E-Broking Services, Depository Services,

Commodities Trading, and IPO and Mutual Fund Investment Advisory Services. Its Value

PMS Scheme gave a 160% post-tax return for the year ended March 2004.

In AsiaMoney Brokers Poll 2003 MOSt has been rated as the Best Domestic Research

House- Mega Funds ,while in 2000 and 2002 it has been rated as the Best Domestic Equity

Research House and Second best amongst Indian Brokerage firms respectively.

HDFC SECURITIES LTD (HDFCsec):

HDFCsec is a brand brought to you by HDFC Securities Ltd, which has been promoted by the

HDFC Bank & HDFC with the objective of providing the diverse customer base of the HDFC

Group and other investors a capability to transact in the Stock Exchanges & other financial

market transactions. The services comprise online buying and selling of equity shares on the

National Stock Exchange (NSE). Buying and selling of select corporate debt and government

securities on the NSE would be introduced in a subsequent phase. In a few months, they will

also start offering the following online trading services on the BSE and NSE:

1. Buying and selling of shares on the BSE

2. Arbitrage between NSE & BSE

3. Trading in Derivatives on the NSE

4. Margin trading products.

They are also planning to include buying and selling of Mutual Funds, IPO subscriptions,

Right issues, purchase of Insurance policies and asset financing.

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UTI SECURITIES LTD.: (UTISEL)

UTI Securities Ltd was incorporated on June 24, 1994 by Unit Trust of India as a 100%

subsidiary and on the repealing of the UTI Act, the capital is now held by the Administrator of

the Specified Undertaking of Unit Trust of India (ASUUTI). UTI Securities has been working

as an independent professional entity for providing financial intermediary and advisory

services to its corporate and retail clientele.

The Company has presence in major cities with 20 branches and 50 franchisees to service a

wide range of clients. The company has also invested in the joint-venture company with

Standard Chartered Bank viz. Standard Chartered UTI Securities (P) Ltd. that is engaged in

primary dealership and Government securities. The company is very soon going to start

Commodity Trading through its subsidiary, USEc Commodities Ltd, which provides facility of

commodity trading on NCDEX and MCX.

IDBI Capital Market Services Ltd.

IDBI Capital is a leading Indian securities firm offering a complete suite of products and

services to individual, institutional and corporate clients.

IDBI Capital Market Services Ltd. (IDBI Capital), a wholly owned subsidiary of Industrial

Development Bank of India (IDBI), is a leading Indian securities firm, offering a complete

suite of products and services to individual, institutional and corporate clients. The services

include fixed income trading, equities brokerage, debt and equity derivatives, research, private

placements, depository services, portfolio management and distribution of financial products.

Over the last five years, we have emerged as a leading player in each of these businesses.

March 1995 - Commenced Equity Broking on NSE CM segment

July 1995 - Built agent Distribution Network across the country

October 1996 - Commenced Debt Broking on NSE WDM segment

December 1996 - Started operations as a Depository Participant

1996 - Started to act as Arranger to Privately Placed Bond issues

April 1998 - Commenced operations as a Portfolio Manager

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February 1999 - Acquired membership of BSE, Mumbai

November 1999 - Started operations as a Primary Dealer

June 2000 - Acquired Derivatives memberships of BSE and NSE

March 2002 - Achieved an outright secondary market turnover exceeding Rs100,000 cr

in G-Secs

October 2002- Commenced trading in Interest Rate Swaps

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CHARGES PROVIDED BY THE DIFFERENT COMPANIES

FOR ONLINE ACCOUNTS:

(N.A. = Not Available)

Parameters

A/c Opening Fee Brokerage Interface

Trading

A/cDemat Delivery

Square

Off

Banks Associated

with

Sharekhan 750 NIL 0.50 0.10HDFC, UTI, OBC,

IDBI & Citibank

ICICI Direct 750 NIL 0.75 0.18 ICICI Bank

Indiabulls 750 250 0.40 0.10 N.A.

5 paisa 800 NIL 0.20 0.05

Citibank, HDFC,

OBC, UTI & ICICI

Bank

Kotak Street 500 N.A. 0.59 0.06Kotak Bank &

Citibank

HDFC Securities 700 NIL 0.50 0.15HDFC & Other 4

Banks

If we check the above table, we can come to know that the rates of Sharekhan is quite

competitive than other brokerage houses.

One other best point of Sharekhan is –if a person is having a online/offline trading account as

well as Demat account with Sharekhan, they won’t be charged any kind of Demat transfer

charges, which are charged when the shares are sold from the Demat account.

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COMPETITIVE ANALYSIS

Follower:

The followers are those who just blindly follow the other player which are leader

and challenges.

The players like 5 paisa, Motilal Oswal, HDFC Securities, Kotakstreet are the

followers.

LEADER:

ICICIdirect.com is a leader in the online account which is having 1, 24,000

accounts in the country.

While in offline account Sharekhan is leading with 64,000 offline accounts.

NICHER:

ICICIdirect.com and Kotakstreet.com are the two stock broking houses which are

focusing only on online investors.

CHALLENGER:

Sharekhan, Kotakstreet and Indiabulls come under this head.

Sharekhan challenges competitors by providing quality services and research based

advice.

Indiabulls is also challenging with low brokerage rates and class one services.

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ABOUT THE COMPANYSharekhan, the retail arm of the SSKI (Shrepal Sewaklal Kantilal Ishwarlal) Group offers

world-class facilities for buying and selling shares on BSE and NSE, demat services,

derivatives (F&O) and most importantly investment advice tempered by 85 years of research

and broking experience. A research and analysis team is constantly working to track

performance and trends. That’s why Sharekhan has the trading products, which are having one

of the highest success rates in the industry. You can avail of all its services at any of their 240

outlets in 110 cities, or through internet using their real time online trading terminals.

A part from Sharekhan, the SSKI Group also comprises of Institutional Broking and Corporate

Finance. The Institutional Broking division caters to domestic and foreign institutional

investors, while the Corporate Finance Division focuses on niche areas such as infrastructure,

telecom and media. SSKI has been voted as the Top Domestic Brokerage House in the research

category, twice by Euromoney survey and four times by Asiamoney survey. SSKI has been

voted the best domestic brokerage in India by Asiamoney Polls’ 2004.

Also SSKI is being rated as No. 1 Financial Researcher by Business Today, in the Survey

conducted on Lead Managers of all the Mutual Funds.

Basically, the company is a market leader in providing brokering services and has a high

turnover in it which makes it No.1 in the market. The main difference is the services that they

provide to the investors. The customer is managed with a friendly corporate culture to give him

a more benefited investment idea and motivate him whenever he needs. The company is

providing as many tips to the clients (pre-market, online and post-market) for more and more

trading ideas and the manager helps each client to concentrate on a few scripts so that he can

manage the profit/loss.

In future, Sharekhan is planning to enter in Mutual funds, Insurance sector and banking sector

to expand beyond the market currently covered by it. And it has started MF (Mutual Funds) on

priority basis but wants to grow in it.

To sum up, Sharekhan brings a user- friendly trading facility, coupled with a wealth of content

that will help customers stalk the right shares.

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SHAREKHAN IN ONLINE TRADING

Trading in stock markets through the Internet, which took a dip due to investor apathy because

of prolonged bearishness in recent years, is witnessing a revival of interest and is expected to

record growth in the coming years.

The retail investors in the capital market are the most neglected lot with no access to research

and Sharekhan, one of the oldest members of the BSE, seeks to fill this vacuum felt by retail

investors. The company had invested about Rs 13 crore in the last two years in creating the

requisite infrastructure by way of branches and for Internet trading. With presence in about 110

cities across the country now, it will seek to consolidate its presence in the current year and

focus on expanding its membership.

Sharekhan enjoyed about 20% market share in Web business (Internet trading) in stock

markets. Three years ago, Web trading showed lot of promise but with the market witnessing a

downturn, there was not much interest among retail customers. The company adds around

1,000 customers a month.

While his company has about 10,000 plus customers, ICICI Securities claimed to have 1.20

lakh customers and there were other players like HDFC too. But the number of active Web

traders would be in the 30,000-50,000 region. This number is growing at 5 to 10% a month and

this was a segment that could not be ignored. In Sharekhan, Web trading constituted about

1 per cent to 2 per cent of the revenue in 2001-02.

But in 2002-03, when the overall revenue trebled, the share of Web trading constituted

22% of the revenue. As Sharekhan's daily trading volume was over Rs 300 crore, the share of

Web trading at about Rs 40 crore a day was substantial and a larger part of the volume was

coming from day traders.

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The pricing for Web trading are expected to come down and once the investment was made on

technology, the scalability would be high and there is minimum involvement of staff in dealing

with customers. The crediting of the sale/purchase orders would be fast with no physical

handling as the system does every work.

Sharekhan has already obtained license to offer Portfolio Management Services (PMS). It was

offering a range of products to suit retail investors and PMS when launched, would cater to the

requirements of the high net-worth individuals. The entry-level investment for PMS

membership may be around Rs 5 - Rs 10 lakhs, which was needed for having a well-diversified

portfolio.

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SHAREKHAN DEPOSITORY SERVICES

Dematerialization and trading in the demat mode is the safer and faster alternative to the

physical existence of securities. Demat as a parallel solution offers freedom from delays, thefts,

forgeries, settlement risks and paper work. This system works through depository participants

(DPs) who offer demat services and the securities are held in the electronic form for the

investor directly by the Depository.

Sharekhan Depository Services offers dematerialization services to individual and corporate

investors. Sharekhan is a registered Depository Participant (DP) with National Securities

Depository Ltd. (NSDL). It has a team of professionals and the latest technological expertise

dedicated exclusively to our demat department, apart from a national network of franchisee,

making our services quick, convenient and efficient. At Sharekhan, the commitment is to

provide a complete demat solution which is simple, safe and secure.

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RESEARCH BASED ADVICE

Every investor’s needs and goals are different. To meet these needs, Sharekhan provides a

comprehensive set of research reports, so that one can take the right investment decisions

regardless of their investing preferences! The Research and Development at Sharekhan is done

at its Head office Mumbai.

The R&D department Head Mr. Hemang Jani forwards all the details regarding all stocks and

scripts to all the branches through Internet. At the end of each trading day there is a

Teleconference, through which the R&D department Head MR. Hemang Jani talks with each

Branch heads and discusses about each day’s closing position and shows their predictions

about next day’s opening position. The quarries regarding stock positions and other relevant

matter of the branch heads of each branch is being solved through teleconference.

The various publications of Sharekhan viz. Derivatives Digest, Sharekhan’s Valueline, Eagle

eye, High Noon, Investor’s Eye, Commodities Buzz, Commodities Beat, Commodity Trader’s

corner, Sharekhan Xclusive, etc. are being prepared by the research team of Sharekhan made

up of highly experienced people from diverse field. These all publication provides:

In-depth analysis of the markets

Analysis Before, During (live market updates) and After market timings

Special sector tracking reports sent regularly

STOCK IDEAS

Stock Ideas is aimed at Sharekhan's trading clients. It presents our best stock picks in today's

market. We categorize these companies into six clusters to help you identify the stocks that fit

your time horizons and return objectives the best. Each cluster represents a certain profile 

in terms of business fundamentals as well as the kind of returns you can expect of it over a

certain time horizon.

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STOCK CLUSTERS

Sharekhan categorise all the scripts that are under coverage into 6 clusters. Each cluster

represents a certain profile in terms of business fundamentals as well as the kind of returns you

can expect over a certain time horizon. This help in identifying the stocks that fit your time

horizons and return objectives best. The six clusters are: Evergreen, Apple Green,

Emerging Star, Ugly Duckling, Vulture's Pick and Cannonball.

EVERGREEN

These stocks are steady compounders, churning out steady growth rates year on year. They are

typically significant players in their markets, with sound strategies that will help them achieve

and sustain market dominance in the long run. They have strong brands, management

credentials and a consistent track record of achieving super normal shareholder returns. We

expect stocks in this category to compound at between 18-20% per annum for the next five to

ten years. Also called ownership stocks, Evergreen stocks are the brightest jewels in any

portfolio.

APPLE GREEN

These are stocks that have the potential to be steady compounders and are attempting to move

upwards, to turn Evergreen. They rank a shade below the Evergreen companies, only because

their potential in the five to ten years' time is still not very clear, although they might grow at

rates faster than that of the Evergreen stocks in the next year or two. They could grow at 25-

30% per annum over the next two to three years.

EMERGING STAR

These are typically young companies, often in niche businesses, that have the potential to grow

and dominate their niches. Even better, they might turn out to be real giants, if their niches

explode into full-blown markets in their own rights. These stocks are potential ten-baggers but

you need to be patient.

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UGLY DUCKLING

These are companies that are trading below their fair value or at values which are at a

significant discount to that of their peer group, due to a combination of circumstances. But

things are now starting to happen in these companies or in their markets that are likely to cause

a re-evaluation of their prospects. These stocks could double in two to three years' time.

VULTURE'S PICK

These are companies with valuable assets or brands that have been trashed to ridiculously low

prices. Buy a Vulture's Pick and wait for a predator who finds its assets undervalued to come

along. This could be a long wait but the returns could be startlingly high.

CANNONBALL

Season's favourites! Typically they are fast gainers in a rising market, which could give returns

of 20-40% within three months. These are based on a combination of sound market

information, technical charts and available fundamentals for investors which are having an

appetite for high risk and high reward.

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COMMODITY TRADING

Sharekhan is providing the facility to trade with the commodities through MCX (Multi-

Commodity Exchange) and NCDEX (National Commodities & Derivatives Exchange).

The commodities market in India is an emerging market, which will become the largest market

in the world within the next 5 years, as the trends in the commodities market shows its

performance. The company also provides research reports on daily, weekly and monthly basis

for the investors in the commodities. It is just like the futures and is having a fixed lot of goods

with the margin for each commodity and the trading is based on the theory of futures and

therefore, it is also called Vayda Market. In short Sharekhan also provides brokering in

commodities and the brokerage charges are 0.10% on total trade value and if carry forwarded

an additional 0.02% charge on total trade.

ONLINE IPO

Online IPO (Initial Public Offering) is a new service started by Sharekhan for providing the

application form of any company’s issues of shares just like the TCS issue can be subscribed

by filling an online form to reduce the paper work and the fund transfer facility is also

provided to the clients for transferring the funds online. It is given on its web-site for helping

the clients who are not able to collect the forms manually and the speed of filling and reducing

the risk of misplacing of forms, not reaching in time, etc.

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PRODUCTS of SHAREKHANSharekhan’s products are basically divided into online and offline products.

OFF-LINE TRADING ACCOUNT:

The Off-Line account is trading account through which one can buy and sell through his/her

telephone or by personal visit at sharekhan shop. This a/c is for those who are not comfortable

with computer and want to trade.

ON-LINE TRADING ACCOUNT:

The Online trading facilities provided by Sharekhan is basically divided into two types of

accounts, viz. Classic Account and Speed trade Plus and Streamer.

1. Classic Account

The CLASSIC ACCOUNT is a Sharekhan online trading account, through which one can buy

and sell shares through our website www.sharekhan.com in an instant.

Along with enabling access for you to trade online, the CLASSIC ACCOUNT also gives you

our Dial-n-Trade service. With this service, all you have to do is dial 1-600-22-7050 to buy

and sell shares using your phone.

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Sharekhan

Off-Line On-Line

Classic Speed Trade

9 Features of the CLASSIC ACCOUNT that enable you to invest effortlessly

1. Online trading account for investing in Equities and Derivatives via sharekhan.com

2. Integration of: Online trading + Bank + Demat account

3. Instant cash transfer facility against purchase & sale of shares

4. Reasonable transaction charges

5. Instant order and trade confirmation by e-mail

6. Streaming quotes

7. Personalized market watch

8. Single screen interface for cash, derivatives and more

9. Provision to enter price trigger and view the same online in market watch

2. SPEED TRADE PLUS

SPEEDTRADE PLUS is an internet-based software application that enables you to buy and

sell shares in an instant. It’s ideal for active traders and jobbers who transact frequently during

day's trading session to capitalize on intra-day price movements.

Speed Trade Plus also provides the features of and functionality of trading in derivatives from

the same single-screen interface.

7 Features of Speed trade Plus that enable you to trade effortlessly

1. Instant order Execution & Confirmation

2. Single screen trading terminal

3. Real-time streaming quotes, tic-by-tic charts

4. Market summary (most traded scrip, highest value)

5. Hot keys similar to a brokers terminal

6. Alerts and reminders

7. Back-up facility to place trades on Direct Phone lines

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CHARGES OF DIFFERENT TRADING ACCOUNTS:

Off-LineRs.300 Demat A/c charge +

10,000 Deposits

Deposits will be in Cash or In term

of Group A’s Shares

Classic Rs.750 (one time)Demat free for 1 year (other

facilities included)

Speed Trade Plus Rs.1,000 (one time)Online trading on your pc with

Demat free and other facilities

The various benefits the client gets from the online trading are:

Freedom from Paperwork: Integrated trading, bank and Demat account (auto pay-in

and pay-out of securities) with digital contracts removes all paperwork.

Instant Credit And Transfer: Instant transfer of funds from bank accounts of client’s

choice to his/her Sharekhan trading account.

Trade Anywhere: Enjoy the ease of trading from any part of the world in a completely

secure environment.

Dial n Trade: Call Sharekhan on a toll free number to place orders through Sharekhan’s

tele-brokers.

Timely Advice: Make informed decisions with expert advice, investment calls and live

market commentary.

Real-Time Portfolio Tracking: Benefit from real-time information of your investment

and current portfolio value.

After-Hour Orders: The Client can place orders after the market hours, which get

executed as soon as markets open.

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ABOUT DERIVATIVES

INTRODUCTIONKeeping in view the experience of even strong and developed economies the world over, it is

no denying the fact that financial market is extremely volatile by nature. Indian financial

market is not an exception to this phenomenon. The attendant risk arising out of the volatility

and complexity of the financial market is an important concern for financial analysts. As a

result, the logical need is for those financial instruments which allow fund managers to better

manage or reduce these risks.

With gradual liberalization of Indian financial system and the growing integration among

markets, the risks associated with operations of banks and All India Financial Institutions have

become increasingly complex, requiring strategic management. In keeping with spirit of the

guidelines on Asset-Liability Management (ALM) systems and on integrated risk management

systems, it is very much required to design risk management architecture, taking into

consideration the size, complexity of business, risk philosophy, market perception and the level

of capital. In addition, fine-tuning the risk management system to deal with credit and market

risk is also the need of the hour. For enabling the banks and the financial institutions, among

others, to manage their risk effectively, the concept of derivatives comes into picture.

The emergence of the market for derivative products, most notably forwards, futures and

options, can be traced back to the willingness of risk-averse economic agents to guard

themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,

the financial markets are marked by a very high degree of volatility. Through the use of

derivative products, it is possible to partially or fully transfer price risks by locking–in asset

prices. As instruments of risk management, these generally do not influence the fluctuations in

the underlying asset prices. However, by locking-in asset prices, derivative products minimize

the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-

averse investors.

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WHAT ARE DERIVATIVES??

A derivative is a financial instrument, which derives its value from some other financial price.

This “other financial price” is called the underlying. The underlying asset can be equity,

FOREX, commodity or any other asset.

A wheat farmer may wish to contract to sell his harvest at a future date to eliminate the risk of

a change in prices by that date. The price for such a contract would obviously depend upon the

current spot price of wheat. Such a transaction could take place on a wheat forward market.

Here, the wheat forward is the “derivative” and wheat on the spot market is “the underlying”.

The terms “derivative contract”, “derivative product”, or “derivative” are used

interchangeably. The most important derivatives are futures and options.

Example: -

A very simple example of derivatives is curd, which is derivative of milk. The price of curd

depends upon the price of milk, which in turn depends upon the demand, and supply of milk.

See it this way. American depository receipts/ global depository receipts of ICICI, Satyam and

Infosys traded on stock exchanges in the USA and England have their own values? No. They

draw their price from the underlying shares traded in India.

Consider how the value of mutual fund units changes on a day-to-day basis. Don’t mutual fund

units draw their value from the value of the portfolio of securities under the schemes? Aren’t

these examples of derivatives? Yes, these are. And you know what, these examples prove that

derivatives are not so new to us. Nifty options and futures, Reliance futures and options,

Satyam futures and options etc are all examples of derivatives. Futures and options are the

most common and popular form of derivatives.

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HISTORYThe derivatives markets has existed for centuries as a result of the need for both users and

producers of natural resources to hedge against price fluctuations in the underlying

commodities. India has been trading derivatives contracts in silver, gold, spices, coffee, cotton

and oil etc for decades in the gray market. Trading derivatives contracts in organized market

was legal before Morarji Desai’s government banned forward contracts. Derivatives on stocks

were traded in the form of “Teji” and “Mandi” in unorganized markets. Recently futures

contract in various commodities was allowed to trade on exchanges. In June 2000, NSE and

BSE started trading in futures on Sensex and Nifty. Options trading on Sensex and Nifty

commenced in June 2001. Very soon thereafter trading began on options and futures in 31

prominent stocks in the month of July and November respectively. The market lots keeps on

changing from time to time. The minimum quantity you can trade in is one market lot.

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DERIVATIVES: AN INDIAN CONTEXT:

In Indian context, the intensity of derivatives usage by institutional investors (viz. Banks,

Financial Institution; Mutual Funds, Foreign Institutional Investors, Life and General Insurers)

depend on their ability and willingness to use derivatives for one or more of the following

purposes:

Risk containment: using derivatives for hedging and risk containment purposes

Risk Trading/Market Making: Running derivatives trading book for profits and

arbitrage; and/or

Covered Intermediation: On-balance-sheet derivatives intermediation for client

transaction, without retaining any net-risk on the balance sheet (except credit risks).

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TYPES OF DERIVATIVES

Derivative as a term conjures up visions of complex numeric calculations, speculative dealings

and comes across as an instrument which is the prerogative of a few ‘smart finance

professionals’. In reality it is not so. In fact, a derivative transaction helps cover risk, which

would arise on the trading of securities on which the derivative is based and a small investor

can benefit immensely. “A derivative security can be defined as a security whose value

depends on the values of other underlying variables.” Very often, the variables

underlying the derivative securities are the prices of traded securities.

Derivatives and futures are basically of 3 types:

Forwards and Futures

Options

Swaps

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DERIVATIVESDERIVATIVES

OptionsOptions FuturesFutures SwapsSwaps ForwardsForwards

CommodityCommodity SecuritySecurity

Interest RateInterest Rate CurrencyCurrencyPutPut CallCall

FORWARDS: A forward contract is the simplest mode of a derivative transaction. It is an agreement to

buy or sell an asset (of a specified quantity) at a certain future time for a certain price. No

cash is exchanged when the contract is entered into.

Illustration: - Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it

outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will

rise 3 months from now. So in order to protect himself from the rise in prices Shyam enters

into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,000.

What Shyam is doing is that he is locking the current price of a TV for a forward contract. The

forward contract is settled at maturity. The dealer will deliver the asset to Shyam at the end of

three months and Shyam in turn will pay cash equivalent to the TV price on delivery.

FUTURE S :

It is an agreement between two parties to buy or sell an asset at a certain time in the

future at a certain price through exchange traded contracts.

A Future represents the right to buy or sell a standard quantity and quality of an asset or

security at a specified date and price. Futures are similar to Forward Contracts, but are

standardized and traded on an exchange, and are valued, or "Marked to Market” daily. The

Marking to Market provides both parties with a daily accounting of their financial obligations

under the terms of the Future. Unlike Forward Contracts, the counterparty to a Futures contract

is the clearing corporation on the appropriate exchange. Futures often are settled in cash or

cash equivalents, rather than requiring physical delivery of the underlying asset. Parties to a

Futures contract may buy or write Options on Futures.

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OPTION S: An option is a contract, which gives the buyer the right, but not the obligation to buy or

sell shares of the underlying security at a specific price on or before a specific date.

‘Option’, as the word suggests, is a choice given to the investor to either honor the contract; or

if he chooses not to walk away from the contract. There are two kinds of options: Call Options

and Put Options.

A Call Option is an option to buy a stock at a specific price on or before a certain date. When

you buy a Call option, the price you pay for it, called the option premium, secures your right to

buy that certain stock at a specified price called the strike price. If you decide not to use the

option to buy the stock, and you are not obligated to, your only cost is the option premium.

Put Options are options to sell a stock at a specific price on or before a certain date. In this

way, Put options are like insurance policies. With a Put Option, you can "insure" a stock by

fixing a selling price. If something happens which causes the stock price to fall, and thus,

"damages" your asset, you can exercise your option and sell it at its "insured" price level. If the

price of your stock goes up, and there is no "damage," then you do not need to use the

insurance, and, once again, your only cost is the premium.

Technically, an option is a contract between two parties. The buyer receives a privilege for

which he pays a premium. The seller accepts an obligation for which he receives a fee.

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CALL OPTIONS

Call options give the taker the right, but not the obligation, to buy the underlying shares at a

predetermined price, on or before a predetermined date.

Illustration: - Raj purchases 1 Satyam Computer (SATCOM) AUG 150 Call --Premium 8

This contract allows Raj to buy 100 shares of SATCOM at Rs 150 per share at any time

between the current date and the end of next August. For this privilege, Raj pays a fee of Rs

800 (Rs eight a share for 100 shares).

The buyer of a call has purchased the right to buy and for that he pays a premium.

Now let us see how one can profit from buying an option; Sam purchases a December call

option at Rs 40 for a premium of Rs 15. That is he has purchased the right to buy that share for

Rs 40 in December. If the stock rises above Rs 55 (40+15) he will break even and he will start

making a profit. Suppose the stock does not rise and instead falls he will choose not to exercise

the option and forego the premium of Rs 15 and thus limiting his loss to Rs 15.

Call Options-Long & Short Positions When you expect prices to rise, then you take a long position by buying calls. You are bullish.

When you expect prices to fall, then you take a short position by selling calls. You are bearish.

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PUT OPTIONS

A Put Option gives the holder of the right to sell a specific number of shares of an agreed

security at a fixed price for a period of time.

Illustration:- Raj is of the view that the a stock is overpriced and will fall in future, but he

does not want to take the risk in the event of price rising so purchases a put option at Rs 70 on

‘X’. By purchasing the put option Raj has the right to sell the stock at Rs 70 but he has to pay a

fee of Rs 15 (premium).

So he will breakeven only after the stock falls below Rs 55 (70-15) and will start making profit

if the stock falls below Rs 55.

Put Options-Long & Short Positions When you expect prices to fall, then you take a long position by buying Puts. You are bearish.

When you expect prices to rise, then you take a short position by selling Puts. You are bullish.

CALL OPTIONS PUT OPTIONS

If you expect a fall in price(Bearish) Short Long

If you expect a rise in price (Bullish) Long Short

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COMMODITIES MARKET IN INDIAOrganized futures market evolved in India by the setting up of "Bombay Cotton Trade

Association Ltd." in 1875. In 1893, following widespread discontent amongst   leading cotton

mill owners and merchants over  the  functioning of the Bombay Cotton Trade Association, a

separate association by the name "Bombay Cotton Exchange Ltd." was constituted. Futures

trading in oilseeds was organized in  India  for the first time with the setting up of Gujarati

Vyapari Mandali  in 1900, which carried on futures trading in groundnut , castor seed  and

cotton. Before the Second World War broke out in 1939 several futures markets in oilseeds

were functioning in Gujarat and Punjab.

There were booming activities in this market and at one time as many as 110 exchanges were

conducting forward trade in various commodities in the country. The securities market was a

poor cousin of this market as there were not many papers to be traded at that time.

The era of widespread shortages in many essential commodities resulting in inflationary

pressures and the tilt towards socialist policy, in which the role of market forces for resource

allocation got diminished, saw the decline of this market since the mid-1960s. This coupled

with the regulatory constraints in 1960s, resulted in virtual dismantling of the commodities

future markets. It is only in the last decade that commodity future exchanges have been

actively encouraged. However, the markets have been thin with poor liquidity and have not

grown to any significant level.

A three-pronged approach has been adopted to revive and revitalize the market. Firstly, on

policy front many legal and administrative hurdles in the functioning of the market have been

removed. Forward trading was permitted in cotton and jute goods in 1998, followed by some

oilseeds and their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc. in

1999. A statement in the first ever National Agriculture Policy, issued in July, 2000 by the

government that futures trading will be encouraged in increasing number of agricultural

commodities was indicative of welcome change in the government policy towards forward

trading.

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Secondly, strengthening of infrastructure and institutional capabilities of the regulator and the

existing exchanges received priority. Thirdly, as the existing exchanges are slow to adopt

reforms due to legacy or lack of resources, new promoters with resources and professional

approach were being attracted with a clear mandate to set up demutualised, technology driven

exchanges with nationwide reach and adopting best international practices.

The year 2003 marked the real turning point in the policy framework for commodity market

when the government issued notifications for withdrawing all prohibitions and opening up

forward trading in all the commodities. Of the country's total GDP, commodities related

(and dependent) industries constitute about roughly 50-60 %, which itself cannot be

ignored.

Most of the existing Indian commodity exchanges are single commodity platforms; are

regional in nature, run mainly by entities which trade on them resulting in substantial conflict

of interests, opaque in their functioning and have not used technology to scale up their

operations and reach to bring down their costs. But with the strong emergence of: National

Multi-commodity Exchange Ltd., Ahmedabad (NMCE), Multi Commodity Exchange

Ltd., Mumbai (MCX), National Commodities and Derivatives Exchange, Mumbai

(NCDEX), and National Board of Trade, Indore (NBOT), all these shortcomings will be

addressed rapidly. These exchanges are expected to be role model to other exchanges and are

likely to compete for trade not only among themselves but also with the existing exchanges.

The current mindset of the people in India is that the Commodity exchanges are

speculative (due to non delivery) and are not meant for actual users. One major reason being-

the awareness is lacking amongst actual users. In India, Interest rate risks, exchange rate

risks are actively managed, but the same does not hold true for the commodity risks. Some

additional impediments are centered on the safety, transparency and taxation issues.

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NCDEX (NATIONAL COMMODITIES AND DERIVATIVES

EXCHANGE)

NCDEX started working on 15th December, 2003. This exchange provides facilities to their

trading and clearing member at different 130 centers for contract.

In commodity market the main participants are speculators, hedgers and arbitrageurs.

Promoters of NCDEX are

National Stock Exchange(NSE)

ICICI bank

Life Insurance Corporation(LIC)

National Bank for Agricultural and Rural Development (NABARD)

IFFICO

Punjab National Bank (PNB)

CRISIL

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WHY NCDEX?

NCDEX is nationalized screen based system which is providing transparent, private

and easy services.

NCDEX is one of the traditional media which gives online information

NCDEX is one of the Indian commodity exchange, constructed on the basis of the

current national institutes the exchange has been established with the coloration of

leading institutes like NABARD, LIC, NSI etc….

In India NCDEX has maximum settlement guarantee fund.

NCDEX has appointed two exports for checking quality at the time of delivery

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FACILITIES PROVIDED BY NCDEX

NCDEX has developed facility for checking of commodity and also provides a wear

house facility

By collaborating with industrial partners, industrial companies, news agencies, banks

and developers of kiosk network NCDEX is able to provide current rates and contracts

rate.

To prepare guidelines related to special products of securitization NCDEX works with

bank.

To avail farmers from risk of fluctuation in prices NCDEX provides special services for

agricultural.

NCDEX is working with tax officer to make clear different types of sales and service

taxes.

NCDEX is providing attractive products like “weather derivatives”

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MCX (MULTI COMMODITY EXCHANGE)

MULTI COMMODITY EXCHANGE of India limited is a new order exchange with a mandate

for setting up a nationwide, online multi-commodity marketplace, offering unlimited growth

opportunities to commodities market participants. As a true neutral market, MCX has taken

several initiatives for users

In a new generation commodities futures market in the process, become the country’s premier

exchange.

MCX, an independent and a de-mutualized exchange since inception, is all set up to introduce

a state of the art, online digital exchange for commodities futures trading in the country and

has accordingly initiated several steps to translate this vision into reality.

MARKET WATCH:

The market watch window is used to view the market details for a particular or group of

contracts and for a particular instrument type. This window displays the following details:

Symbol,Expiry,price quotation unit, buy qty, buy price, sell price, sell qty, last traded

price,D.P.R,volume (in 000’s), value (in lac),% change,

average trade price, high, low, open, close & open interest.

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ARE COMMODITIES SUITABLE FOR FUTURE TRADING??

The following are some of the key factors, which decide the suitability of the commodities for

future trading: -

The commodity should be competitive, i.e., there should be large demand for and

supply of the commodity - no individual or group of persons acting in concert should

be in a position to influence the demand or supply, and consequently the price

substantially.

There should be fluctuations in price.

The market for the commodity should be free from substantial government control.

The commodity should have long shelf life and be capable of standardization and

gradation.

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ITEMS TRADED ON MCX

Bullion: Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI

Oil & Oil Seeds : Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD

Palmolein, Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil, Cottonseed

Oilcake, Cottonseed

Spices: Pepper, Red Chili, Jeera, Turmeric

Metal: Steel Long, Steel Flat, Copper, Nickel, Tin

Fibre: Kapas, Long Staple Cotton, Medium Staple Cotton

Pulses: Chana, Urad, Yellow Peas, Tur

Cereals: Rice, Basmati Rice, Wheat, Maize, Sarbati Rice

Energy: Crude Oil

Others: Rubber, Guar Seed, Gur, Guargum Bandhani, Guargum, Cashew Kernel, Guar seed

Bandhani

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WHY TO TRADE IN COMMODITY FUTURES??

Commodity Futures, which forms an essential component of Commodity Exchange, can be

broadly classified into precious metals, agriculture, energy and other metals. Current futures

volumes are miniscule compared to underlying spot market volumes and thus have a

tremendous potential in the near future.

Futures trading in commodities results in transparent and fair price discovery on account of

large-scale participations of entities associated with different value chains. It reflects views and

expectations of a wider section of people related to a particular commodity. It also provides

effective platform for price risk management for all segments of players ranging from

producers, traders and processors to exporters/importers and end-users of a commodity.

It also helps in improving the cropping pattern for the farmers, thus minimizing the losses to

the farmers. It acts as a smart investment choice by providing hedging, trading and arbitrage

opportunities to market players. Historically, pricing in commodities futures has been less

volatile compared with equity and bonds, thus providing an efficient portfolio diversification

option.

Raw materials form the most key element of most of the industries. The significance of raw

materials can further be strengthened by the fact that the "increase in raw material cost means

reduction in share prices". In other words "Share prices mimic the commodity price

movements". Today, Industry in India runs the raw material price risk; hence going forward

the industry can hedge this risk by trading in the commodities market.

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HEDGING Hedging is a sophisticated mechanism, which provides the necessary immunity to the above

interests in the marketing of commodities from the risk of adverse price fluctuations.

A Hedge is a countervailing contract transacted in a futures market through which those who

have bought in the ready market will sell in the futures market and those who have sold in the

ready market would buy in the futures market. In each of these two cases, a purchase in the

ready market is off-set by an opposite sale in the futures market and a sale in the ready market

is off-set by purchase in the futures market.

When the purchase or sale commitment in the ready market is fulfilled, the sale or purchase

hedge contract is closed out by an offsetting reverse purchase or sale contract in the futures

market.

The practice of hedging is based on the assumption that the ready and futures prices of the

commodity move more or less parallel to each other. The ready and futures prices of a

commodity ordinarily do move together in sympathy with each other because both ready and

futures prices are basically determined by the demand and supply factors of that particular

commodity. When the price of a commodity has declined in the ready market, its price in the

futures market would normally have also declined so that the loss incurred in the ready market

would be recovered by the profit made in the futures market.

Similarly, if the price rises in the ready market after the hedge sale had been entered into the

futures market, there would be a loss in the futures market, which would, however, be made up

with the profit made in the ready market. But, in certain circumstance, the ready and futures

prices may not move together or the spread between the two may increase or decrease sharply .

To the extent that they do not move together by the same extent, hedging itself may be a source

of minor gains or losses. But a dealer, manufacturer or exporter is not, per se, interested in such

speculative losses or gains. His only interest is to ensure that he gets the necessary insurance

against unforeseen fluctuation in prices. By and large, hedging in a futures market does afford

such a protection to the various functionaries.

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REGULATORY BODY

The Forward Markets Commission (FMC) is the regulatory body for commodity

futures/forward trade in India. The commission was set up under the Forward Contracts

(Regulation) Act of 1952. It is responsible for regulating and promoting futures/forward trade

in commodities. The FMC is headquartered in Mumbai while its regional office is located in

Kolkata. Curbing the illegal activities of the diehard traders who continued to trade illegally is

the major role of the Forward Markets Commission.

WHY TO TRADE IN COMMODITIES?

India has very large agriculture production in number of Agri-commodities, which needs use

of futures and derivatives as price-risk management system.

Fundamentally price you pay for goods and services depend greatly on how well business

handle risk. By using effectively futures and derivatives, businesses can minimize risks, thus

lowering cost of doing business. Commodity players use it as a hedge mechanism as well as a

means of making money. For e.g. in the bullion markets, players hedge their risks by using

futures Euro-Dollar fluctuations and the international prices affecting it.

For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the

issues in price dissemination, standards, certification and warehousing are bound to occur.

Commodity Market will serve as a suitable alternative to tackle all these problems efficiently.

PROBLEMS FACED BY COMMODITIES MARKETS IN INDIA

Institutional issues have resulted in very few deliveries so far. Currently, there are a lot of

hassles such as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkata,

transportation costs, octroi duty, logistical problems prevent trading to take place. Exchanges

are used only to hedge price risk on spot transactions carried out in the local markets. Also

multiple restrictions exist on inter-state movement and warehousing of commodities.

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RISKS ASSOCIATED WITH COMMODITIES MARKETS

No risk can be eliminated, but the same can be transferred to someone who can handle it better

or to someone who has the appetite for risk. Commodity enterprises primarily face the

following classes of risks, namely: the price risk, the quantity risk, the yield/output risk and the

political risk. Talking about the nationwide commodity exchanges, the risk of the counter party

(trading member, client, vendors etc) not fulfilling his obligations on due date or at any time

thereafter is the most common risk.

This risk is mitigated by collection of the following margins: -

Initial Margins

Exposure margins

Market to market of positions on a daily basis

Position Limits and Intra day price limits

Surveillance

Commodity price risks include: -

Increase in purchase cost vis-à-vis commitment on sales price

Change in value of inventory

Counter party risk translating into commodity price risk

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EXPECTATIONS FROM COMMODITIES EXCHANGES

The following are some of the key expectations of the investor's w.r.t. any commodity

exchange: -

To get in place the right regulatory structure to even out the differences that may exist

in various fields.

Proper Product Conceptualization and Design.

Fair and Transparent Price Discovery & Dissemination.

Robust Trading & Settlement systems.

Effective Management of Counter party Credit Risk.

Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of

Members, Enforcement of Exchange rules.

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FUTURE OF COMMODITY TRADING

With the gradual withdrawal of the government from various sectors in the post-liberalization

era, the need has been felt that various operators in the commodities market be provided with a

mechanism to hedge and transfer their risks. India's obligation under WTO to open agriculture

sector to world trade would require futures trade in a wide variety of primary commodities and

their products to enable diverse market functionaries to cope with the price volatility prevailing

in the world markets. Government subsidy may go down as a result of WTO. The MSP

programme will not be sustainable in such a scenario. The farmer will have to look at ways of

being in a position to trade on commodity exchanges in future. Also, corporates will feel the

pressure to hedge their price risk once the frontiers open up for free trade.

Indian markets have recently thrown open a new avenue for retail investors and traders to

participate: commodity derivatives. For those who want to diversify their portfolios beyond

shares, bonds and real estate, commodities are the best option.

Following are some of the applications, which can utilize the power of the commodity markets

and create a win-win situation for all the involved parties: -

1. Regulatory Approval / Permission to FII's for trading in the Commodity

Markets: FII's are currently not allowed nor disallowed under any law. As, they have added

depth to the equity markets; they will add depth to the commodities markets, since they

globally know the commodities.

2. Active Involvement of Mutual Fund Industry in India: Currently Mutual

Funds are prohibited from not using derivatives apart from hedging. Mutual Funds as investors

can invest in gold and get returns as they get from debt instruments, equity markets. AMFI &

SEBI need to collectively work towards the same. Launch of the "Commodity Funds", by the

Mutual Funds in India, can serve as a newer investment avenue for investors.

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3. Online commodity trading: Online commodity trading offers a way for an open,

many-to-many system, where every user has equal access to price quotes and trading

functionality. It provides a level playing field for all, without favoritism or control by a chosen

few, where any user can view all quotes posted by other users in real time, act or trade on

quotes posted by others, post their own prices and quantities for others to trade

The Online commodity trading site usually lists a large number of unique products covering a

variety of commodities, structures, and settlement terms ranging from Oil, Natural Gas,

Electric Power, Precious Metals, Emissions and Weather. It provides for various media ranging

from Physical Delivery and Financial Cash Settlement. The greatest advantage of an online

system for trading is that just a click can be used to hit a bid or lift an offer. The Online

trading system operates almost continuously around the clock, 24 hours a day, seven days a

week. This allows any user to extend the trading day, and easily pass the trading objectives to

others in companies in different time zones.

There are further derivative options available ranging from Forwards, Swaps, Options,

Spreads, Differentials, Complex Derivatives.

Liquidity, or trade activity, is perhaps the best measure of success of an online trading

commodity trading system. With most online commodity trading systems, traders can be sure

of finding an interesting market development or trading opportunity almost every time they log

on.

All quotes posted by users on any online commodity trading systems are live and firm. They

can be acted on with full assurance of a completed transaction. The greatest advantage of an

online system for trading is that just a click can be used to hit a bid or lift an offer.

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The Online trading system operates almost continuously around the clock, 24 hours a day,

seven days a week. This allows any user to extend the trading day, and easily pass the trading

objectives to others in companies in different times zones.

The online commodity trading system in India is only an emerging segment yet. This is

because the Internet boom in Indian is on the rise only now. The Internet charges are becoming

minimal and the Internet is soon becoming a way of life in India. It is in this scenario that

online trading is becoming more the way of trading in India.

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SHAREKHAN COMMODITY ADVANTAGE

KEY BENEFITS OF COMMODITIES@ SHAREKHAN:

You are getting 20time exposer in MCX &10 time in NCDEX depends on commodity to open

an account

We have sms facility where u getting market information as well as buy/sell call

You are also getting yahoo chat,Where our dealer/RM are always help for market information

as well as buy/sell call

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62

WHY THIS STUDY IS CONDUCTED??

In the Rajkot City, Most of the investors trade in equity while Derivatives & Commodities

segment remain inaccessible.

There are very few people in Rajkot who are trading in Derivatives & Commodities while

there are immense opportunities for the development of these segments.

Sharekhan as a stock broking company needs to focus on increasing the awareness about

derivatives & commodities. Because, if trading on these instruments will increase, Sharekhan

will also be benefited by earning revenue in term of Brokerage. This was the main reason

behind conducting this study.

63

RESEARCH OBJECTIVEThe main objective of the study is to check literacy ratio of Derivatives & Commodities and

their potential market among the people of Rajkot City.

Some other secondary objectives are as under:

1. To know the awareness of Derivatives & Commodities.

2. To know the scope for the Derivatives & Commodities.

3. To know the investment habit of the people of Rajkot City.

4. To know the purpose of investing in Derivative & Commodities.

5. To know the influencing force behind the decision making while trading in derivatives

and Commodities.

6. To find out the best pattern to educate about Derivatives & Commodities.

7. To find out the medium which is the best suitable for trading on Derivatives &

Commodities.

.

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SOURCES OF DATA

There are mainly two sources of data i.e.

(1) Primary

(2) Secondary

Primary Data:

The data, which is collected directly from the respondents to the base of knowledge and belief

of the research, are called primary data.

The normal procedure is to interview some people individually to get a sense of how people

feel about the derivatives & commodities segment.

So far as our research is concerned, primary data is the main source of information. We have

collected data through Questionnaire and information from respondent.

Secondary Data:

When data are collected and compelled from the published nature or any other’s primary data

is called secondary data.

So far as our research is concerned, we have not collected any information from any sources.

So, we have not used secondary data for our research

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SAMPLING PROCESSIt is very true that it’s very difficult to do the research with the whole universe. As we know

that it is not feasible to go for population survey because of the numerous customers and their

scattered location. So for this purpose sample size has to be determined well in advance and

selection of sample also must be scientific so that it represents the whole universe.

So far as our research is concerned, we have taken sample size of 300 respondents. We have

selected Income Earners with savings to invest in Rajkot city.

All the respondents are stratified on the basis of their profession and savings. We have

selected the samples as per our convenience.

Sample universe Baroda city

Sampling Technique Stratified and Random

Sample size 150 respondents

Sampling Unit:

Professional = Random

Busi Business Man = Random

Government Employees = Random

Employees working in private firms = Random

66

SCOPE OF STUDYThe research that is being conducted by us will be useful in the following respect.

This will help the company, how to make people aware about derivatives &

commodities by imparting best education.

This will help the company to know the taste of masses and turn it towards derivatives

& commodities.

This will help the company to frame effective Marketing Strategy.

This will also help to select the right media for advertising to create brand awareness as

well as to give knowledge of the products.

Mind share of Sharekhan can be known.

This will also help to select right medium for trading in derivatives & commodities

segment.

This will help the company to reduce the obstacles which come in the way for the

development of derivatives & commodities segment.

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LIMITATIONS OF THE STUDY

1. Personal Bias:

People may have personal bias towards particular investment option so they may not give

correct information and due to which conclusion may be derived.

2. Time Limit:

The time duration of the research is short that’s why the information is not covered fully.

3. Area:

The area was limited to Baroda city only, so we can not know the degree of the literacy outside

the city.

4. Sample Size:

The last limitation is Sample size, taken by us is of 150 only; due to which we may not get the

proper results.

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ANALYSIS & INTERPRETATION

1. Gender Ratio

Male Female

93 57

Out of the sample size of 300, the break up of the gender ratio has come up as above.

2. Age

Age21 – 35 36 – 50 51 – 65 Above 66

91 12 47 0

Most of the respondents were between the age of 21 to 35.

3. Educational Qualification

QualificationPost Graduate Graduate Under Graduate

57 93 0

Maximum numbers of respondents were Graduates.

4. Occupation

Professionals Business Man Employees working in Pvt. Firm Govt. Employees

57 23 34 36

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5. Investment Pattern of The people

Securities Nos. Percentage

Bank FD 115 77

Mutual Fund 69 46

Shares/ Equity 93 62

Postal Scheme 104 69

Insurance 115 77

Real Estate 81 54

G-secs 57 38

Bonds/Debentures 69 46

Jewellery 115 77

It can be seen from the graph that the respondents have given first preference for investment to

“Bank FD”. Insurance and Jewellary are at 77% while postal schemes, shares/equities have

almost equal share with second and third position. We can say that the respondents are not in

favor of taking risk. But by seeing the shares on second preferences we can say that people are

now turning towards capital market.

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6. Instruments in which people are trading

Instruments Nos. Percentage (%)

Equity 103 69

Derivative 57 38

Commodities 23 15

When asked to the respondents that out of the given three options in which they are trading.

Equity got the first preference by 69%. While derivatives i.e. F&O has got second rank and

commodities has been least preferred now a days.

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7. Instruments in which people want to be trade in.

Instruments Nos. Percentage (%)

Equity 46 31

Derivative 47 31

Commodities 57 38

On asked about their preferences for trading in future, the respondents have shown equal

interest in equity and commodity with 38% followed by derivatives. From this we can say that

commodity segment has got a brighter future.

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8. The constraints those are decreasing the use of Derivatives &

Commodities segment.

Obstacles Nos. Percentage (%)

Risk Taking Ability 35 23

Fund Facilities 34 23

Lack of Knowledge 23 15

Non Availability of Option

with the Broker- -

Regulatory Constraints - -

Still in “wait & see” 12 08

Lack of Guidance 12 08

While questioned about the constraints which hold them back from trading in derivatives and

commodities, respondents have given the maximum votes to their “Risk awareness” and “lack

of funds” with 23% each. While the lack of knowledge about derivatives and commodities is

also one of the big constraints followed by lack of guidance.

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9. Factors that are to be considered by people while jumping in to Derivative

& Commodity segment.

Factors Nos. Rank

Risk Reduction 28.4 1

To Increase Leverage 21.9 3

Investment 24.6 2

Arbitrage 11.4 5

Speculation 13.7 4

While investigating the factors which have been given the maximum importance by investors

while trading in derivatives and commodities we have come up with “Risk Reduction” as the

first priority with 28.4%, while 24.6% people have considered it as an investment option near

to that almost 22% people are using derivatives and commodity as a tool to increase the

leverage. So, in future derivatives and commodities can be highlighted as an investment option

which given higher leverage.

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10. Factors which people takes into consideration while taking the decision to trade in

Derivatives & Commodities.

Factor Percentage (%) Rank

Independently 14.3 1

Broker/Agent’s advice 11.6 5

News Channel 9.3 8

News Papers 8 9

Internet 11.3 6

Advice of Friends/Colleagues 12 2

Advice of CA/Tax consultants 9.7 7

Well-known Stock Broking Houses 12 2

Business Magazines 11.8 4

On asked to the respondents that while deciding to trade in derivative commodities, whom do

they consider the reliable source of information. We come up with the conclusion that most of

investors take their decision independently. While they consider Business Magazines, Advice

of friends/colleagues and services of well known stock broking houses equally important. Also

brokers have a good knowledge on investment. So, stock broking houses like Sharekhan can

plan out their strategy to increase the trading on derivatives and commodities.

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11. Tools preferred by the people while learning Derivatives & Commodities.

Tools Nos. Percentage (%)

Classroom Teaching 57 38

Literature 57 38

Self-Experience 103 69

Internet 47 31

Documentaries - -

Seminars 35 23

When the respondents were asked about the learning technique on derivatives and

commodities, the most of them preferred preference self experience that is they wanted to learn

through “trial n error”: after all “Experience is The Best Teacher”.

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12. Time which people can devote to learn Derivatives & Commodities.

Time Nos. Percentage (%)

1 day 23 15

2 days 46 31

3 days 12 8

2 hrs per day over 1 month 22 15

Can’t say 47 31

When asked about the time which the respondents would like to devote for learning about

derivatives and commodities, 31% were not sure about the time limit. It means it depends and

varies on person to person.

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13. Most preferred medium for trading in Derivatives & Commodities

Medium Percentage (%) Rank

Stock Broking Cos. (Branded) 33.1 1

Franchisees 15.3 3

Brokers 25.8 2

Online 25.8 2

While finding out the medium which people consider the most reliable while trading

derivatives and commodities, the respondents gave maximum vote to “Branded Stock Broking

Houses” like Sharekhan, ICICIdirect.com, and Kotakstreet.com. While the second choice was

local brokers. So from the above we can say that if proper attention is given on online trading

and brokers the chances of development of derivatives and commodities would be increasing.

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14. Most preferred Broking companies of the city

Broking Company Percentage (%) Rank

India Bulls 10.20 4

ICICIdirect 29.30 1

Kotak Street 14.10 3

Karvy 08.90 5

Sharekhan 25.00 2

5 Paisa 05.10 6

HDFC Securities 03.80 7

Motilal Oswal 01.20 9

Marwadi 02.40 8

This question was one of the most crucial for investigating the mind share of stock broking

houses. In this question we came up with the company which is one of the leading in stock

broking industry i.e. ICICIdirect.com the next close challenger was Sharekhan.com followed

by Kotakstreet.com.

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15. Individual perception and knowledge

True False Can’s Say

54.8 32.7 12.5

In this question we asked eight sub questions on derivatives and commodities segment. Almost

55% questions were correctly answered by the respondents; while 32.7% were false. So, we

can say that the people have more or less knowledge about derivatives and commodities.

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CONCLUSION Most of the people in Rajkot City are investing in fixed return Instruments.

But there are investors who use Equity as an investment tool.

Those people who want to invest in Derivatives & Commodities are investing mainly for

reducing risk and they consider them as investment tool.

People generally want to take trading decisions independently or under the guidance of

Friends or Well Known Stock Broking Houses.

Literature and Self Experience can be taken as the best method to impart education about

derivatives & commodities.

More than 55% of the respondents are familiar with the Derivatives & Commodities.

81

RECOMMENDATION

Sharekhan needs to make its marketing team strong and also it should increase

marketing activities such as promotional campaigns.

Sharekhan should educate the investors about Derivatives & Commodities by

organizing classes, corporate presentations, taking part in consumer fairs, organizing

events.

Company should show the benefits of trading on Derivatives & Commodities

Sharekhan should turn existing customers (who are trading in Equity only) towards

Derivatives & Commodities.

Sharekhan can also use Newspapers and Local New Channels as a medium of

advertising.

Sharekhan may also use its helpline number for giving education on Derivatives &

Commodities.

Company may appoint special team for giving education & attracting people towards

trading on Derivatives & Commodities.

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APPENDIX

1. Gender: Male Female

2. Age: 21-35 36-50 51-65 Above 66

3. Education: _________________________

4. Occupation: Professional Businessmen

Employees working Govt. Employee

in Pvt. Firms Others

5. Of this investment options, with which are you familiar and already invest in?

Bank FD Postal Scheme G-Secs

Mutual Funds Insurance Bonds/Debentures

Shares/Equity Real Estate Jewellary

6. Which of these are you already in today?

Equity Derivatives (F&O) Commodity

7. Which of these you would like to be in for trading?

Equity Derivatives (F&O) Commodity

8. If Questions 6& 7 are not applicable, then what are the constraints that are

holding you back?

Risk taking ability Regulatory constraints

Fund Facilities Still in ‘wait & see’

Lack of knowledge Lack of Guidance

Non-Availability of Options

with your broker

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9. If you are trading in derivatives & commodities or you want to be in, which

factors will you give importance? (Give Rank)

Risk Reduction Speculation

Investment Arbitrage

To increase the leverage

10. How do you take decisions if you want to trade in Derivatives & commodities? (Give

Rank)

Independently Advice of Friends/colleagues

Broker/Agent’s advice Advice from CA/Tax consultant

News channels Well-known Stock Broking Houses

Newspapers Business Magazines

Internet

11. How do you want to learn about derivatives & commodities?

Classroom teaching Internet

Literature Documentaries

Self-Experience Seminars

12. How much time will you be able to devote for learning derivatives &

Commodities?

1 day 2 days 3 days

2 hrs per day over 1 month Can’t say

13. According to you, which medium is the most reliable for trading in derivatives

& Commodities? (Give Rank)

Stock broking cos. (Branded) Brokers

Franchisees Online

84

14. Name any 3 stock-broking companies that deal in derivatives & commodities?

1. ________________ 2. ________________ 3. ________________

15. Individual perception & knowledge: True () ; False (X)

a.) Options are available for too many strikes

b.) Buying Calls and Puts means Teji

c.) If a fund gave a return of 16% in 2004, it will give at least 16% in 2005

d.) Derivatives and commodities are risk-reducing/ Hedging instruments

e.) One needs to pay margin for buying Calls & Puts

f.) Commodities are traded on NSE & BSE.

g.) The price of derivatives & future commodities are based on

current underlying

h.) Options are available in Commodities

85

BIBLIOGRAPHY

Kothari C.R., Research Methodology, New Delhi, Vikas Publishing House pvt.Ltd.

1978

Pathak Bharti v.,Indian Financial System,Delhi,Person Education(Singapore) pvt.Ltd.

WEBSITES:

1. www.Google.com

2. www.bseindia.com

3. www.nseindia.com

4. www.sharekhan.com

5. www.ncdex.com .

6. www.mcx.com

NEWSPAPERS:

ECONOMIC TIMES

TIMES OF INDIA

FINANCIAL EXPRESS

SHAREKHAN’S VALUE LINE MAGAZINE

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