Stock Exchanges

The Capital market is a market for financial investments that are direct or indirect claims to
capital. It is wider than the Securities Market and embraces all forms of lending and
borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The
Capital Market comprises the complex of institutions and mechanisms through which
intermediate term funds and long-term funds are pooled and made available to business,
government and individuals. The Capital Market also encompasses the process by which
securities already outstanding are transferred.

The Securities Market, however, refers to the markets for those financial
instruments/claims/obligations that are commonly and readily transferable by sale.

The Securities Market has two interdependent and inseparable segments, the new issues
(primary) market and the stock (secondary) market.

The Primary market provides the channel for sale of new securities. The issuer of securities
sells the securities in the primary market to raise funds for investment and/or to discharge
some obligation.

The Secondary market deals in securities previously issued. The secondary market enables
those who hold securities to adjust their holdings in response to charges in their assessment of
risk and return. They also sell securities for cash to meet their liquidity needs. This secondary
market has further two components.

First, the spot market where securities are traded for immediate delivery and payment. The
other is forward market where the securities are traded for future delivery and payment. This
forward market is further divided into Futures and Options Market (Derivatives Markets). In
futures Market the securities are traded for conditional future delivery whereas in option
market, two types of options are traded. A put option gives right but not an obligation to the
owner to sell a security to the writer of the option at a predetermined price before a certain
date, while a call option gives right but not an obligation to the buyer to purchase a security
from the writer of the option at a particular price before a certain date.

Stock Exchanges

Stock market is the place where buying and selling of stocks takes place. Stock Exchange is
the place for trading of stocks through stock broker or directly by authorised members and
are owned by either a group of member stock brokers, or by public with listed shares, or by
government or semi government bodies. Trades not involving an exchange are called “off
exchange or over the counter (OTC) trades.

Definitions of Stock Exchange

(1) According to Pyle, “Stock Exchange are market places where securities i.e.
shares, debentures, and bonds that have been listed thereon, may be bought and sold
for either investment or speculation.”
 (2) According to the Securities Contracts (Regulation) Act, 1956, “Stock Exchange
means an association, organization or body of individual whether incorporated or not,
constituted for the purpose of assisting, regulating, or controlling the business of
buying, selling or dealing in securities.”

(3) According to Husband and Dockerary, "Stock exchanges are privately organized
markets which are used to facilitate trading in securities."

The securities traded on an exchange includes shares and its derivatives like futures,
options, index futures, ETFs, unit trusts, pooled investment products and bonds. With the
advent of internet, exchanges have become more efficient with speed and accuracy, and cost
effective. The brokerage which was once around 2 to 3 percent, has come down to 0.1 to 0.5
percent.

Stock markets can exist in both real and virtual arenas. Stock exchanges with physical
locations carry out stock trading on trading floor. This method of conducting trading, where
the traders enter verbal bids, is called open outcry.

In virtual stock exchanges, trading is done online by traders who are connected to each other
by a network of computers. In addition to acting as a market place for stock trading, stock
markets also act as the clearinghouse for stock transactions.

The main features of a stock exchange are as under:

 Stock exchange is an organized market. It is run by an association, organization or

body of individuals.
 It deals in securities issued by various concerns such as companies, government
and other authorized authorities.
 The area of operation of a stock exchange is well defined.
 It is also called securities market or stock market.
 The main object of establishing a stock exchange is to assist, to regulate and to
control the business in securities.
 It operates as per guidelines and rules issued by Securities and Exchange
Board of India (SEBI)
 Stock Exchanges are registered, regulated or controlled as per Securities Contracts
(Regulation) Act, 1956 and Securities Contracts (Regulation) Rules, 1957
.
History of Stock Market

The world's first exchange was established in Antwerp, Belgium in 1460 under the rule of
Philip the Good and exchange traded financial securities, primarily bonds.

The Amsterdam Stock Exchange is considered the oldest in the world. It was established in
1602 by the Dutch East India Company. It was subsequently renamed the Amsterdam Bourse
and was the first to formally begin trading in securities. It merged on 22 September 2000 with
the Stock Exchange of Brussels and Paris to form Euronext, and is now known as Euronext
Amsterdam.
The Bombay Stock Exchange Limited or BSE is the oldest stock exchange in Asia and has
the greatest number of listed companies in the world, with 5200 listed as of August 2018.

The New York Stock Exchange (NYSE) is the world's largest stock exchange by market
capitalization.

List of top 15 exchanges with highest market capitalization

1. New York Stock Exchange, United States, US$ 11,837 billion

2. Tokyo Stock Exchange, Japan, US$ 3,306 billion
3. NASDAQ, United States, US$ 3,239 billion
4. Euronext, Belgium, France, Holland, Portugal, US$ l2,869 billion
5. London Stock Exchange, United Kingdom, US$ 2,796 billion
6. Shanghai Stock Exchange, China, US$ 2,704 billion
7. Hong Kong Stock Exchange, Hong Kong, US$ 2,305 billion
8. Toronto Stock Exchange, Canada, US$ 1,608 billion
9. BM&F Bovespa, Brazil, US$ 1,337 billion
10. Bombay Stock Exchange, India, US$ 1,306 billion
11. BME Spanish Exchanges, Spain, US$ 1,297 billion
12. Frankfurt Stock Exchange, Germany, US$ 1,292 billion
13. Australian Securities Exchange, Australia, US$ 1,261 billion
14. National Stock Exchange of India, India, US$ 1,224 billion
15. SWX Swiss Exchange, Switzerland, US$ 1,064 billion
The World Federation of Exchanges (WFE) is the trade association of 52 publicly regulated
stock, futures and options exchanges. Their market operators are responsible for the
functioning of key components in the financial world.
History of Indian Stock Exchanges

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities. In the
1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840
and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town
Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1.
This banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange
flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil
War broke and the cotton supply from the US to Europe stopped. Further the brokers
increased to 250.

The informal group of stockbrokers organized themselves as the The Native Share and
Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock
Exchange (BSE). BSE was shifted to an old building near the Town Hall. In 1928, the plot of
land on which the BSE building now stands (at the intersection of Dalal Street, Bombay
Samachar Marg and Hammam Street in downtown Mumbai) was acquired, and a building
was constructed and occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out
traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange
and they are still being followed. Several stock broking firms in Mumbai were family run
enterprises, and were named after the heads of the family. The following is the list of some of
the initial members of the exchange, and who are still running their respective business:

 D.S. Prabhudas & Company (now known as DSP, and a joint venture partner
with Merrill Lynch)
 Jamnadas Morarjee (now known as JM)
 Champaklal Devidas (now called Cifco Finance)
 Brijmohan Laxminarayan

In 1956, the Government of India recognized the Bombay Stock Exchange as the first
stock exchange in the country under the Securities Contracts (Regulation) Act.
The most decisive period in the history of the BSE took place after 1992. In the
aftermath of a major scandal with market manipulation involving a BSE member
named Harshad Mehta, BSE responded to calls for reform with intransigence. The
foot-dragging by the BSE helped radicalise the position of the government, which
encouraged the creation of the National Stock Exchange (NSE), which created an
electronic marketplace. NSE started trading on 4 November 1994. Within less than a
year, NSE turnover exceeded the BSE.
Bombay Stock Exchange (BSE) is the oldest stock exchange in India and in Asia as well. It
got Government of India's recognition as a stock exchange in 1956 under Securities Contracts
Act, 1956. It is spread all over India and is present in 417 towns and cities. Total companies
listed in BSE are around 5619. BSE’s online trading system is known as BOLT. BOLT makes
trading efficient, saves time and is transparent. Sensex is the index of BSE. Sensex of BSE is
composed of 30 financially sound company stocks which are liable to be modified from time
to time.

The NSE, on the other hand, was founded in 1992 and started trading in 1994.NSE stands for
National Stock Exchange and is the leading most exchange of India in terms of total volume
traded. It has presence in over 1700 cities and towns. NSE got recognition as a stock
exchange in July 1993 under Securities Contracts Act, 1956. Nifty or Nifty50 is the index of
NSE. It is composed of 50 diversified financially sound Indian company stocks which are
liable to be modified and updated from time to time.

However, both exchanges follow the same trading mechanism, trading hours, settlement
process, etc. Almost all the significant firms of India are listed on both the exchanges. NSE
enjoys a dominant share in spot trading, with about 75% of the market share, as of 2018, and
almost a complete monopoly in derivatives trading, with about a 98% share in this market,
also as of 2018. Both exchanges compete for the order flow that leads to reduced costs,
market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two
stock exchanges within a very tight range.

The trading volumes on exchanges have been witnessing phenomenal growth for last few
years. The growth of turnover has, however, not been uniform across exchanges as increase
in turnover took place mostly at big exchanges(NSE and BSE) and it was partly at the cost of
small exchanges that failed to keep pace with the changes. The business moved away from
small exchanges to big exchanges, which adopted technologically superior trading and
settlement systems. The huge liquidity and order depth of big exchanges further diverted
liquidity of other stock exchanges. The 19 small exchanges put together reported less than
0.02% of total turnover, while 2 big exchanges accounted for over 99.98 % of turnover. NSE
and BSE are the major exchanges having nationwide operations. NSE operated through 2,956
VSATs in 400 cities.

Role of Stock Exchanges

Stock Exchanges play a crucial role in the consolidation of a national economy in general and
in the development of industrial sector in particular. It is the most dynamic and organised
component of capital market. Especially, in developing countries like India, the stock
exchanges play a cardinal role in promoting the level of capital formation through effective
mobilization of savings and ensuring investment safety.

1. Raising capital for businesses

Exchanges help companies to capitalize by selling shares to the investing public.

2. Mobilizing savings for investment

 They help public to mobilize their savings to invest in high yielding economic sectors,
which results in higher yield, both to the individual and to the national economy.

3. Facilitating company growth

They help companies to expand and grow by acquisition or fusion.

4. Profit sharing

They help both casual and professional stock investors, to get their share in the wealth
of profitable businesses.

5. Corporate governance

Stock exchanges impose stringent rules to get listed in them. So listed public
companies have better management records than privately held companies

6. Creating investment opportunities for small investors

Small investors can also participate in the growth of large companies, by buying a
small number of shares.

7. Government capital raising for development projects

They help government to rise fund for developmental activities through the issue of
bonds. An investor who buys them will be lending money to the government, which is
more secure, and sometimes enjoys tax benefits also.

8. Barometer of the economy

They maintain the stock indexes which are the indicators of the general trend in the
economy. They also regulate the stock price fluctuations.

9. Liquidity of investment

Stock exchanges provide liquidity of investment to the investors. Investors can sell
out any of their investments in securities at any time during trading days and trading
hours on stock exchanges. Thus, stock exchanges provide liquidity of investment. The
online trading and online settlement of Demat securities facilitates the investors to
sellout their investments and realise the proceeds within a day or two. Even investors
can switch over their investment from one security to another according to the
changing scenario of capital market.

10. Wide Marketability to Securities

Online price quoting system and online buying and selling facility have changed the
nature and working of stock exchanges. Formerly, the dealings on stock exchanges
were restricted to its head quarters. The investors across the country were absolutely
in dark about the price fluctuations on stock exchanges due to the lack of information.
But today due to Internet, on line quoting facility is available at the computers of
 investors. As a result, they can keep track of price fluctuations taking place on stock
exchange every second during the working hours. Certain T.V. Channels like CNBC
are fully devoted to stock market information and corporate news. Even other
channels display the on line quoting of stocks. Thus, modern stock exchanges backed
up by internet and information technology provide wide marketability to securities of
the industries. Demat facility has revolutionized the procedure of transfer of securities
and facilitated marketing.

11. Investment safety

Stock exchanges through their by-laws, Securities and Exchange Board of India
(SEBI) guidelines, transparent procedures try to provide safety to the investment in
industrial securities. Government has established the National Stock Exchange (NSE)
and Over The Counter Exchange of India (OTCEI) for investors' safety. Exchange
authorities try to curb speculative practices and minimise the risk for common
investor to preserve his confidence.

12. Investment priorities

Stock exchanges facilitate the investors to decide his investment priorities by

providing him the basket of different kinds of securities of different industries and
companies. He can sell stock of one company and buy a stock of another company
through stock exchange whenever he wants. He can manage his investment portfolio
to maximise his wealth.

13. Wider Avenues of investment

Stock exchanges provide a wider avenue for the investment to the people and
organisations with investible surplus. Companies from diverse industries like
Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers,
etc. offer various kinds of equity and debt securities to the investors. Online trading
facility has brought the stock exchange at the doorsteps of investors through computer
network. Diverse type of securities is made available in the stock exchanges to suit
the varying objectives and notions of different classes of investor. Necessary
information from stock exchanges available from different sources guides the
investors in the effective management of their investment portfolios.
Market Structures
Market Structures Markets are classified by their procedures for matching buyers to sellers or
execution systems. The three main types of markets are order-driven markets, quote-driven
markets, and brokered markets. Hybrid markets use some combination of these three systems.
Now most of the equity markets in the world are hybrid markets.
Order-driven markets
Order-driven markets are quite common. All markets that conduct open-outcry auctions or
electronic auctions are order-driven markets. These include all major futures exchanges, most
stock and options exchanges, such as the New York Stock Exchange, American Stock
Exchange (merged with Nasdaq in 1998), Chicago Board of Trade, Chicago Board Options
Exchange, and Tokyo Stock Exchange, and many trading systems created by brokerages and
ECNs (Electronic Communications Networks) to organize trading in stocks, bonds, swaps,
currencies, and pollution rights. Governments commonly issue their new debt securities in
order-driven market calls.
In pure order-driven markets, buyers and sellers regularly trade with each other (through
brokers) without the intermediation of dealers. These markets have trading rules that specify
how they arrange their trades. Their order precedence rules determine which buyers trade
with which sellers, and their trade pricing rules determine the trade prices.
Most order-driven markets are auction markets where buyers seek the lowest available prices
and sellers seek the highest available prices. This process is called the price discovery process
because it reveals the prices that best match buyers to sellers.
Order-driven markets vary considerably in the implement of trading rules. In markets that
conduct oral or open-outcry auctions, traders negotiate their trades face-to-face or “cry out”
their bids and offers on an exchange floor. The trading rules in these markets determine who
can negotiate and when they can negotiate. Markets with rule-based order-matching systems
use rules to match orders. Most order-matching markets use electronic systems to match
orders automatically. Some order-matching markets still use manual operations, where their
clerks match buy and sell orders.
Despite the great variation in how order-driven markets operate, their trading rules are quite
similar. All order-driven markets use orders precedence rules to match buyers to sellers and
trade pricing rules to price the resulting trades.
Traders cannot choose with whom they trade in order-driven markets since the markets use
order precedence rules to arrange trades. They therefore often trade with traders with whom
they have no credit relationships. To prevent settlement failures, order-driven markets have
elaborate mechanisms to ensure that all their traders are trustworthy and creditworthy.
There are dealers trading in order-driven markets. In pure order-driven markets, they trade on
an equal basis with all other traders. Dealers provide most of the liquidity in some order-
driven markets although these markets are still known as order-driven because the dealers
cannot choose their clients. The exchange rules require that they trade with anyone who
accepts their offers.
There are different structures of order-driven markets. Some markets conduct single—price
auctions in which they arrange all trades at the same price following a market call. Other
markets conduct continuous two-sided auctions where buyers and sellers continuously
attempt to arrange their trades at prices that vary through time. Still others conduct crossing
networks in which they match orders at prices derived from major markets.
In call markets, all traders trade at the same time when the market is called. The market may
call all securities simultaneously, or it may call the securities one at a time in a rotation.
Markets that call in rotation may complete only one rotation per trading session or as many
rotations as their trading requires.
Most continuous order-driven stock markets and most electronic futures markets open their
trading sessions with a single price call market auction. These markets also use single price
auctions to restart trading following a halt.
The NYSE, NASDQ market, and the European markets open and close trading with a call
auction. The Deutsche Borse and Euronext Paris Bourse use calls to trade their least active
securities.
Call markets usually arrange their trades using order-driven execution systems. Most of them
use batch execution systems in which all trades are arranged at the same time by matching
orders with order precedence rules. But a few call markets allow bilateral trading where
traders arrange their trades among themselves.
Continuous trading markets are very common. Almost all major stock, bond, futures, options,
and foreign exchange markets have continuous trading sessions.
The main advantage of call markets is that all traders interested in an instrument meet at the
same place and at the same time so that buyers and sellers find each other easily. When
traders can easily find each other, the total trade surplus should be high. For a given order
flow, no other method of arranging trades can produce a higher total trader surplus than that
produced in a single price auction. Other advantages of call markets include fairness as all
traders have the same price; higher information efficiency as all traders have the same access
to market information; low costs since there is no bid/ask spread, and anonymity.
However, the single price call auction does not provide transactional immediacy. Also, for a
given order flow, the single price auction will trade a lower volume than the continuous
auction while it requires sufficient volume for efficient operation.
The main advantage of continuous trading is that it allows traders to arrange their trades
whenever they want. This flexibility can be very important to impatient traders who do not
want to wait for the next market call. The main disadvantage of continuous trading is higher
costs because of the bid/ask spreads. Economically, continuous auction produces a smaller
trader surplus than single price auction when processing the same order flow.
Recent developments in the equity markets around the world suggest that traders prefer
continuous markets with opening calls to exclusive call markets. Many national equity
exchanges have switched from call market rotations to continuous trading with opening calls,
but none has changed from continuous trading to exclusive call markets.
Order-driven market has excellent properties, particularly for liquid stocks, retail order flow,
and markets that are not under stress. But illiquidity is a serious problem for pure order
driven markets, particularly for the mid- and small-cap issues. There are often many orders
that are too big to be easily digested in the market, primarily those generated by institutional
customers, and stress may occur on all markets every day. There are often insufficient limit
orders or inadequate liquidity for low-cap and mid-cap stocks in order driven markets, which
may disrupt price discovery and trading when there are large orders. The difficulty of price
formation is accentuated after major news hit the market. Hence, order-driven markets need
market makers to reduce the stress.

Quote-driven markets
The term, quote-driven market, is created because prices are set only by dealer quotes in the
market. The markets are also known as dealer markets and market maker markets because
dealers make market and supply all the liquidity. In pure quote—driven systems, dealers
arrange every trade when they trade with their customers and among themselves, they often
broker trades among public traders.
In some dealer markets, interdealer brokers help dealers arrange trades among themselves as
many dealers do not like their rivals to know about their trades. By allowing dealers to trade
with each other anonymously, interdealer brokers protect dealers and their clients from
predatory actions by rivals.
The Nasdaq Stock Market, the London Stock Exchange, the eSpeed government bond trading
system, and the Reuters 3000 foreign exchange trading system are well-known quote-driven
markets. However, most dealer markets are informal networks of dealers who communicate
with their clients and among themselves by telephone. A comparison between a traditionally
quote-driven (Nasdaq) market and a traditionally order-driven (the NYSE) market is shown
in Table 1-3.

Here we discuss three major differences between the two markets; one is essentially quote-
driven, while the other is essentially order-driven.
Competition: The Nasdaq market traditionally depended on interdealer competition to keep
markets fair, orderly, and liquid. Market makers on the Nasdaq market compete with each
other, they have been reluctant to accept additional competition from the public order flow.
By contrast, there is just one market maker (the specialist) per issue on the NYSE, the big
board depends on competition from public limit orders, floor traders, specialists on other
exchanges, and its own surveillance system to keep markets fair, orderly, and liquid.
Flexibility: Market makers on the Nasdaq market are free to select the stocks in which they
make markets or offer liquidity. Broker-dealer firms are free to participate in the new-issues
market, although they must temporarily give up market making for an issue in the secondary
market when they underwrite for the same company in the primary market. On the other
hand, specialists on the NYSE can only operate in the secondary market. A specialist firm
must apply for being the market maker for a newly listed issue. An issue is rarely given up by
a specialist firm and is almost never taken away once assigned by the exchange’s stock
allocation committee.
Information Flows: Specialists on the NYSE see a larger fraction of the order flow because
order flow is more consolidated in exchange trading. Specialists on the NYSE are prohibited
from dealing directly with institutions. By contrast, market makers on the Nasdaq market can
receive orders directly from institutional customers.
In addition, some market makers, dealers and brokers maintain close contact with the listed
firms and commonly act in an advisory capacity for these firms. This direct contact gives
OTC (over-the-counter) dealers an information advantage as they can better sense the motive
behind an order, i.e., whether an order is issued by an informed trader or an unformed trader
(e.g., from an index fund).
Brokered markets
In brokered trading systems, brokers actively search to match buyers and sellers, and arrange
trades. Brokers usually start searches when their clients ask them to fill their orders; they also
initiate searches when they suggest trades to their clients.
The broker’s role in finding liquidity is the distinguishing characteristic of a brokered market.
In markets where dealers will not normally trade and where traders usually do not make
public offers to trade, the markets are typically illiquid; traders need brokers to search for
traders on the other side.
Concealed traders and latent traders are liquidity suppliers in brokered markets.
Concealed traders want to trade but do not want to expose orders to the public. They offer
liquidity when brokers present them with trading opportunities they like. Latent traders want
to trade only when brokers present them with attractive trading opportunities. A good broker
can find concealed traders and latent traders.

Hybrid markets
Hybrid markets mix the characteristics of order-driven, quote-driven, and brokered markets.
In fact, most exchanges/markets have long had hybrid structures as hybrid markets give
customers the flexibility to choose between either supply liquidity or receive liquidity.
For example, although the New York Stock Exchange is essentially an order-driven market, it
requires its specialists to offer liquidity as dealers if no one else will do so. There are dealers
acting as market makers at the Big Board, providing liquidity and dealer capital for floor
trading and upstairs block transactions, participating in price discovery, facilitating market
timing, and animating trading. The New York Stock Exchange therefore has elements of a
quote-driven market. Block brokers arrange upstairs negotiations for large trades for NYSE
issues and bring to the trading floor for execution. The Nasdaq Stock Market is also a hybrid.
Although essentially a quote-driven market, it requires its dealers to display, and in many
circumstances to execute, public limit orders. The Nasdaq therefore has elements of an order-
driven market. The London Stock Exchange (LSE) used to be competitive market-maker
markets, but have altered their systems to include the public display of customer limit orders,
particularly with the introduction of SETs (stock exchange electronic trading service) system
in 1997. Both the Nasdaq market and the London Stock Exchange now open and close
market with a call auction.
Since brokers sometimes arrange large block trade in both of these markets, they also have
some characteristics of brokered markets. The Paris Bourse, Deutsche Börse, and other
European continental exchanges run open, close, and intraday call auctions. The continuous
order-driven electronic trading platforms in Europe include market makers on both
contractual and voluntary bases. Almost all European markets open and close trading with a
call auction. The Tokyo and other Far East exchanges have been continuous order-driven
environments that include call auctions at market openings and closings.
A hybrid structure can sharpen price discovery, provide enhanced liquidity, and help to
stabilize a market under stress. Market makers play a vital role in the hybrid structure, and
call auction and continuous trading together in a hybrid structure strengthens an order-driven
market.
Different types of traders in the markets have different trading needs depending on their size,
motive, and the characteristics of the stocks; these needs have been driving the advance
toward hybrid structure around the world. Since late 1990s, major markets around the world
have been explicitly designed as hybrids. Limit order books displaying public limit orders
were introduced in the Nasdaq market.
For this purpose, the Nasdaq market started its Montage system in 1997, and its
SuperMontage system in October 2002, which can handle both dealer and public orders.
Similarly, the London market introduced SETs. Market makers are included in order-driven
platforms throughout Europe, and virtually all markets globally now conduct call auctions.

'Quote-Driven Market'
Contrast to Order driven market is a quote-driven market, where designated market makers
provide bids and offers for other market participants trade on. Typically, the most liquid
markets are order-driven while less liquid markets are quote-driven due to less consistent
order flow which would cause deep price dislocations in a purely order-driven market.
Many markets in the world are a hybrid of these two types.
A quote-driven market is an electronic stock exchange system in which prices are determined
from bid and ask quotations made by market makers, dealers or specialists. In a quote-driven
market, also known as a price driven market, dealers fill orders from their own inventory or
by matching them with other orders. A quote-driven market is the opposite of an order-
driven market, which displays individual investors' bid and ask prices and the number of
shares they want to trade.

In quote-driven markets, customers trade at prices quoted by dealers that generally work for
commercial banks, investments banks, broker-dealers, or trading houses. Most trades in these
markets are conducted through proprietary computer communications networks or by phone.

Quote-driven markets are most commonly found in markets for bonds, currencies and
commodities. Quote-driven markets are also known as a dealers market because all trades are
executed through dealers. The dealers, working with investment banks, commercial banks
and broker-dealers, provide quotes for different instruments and all customers need to trade
through them at the quoted prices. Some people may also refer to quote-driven markets as a
dealer- or price-driven market. The following are some of the key points about the quote-
driven market.

Traders may either accept the prices quoted by the dealers or try to negotiate better prices
either themselves or through their broker or agent. In a pure quote-driven market, all traders
must trade through dealers; however, dealers may also trade among themselves through inter-
dealer brokers. In a quote-driven market, dealers supply all the liquidity in the market.

Dealers may choose not to execute a trade for a specific client. This is often done because
some dealers specialize in certain types of clients, such as retail or institutional.

Order-Driven Markets vs. Quote-Driven Markets

Order execution is not guaranteed in an order-driven market, but it is guaranteed in a quote-
driven market because market makers are required to meet the bid and ask prices they quote.
A quote-driven market is more liquid, but lacks transparency. A hybrid market combines
aspects of both quote-driven and order-driven markets. The NYSE and Nasdaq are both
considered hybrid markets.
In an order-driven market, orders of both buyers and sellers are shown, displaying the price at
which each is willing to buy or sell a stock and the quantity of the stock that they are willing
to buy or sell at that price. An order-driven market is transparent in the sense that it clearly
shows all of the market orders and the prices at which people are willing to buy or sell, which
is not the case for quote driven-markets. Furthermore, a quote-driven market is more liquid
due to presence of market makers, but this is not the case for order-driven markets.

Market Structures
The trading rules and the trading systems used by a market define its market structure.
They determine who can trade; what they can trade; and when, where, and how they can
trade. They also determine what information traders can see about orders, quotations, and
trades; when they can see it; and who can see it.
Market structure is extremely important because it determines what people can know and do
in a market. Since power comes from knowledge and the ability to act on it, market structure
helps determine power relations among various types of traders. These relationships greatly
affect who will trade profitably.
Trading session
Trading takes place in trading sessions. The two types of trading sessions are continuous
trading sessions and call market sessions. In continuous trading, traders can attempt to
arrange their trades whenever the market is open. In call markets, all trades take place only
when the market is called. Trading forums are the places where traders arrange their trades.
In physically convened markets, traders must be on a trading floor to negotiate their trades.
Physically convened stock markets trade at posts. In distributed access markets, traders use
telephones or screen-based trading systems to arrange their trades from their offices.
Physically Convened Screen-based Markets
Although screen-based trading systems are ideally suited for distributed access markets,
many Asian exchanges with screen-based trading systems once required their traders to be on
their trading floors to use their electronic systems. This arrangement made it easier for
exchanges to regulate their traders. It also allowed them to construct reliable communications
networks, which was once an important issue in countries with poor telecommunications
infrastructures.
Many traders like to trade in physically convened markets because they enjoy the society of
other traders. Now that exchange regulations no longer require them to be there, many traders
have stayed on the exchange floor.

Some countries require that traders arrange all trades in a given instrument at a particular
exchange. For example, with few exceptions, it is illegal to arrange trades in a Chicago Board
of Trade corn futures contract outside of the corn futures trading pit on the CBOT floor.
These restrictions are common in many futures markets and in the equities markets of some
Asian and Eastern European countries.
Traders and exchanges use various execution systems to arrange trades. In quote-driven
systems, dealers arrange most trades when they trade with their customers. In order-driven
systems, all trades are arranged by using order precedence rules to match buyers to sellers
and trade pricing rules to determine the prices of the resulting trades. In brokered trading
systems, brokers arrange trades by helping buyers and sellers find each other.
Various information systems move information in and out of the market, present it, and store
it.
Order routing systems send orders from customers to brokers, from brokers to dealers, from
brokers to markets, and from markets to markets. These systems also send reports of filled
orders back to customers.
Order presentation systems present orders to traders so that they can act upon them. The
systems may use screen-based, open-outcry, or hand-signaling technologies.
Order books store open orders.
Market data systems report trades and quotes to the public.
In most markets, traders can only use prices that are an integer multiple of a specified
minimum price increment. The size of the increment, measured as a fraction of price, varies
considerably across markets. The increment is an extremely important determinant of market
quality in many markets.
Order Precedence Rules
Markets with order—matching systems use their order precedence rules to arrange trades.
They first rank orders using their primary order precedence rules, if two or more orders have
the same primary precedence, the markets then apply their secondary precedence rules.
Futures markets and major European equity exchanges use time precedence while U.S. stock
exchanges use public order precedence as secondary precedence rules. Markets apply these
rules one at a time until they rank all orders by their precedence.
Price precedence: The price precedence rule gives precedence to the orders of the best
prices. Buyers can accept only the lowest asked prices and sellers can accept only the highest
bid prices. Market orders always rank the highest because the prices at which they may trade
are not limited.
All order-matching markets use price priority as their primary order precedence rule.
Exchanges do not have to adopt special procedures to enforce price priority, because it is a
self—enforcing rule as honest traders naturally search for the best prices. Traders acquire
price priority by bidding or offering prices that improve the current best bid or offer. Any
trader may improve the best prices at any time.
Markets use various secondary precedence rules to rank orders that have the same price. The
most commonly used rules rank orders based on their time of submission, on their display
status, and on their size. All rule-based order-matching systems must have at least one
secondary precedence rule. Some use more than one. Futures markets use time precedence as
the secondary precedence; U.S. stock exchanges use public order precedence as the
secondary precedence and then time precedence.
Time precedence: The time precedence rule gives precedence to the traders whose bid or
offer first improves the current best bid or offer. Floor time precedence rule is the same as the
time precedence rule in oral auctions. Strict time precedence ranks all orders at the same price
according to their submission time. Pure price—time precedence systems rank orders based
only on price priority and strict time precedence.
The time precedence rule encourages price competition. It encourages traders to improve
prices aggressively and rewards aggressive traders by giving them the exclusive right to trade
first at the improved price. Traders who want to trade ahead of a trader who has time
precedence must improve the price.
Time precedence is not a self-enforcing rule. Most traders do not care whose bid or offer they
accept as long as they get the same price. Traders who have time precedence must therefore
defend it when someone improperly attempts to bid or offer at the same price.
Time precedence is meaningful only when the minimum price increment is not trivially
small. If it is very small, the time precedence rule gives little privilege to the traders who
improve price. However, if the tick is too large, traders are reluctant to improve prices
because of the increased trading cost.
Public precedence: The public precedence rule gives public orders the priority at the same
prices. Exchanges use this rule to give public traders more access to their markets and to
weaken the informational advantages that floor traders have. The public order precedence
rule allows public traders to take precedence over a member even when the member has time
precedence. This rule also increases investor confidence in the exchange by assuring them
that exchange members cannot step in front of their orders. Without this rule, exchange
members usually can acquire time precedence at a new price before public traders because
members see prices change first and can quote faster than public traders can submit orders.
Display precedence gives displayed orders precedence over undisclosed orders at the same
price. Markets give precedence to displayed orders in order to encourage traders to expose
their orders. If an order is partly displayed and partly undisclosed, the market usually treats
the two parts separately.
Size precedence varies by market. In some markets, large orders have precedence over small
orders, while in other markets the opposite holds. When two or more orders are at parity, and
they cannot all be fully filled, some markets allocate available size on a pro rata basis. In a
pro rata allocation, orders fill in proportion to their size.
Most exchanges allow traders to issue orders with size restrictions. Traders may specify that
their entire order must be filled all at once, or they may specify a minimum size for a partial
execution. Orders with size restrictions usually have lower precedence than unrestricted
orders because they are harder to fill. Large traders use these restrictions to avoid paying
fixed costs for settling numerous small trades. These costs include exchange fees, settlement
fees, and the costs of accounting for each trade.
Stock Exchange Trading Mechanism

Trading at both the exchanges takes place through an open electronic limit order
book, in which order matching is done by the trading computer. There are no market
makers or specialists and the entire process is order-driven, which means that market
orders placed by investors are automatically matched with the best limit orders. As a
result, buyers and sellers remain anonymous. The advantage of an order driven market
is that it brings more transparency, by displaying all buy and sell orders in the trading
system. However, in the absence of market makers, there is no guarantee that orders
will be executed.

All orders in the trading system need to be placed through brokers, many of which
provide online trading facility to retail customers. Institutional investors can also take
advantage of the direct market access (DMA) option, in which they use trading
terminals provided by brokers for placing orders directly into the stock market trading
system.

Automated Trading System

Today our country has an advanced trading system which is a fully automated screen
based trading system. This system adopts the principle of an order driven market as
opposed to a quote driven system.

i) NSE operates on the 'National Exchange for Automated Trading' (NEAT) system.
ii) BSE operates on the „BSE‟s Online Trading‟ (BOLT) system.

1. Market Types

The Capital Market system (the NEAT system) has four types of active markets:

1. Normal Market: Normal market consists of various book types in which orders
are segregated as Regular Lot Orders, Special Term Orders, and Stop Loss
Orders depending on the order attributes.

2. Auction Market: In the auction market, auctions are initiated by the exchange
on behalf of trading members for settlement related reasons.

3. Odd Lot Market: The odd lot market facility is used for the Limited Physical
Market and for the Block Trades Session.

4. Retail Debt Market: The RETDEBT market facility on the NEAT system of
capital market segment is used for transactions in Retail Debt Market session.
Trading in Retail Debt Market takes place in the same manner as in equities
(capital market) segment.

2. Market Timings:
 Trading on the equities segment takes place on all days of the week (except Saturdays
and Sundays and holidays declared by the Exchange in advance). The market timings
of the equities segment are as follow;

(i) Market Opening Phase:

During marketing opening session the trading member can carry out the following
activities after login to the operating system and before the market opens for trading:

(a) Set up Market Watch (the securities which the user would like to view
on the screen)

(b) View Inquiry screens

At the point of time when the market is opening for trading, the trading member cannot
login to the system. A message ‘Market status is changing. Cannot login for sometime’
is displayed. If the member is already logged in, he cannot perform trading activities till
market is opened.

(ii) Pre-open

The pre-open session is for duration of 15 minutes i.e. from 9:00 am to 9:15 am. The
pre-open session is comprised of Order collection period and order matching period.

 The order collection period of 8* minutes is provided for order entry,

modification and cancellation. (* - System driven random closure
between 7th and 8th minute). During this period orders can be entered,
modified and cancelled. The information like Indicative equilibrium /
opening price of scrip, total buy and sell quantity of the scrip is
disseminated on the NEAT/BOLT Terminal to the members on real time
basis.

 Order matching period (9.08 to 9.12), starts immediately after

completion of order collection period. Orders are matched at a single
(equilibrium) price which will be open price. The order matching
happens in the following sequence:

 Eligible limit orders are matched with eligible limit orders

 Residual eligible limit orders are matched with market orders

 Market orders are matched with market orders

 During order matching period order modification, order

cancellation, trade modification and trade cancellation is not
allowed. The trade confirmations are disseminated to respective
members on their trading terminals before the start of normal
market.
  Buffer Period (9.12 to 9.15)

After completion of order matching there is a silent period to facilitate

the transition from pre-open session to the normal market. All
outstanding orders are moved to the normal market retaining the original
time stamp. Limit orders are at limit price and market orders are at the
discovered equilibrium price. In a situation where no equilibrium price
is discovered in the pre-open session, all market orders are moved to
normal market at previous day’s close price or adjusted close price /
base price following price time priority. Accordingly, Normal Market /
Odd lot Market and Retail Debt Market open for trading after closure of
pre-open session i.e. 9:15 am.

 The opening price is determined based on the principle of

demand supply mechanism. The equilibrium price is the price at
which the maximum volume is executable. In case more than one
price meets the said criteria, the equilibrium price is the price at
which there is minimum unmatched order quantity. In case more
than one price has same minimum order unmatched quantity, the
equilibrium price is the price closest to the previous day’s closing
price. In case the previous day’s closing price is the mid-value of
pair of prices which are closest to it, then the previous day’s
closing price itself will be taken as the equilibrium price. In case of
corporate action, previous day’s closing price is adjusted to the
closing price or the base price. Both limit and market orders are
reckoned for computation of equilibrium price. The equilibrium
price determined in pre-open session is considered as open price
for the day. In case if only market orders exists both in the buy and
sell side, then order is matched at previous days close price or
adjusted close price / base price. Previous day’s close or adjusted
close price / base price is the opening price. In case if no price is
discovered in pre-open session, the price of first trade in the
normal market is the open price.

(iii) Normal Market Open Phase (9.15 to 3.30)

The open period indicates the commencement of trading activity. To

signify the start of trading, a message is sent to all the trader
workstations. The market open time for different markets is notified by
the Exchange to all the trading members. Order entry is allowed when
all the securities have been opened. During this phase, orders are
matched on a continuous basis. Trading in all the instruments is allowed
unless they are specifically prohibited by the Exchange. The activities
that are allowed at this stage are Inquiry, Order Entry, Order
 Modification, Order Cancellation (including quick order cancellation),
Order Matching and Trade Cancellation.

(iv) Market Close (3.30-3.40)

When the market closes, trading in all instruments for that market comes
to an end. A message to this effect is sent to all trading members. No
further orders are accepted, but the user is permitted to perform
activities like inquiries and trade cancellation.

(v) Post-Close Market (3.40-4.00)

This closing session is available only in Normal Market Segment. Its

timings are from 3.40 PM to 4.00 PM. Only market price orders are
allowed. Special Terms, Stop Loss and Disclosed Quantity Orders, Index
Orders are not allowed. The trades are considered as Normal Market
trades. Securities not traded in the normal market session are not
allowed to participate in the Closing Session.

(vi) Surcon

Surveillance and Control (SURCON) is that period after market close

during which, the users have inquiry access only. After the end of
SURCON period, the system processes the data for making the system
available for the next trading day. When the system starts processing
data, the interactive connection with the NEAT system is lost and the
message to that effect is displayed at the trader workstation.
Mode of stock Market Trading

(A) Online Stock Trading

Doing stock trading with help of computer, internet connection and with
trading/demat account is called Online Stock Trading. If you would like to do
online stock trading then you should have a computer, internet connection and
online trading account. Basically people use online stock trading who want to
trade themselves.
Essential of Online Trading –
 Online trading account - You have to open an online trading account
with any of the bank or financial trading system like ICICIdirect.com,
5paisa.com, Stockkhan.com etc. There will be nominal annual charges.
These charges vary from bank to bank but should not be more than
Rs.1000 annually.
 A computer with internet connection or can do trading in internet cafe.
 After successfully opening the online account you will receive the
username and password with the help of which you can login in online
trading system and trade yourself.
 The trading system executive (with whom you opened trading account)
will help you initially about how to use the online trading system.
 Once you get familiar with the system then you can trade yourself at
your home or in the internet cafe.
 Nowadays you can get internet enabled on your cell (which is called
GPRS) whose speed will be sufficient to do trading and also the
charges of GPRS are very nominal.
Advantages of Online Trading
 No need to depend on any broker or anybody else to place the order or
to square off the order. In short you are the boss of yourself to do
trading of stocks.
 It’s reliable, convenient and you can take your own decisions yourself
by actual selling or analyzing the market on the computer screen
instead of calling broker all the time and getting news about the
market.
 It’s not possible or practical for a broker to update you about each and
every information about the market or any news which will influence
or affect the stock market. Because he may be having many other
customers like you and even if he updates you by that time the news
have been affected the concerned sector or stock. So if you are doing
online trading yourself, then you may save yourself from big disaster.
You will get news and updates on various websites and also on your
online trading system and most of the information will be free of cost.
 “Always remember stock market always get influences (or affected) by
the appropriate news. So get updated or be in touch with news all the
time. This will benefit you always.
 By doing online trading yourself, you can see and judge where market
(or your stock) is heading by seeing different graphs online yourself,
which is not possible if you’re trading through broker. Some online
trading systems have graphs integrated in their system, so your job is
to just add those graphs and check the status of current market (or
stock) (graphs will be discussed later). And depending on your analysis
you can take steps towards your successfully trading.
 All your transactions and related documents can be seen online and can
also be downloaded to your PC without depending on your broker. You
can also check the status of your amount on daily basis through you
online trading system.
Disadvantages of Online Trading
 In online trading system you may face problem of disconnection to
internet due to which you will not be able to login to your online
trading system and hence you can’t do trading yourself. At such
critical times you have to call trading system executive and do
trading or square off your transactions.
 If may face other problems such as electricity cut-off, PC problem
etc during online trading then immediately you have to contact
your trading system executive and place orders or do trading.
 (B) Mobile Trading
Doing stock trading with the help of Mobile phone is called Mobile
trading
(C) Offline Stock Trading
Doing stock trading with the help of broker or through phone is called
Offline trading. In other words trading will be done by another person
on your behalf based on the instructions given by you, and then the
other person can be a broker. The broker will do buying and selling of
stocks on your behalf depending on the instructions given by you. If
you want to do offline stock trading then you needs to open the Demat
account.
Type of stock Market Segment and Trading
Cash Segment
The markets where securities have to be delivered by the seller and cash to be
paid by the buyer immediately
1. Day Trading
Buying and selling of stocks on daily basis is called day trading this is also
called as intraday trading. Whatever you buy today you have to sell it today OR
whatever you sell today you have to buy it today and very importantly during
market hours that is 9.55 am to 3.30 pm (Indian time). Traders are called as day
trader. This type of trading demands quick thinking and immediate action and is
not suitable for beginners who are new to the stock market. Day trading branches
out into many sub-categories:
i. Arbitrage
This technique focuses on the slight differences in the prices of financial
instruments. Whenever there is a difference in the price of a financial
instrument between two markets, the trader or the arbitrageur will buy
the securities for a low price and sell it back for a higher price.
ii. Market Making
Market makers are individuals appointed by major stock exchanges to
provide bid and ask rates that help stock traders buy and sell their stocks.
iii. Momentum day trading
 This trading focuses on the trending stock of the day, where traders
attempt to cash in on the momentum/volatility of the stock on a given
day.
iv. Pattern trading
Volatility is a distinguishable feature of the market. The graphs of the
stock market go up and down leading to the formation of various patterns
known as chart patterns. Pattern trading gives more consistent and
profitable trades in the long run.
v. Scalping
This is a quick trading technique where the trader makes profits by
carrying out many numbers of trades for the day. Scalping helps traders
garner profits from the differences between the ask and bid prices.
vi. Swing trading
Swing trading is a technique that focuses on the price of a stock on the
beginning of the day and the closing price of the stock for the same day.
This method focuses on the price differences and the movement in the
stock.
vii. Trending stock
Many stocks witness fluctuations in their prices when press releases are
announced. The trader can trade any financial instrument that is backed
by a press release and profit from the trade. Like other methods of day
trading, this trading happens on the same day.
2. Delivery/Position Trading
In Delivery Trading, as the name say, you have to take the delivery of stocks
and after getting these stocks in your Demat account you can sell them at
anytime (or you can hold them till you want, there is no restriction). In
delivery trading you need to have the amount required to buy stock for
example, if you want to buy 100 stocks of Reliance at price 500 than you must
have (100*500) Rs. 5000 in your account; once you purchased these stocks
will get deposited in your Demat account (say after basically, trading day and
2 additional days). Then you can sell these stocks when the price of these
stocks goes up or else you can sell whenever you want.
*Please Note - First you have to buy and sell. You can’t sell before buying in
delivery trading while it’s possible in day trading.
 i. Short-term trading
This type of trading entails the trading transaction to have a shelf life of a
day to a few weeks. The short trade starts by buying the financial
instruments with a holding period of a day or few weeks. The trader will
create a sell position in this technique.
ii. Medium-term trading
The trade of a few weeks to few months is known as medium-term trading.
This trading indicates the stock has the potential to reach a high position in the
future.
iii. Long-term trading
This technique of trading is mostly used for stocks that have long standing in
the market. These stocks have the potential to become profitable by the day,
so the holding period of these stocks ranges from few months to a few years.
3. Swing trading uses a slightly longer time horizon than day trading, watching a
stock for weeks or months before trading. This type of stock market trading
relies on careful monitoring of fundamental and technical analysis. Swing
traders often specialize in a certain business or industry so that they become
experts in the movement within those stocks. They also have more time to study
the company financial reports and industry forecasts. Since swing trading does
not require hours of daily monitoring, it is a good strategy for the trader who
wants to make money from stock market trading without turning it into a full
time job. Even the study of reports could be done during the daily commute or
lunch hour so that the swing trader stays well informed.
4. Trend Trading
Trend Trading is a technique of stock trading, where a trade is entered after
confirmation of a market trend and is carried on to the end of the trend.
Stock market moves only in three directions. Either it moves up, moves down or
moves sideways. These trends, respectively called as an Uptrend, a Down trend
or a Side trend.
The rule is to always buy in an uptrend, sell in down trend and cross your hands
(go fishing) in side trend. Always remember that market trend is your friend,
trend is your friend till the end and always be with the friend (trend).
The trend can be determined by analyzing the price action. The basic criterion
for an uptrend is that, the prices keep making higher highs and higher lows
where as a down trend is characterized by lower lows and lower highs. A side
 trend does not exhibit such a pattern. It keeps moving up and down, within a
range, sometimes haphazardly. It seems to go nowhere.
Trend differs in different time period charts. It can be up in weekly chart but
down in daily charts. At the same time it can be up in hourly chart and down in
five minute chart. So the analysis of trend should be done in the trading time
period and one about four to five times the trading time period.
This means that if you are day trading in five minutes time frame, then both five
minute chart and twenty or twenty five minute chart should be analyzed. Both
need to be in uptrend to take long trades and both need to be in down trend to
take short trades.
5. Contrarian Investing
Contrarian investing is the ideology in which an investor attempts to make
profits by making his decision against the popular consensus but only when the
conventional wisdom appears to be wrong. A contrarian investor moves against
mass psychology and looks for an opportunity of mispricing of the stocks due to
consensual opinion. They believe in betting against the crowd.
When the stock prices are down and the people are bearish, contrarian investors
find good opportunity to buy the under-priced stocks. When the stock prices are
high and the people are bullish, a contrarian investor tends to sell his stocks as he
finds it over-priced and believes to make a good profit by selling it at that time.
A contrarian investor likes to invest opposite of the trends and what the majority
are doing. He believes in taking advantage of the temporary mispricing of the
stock by the masses. By choosing out of the favor stocks, a contrarian investor
tends to make a profit by following the same old strategy of buy low and sell
high.
6. Range Trading
Range Trading is a technique of stock trading, where a stock is bought and sold,
when the prices move up and down with in a definable range.
Stock market moves only in three directions. Either it moves up, moves down or
moves sideways. These trends are respectively called as an Uptrend, a Down
trend or a Side trend.
Stock prices move up and down, and create trends in the market. An higher high,
higher low forms an uptrend. A lower low, lower high forms adown trend.
A side trend does not exhibit such a trending pattern. It keeps moving up and
down, within a range, sometimes haphazardly. It seems to go nowhere.
7. Dabba Trading
We often read about dabba trading, not being permitted by the regulators. Many
do not know the mechanics, and also the risk associated with it, till now. Dabba
 means box and a dabba operator, in stock market terminology is the one who
indulges in dabba trading. His office is like any other broker’s office having
terminals linked to the stock exchange showing market rates of stocks. However,
the difference is that the investor’s trades do not get executed on the stock
exchange system but in the dabba operator’s books only. A dabba operator acts
as a principal to all the trades and not as an agent of the client. He is a counter
party to the trades, whereas, he should be the Clearing Corporation who
guarantees trades on the BOLT/NEAT system. This kind of operation, where
trade is kept within the books of the operator is called “dabba” in the popular
market terms.
8. There are many other different types of stock trading other than the types
mentioned above, and they are: IPO trading, Exchange-Traded Funds (ETF)
trading, Futures trading, Options trading, etc.
9. Value Investing is a method of stock trading, where in investment is made in
undervalued companies which have high intrinsic value.
10. Block Trading session is available for the next 35 minutes from the open of
Normal Market.
11. Bulk Trading
12. Basket Trading
The purpose of Basket Trading is to provide NEAT users with a facility to
create offline order entry file for a selected portfolio. On inputting the value,
the orders are created for the selected portfolio of securities according to the
ratios of their market capitalizations. All the orders generated through the
offline order file are priced at the available market price.
Quantity of shares of a particular security in portfolio is calculated as under:

No. of Shares of a security in

portfolio =
Where:
Current Portfolio Capitalization = Summation [Last Traded Price (Previous
close if not traded) * No. of Issued shares]
In case at the time of generating the basket if any of the constituents are not
traded, the weightage of the security in the basket is determined using the
previous close price. This price may become irrelevant if there has been a
corporate action in the security for the day and the same has not yet been
 traded before generation of the file. Similarly, basket facility will not be
available for a new listed security till the time it is traded.
5) Reverse Basket on Traded Quantity
The Reverse Basket Trading provides the users with an offline file for
reversing the trades that have taken place for a basket order. This file will
contain orders for different securities of the selected basket file. The Orders
are created according to the volume of trade that has taken place for that
basket. This helps to monitor the current status of the basket file as the latest
status of the orders are displayed in the list box. It is advisable to create each
basket with a different name and clean up the directories regularly and not
tamper with the original basket file once it has been loaded as it may give
erroneous results.
6) Index Trading
The purpose of Index Trading is to provide users with a facility of buying and
selling of Indexes, in terms of securities that comprises the Index. The users
have to specify the amount, and other inputs that are sent to the host, and the
host generates the orders. The Index Trading enables the users for buying or
selling an Index Basket. Putting orders in securities in proportion that
comprises the chosen index, simulates the buying and selling of Index basket.
Formula Used to calculate no of shares of each security is
Amount * Issued Capital for the security * Free Float Factor No of Shares of a
security in index =
Current Market Capitalization of the Index
Current Market Capitalization of the Index =
Summation [Last Traded Price (Previous close if not traded) * No of Issued
shares] The no of shares are rounded off to the nearest integer. If the Index
basket contains any security whose regular lot is not one, then the file will
need to be corrected by the user to accommodate shares in tradable lots.
7) Buy Back Trades
The purpose of Buy Back Trade functionality is to give information to the
market about the buy back trades executed from the start of the buy back
period till current trading date in the securities whose buyback period is
currently on. The front screen shows Symbol, Series, Low price (Today), High
price (Today), Weightage. Average price, Volume (Today) and Previous day
Volume.
Trading cycle in the Indian stock exchange

Trading is the process of buying or selling the security of a company. A person holding assets
(securities/funds), either to meet his liquidity needs or to reshuffle his holdings in response to
changes in his perception about risk and return of the assets, decides to buy or sell the
securities. He finds out the right broker and instructs him to place buy/sell order on an
exchange. The order is converted to a trade as soon as it finds a matching sell/buy order. The
trades are cleared to determine the obligations of counterparties to deliver securities/funds as
per settlement schedule. Buyer/seller delivers funds/securities and receives securities/ funds
and acquires ownership over them.

A securities transaction cycle is presented in Figure

Transaction cycle

The Indian share market has a complex mechanism that ensures investors receive the shares
they bought or the money they made by selling the same. The process by which the shares are
settled in the Indian stock market is called the trading cycle. The trading cycle includes
performing three basic tasks:

 Trading

 Clearing

 Settlement

A. Trading

Trading is the process of buying the security of a company. The investor takes a decision of
investing in a particular company based on its past performance and future potential. Trading
is said to have happened when the investor has confirmed the order and the money has been
debited from his/her account towards the shares of the company.

1. Decision to trade
2. Placing an Order
3. What Are Orders, and Why Do People Use Them?
Orders are instructions that traders give to the brokers and exchanges that arrange
their trades. The instructions explain how they want their trades to be arranged. An
order always specifies which instrument (or instruments) to trade, how much to trade,
and whether to buy or sell. An order may also include conditions that a trade must
satisfy. The most common conditions limit the prices that the trader will accept. Other
conditions may specify for how long the order is valid, when the order can be
executed, whether it is okay to partially fill the order, where to present the order, and
how to search for the other side. Some orders even specify the traders with whom the
trader is willing to trade.
Having analyzed and decided to enter into a trade, one can place your order online in
your broker's trading software or offline by calling your broker over the phone or
faxing or emailing.
An Order Example
Mr. X wants to sell 7,600 shares of BPCL at no less than ₹ 315 per share, but only if
he can trade during the current trading session and only if he can trade the entire
quantity at once. He would issue an all-or-nothing, day order to sell 7,600 shares of
BPCL, limit ₹ 315.

Some Important Terms

Traders indicate that they are willing to buy or sell by making bids and offers. Traders
quote their bids and offers when they arrange their own trades. Otherwise, they use
orders to convey their bids and offers to the brokers or automated trading systems that
arrange their trades. Bids and offers usually include information about the prices and
quantities that traders will accept.
Traders call these prices bid and offer prices. They also use the terms bidding price,
offering price, asking price, or simply bid and ask. They refer to the quantities as
sizes.
Prices are firm when traders can demand to trade at those prices. Prices are soft if the
traders who offer them can revise them before trading. Orders generally have firm
prices.
The highest bid price in a market is the best bid. The lowest offer price is the best
offer (or equivalently, the best ask). Traders also call them the market bid and the
market offer (or market ask) because they are the best prices available in the market.
A market quotation reports the best bid and best offer in a market. A market quotation
is often called the BBO, which is the acronym for Best Bid and Offer. Many markets
continuously publicize their market quotations. The best bid and offer anywhere in the
United States is the NBBO—National Best Bid and Offer.
The difference between the best ask and the best bid is the bid/ask spread. Traders
sometimes call it the inside spread because the space between the highest bid price
and the lowest ask price is inside the market. The English often refer to the spread as
the touch. In sports betting markets, bettors and bookies call it the vigorish.
An order offers liquidity—or equivalently supplies liquidity—if it gives other traders
an opportunity to trade. For example, suppose Joe issues an order to buy 100 shares of
IBM for no more than 100 dollars per share from the first person to contact him
before trading closes today.
Joe’s bid offers liquidity because other traders now have the opportunity to sell IBM
for 100 dollars per share. Joe’s bid is a day limit order because it is only valid for the
day, and because Joe limits the price that he will pay.
Buyers and sellers can both offer liquidity. Buyers offer liquidity when their bids give
other traders opportunities to sell. Sellers offer liquidity when their offers give other
traders opportunities to buy.
The dual use of the word “offer” may seem confusing. It may refer to an offer of an
item for sale, or to an offer of liquidity. If you think of liquidity—the ability to trade
when you want to trade—as a service that you can buy or sell, the use of the word
“offer” makes sense. This perspective leads to many useful insights. For example,
dealers make money by selling liquidity to their clients.
Standing orders are open offers to trade. Joe’s order will stand until someone sells to
Joe at 100 dollars or less, the order expires at the end of the day, or Joe cancels it.
Standing orders are also called open orders. Since standing orders allow other traders
to trade when they want to trade, traders offer liquidity when they have orders
outstanding.
Traders who want to trade quickly demand liquidity. Traders take liquidity when they
accept offers—standing limit orders or quotes—that other traders made. If Sue is
willing to sell 100 shares of IBM at 100 dollars, she can initiate a trade by taking Joe’s
offer.
Traders who demand to trade immediately demand immediacy. Iimmediacy is one of
several dimensions of liquidity.
A market is liquid when traders can trade without significant adverse effect on price.
Markets with many standing limit orders and small bid/ask spreads are usually quite
liquid. The prices at which orders fill are trade prices. Buy orders that trade at high
prices and sell orders that trade at low prices trade at inferior prices.
Markets and traders sometimes treat orders differently depending on whether they are
agency orders or proprietary orders. Agency orders are orders that brokers represent
as agents for their clients. Proprietary orders are orders that traders represent for their
own accounts. In many organized markets, agency orders have precedence over
proprietary orders at the same price.
Pending orders are orders submitted to brokers, but before the brokers accept them
(whether the account is authorized to trade or securities can be borrowed for short
sale). A working (open) order is an order accepted by a broker, but before it is filled
or cancelled. A good order is an order that can be executed.

Types of orders
There are over twenty types of orders in the most developed markets, of which,
market and limit orders are the two standard orders, other orders are based on the two
standard orders with attached contingences.
 Market Order
A market order is an instruction to trade at the best price currently available in
the market. All exchanges in developed countries accept market orders.
Market orders usually fill quickly. Impatient traders, informed or uninformed,
may use market orders. Market order issuers pay the bid/ask spread for
receiving liquidity or immediacy. Execution of a market order depends on its
size and on available liquidity in the market. The issuers of market order face
execution price uncertainty, i.e., their orders are sometimes executed at
inferior or better (price improvement) prices than the prices they saw
when they submitted their orders. Traders who are concerned about the
execution price uncertainty may submit limit orders.
 Limit Order
Limit Trading Order is a conditional request made to the broker (or the
system) to buy or sell a stock at a particular price or at a better price. A limit
order is an instruction to trade at the specified price or better. A limit order will
stand as an offer to trade until someone is willing to trade at its limit price,
until it expires or is cancelled. All exchanges in developed countries accept
limit orders. Standing limit orders are placed in a file called a limit order book.
Limit orders are usually far from the market when the market is volatile.
Patient and absent traders prefer to use limit orders. Limit order issuers are
 supplies of liquidity in the market, they receive better average price as
compensation for supplying liquidity. The execution uncertainties that limit
order issuers face include time and trade uncertainties. The time when the
order will be executed and whether they will trade is not known, the limit
order may expire without being executed. They also face the risk of ex post
regret, the market price can be much worse than the limit after the order is
executed if the market moves against them in response to some significant
news.

 Stop Loss Order

Order at stop is a conditional request made to the broker (or the system) to
execute the transactions with the immediate best available price, once the price
crosses a predetermined trigger price.
A stop (loss) order is an instruction that stops executing the order until price
reaches or passes a stop price. Stop orders are accepted by most exchanges or
handled by brokers in developed countries. With stop instructions traders may
buy only after price rises to stop price or sell only after price falls to stop
price, or when prices move against them.
There are two types of stop orders, stop market order--the order becomes
market order once the stop price is reached, and stops limit order--the order
becomes limit order once the stop price is reached. Two prices must be
specified for a stop limit order, the stop price and the limit price.
A trader with a long position may use a stop sell order to close the position if
the price declines significantly. A trader with a short position may use a stop
buy order to cover the short position if the price increases significantly.
Stop order issuers demand liquidity when it is less available and hence
accelerate price changes, or they add momentum to the market. Prices often
change because traders on one side of the market demand more liquidity than
is available. When these price changes activate stop orders, the stop orders
accelerate price changes by adding buying pressure when prices are rising and
selling pressure when prices are falling.
Momentum traders buy when prices are rising and sell when prices are falling.
They destabilize prices. They use stop, market and limit orders. Contrarian
traders buy when prices are falling and sell when prices are rising. They
supply liquidity and stabilize prices. They use limit orders.
Many regulators, traders, and exchanges are concerned about the destabilizing
effects that stop orders and momentum strategies have on the market, it is
related to front runners, market manipulation, and extreme volatility.
 Market-to-limit orders
A Market-to-limit order is an instruction to trade at the auction price, or the
best limit price, if this limit is represented by at least one limit order and if
there is no market order on the other side. Any unexecuted part of a market to
limit order is entered in to the order book with a limit equal to the price of the
executed part.
 Market-if-touched (MIT) orders
A market-if-touched order is an instruction to activate a market order when
price touches (reaches) a specified touch price.
With market-if-touched orders traders may buy when prices fall to their touch
prices or sell when prices rise to their touch prices, or when prices move in
their favour. Traders who want to trade when prices reach their touch price
may use MIT orders.
MIT traders stabilize the market because they buy when the market is falling
and sell when it is rising. In a broader sense, MIT traders supply liquidity
because they offer liquidity to traders who push prices to their touch prices,
thus decrease the price impacts of other traders.
In a narrow sense, MIT orders demand liquidity because they become standard
market orders that demand immediacy when they are triggered.

 Tick-sensitive orders
A tick-sensitive order is an instruction to activate a market order that is related
to previous prices. Ticks include uptick, downtick, zero tick, zero down tick,
and zero uptick. The orders are like limit orders that dynamically adjust limit
prices. Tick-sensitive order issuers supply liquidity and have no market impact
since they allow other traders to trade when they want to trade.
Strategies of using dynamic limit orders are almost impossible to implement
effectively in fast markets. Traders must continuously monitor the market and
immediately cancel and resubmit their limit orders whenever prices change.
Most traders cannot cancel and resubmit their limit orders quickly enough
therefore they use tick-sensitive orders instead for their strategies.
Tick-sensitive orders are more attractive when the minimum price increment is
large. The decimalization of the U.S. stock markets in 2000 decreased the
minimum price increment from one-sixteenth dollar (6.25 cents) to 1 cent.
This change made tick—sensitive orders much less attractive.

 Market-not-held orders
A Market—not—held order is an instruction that brokers use their discretion
when filling the orders, because brokers are often better traders than their
clients. The broker then can offer or take liquidity according to current market
conditions. Traders submit market-not-held orders to indicate that they will not
hold their brokers accountable for failing to trade. Traders of large orders give
the market-not-held orders to brokers on the floor of an exchange, recently
more traders issue their orders to brokers who operate order desks that use
econometric models to formulate optimal order submission strategies.
 Alternative (either or) orders are instructions to execute one but cancel the
other of the two alternatives. For example, the order issuer wants to buy one of
the two stocks at a limit price, or buy (sell) the same instrument at either a
limit or a stop price.
 Contingent orders are instructions to buy or sell an instrument only after
certain action.
 Switch orders are instructions to sell one instrument and buy anther at a
specified price difference or larger.
 Spread orders are instructions to buy one instrument and simultaneously sell
another. They can be market or limit orders. The two instruments usually are
closely related. The trader specifies a limit for the difference between the two
prices when the spread order is a limit order. The order is said to have a sell
side premium if the trader wants to sell an instrument at a higher price than he
or she wants to pay for the other instrument, in this case, the order can be
filled only if the difference between the sales and purchase prices is greater
than or equal to the limit. The order is said to have a buy side premium if the
trader wants to buy an instrument at a higher price than he or she wants to sell
for the other instrument, in this case, the order can be filled only if the
difference between the purchase and sales prices is less than or equal to the
limit.
 Do not reduce (DNR) orders are instructions to keep (not reduce) the limit or
stop price when limit and stop prices are automatically reduced on the ex-
dividend day.
 Scale orders are instructions to buy or sell certain instruments at different
prices in order to achieve a better average price.
 All or none (AON) orders instructs broker to fill the order all at once, or not
at all. It is a conditional request made to the broker (or the system) to buy or
sell a required number of shares at particular price, only if full quantity of
shares is available.
 Minimum-or-none, Minimum Acceptable Quantity (MAQ) orders instruct a
broker to arrange multiple trades to fill large orders.
Issuers of AON and MAQ orders usually do so to minimize the costs that they
pay to clear and settle their trades.
 IOC (immediate or cancel), Fill-or—kill (FOK), Good—on—sight orders.
IOC orders are orders that are valid only when they are presented to the
market. Whatever portion of the order that cannot be filled immediately is
cancelled. Issuers of IOC orders do not want to give trading options to the
market.
 Iceberg (undisclosed, hidden, or reserve) orders instruct brokers to show no
more than some maximum quantity of the order. Traders submit iceberg orders
when they fear that showing the full size would cause the market to move
against them. Some electronic exchanges, such as the Euronext and Xetra
permit traders to issue undisclosed limit orders. Iceberg orders in an electronic
trading system offer liquidity as they allow orders on the other side to trade.
 Day, GFD (good for day) orders are valid for the trading day. They expire
when the market closes if they have not been filled.
 Good—till—cancel (GTC) orders are valid until the trader cancels them.
 Good-till-date (GTD) orders are valid until the date specified by the issuer.
GTC and GTD orders usually have a 30 to 90-day validity is used for buying
and selling large quantity.
Good this week (GTW) and Good-this-month (GTM) are special cases of
good-until orders. Good—after orders are good only after some specified date.
Market—on—open, (Opening auction only) orders are market orders that a
broker can fill only at the beginning of the trading session. Market—on—open
orders usually guarantee the opening price, are easy to execute, and the
commissions are lower.
 Market-on-close, (Closing auction only) orders are market orders that a
broker can fill only at the close of the trading session. They are usually
executed at the closing price, particularly attractive to mutual funds because
mutual funds use closing prices to calculate their net asset values. Brokers
charge higher commissions for closing price guarantee.
Accept Surplus orders can only be entered during the order book balancing
phase of an auction.
It can be used to execute a remaining auction surplus. They require IOC or
FOK.
 Auction-only orders are valid only in scheduled auctions. Auction-in-main-
trading-phase-only orders are valid only in the auctions of main trading phase.
Main-trading-phase-only orders are valid only in the main trading phase that is
from the beginning of the opening auction until the end of the closing auction.
 Substitution orders instruct brokers to use their discretion to choose which
securities to trade, based on their best prices. Substitution order issuers are
traders who want to invest or disinvest a specified amount of money by
trading any of several securities.
Orders with special settlement instructions are used by traders who want to
settle on a different date. In the U.S. equity markets, regular settlement occurs
three days after the trade (T+3). The most common nonstandard settlement is
cash settlement on that day. The traders decide at the last moment that they
want to be a shareholder of record before a vote or dividend date. Orders with
special settlement instructions are difficult to find a match.
A Cancel former order is an instruction to replace an open order with a new
order.
A Straight cancel order is an instruction to cancel an open order.

 All or None Order

 GTC Order
It is a conditional request made to the broker (or the system) to keep the order
in system until it gets executed or canceled.
 GTD Order
It is a conditional request made to the broker (or the system) to keep the
order in system until it gets executed or till a predetermined date.
 IOC Order
 Immediate or Cancel is a conditional request made to the broker (or the
system) to execute the transactions immediately or to cancel it.

 Stop Limit Order

Order at stop limit is a conditional request made to the broker (or the
system) to execute the transactions with the immediate best available price,
once the price crosses a predetermined trigger price but with in a
predetermined limit price.
 Minimum Fill Order
This is a conditional request made to the broker (or the system) to execute
the transactions only when a minimum number of shares are available.
 One Cancels Other Order
This is a conditional request made to the broker (or the system) to execute
one of the two orders, which ever meets the required parameter first, and
cancel the other.
 Market on Close Order
This is a conditional request made to the broker (or the system) to buy or
sell a stock at the closing price.
 Limit on Close Order
This is a conditional request made to the broker (or the system) to buy or
sell a stock at the closing price but with in a limit price.
 Market on Open Order
This is a conditional request made to the broker (or the system) to buy or
sell a stock at what ever the market opening price.
 Limit on Open Order
This is a conditional request made to the broker (or the system) to buy or
sell a stock at what ever the market opening price but with in a predetermined
limit price.
 Market If Touched Order
This is a conditional request made to the broker (or the system) to buy or
sell a stock at what ever the market price only after the stock trades at
particular predetermined price.
 Iceberg Order
This is a conditional request made to the broker (or the system) to buy or
sell a large required quantity of stock, but in smaller predetermined quantity.
 Fill or Kill Order
This is a conditional request made to the broker (or the system) to execute the
transactions only if the full quantity of shares is available, or else to cancel the
order.
4. Execution of the Order
Orders are executed based on a first come first served rule and on their priority
rule. Market orders receive highest priority, followed by limit orders.
Conditional orders generally get priority based on the time, when the condition
is met. 'Iceberg orders' and 'dark pool orders' (which are not displayed) are
given lower priority.
Some brokers may charge different fee for different type of trading order. For
example, they may charge more for a limit order than to market order. They
may charge more for all or none order or a conditional order. Some brokers
charge you an extra fee for offline orders.
You may go long, that is first buying to sell later, or you may go short, that is
first selling to buy back later. Once you place your order you should follow
your trades until it is close.
5. Order Modification
All orders can be modified in the system till the time they do not get fully
traded and only during market hours. Once an order is modified, the branch
order value limit for the branch gets adjusted automatically. Order
modification is rejected if it results in a price freeze, message displayed is
‘CFO request rejected’.
6. Order Cancellation
Order cancellation functionality can be performed only for orders which have
not been fully or partially traded (for the untraded part of partially traded
orders only) and only during market hours and in preopen period.
7. Order Matching
The buy and sell orders are matched on Book Type, Symbol, Series, Quantity
and Price.
8. Matching Priority: The best sell order is the order with the lowest price and a best
buy order is the order with the highest price. The unmatched orders are queued in the
system by the following priority:
 (a) By Price: A buy order with a higher price gets a higher priority and
similarly, a sell order with a lower price gets a higher priority. E.g. consider
the following buy orders:
1) 100 shares @ Rs. 35 at time 10:30 a.m.
2) 500 shares @ Rs. 35.05 at time 10:43 a.m.
The second order price is greater than the first order price and therefore is the
best buy order.
(b) By Time: If there is more than one order at the same price, the order
entered earlier gets a higher priority. E.g. Consider the following sell orders:
1) 200 shares @ Rs. 72.75 at time 10:30 a.m.
2) 300 shares @ Rs. 72.75 at time 10:35 a.m.
Both orders have the same price but they were entered in the system at
different time. The first order was entered before the second order and
therefore is the best sell order.
As and when valid orders are entered or received by the system, they are first
numbered, time stamped and then scanned for a potential match. This means
that each order has a distinctive order number and a unique time stamp on it. If
a match is not found, then the orders are stored in the books as per the
price/time priority.
An active buy order matches with the best passive sell order if the price of the
passive sell order is less than or equal to the price of the active buy order.
Similarly, an active sell order matches with the best passive buy order if the
price of the passive buy order is greater than or equal to the price of the active
sell order.

B. Clearing
Clearing is the process by which an organization acts as a link between a buyer and a seller to
ensure a smooth transaction of money and the shares. Clearing is necessary for matching the
sell and buy orders from each other. Investors, to avoid complications, transfer the money to
the clearing corporation rather than crediting the account of the company itself. This enables
a smooth transaction and reduces the chances of fraud on account of both the parties.

C. Settlement

When the Demat of the investor is credited with the shares he/she bought, or his/her bank
account is credited with the money they earned on selling the shares, the settlement is said to
have occurred. Clearinghouses, after clearing all necessary obligations of funds transfer, give
the go-ahead for the settlement of the shares or the money to the investor’s account.

Clearing and settlement process

The two depositories of the Indian share market - National Securities Depositories
Limited (NSDL) and Central Depositories Services Limited (CDSL) - are responsible
for the transfer of shares which is done in dematerialized form.
 The required securities are made available through the pool account of
members/custodians with the depository participants (brokers, banks, investment
firms, etc.) according to the prescribed pay-in time of the securities.

The depository then transfers the shares from the pool account of
custodians/members to the account of the other party according to the prescribed
pay-out day.

The investor is informed electronically about his/her obligations regarding the fund
transfer on the pay-in day. He/she ensures that the required funds are available in
his/her account so that they can be transferred to the concerned company.

The funds' obligation file is then forwarded to the clearing bank by the clearing
agency which debits the account of the investor and credits the account of the clearing
agency.

The clearing agency, after clearing the obligations, moves to the next step of
settlement and credits the funds from its account to the account of the company and
credits the shares into the account of the investor.

The trading cycle is the most crucial processes that enable an effortless transaction
between the investor and the company. The process has evolved over time, and 99%
of the total turnover is settled in electronic form, making it quick and easy.

Explanations of the settlement process:

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

(2) NSCCL notifies the consummated trade details to CMs/custodians who

affirm back. Based on the affirmation, NSCCL applies multilateral netting
and determines obligations.
 (3) Download of obligation and pay-in advice of funds/securities.

(4) Instructions to clearing banks to make funds available by pay-in time.

(5) Instructions to depositories to make securities available by pay-in-time.

(6) Pay-in of securities (NSCCL advises depository to debit pool account of

custodians/CMs and credit its account and depository does it).

(7) Pay-in of funds (NSCCL advises Clearing Banks to debit account of

custodians/CMs and credit its account and clearing bank does it).

(8) Pay-out of securities (NSCCL advises depository to credit pool account of

custodians/ CMs and debit its account and depository does it).

(9) Pay-out of funds (NSCCL advises Clearing Banks to credit account of

custodians/CMs and debit its account and clearing bank does it).

(10) Depository informs custodians/CMs through DPs.

(11) Clearing Banks inform custodians/CMs.

Trading and Settlement Agencies

1. Brokers and sub brokers

A stock broker can be either a person or a firm that trades in the stock market on
behalf of its clients are responsible for issuing the buy or sell orders in the stock
market when their clients ask them to do so. They do all the buying and selling of
securities for their customers by charging a fee called a brokerage.

The transactions in a stock market can be done by two members of the exchange only.
Therefore, any individual wishing to invest in the stock market cannot just go and
invest in the market, but has to go through a registered broker to carry out his
transaction. The stock broker can only carry out the client's instruction by buying or
selling the stocks.

While the brokers may advise their clients on the buying and selling of their shares,
the client has the final say and the broker must carry out their wishes. Discretionary
dealing is another service of the stock broker where the broker is responsible for all
the dealings and decision making in the market on his client's behalf.
There are three types of stock brokers:
 Full Service Broker
 Discount Broker
 Direct-Access Broker
A full-service broker generally provides their clients with various financial services
depending on the requirements of the clients. The services provided by them may be
investment research advice, retirement planning and tax planning. A discount broker
executes the client's instruction by buying or selling the stocks, but refrains from
offering any kind of investment or financial advice. The direct access brokers are
those who make the client's trade directly with electronic communication networks
(ECN's) making the trading much faster.
Investors who are new to the stock market can go to a full service broker who will
help the investors with necessary information, thus helping them to decide on which
stock to invest in. For the experienced investors who are very well aware of the
market, a discount broker is sufficient to do the trading on his or her behalf. Day
traders generally prefer to use direct access brokers.
Who can become stock Broker?
The persons eligible to become trading members of Exchange are:
1. Individuals, or Partnership firms registered under the Indian Partnership
Act, 1932 or Institutions, including subsidiaries of banks engaged in
financial services;
2. Banks for Currency Derivatives Segment;
3. Body corporate including companies as defined in the Companies Act,
1956. A company is eligible to be admitted as a member if:
a. It is formed in compliance with provisions of Section 12 of the
Companies Act 1956 which mentions about the mode of forming
incorporated company;
b. It complies with the financial requirements and norms as may be
specified by SEBI;
c. The directors of the company shouldn’t have been disqualified for
being members of a stock exchange and should not have held the
offices of the directors in any company which had been a member
of the stock exchange and had been declared defaulter or expelled
by the stock exchange; and
4. Such other persons or entities as may be permitted from time to time by
RBI/SEBI under the Securities Contracts (Regulations) Rules, 1957.

Membership Segments
Persons or Institutions desirous of securing admission as members (stock brokers) on
the Exchange may apply for membership on any one of the following segment
groups:
(a) Wholesale Debt Market (WDM) Segment
(b) Capital Market (CM) segment
(c) Capital Market (CM) and Wholesale Debt Market (WDM) segment
(d) Capital Market (CM) and Futures & Options (F&O) segment
(e) Capital Market (CM), Futures & Options (F&O) segment and Wholesale Debt
Market (WDM) segment
(f) Currency Derivatives (CD) segment with or without the above mentioned
segments.
(g) Clearing Membership of National Securities Clearing Corporation Ltd.
(NSCCL) as a Professional Clearing Member (PCM). Professional Clearing
 Members do not trade but only clear and settle trades executed by other
trading members (TMs). Professional clearing membership is only applicable
for the F&O and CD segments.
2. Clearing Corporations
A clearing corporation, with the help of clearing members, custodians, clearing banks
and depositories, settles the trades executed on exchanges. It performs the following
tasks:

 Clears all trades.

 Determines obligations of members.
 Arranges for pay-in of funds and securities.
 Arranges for pay-out of funds and securities.
 Assumes the counter-party risk of each member and guarantees financial
settlement.
 It also undertakes settlement of transactions on other stock exchanges like the,
Over the Counter Exchange of India.

In India, the clearing corporation for the NSE is the NSCCL and for the BSE it
is BOI Share Holding. The NSCCL, a wholly-owned subsidiary of the NSE,
was incorporated in August 1995. It is responsible for the post-trade activities
of the NSE. The clearing and settlement operations of the BSE are managed
by a company called BOI Share Holding, which is a subsidiary of the Bank of
India and the BSE and is known as a clearing house. All settlements for
securities are through the clearing house on a delivery versus payment (DVP)
basis.
3. Clearing Members

Clearing members (CMs) are the members of the clearing houses/clearing

corporations who facilitate settlement of trades done on the stock exchanges. He/she
could be a broker or a custodian registered with the SEBI since he/ she is an important
intermediary in the capital market and an essential link in the depository system. The
CM’s main activity is to facilitate pay-in/pay-out of securities to / from stock
exchanges/clearing house/ clearing corporations either on their own behalf or on
behalf of their clients. The securities which are due for delivery can be delivered
directly from the client’s account (depending on whether the exchange provides this
facility) or through CMs to the stock exchanges / clearing house / clearing corporation
account.

Similarly, pay-out of securities can be delivered directly to the client’s account on the
basis of information given to a clearing house by the CM or to the CM’s account. In
the capital market segment all the trading members of the exchange are the clearing
members of the clearing corporation. However, please note that in the case of trades
done in the future and option market, clearing members can be a separate entity as
compared to trading members as the volume of trades done in this segment is huge.
4. Custodians

A custodian is a clearing member but not a trading member. He /she settles trades
assigned to him/her by the trading members. He/she is required to confirm whether
he/she is going to settle a particular trade or not.

5. Clearing Banks

Clearing banks act as a link between the clearing members and the NSCCL for the
settlement of funds, i.e., pay-in and pay-out of funds. Every clearing member gets an
account opened with a clearing bank for this purpose only. A clearing bank works on
the instructions of the clearing member. A clearing member after defining the
obligations in terms of funds informs the clearing bank about the obligations to be
fulfilled. The clearing bank makes the funds available required on the pay-out day to
meet the obligations on time.

6. Depositories
The earlier settlement system followed by the Indian stock exchanges was very
inefficient as it was unable to take care of the transfer of securities in a speedy
manner. Since the securities were in the form of physical certificates their quick
movement was again difficult. This led to settlement delays, theft, forgery, mutilation
and bad deliveries and also to added costs. To wipe out these problems, the
Depositories Act 1996 was passed. It was formed with the purpose of ensuring free
transferability of securities with speed, accuracy and security. It has been able to do so
by:
1. Making securities of public limited companies freely transferable, subject to
certain exceptions.
2. Dematerialising the securities in the depository mode.
3. Providing for maintenance of ownership records in a book entry form.
4. At present, in India, there are two depositories viz., the National Securities
Depository (NSDL) and the Central Depository Services (India) (CDSL)
which are registered with the SEBI. A clearing member /custodian opens a
securities pool account (demat) with a depository participant of these
depositories to make the securities available in the account on the settlement
day. As per the instructions, the depository transfers the securities
electronically.
5. National Securities Depository (NSDL) NSDL, the first and the largest
depository in India, was established in August 1996. NSDL has been promoted
by the Industrial Development Bank of India (IDBI), Unit Trust of India (UTI)
and National Stock Exchange of India (NSE). As on January 18, 2010, they
have crossed 1 crore active investor accounts.
6. Central Depository Services (I) (CDSL) : CDSL has been promoted by the
Bombay Stock Exchange and the Bank of India. It was formed in February
1999. Both the depositories have a network of depository participants (DPs)
which are further electronically connected to their clients. So, DPs act as a link
 between the depositories and the clients. CDSL was promoted by the Bombay
Stock Exchange (BSE) jointly with leading banks such as the State Bank of
India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank,
Union Bank of India, Bank of Maharashtra, Canara DS Bank & The Calcutta
Stock Exchange.

Risks in Settlement
The following two kinds of risks are inherent in a settlement system:
(1) Counterparty Risk: This arises if parties do not discharge their obligations
fully when due or at any time thereafter. This has two components, namely
replacement cost risk prior to settlement and principal risk during settlement.
(a) The replacement cost risk arises from the failure of one of the parties to
transaction. While the non-defaulting party tries to replace the original
transaction at current prices, he loses the profit that has accrued on the
transaction between the date of original transaction and date of replacement
transaction. The seller/buyer of the security loses this unrealised profit if the
current price is below/above the transaction price. Both parties encounter this
risk as prices are uncertain. It has been reduced by reducing time gap between
transaction and settlement and by legally binding netting systems.
(b) The principal risk arises if a party discharges his obligations but the
counterparty defaults. The seller/buyer of the security suffers this risk when he
delivers/makes payment, but does not receive payment/delivery. This risk can
be eliminated by delivery vs. payment mechanism which ensures delivery only
against payment. This has been reduced by having a central counterparty
(NSCCL) which becomes the buyer to every seller and the seller to every
buyer.
(c) A variant of counterparty risk is liquidity risk which arises if one of the parties
to transaction does not settle on the settlement date, but later. The seller/buyer
who does not receive payment/delivery when due, may have to borrow funds/
securities to complete his payment/delivery obligations.
(d) Another variant is the third party risk which arises if the parties to trade are
permitted or required to use the services of a third party which fails to
perform. For example, the failure of a clearing bank which helps in payment
can disrupt settlement. This risk is reduced by allowing parties to have
accounts with multiple banks. Similarly, the users of custodial services face
risk if the concerned custodian becomes insolvent, acts negligently etc.
(2) System Risk:
This comprises of operational, legal and systemic risks. The operational risk
arises from possible operational failures such as errors, fraud, outages etc. The
legal risk arises if the laws or regulations do not support enforcement of
settlement obligations or are uncertain. Systemic risk arises when failure of
one of the parties to discharge his obligations leads to failure by other parties.
The domino effect of successive failures can cause a failure of the settle ment
system. These risks have been contained by enforcement of an elaborate
margining and capital adequacy standards to secure market integrity,
settlement guarantee funds to provide counter-party guarantee, legal backing
for settlement activities and business continuity plan, etc.

Rolling Settlement Introduction

Under rolling settlement, all trades executed on a trading day are settled X
days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date
and ‘X’ is the number of business days after trade date on which settlement
takes place. The rolling settlement has started on T+2 basis in India, implying
that the outstanding positions at the end of the day ‘T’ are compulsorily settled
2 days after the trade date.
Rolling settlement was first introduced in India by OTCEI. As
dematerialisation took off, NSE provided an option to settle the trades in
demat securities on rolling basis. In January 2000, SEBI made rolling
settlement compulsory for trades in 10 scrips selected on the basis of the
criteria that they were in the compulsory demat list and had daily turnover of
about Rs.1 crore or more. This list, however, did not include scrips, which had
carried forward trading facility. SEBI reviewed the progress of rolling
settlement in February 2000. Consequent on the review, SEBI added a total of
156 scrips under rolling settlement. 74 companies, which had changed names
to infotech companies, were included in compulsory rolling settlement from
May 8, 2000. 31 NBFCs, which are listed and traded on the BSE, but whose
applications for certificate of registration were rejected by RBI, were covered
under compulsory rolling settlement from May 8, 2000. 17 scrips, which
exhibited high volatility (i.e., of more than 110% for 7 weeks or more in the
last 10 weeks) were also included in compulsory rolling settlement from May
8, 2000. In addition, 34 companies out of 199 companies, which were already
included in compulsory demat trading for all investors and did not have carry
forward facility in any of the exchanges and had signed agreements with both
the depositories were included for compulsory rolling settlement from March
21, 2000.
Following Finance Minister’s announcement on March 13, 2001 that the
rolling settlement would be extended to 200 category ‘A’ stocks in MCFS
(Modified Carried Forward System), ALBM (Automated Lending and
Borrowing Mechanism) and BLESS (Borrowing and Lending Security
Scheme) by July, 2001, SEBI decided that all 263 scrips included in the
ALBM/BLESS or MCFS in any stock exchange or in the BSE-200 list would
be traded only in the compulsory rolling settlement on all the exchanges from
July 2, 2001. Further, SEBI mandated rolling settlement for the remaining
securities from December 31, 2001. SEBI introduced T+5 rolling settlement in
equity market from July 2001. Subsequently shortened the settlement cycle to
T+3 from April 1, 2002. After having gained experience of T+3 rolling
settlement and also taking further steps such as introduction of STP (Straight
 Through Processing), it was felt appropriate to further reduce the settlement
cycle to T+2 thereby reducing the risk in the
market and to protect the interest of investors. As a result, SEBI, as a step
towards easy flow of funds and securities, introduced T+2 rolling settlement in
Indian equity market from 1st April 2003. The time schedule prescribed by
SEBI for depositories and custodians for T+2 rolling settlement is as given in
Table 3.5.
Table 5: Time schedule of Rolling Settlement:
Time Description of activity
Trade Day
By 1.00 pm Confi rmation of all trades (including custodial trades).
By 2.30 pm Processing and Downloading of obligation fi les to
brokers/custodians
By 11.00 am Pay-in of securities and funds
By 1.30 pm Pay-out of securities and funds

As per SEBI directive, the Custodians should adhere to the following activities
for implementation of T+2 rolling settlement w.e.f. April 1, 2003:
1. Confirmation of the institutional trades by the custodians latest by 1.00 p.m. on T+1.
2. Pay-in to be made before 11:00 a.m. on T+2. Rolling settlement offers several
advantages over account period settlement:
a) The account period settlement does not discriminate between an investor transacting
on the first day and an investor transacting on the last day of the trading period, as
trades are clubbed together for the purposes of settlement and all investors realise the
securities and/or funds together. Hence some investors have to wait longer for
settlement of their transactions. Under rolling settlement, the investors trading on a
particular day are treated differently from the investors trading on the preceding or
succeeding day. All of them wait for “X” days from the trade date for settlement.
Further, the gap between the trade date and the settlement date is less under rolling
settlement making both securities and funds easily convertible.
b) The account period settlement combines the features of cash as well as futures
markets and hence distorts price discovery process. In contrast, rolling settlement,
which segregates cash and futures markets and thereby removes excessive
speculation, helps in better price discovery.
c) Account period settlement allows build up of large positions over a trading period of
five days and consequently, there is a pressure to close them out on the last trading
day, leading to significant market volatility. This does not happen under rolling
settlement, where positions can be built during a day only.
d) There is scope for both intra-settlement and intra-day speculation under account
period settlement, which allows large outstanding positions and hence poses greater
settlement risks. In contrast, since all open positions under rolling settlement at the
end of a date ‘T’ are necessarily settled ‘X’ working days later, it limits the
outstanding positions and reduces settlement risk.
e) Till recently, it was possible to shift positions from one exchange to another under
account period as they follow different trading cycles. Rolling settlement took care of
this by making trading cycle uniform.

Settlement Cycle
The NSCCL clears and settles trades as per well-defined settlement cycle. The
settlement cycle for the CM segment of NSE is presented in Table 3.6. NSCCL
notifies the consummated trade details to clearing members/custodians on the trade
day. The custodians affirm back the trades to NSCCL by T+1 day. Based on the
affirmation, NSCCL nets the positions of counterparties to determine their
obligations. A clearing member has to pay-in/pay-out funds and/or securities.
A member has a security-wise net obligation to receive/deliver a security. The
obligations are netted for a member across all securities to determine his fund
obligations and he has to either pay or receive funds. Members’ pay-in/pay-out
obligations are determined latest by T+1 day and are forwarded to them on the same
day so that they can settle their obligations on T+2 day. The securities/funds are paid-
in/paid-out on T+2 days and the settlement is complete in 2 days from the end of the
trade day.
Under Limited Physical Market segment, settlement for trades is done on a trade-for-
trade basis and delivery obligations arise out of each trade. The settlement cycle for
this segment is same as for the rolling settlement
Table: Settlement Cycle in CM Segment of NSE:
Activity T+2 Rolling Settlement
Trading T
Custodial Confi rmation T+1
Determination of Obligation T+1
Securities/Funds Pay-in T+2
Securities/Funds Pay-out T+2
Valuation Debit T+2
Auction T+2
Auction Pay-in/Pay-out T+3
Bad Delivery Reporting T+4
Rectified Bad Delivery Pay-in/Pay-out T+6
Re-bad Delivery Reporting T+8
Close out of re-bad delivery and funds pay-in & T+9
pay-out

Salient features of settlement

Delivery of shares in street name and market delivery (clients holding
physical shares purchased from the secondary market) is treated as bad
delivery. The shares standing in the name of individuals/HUF only would
constitute good delivery. The selling/delivering member must necessarily be
the introducing member.
Any delivery of shares which bears the last transfer date on or after the
introduction of the security for trading in the LP market is construed as bad
delivery.
Any delivery in excess of 500 shares is marked as short and such deliveries
are compulsorily closed-out.
Shortages, if any, are compulsorily closed-out at 20% over the actual traded
price. Uncertified bad delivery and re-bad delivery are compulsorily closed-
out at 20% over the actual traded price.
All deliveries are compulsorily required to be attested by the introducing/
delivering member.
The buyer must compulsorily send the securities for transfer and
dematerialization, latest within 3 months from the date of pay-out.
Company objections arising out of such trading and settlement in this
market are reported in the same manner as is currently being done for normal
market segment. However securities would be accepted as valid company
objection, only if the securities are lodged for transfer
within 3 months from the date of pay-out.
Institutional Segment: The Reserve Bank of India had vide a press release
on October 21, 1999, clarified that inter-foreign-institutional investor (inter-
FII) transactions do not require prior approval or postfacto confirmation of the
Reserve Bank of India, since such transactions do not affect the percentage of
overall FII holdings in Indian companies. (Inter FII transactions are however
not permitted in securities where the FII holdings have already crossed the
overall limit due to any reason).
To facilitate execution of such Inter-Institutional deals in companies where the
cut-off limit of FII investment has been reached, the Exchange introduced a
new market segment on December 27, 1999. The securities where FII
investors and FII holding has reached the cutoff limit as specified by RBI (2%
lower than the ceiling specified by RBI) from time to time would be available
for trading in this market type for exclusive selling by FII clients. The cut off
limits for companies with 24% ceiling is 22%, for companies with 30%
ceiling, is 28% and for companies with 40% ceiling is 38%. Similarly, the cut
off limit for public sector banks (including State Bank of India) is 18% whose
ceiling is 20%. The list of securities eligible / become ineligible for trading in
this market type would be notified to members from time to time.
Brokerage and Other Transaction Costs

Brokerage is negotiable. The Exchange has not prescribed any minimum

brokerage. The maximum brokerage is subject to a ceiling of 2.5 percent of the
contract value. However, the average brokerage charged by the members to
the clients is much lower. Typically there are different scales of brokerages for
delivery transaction, trading transaction, etc.

The Stamp Duty on transfer of securities in physical form is to be paid by

the seller but in practice it is paid by the buyer while registering the shares in
his name. In case of transfer of shares, the rate is 50 paise for every Rs.100/-
or part thereof on the basis of the amount of consideration and that for transfer
of debentures the rate of stamp duty varies from State to State, where the
registered office of a Company issuing the debentures is located.

Price Bands
Stock market volatility is generally a cause of concern for both policy makers
as well as investors. To curb excessive volatility, SEBI has prescribed a system
of price bands. The price bands or circuit breakers bring about a coordinated
trading halt in all equity and equity derivatives markets nation-wide. An index-
based market-wide circuit breaker system at three stages of the index
movement either way at 10%, 15% and 20% has been prescribed. The
breakers are triggered by movement of either S&P CNX Nifty or Sensex,
whichever is breached earlier. As an additional measure of safety, individual
scrip-wise price bands have been fixed as below:
a) Daily price bands of 2% (either way) on securities as specified by the
Exchange.
b) Daily price bands of 5% (either way) on securities as specified by the
Exchange.
c) Daily price bands of 10% (either way) on securities as specified by the
Exchange.
d) No price bands are applicable on: scrips on which derivative products are
available or scrips included in indices on which derivative products are
available. In order to prevent members from entering orders at non-
genuine prices in such securities, the Exchange has fixed operating range
of 20% for such securities.
e) Price bands of 20% (either way) on all remaining scrips (including
debentures, warrants, preference shares etc).
The price bands for the securities in the Limited Physical Market are the same
as those applicable for the securities in the Normal Market. For auction market
the price bands of 20% are applicable. There are no price bands for those
securities which are available for trading in the Futures and Options segment
and securities which form part of the indices on which trading is available in
the Futures and Options segment.
The market trends that a financial market may have are the following:
Primary Trends:
Bull Market and Bear Market. A Bull Market indicates that the condition of
economy is good, there is no unemployment, the gross domestic product
(GDP) is increasing, and the stock prices are up. A Bull Market is
accompanied with growing investor confidence and it inspires the investors to
buy stocks in anticipation of more capital gains.

During a bull market choosing stocks is much easier because everything has
an upward trend. A person is called a bull if he has an optimistic thinking and
belief that stock prices will rise, and his outlook is termed as a bullish outlook.
An exaggerated bull market influenced by overconfidence and/or speculation
can create a stock market bubble. Bull markets cannot be a perennial condition
and sometimes can head towards a dangerous situation if there is
overvaluation of stocks.

A Bear Market indicates that the economy is bad, recession is imminent, and
stock prices are going down day by day. A Bear Market is always associated
with far-reaching pessimism. Investors panicked by anticipation of further
losses are provoked to sell stocks. It is very difficult for investors to choose a
profitable stock during Bear Markets. One way to make money during bear
markets is the short selling technique. Another strategy is there and that is
waiting on the sidelines until there is a feeling that the bear market is going to
end, and beginning to buy shares only when there is an anticipation of a bull
market. If a person has a pessimistic thinking that stock prices are bound to go
down, he is termed as a bear and his outlook is a bearish outlook. An
exaggerated bear market is often accompanied with declining investor
confidence and panic selling and may result in a stock market crash and
subsequent recession.
Secondary Trends (Short-Term):
Correction and Bear Market Rally. A secondary trend is a transient change of
price within a primary trend. The tenure can range from a few weeks to few
months. A correction is a temporary decrease at the time of a bull market, and
a bear market rally is a temporary increase at the time of a bear market.
Secular Trends (Long-Term):
Secular Bull Market and Secular Bear Market. A secular market trend is a
trend that is long-term in nature and may last from 5 to 20 years and includes
subsequent primary trends. In a secular bull market the bear markets are
smaller in duration than the bull markets. In a secular bear market, the bull
markets are smaller in duration than the bear markets.
Stock Market Performance is dependent on a lot of factors. Some of the
factors are internal and some of the factors are external. One of the important
internal factors can be a company's performance. If it continues to have
increased revenues and profits and good asset value, then people will be
confident on buying that particular company's shares. If they do so, the price
indices of that particular company's shares will go up on the stock exchange.
This is an indication of improved Stock Market Performance. On the other
hand, if it continues to run at a loss, then its share prices will go down and
people will start selling those shares. Then the price indices of that particular
company's shares will come down on the stock exchange and that is an
indication of poor Stock Market Performance.
The external factors may include changes in government policy, recessions,
depressions, natural calamities, unprecedented incidents like the 9/11 disasters
etc.
Stock Analysis
Stock analysis is a vital means of ascertaining the value of stocks. There are
many ways of doing it and a process followed by one investor may not be
approved by any other. Investing in shares of a company means that the
investor is buying a small portion of the business. There are many companies
listed on the stock exchange.
The question is which companies will offer better returns on investment. This
is judged by the value of the stocks of every company. It requires a thorough
analysis of the stocks.
Stock analysis may be of the following broad types.
(A) Fundamental Analysis
(B) Technical Analysis(C) Quantitative Analysis

(A) Fundamental analysis:

The fundamental analysis is done by calculating the "per share value". The
fundamental stock analysis has been further sub categorized for the
convenience of understanding. Under this system, stock analysis is done on
the basis of value, growth, GARP( growth at a reasonable price), quality and
income.
(a) Value:
When the investor sees the value of the stocks, it means that he actually wants
to reckon the price of the stocks, if they are sold a couple of years down the
road. In other words, the investor wants to get back more than he actually
invested. Hence, he does the stock analysis accordingly.
(b) Growth:
The investors who take growth as a means of measuring stocks analyzes the
growth of the company every year. He sees as to what are the possibilities of
the company's business metrics, earnings and sales per year.
(c) GARP or Growth at a Reasonable Price:
The investors who take GARP as the indicator of the company's growth, judge
the company's stock status by the combination of growth as well as value
parameters. The most widely accepted approach in case of GARP is to monitor
the P/E ratio. (P/E refers to the price/earnings ratio).
(d) Income:
There are many investors who decide about purchasing stocks depending on
the dividends earned from stocks.
(e) Quality:
The common approach here is a mix of GARP, growth and value. The ROE or
the return on equity approach is taken into account. The fundamental stock
analysis has been widely criticized by many owing to its "hazy and blurred"
approach.

(B) Technical analysis:

No specifically defined tool for technical stock analysis is recognized but a
chart may be a way of determining the accuracy of numbers in the stock
market. It is reckoned that this is not a very dependable way of stock analysis.
(C)Quantitative stock analysis:
This method of stock analysis is based on calculating numbers. There are other
factors, which are taken into consideration. They are expertise of the
management, potential of newly launched products and competitive
environment.
Stock Chart
A stock chart is a chart, which represents the trends of stocks in a systematic
way. The bottom of the chart (X-axis) represents the time line denominated in
days, months or years. The vertical axis (Y-axis) shows the trading price value.
The future performance of a stock can also be evaluated from a well
represented chart. The performance of a stock over time can be known from a
stock chart. Usually, stocks show a down trend.

The stock cycle revealed in a stock chart has a self-repeating four main stages.
The stock enters an upward trend in its first stage. In its second stage, it is
traded again with momentum traders buying that stock. In the third stage, the
stock reaches its crescendo and in the fourth stage, it begins to repeat its
downward trend again.

Though stock charts are of various types, there are some basic charting skills
common to all of them. These charts are instrumental in bettering trading
outcome. Resistance levels of a stock can be known best from a stock chart.
The price levels through which a stock passes with difficulty is known as the
resistance level.
The upper resistance is the ceiling while the bottom resistance is the floor. In
the floor situation, the buyers enter the market with the intension of stabilizing
the price, while in the ceiling situation the sellers enter the market with the
aim of driving down the stock price.
With each test, the resistance level increases in strength. The prices at which
the stock moves sideways on a stock chart are to be spotted in order find the
resistance level.
The number of shares traded in a day or the trading volume can also be known
from a stock chart. This volume is revealed along the bottom of a stock chart.
When a stock on high volume is traded high then this trend continues. Trading
activities that are higher than normal on a stock chart show a positive sign.

The stock chart gap can also be known from chart of stock prices. This space
is revealed as a gap on the chart where the stock "jumps". On the basis of this
information, a stock chart has other alternatives too, but this does not reduce
the importance of a stock chart.
Games one must play to learn trading
There are some gaming platforms which teach you about automated trading
strategies and technical analyses.
Stock Market Chart
Trading is risky and complicated as it requires the use of various tools and
charts to interpret and beat the market. Following real-time news is essential to
interpret the market and have a head start. However, it is not a viable solution
to put your hard-earned money directly into trading. Before getting into
trading, it is essential to do some practice & have some hands-on experience.
Here, making use of virtual trading games to learn about live trading will be a
great way to begin your trading career. They provide you with virtual money
to add various asset classes like shares, commodities, and mutual funds to your
portfolio. Their price fluctuation affects your portfolio & you can compare
your performance against that of your peers.
Most platforms today have active trading communities which help you gain
insight into other people’s trading strategies. Gaming platforms also teach you
about automated trading strategies and technical analyses. Here are some
games to learn about stock trading:
1. Moneybhai
Moneycontrol.com's virtual trading game helps one invest in various assets
like stocks, mutual funds, commodities, and fixed deposits. They provide
'investors' with Rs1cr in their portfolio account & a Rs1cr intraday trading
limit.
2. DSIJ Stock Market Challenge
Dalal Street Investment Journal (DSIJ) has helped the Bombay Stock
Exchange (BSE) develop this platform. A demo teaches users the basics of
the market and a 'game master' answers queries. It has various levels of
difficulty which increase with each level.
3. NSE Paathshala
The National Stock Exchange of India (NSE) developed this game to help
people learn about stock trading. It also teaches users how to use the
various tools on the platform.
4. Chart Mantra
Economic Times developed this as a gaming-cum-learning platform for
technical analysis. You get the opportunity to learn about basic technical
analysis & apply it to stock markets. The efficiency of your buy/sell
decision will rank you among other players.
5. Investfly
Here you can build your automated trading strategies and learn to manage
a virtual portfolio by making use of various tools. It also has a monthly
trading contest.
6. Stock Trainer
 This virtual trading app works with real-life world market data. It helps
one learn trading with help of live market simulation to give real-time
results.
7. Trader Trainer
This stock trading app loads anonymous stock market data from the past to
put your trading skills to test. It also provides you with an opportunity to
choose and customize your technical indicators.
8. Wall Street Survivor
You get $1,00,000 to invest in this virtual stock market and a cartoon
version of Guru Mark Brookshire helps you to make investing strategies
based on his rating.
9. Investopedia Stock Stimulator
This app provides virtual trading in various asset classes and different
trading challenges. It also provides an option to invest in Options virtually,
something which other virtual service providers fail to provide. It also
offers one the chance to join and create challenges with friends to compete
and see who has the best investment results daily.

Points to Consider When Investing in Stock Market for the First Time
Here are few tips to make a comprehensive and successful investment plan
that can lead you towards a profitable investment future in share market.
Many investors think the stock market is like a treasure box. Once you
open it, it would overflow with wealth and goodness. However, that’s not
the case. The stock market does have the potential to make you rich but
only if you invest smartly. You need to plan your investments in such a
way that your losses are lesser than the profits in the long run.

For this, you need to have an investment strategy in place. If you are a new
investor investing in the stock market for the first time, you need to
consider some points. These would help you make a comprehensive and
successful investment plan. Implementing and following these tips can
lead you towards a profitable investment future. So here are 5 tips for your
consideration:
1. Spend time in preparation before you start
Investing in thestock market isn’t something you start immediately once
you hear about it. Take time to understand and prepare yourself for the
stock market. Know the various risks associated and your reasons for
investing. Having clarity about your reasons helps you get focused results
faster.

2. Know your investment options

As a new investor, you have an option to invest in different shares
individually or invest in mutual funds and let the fund manager do the
work for you. Ensure that you know the various options that stock market
has to offer. Consider each along with its pros and cons. Weigh it with the
goal and reason of investing and see if it is the most profitable option for
you. Investment in stocks, gold, real estate and other avenues are some of
the many options that you must consider. Once you choose, ensure you
stick to it till you achieve your goals.

3. Have a roadmap and diversify investments

In the stock market, just investment is not enough. You need to have a
solid financial plan or roadmap to back your investments. Consider your
financial situation, your cash flow and risk tolerance before investing and
locking away your funds. This would ensure that you are able to manage
comfortably without having to be dependent on anyone even in the event
of a loss. Planning also helps you make a budget and promote financial
discipline in your life.

4. Have a contingency plan in place

Since investment in thestock market may not be completely safe, it is
always advised to have a contingency plan in place. This is often referred
to as an emergency fund. It is something that you keep contributing to,
along with your investment. The role of this fund is to take care of you in
case an emergency arises. You don’t have to withdraw from your
investment in that case but instead can meet your urgent need with these
funds. Ideally, having a sum that could last you for six months without any
other income is considered as a basic level of an emergency fund.

5. Avail professional help, if necessary

You are a first-time investor and therefore, it is quite possible that you
would not be well aware of the nuances of the market. At such times, you
can take help from a professional investment advisor. An investment
advisor or financial planner would help you identify and analyze your
goals and work towards it. They would also provide you with a roadmap
for your investments and also factor in your emergency fund for your
financial security. You can ride on their market knowledge and expertise
till you are confident of taking care of your investments on your own.
They might charge a nominal fee for this service but the upside or
learnings you get, besides the profits, are priceless.

As a new investor, you don’t need to get afraid when investing in the stock
market. Spend time in knowing why you want to invest and what is it that
you want to accomplish out of it. This would help make half of your task
easier. Then check out the various options, choose the ones that suit you
and plan your investment strategy for a happy future. If you still have
doubts, don’t shy away from taking professional help. It would only do
well for you and your investments. So, stop delaying and start investing
today.
 10. Stock Trading Books
 Getting Started In Value Investing —by Charles S.Mizrahi
 New Concepts in Technical Trading Systems —by J.Welles Wilder Jr
 The Adam Theory of Markets —by J.Welles Wilder Jr
 The Delta Phenomenon or The Hidden Order In All Markets by J.Welles Wilder Jr
 The Encyclopedia of Chart Patterns —by Thomas N. Bulkowski
 http://www.stock-trading-infocentre.com/technical-indicators.html
 https://www.indiainfoline.com/article/general-blog/what-are-the-different-types-of-
stock-trading-118081900062_1.html
 https://www.dsij.in/article-details/ArticleID/10048/WHAT-IS-A-TRADING-CYCLE-
IN-STOCK-MARKET
 http://www-bcf.usc.edu/~lharris/Trading/Book/Book-extract.pdf
 http://www.sse.com.cn/aboutus/research/workstation/c/station20050821.pdf
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