Trading ppt

TRADING OF SECURITIES

Definition

• Trading is the process of buying and selling securities.

• The procedure of trading consists of two processes, i.e.

• Delivery (when securities are sold) and • Receipt (when securities are purchased).

Forms of Trading

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

Delivery-based Trading

• Delivery based trading is normally considered as a safer approach for trading in shares when compared to day trading.

• Delivery based trading involves buying shares on a market day and selling them only after receiving the delivery of those shares in demat account.

Intra-day Trading

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

Example of Intra Day Trading

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

• Day trading is considered as a riskier form of trading, with more than 80% of day traders loosing considerable amount of money.

• Day traders generally use borrowed money (known as buying on margin) which amplifies gains/losses. As a result, substantial amount of gains/losses occur in just one day.

• In the past, day trading was practiced by financial firms and professionals and some savvy private investors and speculators.

• But in recent years day trading has become more popular amongst individual traders who take advantage of new facilities offered via the Internet with an intention of making quick money.

What is dematerialisation?

• Dematerialisation is the process by which physical share certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the investor's account maintained with his/her depository participant (DP).

• It is like having a bank account where instead of money, you hold securities in your account.

How can one dematerialise securities?

• In order to dematerialise physical securities held by an investor, he has to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical share certificates one wishes to dematerialise.

• Separate DRF has to be filled for each ISIN Number.

What is an ISIN?

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

• National Securities Depository Limited (NSDL) issues ISINs in India and a complete list of ISINs is available on their website: www.nsdl.co.in.

• Also note that ISIN of a security changes in case of certain corporate action such as split in share par value, consolidation of share capital etc.

• Hence you have to quote the correct ISIN at the time of giving dematerialisation request as well as at the time of transfer of shares.

Do dematerialised shares have distinctive numbers?

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

What is a Depository

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

How many Depositories are registered with SEBI?

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

Who is a depository participant?

• A depository participant is a person or entity, which is registered with depositories such as NSDL and/or CDSL as also with SEBI and who offers services of holding your shares and effecting transfer (accepting credits in your account as well transferring shares from your account to that of some one else based on your instructions).

• Thus a depository participant acts as a custodian of your securities held in dematerialized or fungible form and carries out your instruction to transfer the same.

Is it compulsory for every investor to open a depository account to trade in

the capital market?

• Around 99.9% of the securities settlement takes place in dematerialized mode. Therefore, in view of the convenience in settlement through dematerialized mode, it is advisable to have a beneficiary owner (BO) account to trade at the exchanges and to hold the securities.

How are transfers made by DP?

• DPs issue Delivery Instruction Slips (or DIS) to all account holders.

• These are like cheque leaves. • Whenever you want to transfer shares from your

account to another account, you are required to fill the relevant details such as security identification number, number of shares you want to transfer, date of transfer, account to which shares need to be transferred etc. and submit this slip to your DP.

• The DP would then affect the transfer.

What are the services offered by stock brokers?

• Stock brokers offer services such as buying and selling on behalf of investors.

• They also provide advisory services. • Some of the bigger brokers also publish their

own research reports which are available at a cost for investors.

National Stock Exchange of India• The National Stock Exchange of India was promoted by

leading Financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company.

• In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.

• The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

Currently, NSE has the following major segments of the capital market:

• * Equity• * Futures and Options• * Retail Debt Market• * Wholesale Debt Market• * Currency futures

Brokers and jobbers

• . A broker acts as an agent for his customers; a jobber, or dealer, transacts business on the floor of the exchange but does not deal with the public.

• A customer gives an order to a brokerage house, which relays it to the floor for execution. The receiving broker goes to the area where the security is traded and seeks a jobber stationed in the vicinity who specializes in the particular issue.

• The jobber serves only in the capacity of a principal, buying and selling for his own account and dealing only with brokers or other jobbers. The broker asks the jobber’s current prices without revealing whether he is interested in buying or selling.

• The broker may seek to narrow the spread between the bid and ask quotations or he may approach another jobber handling the same issue and undertake the same bargaining process. Eventually, when satisfied that he has obtained the best possible price for his client, the broker will complete the bargain.

• A broker is compensated by the commission received from the customer. The jobber seeks to maximize his profitable business by adjusting his buying and selling prices.

• The trading procedures of other major exchanges throughout the world employ the principles that have been described above, although they vary in their application of them.

Types of corporate securities

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

Bonds

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

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

Stock

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

• Typically these include the right to share in dividends and other distributions, to vote for directors and fundamental corporate changes, and to inspect the books of the corporation

• The stockholder’s interest is divided into units of participation, called shares.

Preferred stock

• Preferred stock has priority with respect to dividends and, if the corporation is dissolved, to the division of assets.

• Dividends on preferred stock usually are paid at a fixed rate and are often cumulated in the event the corporation finds it necessary to omit a distribution.

Common stock

• Common stock, in some countries called ordinary shares, represents a residual interest in the earnings and assets of a corporation.

• Whereas distributions to bonds or preferred stock are ordinarily fixed, dividends paid on common stock are set at the time of payment by the directors and tend to vary with earnings.

• The market price of common stock is likely to move in a relatively wide range, depending on investors’ expectations of earnings in the future.

Options

• An option contract is an agreement enabling the holder to buy a security at a fixed price

• One form of option contract is the stock purchase warrant, which entitles the owner to buy shares of common stock at designated prices and according to a prescribed ratio.

The development of securities trading

• Organized securities markets and stock exchanges are a product of economic development. In the early years of economic growth, most of a country’s industrial units are small and their capital requirements relatively modest.

• The rate of saving is low, and institutions for channelling private savings into investment are generally lacking.

• As the economy progresses and national income grows, new institutions enter the financial picture to direct the mounting volume of savings into productive outlets.

Organization of exchanges

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

Over-the-counter

• In the early days of securities trading, stocks and bonds were often bought at private banking houses in the same way that commodities might be purchased over the counter of a general store.

• This was the origin of the term “over-the-counter.”

• It is used today to mean all securities transactions that are handled outside the exchanges.

• . Increasingly, this market is being subjected to regulation.

• The extent and nature of the over-the-counter market varies throughout the world.

• The over-the-counter market is a negotiated market, as distinguished from the auction markets for listed securities.

• An investor desiring to trade an over-the-counter security gives his order to a broker functioning as a retailer, who ordinarily shops among various firms to obtain the best possible price.

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

The matching engine

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

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

• Now imagine that there are four people who want to buy shares of the ABC company. The list looks like this:

• Customer A: buy 100 shares for $15.15 • Customer B: buy 200 shares for $15.10 • Customer C: buy 150 shares for $15.00 • Customer D: buy 75 shares for $1 4.95

• Right now there are no matches. The lowest price on the sell side is $15.20, and the highest price on the buy side is $15.15.

• The difference between the lowest selling price and the highest buying price is called the spread.

• In a widely traded stock, it's usually only a penny or two. In a low-volume stock, the spread can grow much larger.

• Because of the spread here, these trades are going to sit in these lists waiting for a match to come along.

• Now let's imagine that Customer A sends in a new sell order. He wants to buy 50 shares for $15.25.

• Instead, he'll get the stock for $15.20 from Customer 3, because that's the lowest price available in the list of sellers.

• The 100 shares available at the $15.20 sale price will be split -- 50 shares will remain in the list, while the other 50 will complete the transaction.

• Customer 3 is happy because he got the price he wanted, and Customer A is happy because he got a small discount.

• Once the match is made, information about the completed transaction flows out of the matching engine and goes back to the broker dealers of the buyer and seller.

• Information also flows to the quote servers so that anyone who's interested can see what happened.

Electronic Trading

• Steps of your stock trade through the system

• Before you can buy, however, you have to open a brokerage account. There are dozens of companies that allow you to do electronic trading,

• These companies are called broker dealers, and they give you access to the stock exchanges.

• Without a brokerage account, you can't trade stocks.

• Let's imagine you want to buy 100 shares of the ABC company.

• You check the price of that stock on the quote screen and see that it costs $20.40 to buy it at this moment. You enter in an order to buy 100 shares at $20.40 a share.

• Your broker dealer will transmit your order to a stock exchange. If the ABC company trades on the NASDAQ stock exchange, the order goes there.

• Inside the NASDAQ exchange, there's a computer that's dedicated to handling all the orders coming from your broker dealer.

• Having received your order from your broker dealer, the exchange will try to match your buy order up with a sell order from someone else.

• If it can find a match, you'll have executed a stock trade. If not, your trade will sit on the exchange waiting for a matching order.

• The broker dealer is keeping track of the number of shares of stock you own. But that's not enough. Somewhere, there needs to be a cen

• The central entity that holds the "who owns what" information is called the Depository tral repository that knows who owns what.

Questions for Revision

• Write a short note on trading in the Capital Markets ?