Project Of On Line Trading

Bombay Stock Exchange Limited

The Edge is Efficiency

INTRODUCTION The stock exchange, Mumbai popularly known, as Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. It was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956. The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange

is

now

a

demutualised

and

corporatised

entity

incorporated under the provisions of the Companies Act, 1956, pursuant to BES (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI) With demutualisation, the trading rights and ownership rights have been delinked effectively addressing concerns regarding perceived

and

real

conflicts

of

interest. The

Exchange

is

professionally managed under the overall direction of the Board of Directors.

The

Board

comprises

eminent

professionals,

representatives of Trading members and the managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. In terms of organization structure, the Board formulates larger policy issues and exercises over-all control. The committees constituted by the Board are board based. The Day-to-Day operations of the Exchange are managed by the Managing Director and a management team of professionals. The Exchange has a Nation wide reach with a presence in 417 2

cities and towns of India. The systems and processes of the Exchange are designed to safeguard the market integrity and enhance transparency in operations. During the year 2005-2006, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's Online Trading System (BOLT) is a proprietary system of Exchange and is BS 77992-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. The Stock Exchange, Mumbai is not in any manner answerable, responsible or liable to any person or persons for any acts of omission or commission, errors, mistakes and or violation actual or perceived, by us or our partners, agents, associates, etc., of any of the rules, regulations, Bye-Laws of the Stock Exchange, Mumbai, SEBI Act or any other laws in force from time to time. The Stock exchange, Mumbai is not answerable, responsible or liable for any information on this website or for any services rendered by us, our employees and our servants.

3

THE ORGANIZATION The national stock exchange of India Limited has genesis in the report of the High Powered Study Group on establishment of new stock exchanges, which recommended promotion of a national stock exchange by financial institutions (FIS) to provide access to investors from all across the country on an equal footing. Based on the recommendations,

NSE

was

promoted

by

leading

financial

institutions at the behest of the Government of India and was incorporated in November 1992 as a tax paying company, unlike other stock exchanges in the country. On its recognition as a stock exchange under the securities contracts (regulations) Act, 1956 in April 1993, NSE commenced operations in the wholesale debt market (WDM) segment in June 1994. The capital market (Equities) segment commenced operations in

November

1994

and

operations

in

derivatives

segment

commenced in June 2000.

4

DEFINITIONS AND EXPLANATIONS

1. Shares:In every day language, when we talk of shares we normally refer to equity shares or ordinary shares of a company. The terms shares and stock essentially means the same things, the letter being a more common American usage. An equity share is evidence of ownership in a company. The physical evidence of this ownership of this document is called the Share Certificate. Now days, shares are usually kept in electronic, or dematerialized, form with a depository participant (Banks, brokers, financial institutions) of the National Securities Depository Limited (NSDL). However, if one wants one can still hold the share in the physical form which has your name endorsed on it, and is proved that you are a part owner of the company. Your ownership rights are proportionate to the number of share you own. Companies issue shares of a certain fixed denomination, called face value or par value of that share, which is clearly indicated on a share certificate in the physical form. 2. Investment: Investment essentially refers to what you do with your savings in order to preserve them and make them grow or yield an income. If you keep your savings in the form of cash, they are certainly going to diminish in value because the purchasing power of money is constantly going down as a result of inflation. (The value of money is judged by the quantity of goods and services you can buy with it). Therefore, if you want to maintain or increase the value of 5

your savings, you have to keep them in forms other than cash. This is what investment is all about, deployment of your saving with the intentions of preserving or increasing their value. This deployment can be done by using your savings to buy land, residential properties, commercial properties, gold, jewelry, works of art, fixed deposits in banks and companies, shares, bonds, infact, anything whose value is likely to either remain constant or appreciate with time. Investment also refer to using one's savings with the intention of earning an income. 3. Demate A/c:On doing an online business ever customer has to open and demate account in any bank whichever he likes. Demate account is the account in which the trading done by the customer is mentioned. If the customer sales or purchases any share the details of this sale and purchasing are in demate account. This account contents the name of the shares and also the number of shares held or sold and also the rate of the share with this demate account. It is also compulsory for every customer to open a saving account in the bank because the amount which is to be received when the customers sales the shares are transferred from the demate account to the saving account. It is the responsibility of the customers that the share which he purchased or sales are properly transferred in demate account from the stock exchange whichever he deals. The amount of dividend whichever to be received on the shares when held for one or more year are also transferred in this demate account. It is compulsory for every customer to have a PAN no. For opening an demate account. If PAN no. Is not there is no chance for 6

the customer to do any trading on line. There is no limit of amount to deal in this account. 4. Circuit Limit:While issuing the shares to the public the company has to fix a particular limit of the rate of the per share this limit is called as circuit limit. This circuit limit is generally fixed on the percentage basis. This circuit limit is applied to both the ends of the share. That is to the upper limit also and also to the lower limit actually circuit limit is of two types 1) Upper limit 2) Lower limit It is compulsory for every company to fix the circuit limit. This limit is beneficial to both. The customer and also to the company generally every company fix below 10%of the rate of per share. 5.Upper Limit: While issuing the shares to the public the company has to fix the upper limit this limit is also calculated in percentage the limit is also beyond which the rate of the shares cannot exceed nor that the customer doing the trading can sell above the level. For ex. Customer wants to sell a share which is of Rs10 and its upper limit is fixed at 10% so in this case the person will have to sell it at Rs11 or the rate which ever he wants but the person cannot sell it beyond this Rs 11 because by addition of upper limit to the rate of share the maximum amount of the shares is Rs 11 only and not above.

7

6.Lower Limit: At the time of issuing share the company has to fix the lower limit also. This lower limit is calculated on the basis of the rate of the shares. This limit bears the same percentage, which is mentioned for the upper limit of the share. Like upper limit in this limit also the share minimum rate of the share is fixed the customer who wants to se; the holding shares has to first consider the upper& lower limit of the share he cannot sell the share below the lower limit and not above the upper limit like the upper limit Percentage generally in this limit also the percentage is below 10% of the face value of the shares the percentage is below 10% of the face value of the shares the percentage of the upper &lower limit is equal to every type of share For ex. Suppose the person wants to sell the shares and the rate of the share is Rs. 10/- and the lower limit percentage is 10% of the rate. So in this case the person cannot sell the share at below Rs. 9/-. He will have to sell at above Rs. 9/- or up to the upper limit of the share. 7. Sensex:When the shares are issued to the public the stock exchange gives a particular group to the company. For ex. The Reliance Group is given the group “A” like this there are several companies which fall in “A” Group. The weightage mean is calculated according to its equity when all the companies of Group “A” has calculated this weightage mean they are added all together when this addition is done the result which comes down is known as “Sensex”. The trading of shares of “A” group is totally depended on this sensex value. The price of the share rises this 8

sensex value also rises and when the price of this share comes down the sensex value also comes down. With the sensex value the investors can know that the share market is in plus position or minus position. 8. Scripts:The company, which has more than one working area, it has to issue the share separately than that company is the company which has the script of its name. For Ex. The Reliance this company has its several working area Namely Reliance, Capital Reliance, Infocom Reliance Energy, Reliance Industry. So reliance company issues separate share for separate working area but the bold name which is given to the working area is “Reliance”. So in this case Reliance has its own scripts. Other example Ambuja, Birla, Etc. 9. Groups:When the shares are issued by the company they are given the particular group by the Stock exchange according to its demand in the market. There are mainly 7 groups known as:i.

Group “A”

ii.

Group “B”

iii.

Group “C”

iv.

Group “K”

v.

Group “T”

vi.

Group “TS”

vii.

Group “Z” The company which are in great demand is given

as Group “A” company. And the company which are not in so 9

demand are given in other group. This means that the companies are given the group according to its demand.

10

BUYING AND SELLING The first step is to open a demate account with your selected Depository Participants (DP). All transactions on both the BSE and NSE are done in demate securities. When you buy shares, you are required to pay money to your broker or sub-broker immediately upon getting the contract note/confirmation memo for the purchase of shares. The broker issue as contract note, whereas sub-broker issues a confirmation memo. Similarly, when you sale shares you are required to give delivery of your shares by transferring them to the demate account of your broker/sub-broker immediately upon getting the contract note or confirmation memo. When you buy the shares then the share you have purchased will come first to demate account of your broker/subbroker. Once this happens, you can instruct your broker/sub-broker to transfer those shares to your demate account for receiving shares in your demate account you will have to give your broker or subbroker the details regarding your demate account. When you sale shares you are required to give delivery of share from your demate account by instructing your DP to transfer the number of shares that you have sold from your account to the demate account of your broker. In this regard, you will be required to include the details of the demate account of your broker in the instruction slip that you give to your DP. Your broker or sub-broker will help you to fill in the delivery instructions. These instructions are of a technical nature and the delivery instruction forms and procedures differ from DP to DP. PROCEDURE FOR REGISTRATION 11

For registration, send your name, address, phone no. and EMail ID, package name and duration of your subscription with payment details like DD, Cheque no., or online fund transfer detail. Mode of payment:Pay us buy cheque or demand draft or pay for our services

to

I.C.I.C.I

bank.

For

more

details

E-Mail

at

[email protected] DEALING THROUGH NSE TRADING MEMBER/SEBI REGISTERED SUB-BROKER 1.

Where do I go for buying/selling of shares? To buy or sale securities you could approach either SEBI registered trading member of the NSE or SEBI registered Sub-broker of the trading member of the NSE.

2.

What care should I take while investing? Before making any investment, you must ensure that you: 

Obtain written documents explaining the investment



Read and understand such documents,



Verify the legitimacy of the investment,



Find out the costs and benefits associated with the investment,



Assess risk return profile of the investment,



Ascertain if it is appropriate for your specific goals,



Compares these details other investment opportunities available,



Examine if it fits with other investments you are considering or you have already made,

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

Deal only through an authorized intermediary,



Seek all clarifications about the intermediary and the investment,



Explore the options available to you if something goes wrong and then if satisfied make the investment. We call this the 12 step to investing.

3.

Why I should trade on Stock Exchange? Any trade in securities outside stock exchanges other than spot transactions are illegal. Hence, you do not get any protection if you trade outside an exchange besides the stock exchange NSE offers a ready market for your securities. If you are trading outside and exchange you have to waste considerable time to find out the right person who is willing to undertake a corresponding transaction with you. Other benefits of trading on an exchange include you have to right to receive the best price prevailing at that time for the trade you do not take counter party risk which is assumed by a clearing corporation you have accessed to the investor grievances redressal mechanism of stock exchanges; you have protection upto a limit from the investor protection fund and you have access to all company related information to enable an inform decision, etc.

4.

Is it necessary to deal with a semi registered brokers/subbroker/NSE trading member? You are advised to deal with registered intermediaries as it ensures speedy settlement as well as speedy dispute 13

resolution mechanism. The exchange can ensure the settlement and handle dispute/claims arising out of only those trades which are executed on NSE through registered

trading

members/registered

sub-brokers.

Thus, incase of any trade executed through non-NSE entity, the investor may not be able to approach the investor grievances cell of the exchange. In case of nonsettlement or a dispute arising out of same. 5.

How do I verify the authenticity and the conduct of trading member/sub-broker? All the SBI registered trading member/sub-brokers get the SBI registration certificate/no. You may ask the trading member to furnish the same document to verify the antecedents of the person. You may verify the authenticity and the validity of the registration exchange,

with

the

exchange web

or

from

the site

WWW.NSEINDIA.COM/content/members/mem_dir ectory.html. Generally reputation of a trading member/sub-broker can be known from the existing clients besides the exchange issues press release as and when approves the surrender application of any trade member and also when it expels any trading member or declares any trading member a defaulter. 6.

What are my general rights and obligations?

14

As an investor you have the right to receive all documents evidencing your investment if you are trading on NSE, you should get the price at that point of time and receive money and securities in time. Your general obligations are to remain informed about the intermediaries and securities you

are

dealing

with/in,

to

pay/deliver

funds/securities as and when called upon, to exercise all rights conferred on you and to remain vigilant. REGISTRATION AS A CLIENT 7.

What are the formalities for registration as a client for NSE trading member/sub-broker? You

(clients)

should

register

yourself

with

registration trading member/sub-broker Rs. By: Filing a client registration form.  Signing a member constituent agreement.  Signing a sub-broker-client agreement, if dealing through a sub-broker.  Obtaining a copy of the above agreement for one’s own record. The

member-constituent

agreement/sub-broker

client agreement contains the terms and conditions including

order/trade,

confirmation,

brokerage

charged by trading member/registered sub-broker, delivery of securities and funds and therefore helps

15

reduced the chance of dispute. This agreement is mandatory for all the person registering as a new client of a NSE trading member/SEBI registered sub-broker. On registration with a trading member or a sub-broker, an uniform and unique client-ID needs to be obtained, which is required to be incorporated in all transactions on NSE. 8.

What check points/precautions should one take before signing the member-constituent agreement/sub-broker-client agreement? What are my general rights and obligations? As an investor you have the right to receive all documents evidencing your investment if you are trading on NSE, you should get the best price at that point of time and receive money and securities in time. Your general obligations are to remain informed about the intermediary and securities you are dealing with/in, to pay deliver funds/securities as and when called upon, to exercise all rights conferred on you and to remain vigilant registration as a client. One should read the various terms and conditions carefully and understand their implications before entering into this agreement with the trading member/registered broker. A check should be done whether the agreement is on the stamp paper of requisite value and whether the stamp paper is valid. Date of agreement should be within the validity period of the stamp paper. 16

The clients name and the name of the trading member/sub-broker should be clearly mentioned in the agreement. All the pages of the agreement should be duly signed by the trading member as well as the client (Investor). The witness should also put their names and addresses against their signature. The investors (client) should check whether the trading/registered sub-broker or the representatives have the authority (such as board resolution, power of attorney, etc.) to sign the member-constituent agreement/sub-broker-client agreement.

17

PERFORMANCE OF COMPANIES

9.

How do I know of the performance of the companies whose securities I want to trade in? There are no. of sources where information about the company can be received. In terms of listing agreement, the companies are required to make continuous disclosures about the price sensitive information. These disclosures are disseminated through the website of the exchangers. Besides, SEBI provides EDIFAR (Electronic Data Information Filing And Retrieval System), which contain the information about (i) financial statement comprising of balance sheets, profit and loss a/c and full version of the annual report, half yearly financial statements, (ii) corporate governance reports (iii) share holding pattern and (iv) action against the company by a regulatory body. Apart from the above the detail of the company are also available with the various market participants and numerous public online sites. News magazines also carry out analysis of the companies periodically.

TRADING RELATED ISSUES GIVING PURCHASE/SALE INSTRUCTIONS 18

10.

How do I give sale/purchase instructions to my trading member/registered sub-broker? A trading member will have to communicated the order instruction in writing. The order instructions should clearly indicate the security name weather the order is for buy or sell, the quantity for each of the security, rate specifications, and other relevant instructions.

This

reduces

chances

of

miscommunication between the client (investors) and the trading member/registered sub-broker at the time of placing the deals on behalf the client. You are advised to quote your uniform and unique client id, while communicating with the trading member or the sub-broker.

19

PRICE AT WHICH TRADED 11.

What is price time priority? The system arranges all orders in the priority of price and within price by time. You have, let us say placed buy order for hundred shares of company A at Rs.285/- and another investor has placed a buy order at Rs.290/-, than any one who places a sell order in company A will be first matched with the buy order of 2nd investor as he has given a better price. This is price priority. Let us say both of you have quoted Rs.285/- as the price at which you want to buy shares of company A, than sell order which comes in to the system at this price will be matched against the order which was placed first.

12.

How do I know my tm has given me the best price? The NSE trading system matches order Rs. In such a way that the order gets executed at a price which is either equal to or better than the specified price but never worse than it. Therefore, if you have given an order for selling 100 shares at the rate of Rs.50/-,your order will be traded in the system in such a way that you will et a sale price of Rs.50,or more but never the less. Similarly, if you have given an order for buying 100 shares at the rate of Rs.50, your order will be traded in the system in such a way that you will get a buy price of Rs.50or less but never come. 20

13.

How do I know that the broker has given me the correct price? Regulations provide that the client receives a contract note indicating details like order number, trade number, time, price, brokerage, etc. within 24 hours of the trade. In case of any doubts about the details of the contract note, you(investor)can avail the facility provided by NSE, wherein you can verify the traders on your website WWW.NSEINDIA.COM /content/equities/eq_trdverify.htm. The exchange generates

and

maintains

an

audit

trail

of

orders/trades for a no. of years and you can counter check details of order /trade with the exchange .

21

CONTRACT NOTE 14.

What is a contract note? What is its need? What is important in contract note? Contract note is a confirmation of trades done on a particular day on behalf of the client. It establishes a legally enforceable relationship between the client and the trading member with respect to the settlement of the trades. It also helps to settle disputes/claim/differences in terms of the contract note. It is a prerequisite for filling a complaint or arbitration

proceeding

against

the

trading

member/sub-broker in case of a dispute. A valid contract note should be in the prescribed form contains the details of trades, stamped with requisites value and duly signed by the authorized signatory. Contract notes are made in duplicate, the trading members and the client should keep one copy each. After verifying the details contained therein, the client keeps the one copy and returns the

2nd

copy

acknowledge

to

the

by

unsigned/duplicate

trading

him. contract

Do note

member not

duly

accept

confirmation

memo or contract not confirmation memo signed by any authorized person. 15.

Will a contract note be issued even if the trade has been executed through a registered sub-broker? 22

In case of a deal executed through a registered

sub-broker,

the

sub-broker

is

required to issue purchase/sale notes to the client

(investor).

However,

the

trading

member would issue to the registered subbroker back to back contract notes giving the details of all transaction done by the subbroker through the trading members terminal. 16.

What if the details contained in the contract/purchase/sale notes are incorrect or the notes include some transaction not pertaining to my order /trades? Counter-check the details contained in the contract note purchase/sale notes with those on the order and trade confirmation slip. Check whether the order number, trade number and other details on the trade confirmation

slip

contract/purchase

match

with

those

/sale

notes.

In

on case

discrepancy, bring the same to the notice of the notice of the trading member /registered sub-broker immediately by way of written communication.

17.

What are the points to be checked by an investor to check the validity of a contract?

23

To ensure that the contract note issued to you by the trading member is a valid one, you must verify the following details: The contract note in the prescribed format (annexure). Name and address of the trading member. SEBI registration no. of the trading member. Details of trade like order no., trade no., trade time

security

name,

quantity,

price,

brokerage, client code,etc. The trade price should be separately shown from the brokerage charged. Signature of the authorized person.

24

BROKERAGE 18.

What is the brokerage chargeable? As

stipulated

by

SEBI,

the

maximum

brokerage chargeable by a trading member in respect of traders executed on the exchange is fixed at 25% of the contract price. This maximum brokerage is inclusive of the brokerage charged by sub-broker which shall not exceed 15% of the contract price. Apart from the above, the trading member can charge statutory levies. 19.

What documents should I receive from the trading member in respect of trade? After the order/trade is placed/executed you (investor)

should

receive

an

order/trade

confirmation slip from the trading member, within 24 hours of the execution of trade, you should also receive a contract note from the trading member. Receipts of all the monies paid to the brokers specifying the nature of payment should also be obtained from the trading member. In case of derivates obtain receipt for collateral deposited with Trading Member (TM) towards margin.

DEMATE SETTLEMENT 25

20.

What is the depositary? A depositary is like a bank wherein the deposits

are

securities

(viz.,

shares,

debentures, bonds, govt.securities, units etc.) in electronic form. Besides holding securities, a depositary also provides services related to transaction in securities. 21.

Who is Depositary Participant (DP)? Depositary provides its services to investors through

its

Participant

agents (DPs).

called These

Depositary agents

are

appointed by the depositary with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities i.e.

Banks,

Financial

Institutions,

and

Members Of Stock Exchanges registered with SEBI(TMs) can become DPs. 22.

What is dematerialization? Dematerialization is the process by which physical converted

certificates to

an

of

an

investor

equivalent

number

are of

securities in electronic form and credited in the investors account with his DP. 23.

What is the procedure for dematerialization?

26

In order to dematerialize certificates, you will have to first open an account with DP and then request for the dematerialization of request form (DRF), which is available with DP and submitting the same alongwith the physical

certificates.

certificates

are

Ensure

defaced

by

that

the

marking

“Surrendered for dematerialization” on the face of the certificate before the certificate are handed over to the DP. 24.

Why should I hold securities in depository and is it compulsory for every inventory to open a depository account to trade in capital market? Holding securities in depository enables immediate transfer of securities in case of purchases. The stamp duty to be paid on transfer of securities is not needed, all risks associated with physical certificates like fake securities, forgery, bad delivery, etc. is not involved. Also since more than 99% of the settlement at the stock exchanges is taking place in demate form, it is advisable that securities be held in demate form within DP.

25.

How do I receive demate shares in my account towards my purchase transaction and pay-in demate shares towards my sale obligation?

27

For receiving demate securities in case of purchase made you may give a one time standing instruction to your DP. This standing instruction can be given at the time of account opening or later. Alternatively, you may choose to give a separate receipt instruction to your DP for receiving every credit. For payin obligations, you should instruct your DP to give ‘Delivery Out” instructions to transfer the shares from your beneficiary account to the pool/principal account of your trading member through whom you have sold the shares. The details of the pool/principal account of your trading member /clearing member to which shares to be transferred, security, quantity, etc. should be mentioned in the ‘Delivery Out’ instruction given by you to your DP. The instruction should be given well before the prescribed securities pay-in day. SEBI has advised that the ‘Delivery Out’ instruction should be given at least 24 hours prior to the cut-off time for the prescribed securities payin to avoid any rejection of instruction due to data entry error, networks problems etc. AUCTION OF SHARES 26. What is an auction? On account of non delivery of securities, by the trading member, the securities are put for auction by the exchange. This ensures that 28

the buying trading member receives the securities on time. Non-delivery by the selling trading member can arise on account of short delivery and deliveries not rectified. The exchange purchases the requisites quantity in the auction market and gives them to the buying trading member. 27. Can I avail the benefit of the auction mechanism, if I have shares to deliver? Yes, you can direct your trading member to sell your securities in the auction. However you should ensure that the securities are readily available for delivery. Securities not delivered on auction pay-in day are directly squared off at a price specified by the exchange /clearing corporation. 28. What happens if the shares are not bought in the auction? If the shares are not bought in the auction, the transactions are squared up as per SEBI guidelines.

29

REDRESSAL OF COMPLAINT Complaints to be addressed to:29. Whom should I approach if have a grievance against a subbroker /company? You should bring it to the notice of the broker with whom the sub-broker is affiliated. In case the sub-broker broker fails to resolve the dispute and in case of complaints against a broker/company, you should take of the matter with Investor Grievances Cell (IGC) of the exchange. The cell takes up complaints for redressal in respect of trades executed on the

exchange

of

trades

pertaining

to

companies traded on the exchange. You should lodge the complaints in the prescribed form with all associated documents such as contract notes, purchase/sale notes, bills, statement of accounts and the member client agreement. 30. Who should I approach for redressal of my complaints? Despite all the precautionary measures taken by you and the exchange, there might be some grievances. The exchange tries to solve and sort out all the grievances, in addition to this you also have the freedom to take up the

30

grievances with SEBI, consumer forum and court of law. 31. Whom should I address my complaints against a trading member/registered sub-broker or against any company traded on NSE? You should address all complaints to the Mumbai office or the regional office of NSE based on the dealing office where the deals are executed. INVESTOR PROTECTION FUND 32. What protection is available from Investor Protection Fund? The

exchange

maintains

an

Investor

Protection Fund to make good investor claims, which may arise out of non-settlement of obligations by the trading member, who has been declared a defaulter, in respect of trades executed on the exchange. The maximum amount of claim payable from the fund is Rs.10 lakhs in respect of trades on NES.

31

ELECTRONIC TRADING: THE ROLE OF A MARKET MAKER Market makers (sometimes referred to as “AX”) provide continuous bid and offer prices within a prescribed percentage spread for shares in which they are designated to make a market. There can be any where from 4 to 40 (or more) market makers for a particular stock depending on average daily volume. The market makers play an important role in the secondary market as catalysts, particularly for enhancing stock liquidity and thus generally for promoting long-term growth the market. Market makers must maintain continuous two-sided quotes (bid & ask) within a predefined spread. A market is created when the designated market maker quotes bids and offers over a period of time. They ensure here is a buyer for your sell order and a seller for your buy order at any time. Once the market maker has entered a price, they are obligated to either buy or sell at least 1000 securities at that advertised price. Once the market maker has either bought or sold these shares they may then leave the market and enter a new bid or ask price to make a profit on their previous trade. Let’s say that market maker has entered a sell order for Microsoft (MSFT) and the bid/ask is $65.25/$65.30. The market maker can try to sell shares of MFST at $65.30, if they do, they can then turn around and enter a bid order to buy shares in MSFT. The market maker can bid higher or lower than the current bid of $65.25, if he/she enters a bid at $65.26 than a new market is created because their bid price is now best bid. If the market maker attracts a seller at the new bid price of $65.30 and bought these shares back at $65.26. As a result, the market maker made $40(1000shares x 4 cents) on 32

the difference between the two transactions. This might not seem like much, but doing this repeatedly with larger order sizes can provide lucrative profits. All day long market makers do this, providing liquidity to individual and institutional investors. The major risk for the market maker is the time elapsed between the two transactions, the faster they can make the spread the more money they can potentially make. However, making money from the differences in bid and ask prices is not only the function of market makers. Their 1st priority is to provide liquidity to their own firm’s client, for which they will receive a commission. They may also facilitate trading for other brokerage firms, very similar to the specialist’s duties. It should also be noted that market makers are requested by law to give customers the best bid or ask price for each market order transaction. This ensures a fair and reasonable two-sided market. If these regulations were not in place, we would see customers getting gouged and share prices being much more volatile than they already are.

33

A STEP-BY-STEP GUIDE TO ACTUAL INVESTING Given below is a simple step-by-step summary procedure for selecting the right share to invest in: Preliminary Screening  Examining The Company  Analyzing The Company’s Finances  Making An Investment Decision

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CONCLUSION Tips For Successful Investing  Basic Principles  Do not invest in unlisted shares  Invest in active shares  Diversify your investment  Don’t over diversify  Ensure liquidity of your investment  In all investments there is a trade-off between reward and risk  Investment risks can be reduced through knowledge and experience.  Understanding The Stock Markets  The stock markets always over-react  Stock market prices never go straight up or straight down  Greed and fear are the two most dominant emotions that influence stock behavior  The stock markets are irrational in the short run, but rational over the long-term  Tactics And Strategy  Do not speculate unless you have a natural flair for it

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 When investing in shares go for the long-term investments  The stock markets are dominated by short-term traders and speculators  Invest in companies with a low price earning ratio  Beware of bargain hunting in stock markets  Be on the lookout for rights renunciations  Averaging up is a sound investment strategy  A company is generally good at its management  Invest in companies, which have a clearly identifiable plus factor. Apart from this above tips you should keep in mind that stock market is like a drunkard man. So as a result stock market is un predictable. It fluctuates any times in a day. Trading online is risky. It is not a work of a child, even a learned man can make a mistake while trading.

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