A

AProject Study Report on

ANAND RATHI SECURITIES LTD.Titled

To do a study on various aspects of Financial Planning strategies provide by anand rathi

Submitted in partial fulfillment for theAward of degree of

Master of Business Administration

OFMASTER IN BUSINESS ADMINISTRATION

Submitted To: -

Submitted By:-Ms. Jaya kundnani

Parul Gupta

MBA Part -II APEX INSTITUTE OF MANAGEMENT & SCIENCE, JAIPUR

(Approved by AICTE, New Delhi & Affiliated to University of Rajasthan, Jaipur)[2011 2013],ACKNOWLEDGEMENT

I express my sincere thanks to my project guide, Ms. Jaya kundnani For guiding me right from the inception till the successful completion of the project. I sincerely acknowledge her for extending their valuable guidance, support for literature, critical reviews of project and the report and above all the moral support she had provided to me with all stages of this project.

PARUL GUPTAPrefaceIndian Stock market has undergone tremendous changes over the years. Investment in Mutual Funds has become a major alternative among investors. The project has been carried out to have an overview of Mutual Funds Industry and to understand investors perception about Mutual Funds in the context of their trading preference, explore investors risk perception & find out their preference over Top Mutual Funds.

The methodology used was data collection using Schedule. Secondary data was collected from Internet and Books. Primary Data was collected through survey among existing client along with the other investors. The procedure adopted to select sample was simple random sampling.

The research design is analytical in nature. A questionnaire was prepared and distributed to investors. The investors profile is based on the results of a questionnaire that the Investor completed. The sample consist of 60 from various brokers premises. The target customers were Investors who are trading in the stock market. The area of survey was restricted to people residing in JAIPUR.Index / Contents Cover Page

..1 acknowledgement

..3 Preface

..4 Executive Summary

..5

S.No.TitlePage No.

1.Introduction to the Organization Company Profile

Milestones

AR Core Strengths

Management Team

Acquisition & Division Of Company

List of Products6

7

9

9

10

11

2.About Financial Planning (Title of the study) Introduction

Objectives of the study12

15

3.Different types of the products and areas Demat Account

Mutual Fund

Derivatives (Capital Market)

Commodity Market

Insurance16

17

22

64

78

4.Limitation of Study80

5.Scope of Study80

6.Research Methodology81

7.Facts And Findings82

8.Analysis and interpretation83

9.Conclusion88

10.Suggestions89

11.Appendix91

12.Bibliography94

1. Introduction to the company Company Profile

Milestones

AR Core Strengths

Management Team

Acquisition & Division of Company

List of Products

Mission & Vision

1.1: Company ProfileAnand Rathi (AR) is a leading full services securities firm providing the entire gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi today has a pan India presence as well as an international presence through offices in Dubai and Bangkok. AR provides a breadth of financial and advisory services including wealth management, investment banking, corporate advisory, brokerage & distribution of equities, commodities, mutual funds and insurance, structured products all of which are supported by powerful research teams.

The firms philosophy is entirely client centric, with as clear focus on providing long term value addition to clients, while maintaining the highest standards of excellence, ethics and

Professionalism. Private Clients, Corporate and Institutions and was recently ranked by Asia Money 2006 poll amongst South Asias top 5 wealth managers for the ultra- rich.

In year 2007 Citigroup Venture Capital International joined the group a financial partner.Anand Rathi provides end to end equity solutions to institutional and individual investors. Consistent delivery of high quality advice on individual stocks, sector trends and investment strategy has established us a competent and reliable research unit across the country.

Clients can trade through us online on BSE and NSE for both equities and derivatives. They are supported by dedicated sales & trading teams in our trading desks across the country. Research and investment ideas can be accessed by clients either through their designated dealers, emails, web or SMS.1.2: Milestones

1994 TO 1997

Started activities in consulting and Institutional equity sales with staff of 15 in 1994.

Set up a research desk and empanelled with major institutional investors in 1995.

Introduced investment banking businesses in 1997.

Retail brokerage services launched in 1997.

1999 TO 2002

Lead managed first IPO and executed first M&A deal in 1999

Initiated Wealth Management Services in 2001

Retail business expansion recommences with ownership model in 2002

2003:

Wealth Management assets cross Rs.1500 crores

Insurance broking launched

Launch of Wealth Management services in Dubai

Retail Branch network exceeds 50

2004:

Commodities brokerage and real estate services introduced

Wealth Management assets cross Rs.3000crores

Institutional equities business re-launched and senior research team put in place

Retail Branch network expands across 100 locations within India

2005:

Real Estate Private Equity Fund Launched

Retail Branch network expends across 200 locations within India

2006:

AR Middle East, WOS acquires membership of Dubai Gold & Commodity Exchange (DGCX)

Ranked amongst South Asias top 5 wealth managers for the ultra-rich by Asia Money 2006 poll

Ranked 6th in FY 2006 for All India Broker Performance in equity distribution in the High Net worth Individuals (HNI) Category

Ranked 9th in the Retail Category having more than 5% market share

Completes its presence in all States across the country with offices at 300 + locations within India

2007:

Citigroup Venture Capital International picks up 19.9% equity stake

Retail customer base crosses 100 thousand

Establishes presence in over 350 locations

1.3: AR Core StrengthsBreath of Services:-

In line with its client centric philosophy, the firm offers to its clients the entire spectrum of financial services ranging from brokerage services in equities and commodities, distribution of mutual fund, IPOs and insurance products, real estate, investment banking, merger and acquisitions, corporate finance and corporate advisory.

Client deal with a relationship manager who leverage and brings together the product specialists from across the firm to create an optimum solution to the client needs.1.4: Management Team

AR brings together a highly professional core management team that comprises of individuals with extensive business as well as industry experience.

The senior Management comprises a diverse talent pool that brings together rich experience form across industry as well as financial services.

Mr. Anand Rathi Group Chairman

Chartered Accountant

Past President, BSE

Held several Senior Management positions with one of Indias largest industrial groups

Mr. Pradeep Gupta Vice Chairman

Plus 18 years of experience in Financial Services

Mr. Amit Rathi Managing Director

Chartered Accountant & MBA

Plus 12 years of experience in financial services

1.6: DIVISIONS OF THE COMPANY

Offices of ANAND RATHI are in 197 cities across 28 states & it has also branches in Dubai & Bangkok with more than 44000 employees. It has daily turnover in excess of Rs. 4bn. It has 1, 00,000 + clients nationwide. It is also leading distributor of IPOs.

In India where ANAND RATHI is present in 20 STATES:

Andhra PradeshKerala

AssamMadhya Pradesh

BiharMaharashtra

ChhattisgarhOrissa

DelhiPunjab

GujratRajasthan

Haryana Tamil Nadu

Jammu & KashmirUtter Pradesh

Jharkhand Uttaranchal

KarnatakaWest Bengal

1.7: LIST OF PRODUCTS: Demat Accounts

Mutual Funds

Derivatives

Commodities

Bonds

Trading Account

Insurance

MISSIONTo be Indias first Multinational providing complete financial services solution across the globe.

VISION

Providing integrated financial care driven by the relationship of trust and confidence.2. About Financial PlanningDefinition:

Financial Planning is the process of examining a client's personal situation, financial resources, financial objectives and financial problems in a comprehensive manner, developing an impartial, integrated plan to utilize the resources to meet objectives and solve problems, taking the steps to implement that plan once approved by the client, and monitoring the plan performance to take corrective action as necessary to assure that results match the plan projections."

- College of Financial Planning2.1: Introduction:

The only thing permanent in life is change. Time changes. People change. So does life? You expect life to be much better tomorrow that it is today. Tomorrow, you hope to fulfill all your dreams and aspiration.

The person may have many dreams, needs and desires. For example, you could be dreaming of various things like Car, House etc However, in todays world and inflation, how many of these dreams can you hope to turn in to reality? By planning well, you can utilize your limited resources to the fullest.

We believe that investors should take a hard look at the fixed income components of their portfolios and rethink this strategy in the context of more comprehensive, long-term objectives. Understanding where you are coming from, the priorities in your life and the challenges you face in a rapidly changing investment horizon. Succeeding in your career, planning your childrens education, marriages and having more than enough for an enjoyable retirement are some of the objective most people aim at. The complexities of todays financial environment have led many individuals and corporations to conclude that full-time, professional investment management is a necessary element of a successful investment plan.

Financial Planning is the process of meeting your lifes goals through proper management of your finances. The process includes gathering relevant financial information, setting your goals, examining your current financial situation and formulating strategies for how you can achieve your goals, given your current financial situation & future plans. At Anand Rathi, financial planning is the main approach and they gave advice after understanding your financial needs.

Some investors have failed to recognize the less obvious, but potentially more damaging, risk of diminished income from staying completely invested in low yielding fixed income securities or bank deposits.We believe that investors should take a hard look at the fixed income components of their portfolios and rethink this strategy in the context of more comprehensive, long-term objectives. Understanding where you are coming from, the priorities in your life and the challenges you face in a rapidly changing investment horizon. Succeeding in your career, planning your childrens education, marriages and having more than enough for an enjoyable retirement are some of the objective most people aim at. Nowadays, we hear about the baby boomers everyday. The baby boomers are the generation born between World War II and the early 60's. They form the largest American generation, 78 million people or 30.8% of the U.S. population. It is estimated a baby- boomer will turn 50 every 7.5 seconds for the next decade. You might say, what does that have to do with me?The baby boomer generation includes the parents of most of us. As they begin to retire in the early part of the next century, when we are in our 20s or 30s, they will start collecting Social Security. Such a large number of people would put a tremendous strain on the Social Security system. Many experts have predicted that this will lead to the bankruptcy of the Social Security system around the year 2010. That's a lesson for all of us--we can't rely on the government to provide a financially secure retirement, we have to rely on ourselves. However, retirement is still four, five decades away; we don't need to worry about it yet! Wrong. The fact is, the later you start planning and saving, the more money you will have to save and you will need a higher return on your investments. Starting early requires you to put away small amounts of money consistently, would not affect your lifestyle and leads to more money for retirement than starting late. For example, if you start saving $50 a month at age 25, you can expect to withdraw about $57,000 a year at age 65. But if you start saving at age 35, you would need to save $200 a month for the same result!

Dealing with a chronic disease such as arthritis can be difficult. Many of these difficulties are emotional; some of them are financial. That's why managing your money should be a part of managing your health. A good way to get started is to have a financial plan.

How can I plan when everything seems so uncertain?It's true-you can't predict how arthritis may change your life. If you're working now, you may be able to work for many years to come. Or, you may need to cut back on your hours in the future, find a new job or even quit working altogether. If you are retired, you may not know what expenses to expect in the future. But despite these uncertainties.What exactly is financial planning?Financial planning is the process of assessing your financial goals, taking an inventory of the money and other assets you already have to help you reach those goals, and estimating what you will need in the future. Financial planning also includes:

Part of the problem with the "world of finances" is that it is a huge space with hundreds of options and its own peculiar vocabulary. If you take it step by step, however, you actually can penetrate this field and completely understand it. So let's start at the beginning and see how the most basic things in life directly affect you and your finances.If you are like most normal folks, you have a job. You go to your job every day. Every week or two weeks or month, you get a paycheck for some amount. For the sake of example, let us imagine a fictitious person named Bob, a 24-year-old computer programmer out of college two years. Bob is paid $3,000 each month, or $36,000 per year.

You have taxes. The government, in an effort to make your life easier, politely lifts something like a third of your paycheck without your having to do a thing. Poof, it's gone - you never even get to touch it. The federal government takes perhaps 23%. The state government takes perhaps 7%, depending on the state. The social security administration (FICA) and Medicare take another 7.5% or so. Bob's $3,000 paycheck therefore diminishes to perhaps $1,850 by the time he sees it:

Importance:

Now as we already understand the concept of Financial Planning, so what is the importance of financial planning?

1. If any person wants to know his/her financial health.2. If the person wants to invest the money and take care about the return then this procedure is very important.

3. If the person invest once then what is the asset allocation? Means how much portion goes in to the equity & how much portion goes in to the debt and liquid market?

4. Through the financial planning, we also taken care of our insurance, risk cover.

5. Moreover, the last one but most important i.e. Save the tax.2.2: Objective:The objective of my project is To do a study on various aspects of Financial Planning strategies provide by anand rathi. In addition, as we understand a simple meaning of this means do a financial planning of an individual or company or firm and comparison of different product available in the market for investment. To get the knowledge about the stock market. Learn how to do the work in Corporate. Understand about the company. To know the investment strategies for good return. Understand the risk bearing capacity after entered in security market.3. Different types of the products of the company3.1: Demat account:Dematerialisation is a process in which you can convert physical share certificates into electronic shares.Shares should have been transferred in your name / joint names before sending it for dematerialisation.

The single biggest reason over buying shares in the physical form is that demat shares credited to your account within 2 to 3 days after the end of the settlement. This is unlike the average 30 to 40 days taken in receiving back physical shares from the R&T Agent and sometimes with objections.Further, possibility of loss or theft of the certificates is eliminated.This is in addition to the 0.50% stamp duty savings, which works out to Rs.50 for transfer of shares worth of Rs.10,000

Brokers have no fear of bad delivery while selling demat shares. Due to this, they offer lower brokerage to you.As bad deliveries are eliminated shares are not returned due to objections, resulting in saving of costs and follow up.

In order to demat your shares/certificates, you have to fill in a Dematerialisation Request Form in triplicate alongwith the relevant details and submit the same to your DP alongwith the certificates to be dematerialised. The combination of names in the shares must be same as that in the account.

What are the requirements to open demat account?1. 2 photos of a/c holder.

2. Address proof (two copies)

3. Pan card (two copies)

4. Bank pass book/ statement photocopy

5. 1 cancelled cheque

3.2: Mutual fund:-

Definition of Mutual Fund:

It is a pool of money, collected from investors, and is invested according to certain investment objectives.

The contributors and beneficiaries are the same class of people namely the investors

A mutual funds business is to invest the funds thus collected, according to the wishes of the investors who created the pool

Importance of Mutual Fund:

1. The ownership is in the hands of the investors who have pooled in their funds.

2. A team of investment professionals and other service providers manages it.

3. The pool of funds is invested in a portfolio of marketable investments.

4. The investors share is denominated by units whose value is called as Net Asset Value (NAV) which changes everyday.

5. The investment portfolio is created according to the stated investment objectives of the fund.

Types of funds :Open Ended Fund: In an open-ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund.

Open ended scheme are offered for sale at a pre- specified price, say Rs.10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases. Investors receive account statements of their holdings.Close-Ended Fund:

A closed -end fund is open for sale to investors for a specified period, after which further sales are closed.

Any further transactions happen in the secondary market where closed-end funds are listed.

The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV.

Investors receive either certificates or depository receipts, for their holdings

Characteristics of a Mutual Fund

1- A mutual fund actually belongs to the investors who have pooled their funds is in the hands of the investors.

2- Investment professionals and other service providers, who earn a free for their services, from the fund, manage a mutual fund.

3- The pool of funds invested in a portfolio of marketable investments. The value of the portfolio is updated every day.

4- The investors share in the fund is denominated by units. The value of the units changes in the portfolios value, every day. The value of one unit of investment is called as the net asset value of NAV.

HISTORY

Mutual funds have been on the financial landscape for longer than most investors realize. In fact, the industry traces its roots back to 19th century Europe, in particular, Great Britain. The Foreign and Colonial Government Trust, formed in London in 1868, resembled a mutual fund.

It promised the investor of modest means the same advantages as the large capitalist by spreading the investment over a number of different stocks. Most of these early British investment companies and their American counterparts resembled todays closed-end funds. They sold a fixed number of shares whose price was determined by supply and demand. Until the 1920s, however, most middle-income Americans put their money in banks or bought individual shares of stock in a specific company. Investing in capital markets was still largely limited to the wealthiest investors.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors' Trust was thecustodian of the Massachusetts Investors' Trust. Later, State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark, an outfit that would launch the firstno-load fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade.

MUTUAL FUNDS TAKE ROOT AND GROWMutual funds began to grow in popularity in the 1940s and 1950s. In 1940, there were fewer than 80 funds with total assets of $500 million. Twenty years later, there were 160 funds and $17 billion in assets.The first international stock mutual fund was introduced in 1940; today there are scores of international and global stock and bond funds.The complexion and size of the mutual fund industry dramatically changed as new products and services were added. For example, before the 1970s, most mutual funds were stock funds, with a few balanced funds that included bonds in their portfolios. In 1972, there were 46 bond and income funds; 20 years later, there were 1,629.

THE INDUSTRY TODAY

The mutual fund industry has enjoyed substantial growth by avoiding the bumps in the road that have occurred in other financial services sectors.

The principles that exemplify the industrys longstanding commitment to shareholdersensuring strong regulation, educating investors, and promoting opportunities for long-term investinghave guided the industry for the past 65 years, and will continue to do so in the future.Mutual Fund Structure

3.3: Derivatives (Capital Market):-Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks.

The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision.

The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO).

The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91-day T-Bills, 10-year notional zero coupon bond, and 6% notional 10-year bond.

The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population.

The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The various methods by which a company can raise funds are as follows:

Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc.

Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc.

Organizations include various entities such as BSE, NSE, and other regional stock exchanges, the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).

Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT)

Participants in the Securities MarketSAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes.

EQUITY MARKETHistory of the Market

With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of Investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets.

The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a peoples market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs accounted for $107bn in 382 deals out of the total of $255bn raised by the four BRIC countries. This was a sizeable growth from $90bn raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks.Derivative MarketsThe emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. 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. 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. This instrument is used by all sections of businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc.

According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives.

What are futures contracts?Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of the underlying asset is standardized. Futures contracts are transferable in nature. Three broad categories of participantshedgers, speculators, and arbitragerstrade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk.

Speculators have a particular mindset with regard to an asset and bet on future movements in the assets price. Futures and options contracts can give them an extra leverage due to margining system.

Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Important DistinctionsExchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct market between two parties who know and trust each other. Most common example for OTC is the forward contract. Forward Contracts are directly negotiated, tailor-made for the needs of the parties, and are often not easily reversed.

Distinction between Forward and Futures Contracts:

Futures Contracts Forward Contracts

MeaningA futures contract is a contractual agreement between two parties to buy or sell a standardized quantity and quality of asset on a specific future date on a futures exchange.A forward contract is a contractual agreement between two parties to buy or sell an asset at a future date for a predetermined mutually agreed price while entering into the contract. A forward contract is not traded on an exchange.

Trading placeA futures contract is traded on the centralized trading platform of an exchange. A forward contract is traded in an OTC market.

Transparency in contract priceThe contract price of a futures contract is transparent as it is available on the centralized trading screen of the exchange.The contract price of a forward contract is not transparent, as it is not publicly disclosed.

Valuations of open position and margin requirementIn a futures contract, valuation of open position is calculated as per the official closing price on a daily basis and mark-to-market (MTM) margin requirement exists.

In a forward contract, valuation of open position is not calculated on a daily basis and there is no requirement of MTM on daily basis since the settlement of contract is only on the maturity date of the contract.

LiquidityLiquidity is the measure of frequency of trades that occur in a particular futures contract. A futures contract is more liquid as it is traded on the exchange.A forward contract is less liquid due to its customized nature.

Counterparty default riskIn futures contracts, the exchange clearinghouse provides trade guarantee. Therefore, counterparty risk is almost eliminated.In forward contracts, counterparty risk is high due to the customized nature of the transaction.

RegulationsA regulatory authority and the exchange regulate a futures contract. A forward contract is not regulated by any exchange.

Benefits of Derivatives

a. Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its underlying. Suppose, A has bought 100 shares of a real estate company with a bullish view but, unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, A can sell the same quantity of futures of the script for the time period he plans to stay invested in the script. This activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have been mutual funds and other institutional investors.

b. Price Discovery: The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets. This process of price adjustment is often termed as price discovery and is one of the major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets.

c. Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporates and financial institutions but also for retail investors like high net worth Individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to fact that historically, it has been witnessed that there lies an inverse correlation of daily returns in equities as compared to commodities.

d. High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It is an instrument that requires only the margin on a contract to be paid in order to commence trading. This is also called leverage buying/selling.

e. Transparency: Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally. This reduces the chances of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding the day-to-day activities taking place in the securities markets, taking care of the illegal transactions.

f. Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time.

EXCHANGE PLATFORMDomestic ExchangesIndian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE).

Bombay Stock Exchange (BSE)BSE is the oldest stock exchange in Asia with an existence of 133 years. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited (BSE).

BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screen-based order-driven trading system.

The exchange opened up for foreign ownership (foreign institutional investment).

Allowed Indian companies to raise capital from abroad through ADRs and GDRs.

Expanded the product range (equities/derivatives/debt).

Introduced the book building process and brought in transparency in IPO issuance.

T+2 settlement cycle (payments and settlements).

Depositories for share custody (dematerialization of shares).

Internet trading (e-broking).

Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT).

Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCGhttp://www.bseindia.com/National Stock Exchange (NSE)NSE was recognized as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000.

NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly.

The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations.

Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures

http://nseindia.com/National Stock Exchange (NSE)NSE was recognised as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000.

NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly.The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations.

Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures

http://nseindia.com/International ExchangesDue to increasing globalization, the development at macro and micro levels in international markets is compulsorily incorporated in the performance of domestic indices and individual stock performance, directly or indirectly. Therefore, it is important to keep track of international financial markets for better perspective and intelligent investment.

i. NASDAQ (National Association of Securities Dealers Automated Quotations)

NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC), the regulatory authority for the securities markets in the United States.NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site) being listed. There are four major indices of NASDAQ that are followed closely by the investor class, internationally.

i. NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that the total components count of the Index is over 3,000 stocks and it includes stocks of US and non-US companies, which makes it an international index. It is highly followed in the US and is an indicator of performance of technology and growth companies. When launched in 1971, the index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000-mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It was trading at 1316.12 on November 20, 2008.

ii. NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial companies listed on NASDAQ. The component companies weight in the index is based on their market capitalization, with certain rules controlling the influence of the largest components. The index doesnt contain financial companies. However, it includes the companies that are incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial, technology, biotechnology, healthcare, transportation, media, and service sectors.

iii. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing companies and nine railroad companies). Today, the index contains 30 blue-chip industrial companies operating in America. The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the prices of all stocks divided by the number of stocks (30).

iv. S&P 500: The S&P500 Index was introduced by McGraw Hill's Standard and Poor's unit in 1957 to further improve tracking of American stock market performance. In 1968 the USDepartment of Commerce added the S&P500 to its index of leading economic indicators. The S&P500 is intended to be comprised of the 500 biggest publically-traded companies in the United States by market capitalization (in contrast to the FORTUNE500, which is the largest 500 companies in terms of sales revenue). The S&P500 Index comprises about three-fourths of total American capitalization.

http://www.nasdaq.com/ii. LSE (London Stock Exchange)

The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on the exchange. The LSE has four core areas:

i. Equity markets: The LSE enables companies from around the world to raise capital. There are four primary markets; Main Market, Alternative Investment Market (AIM), Professional Securities Market (PSM), and Specialist Fund Market (SFM).

ii. Trading services: Highly active market for trading in a range of securities, including UK and international equities, debt, covered warrants, exchange traded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary receipts.

iii. Market data information: The LSE provides real-time prices, news, and other financial information to the global financial community.

iv. Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to bring the cash, equity, and derivatives markets closer together. It combines the strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.

The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and Korea.

http://www.londonstockexchange.com/en-gb/

Frankfurt Stock Exchange

It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Brse. The Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big share in the European market. The exchange has a few well-known trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50.

DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt Stock Exchange.

http://deutsche-boerse.com/REGULATORY AUTHORITYThere are four main legislations governing the securities market:

a. The SEBI Act, 1992, which establishes SEBI to protect investors and develop and regulate the securities market.

b. The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment, and transfer of securities, and disclosures to be made in public issues.

c. The Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges.

d. The Depositories Act, 1996, which provides for electronic maintenance and transfer of ownership of demat securities.

In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and Exchange Board of India).

The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with the law.

The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country.

http://www.mca.gov.in/SEBI protects the interests of investors in securities and promotes the development of the securities market. The board helps in regulating the business of stock exchanges and any other securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities markets in any manner.

The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting and regulating self regulatory organizations.

http://www.sebi.gov.in/The RBI is also known as the bankers bank. The central bank has some very important objectives and functions such as:

Objectives Maintain price stability and ensure adequate flow of credit to productive sectors.

Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public.

Facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Give the public adequate quantity of supplies of currency notes and coins in good quality.

Functions Formulate implements and monitor the monetary policy.

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

Manage the Foreign Exchange Management Act, 1999.

Issue new currency and coins and exchange/destroy currency and coins not fit for circulation.

Perform a wide range of promotional functions to support national objectives.

http://www.rbi.org.in/home.aspx

The London Stock Exchange.

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

New York Stock Exchange.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock. [1].

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant[citation needed].

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].

Market participantsMany years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large institutions[citation needed].)

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'[citation needed].

History

Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish merchants had already set up every form of trade association and had knowledge of many methods of financial dealings, disproving the belief that these were originally invented later by Italians. In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first share on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, UK, Japan, China, Canada, Germany, and France.

The Shanghai Stock Exchange in China.

Importance of stock marketFunction and purposeThe stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up and coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'tre of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

Relation of the stock market to the modern financial systemThe financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.

The stock market, individual investors, and financial riskRiskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett.[4] Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st century.

The behavior of the stock market

NASDAQ in Times Square, New York City.

From experience we know that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets.) Over-reactions may occurso that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have since been put forward against the notion that financial markets are 'generally' efficient (i.e., in the sense that stock prices in the aggregate tend to follow a Gaussian distribution).

According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpointknown as 'hard' EMHalso predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percentthe largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed upon definite cause: a thorough search failed to detect any 'reasonable' development that might have accounted for the crash. (But note that such events are predicted to occur strictly by chance , although very rarely.) It seems also to be the case more generally that many price movements (beyond that which are predicted to occur 'randomly') are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this.[5]However, a 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from any momentary market 'inefficiencies'. Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. But the best explanation seems to be that the distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly applicable). [6] [7]Other research has shown that psychological factors may result in exaggerated (statistically anomalous) stock price movements (contrary to EMH which assumes such behaviors 'cancel out'). Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.[8]Another phenomenonalso from psychologythat works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[9] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 bear market, the average did not rise above 5%). In the run up to 2000, the media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 bear market, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)

Irrational behaviorSometimes the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the technical value of securities itself. But this may be more apparent than real, since often such news has been anticipated, and a counterreaction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumors, euphoria and mass panic; but generally only briefly, as more experienced investors (especially the hedge funds) quickly rally to take advantage of even the slightest, momentary hysteria.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally obscure. Behaviorists argue that investors often behave 'irrationally' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money[10]. However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined.

The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11 percent, this occurred on October 13, 2008.[11]

Crashes

Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.[12] In the preface to this edition, Shiller warns, "The stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. . . . People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."

Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1,[12] source). The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot "confirms that long-term investorsinvestors who commit their money to an investment for ten full yearsdid do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low."[12]Main article: Stock market crashA stock market crash is often defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is also due to panic. Often, stock market crashes end speculative economic bubbles.

There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock market crash of 19734, the Black Monday of 1987, the Dot-com bubble of 2000.

One of the most famous stock market crashes started October 24, 1929 on Black Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It was the beginning of the Great Depression. Another famous crash took place on October 19, 1987 Black Monday. On Black Monday itself, the Dow Jones fell by 22.6% after completing a 5 year continuous rise in share prices. This event not only shook the USA, but quickly spread across the world. Thus, by the end of October, stock exchanges in Australia lost 41.8%, in Canada lost 22.5%, in Hong Kong lost 45.8%, and in Great Britain lost 26.4%. The names Black Monday and Black Tuesday are also used for October 28-29, 1929, which followed Terrible Thursday--the starting day of the stock market crash in 1929. The crash in 1987 raised some puzzles-main news and events did not predict the catastrophe and visible reasons for the collapse were not identified. This event raised questions about many important assumptions of modern economics, namely, the theory of rational human conduct, the theory of market equilibrium and the hypothesis of market efficiency. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the Federal Reserve system and central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday. Computer systems were upgraded in the stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market. The New York Stock Exchange and the Chicago Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time.

New York Stock Exchange (NYSE) circuit breakers[13]

% droptime of dropclose trading for

10% dropbefore 2PMone hour halt

10% drop2PM - 2:30PMhalf-hour halt

10% dropafter 2:30PMmarket stays open

20% dropbefore 1PMhalt for two hours

20% drop1PM - 2PMhalt for one hour

20% dropafter 2PMclose for the day

30% dropany time during dayclose for the day

Stock market indexMain article: Stock market indexThe movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.

Derivative instrumentsMain article: Derivative (finance)Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchangestheir history traces back to commodities futures exchanges), or traded over-the-counter. As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.

Leveraged strategiesStock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.

Short sellingMain article: Short sellingIn short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.

Margin buyingMain article: margin buyingIn margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).

New issuanceMain article: Thomson Financial league tablesGlobal issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.

Investment strategiesMain article: Stock valuationOne of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification.

Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year, compounded annually, since World War II).

TaxationMain article: Capital gains taxAccording to much national or state legislation, a large array of fiscal obligations are taxed for capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state, or that tax free stock market operations are useful to boost economic growthSENSEX - The Barometer of Indian Capital MarketsSENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. SENSEX has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the SENSEX has become one of the most prominent brands in the country.

SENSEX Calculation MethodologySENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds. The value of SENSEX is disseminated in real time.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception. (For more details click 'Dollex series of BSE indices')

SENSEX - Scrip Selection CriteriaThe general guidelines for selection of constituents in SENSEX are as follows:

1. Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.

2. Trading Frequency:The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

3. Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

4. Market Capitalization Weightage:The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.5. Industry/Sector Representation:Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

6. Track Record:In the opinion of the BSE Index Committee, the company should have an acceptable track record.

A stock exchange, (formerly a securities exchange) is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

The First Stock ExchangesIn 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.

House Ter Beurze in Bruges, Belgium.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.

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